PURCHASING LU 4

PAGE 137
 Chapter content
 Introduction
 The importance of the purchasing and supply
function to the business
 The management task of the purchasing and
supply manager
 Purchasing process and activities
 Summary
Introduction

 Purchasing and supply function often under-

estimated
 Buyers buy variety of materials
 Expected to keep abreast of better substitute
materials, market trends, seasons and state of
market
 Buyers’ expertise can improve
progressiveness, productivity and
profitability
Introduction (continued)

 Need to ensure quality

 Purpose of purchasing and supply
function is to provide right materials,
services and equipment at reasonable
price, to satisfy quality requirements, and
to have correct quantity at right time and
place
 Place of purchasing and supply function in
organisational structure 143-145
 Place of the purchasing and supply function in the
business is affected by two elements:
 Centralisation or decentralization
 Centralised – good standardization and strong purchasing
power. Decentralised if geographically diverse
 The hierarchical level of the purchasing and supply function
in the organisational structure. How important is the
purchasing department within the business ?
 The value of items purchased, supplier market type
(monopoly), size of the business, specialised knowledge
needed, management’s perception
 Youth  Ireland: 13%
Unemployment.  India: 13%
 
 UK: 12%
 S Africa: 52%
 Australia: 12%
 Greece: 44%
 Canada: 11%
 Spain: 36%
 Norway: 9.4%
 Nigeria: 33%
 US: 9.2%
 Italy: 32%
 S Korea: 8.6%
 Iran: 29%
 Netherlands: 7.4%
 France: 22%
 Germany: 6.6%
 Turkey: 19%
 Japan: 3.3%
 Sweden: 17%
 Poland: 14%
 ..\VIDEO DOWNLOADS\COMMUNICATION ERRORS.mp4
 Internal organisation of the
purchasing and supply function
 Specific activities for activity groups may be
necessary if the department is large:
 Purchasing and negotiation
 Follow-up and expediting
 Administration
 Purchasing research
 Inventory holding
The purchasing process NB NB !!! 146

 Steps of the purchasing and supply cycle:

1. Recognition of need
2. Description of a need – specifications set out clearly
3. Identification of suppliers – based on many selection
criteria
4. Supplier Selection
5. Issuing the order and concluding a contract – a legal
binding contract
6. Follow-up and expediting – very important as can have
costly delays
The purchasing process continued

 Steps of the purchasing and supply cycle:

7. Receipts, inspection and distribution – counted,

quality confirmed and material sent to user
8. Invoice clearing and payment
9. Maintenance of records and relationships – keep
all documents as a record of purchase
Levels of purchasing and supply
planning
 Greatest expenditure for the
business
 Purchasing costs are business’ biggest expense -
represent an area where cost savings can make a
vital contribution to the business profits – 90%
held in stock – Edgars/Spar
 Stock is held to prevent disruptions when there is
interruption in the flow of material to a business –
aim to keep inventory levels low without risking
an interruption in the operational process
 Greatest expenditure for the
business (continued)
 Profit-leverage means that purchasing costs are major
portion of total cost and saving on these costs has
greater profit potential than similar increase in sales
eg a 4% reduction in purchasing costs may lead to the
same increase in profits as a 20% increase in sales
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Leverage Effect.mp4
 Purchasing materials of the right quality and price at
the right time can make final products available in the
right quantities at a competitive price at the right time
to its customers – see case study page 543
 Quality decisions - a purchasing and
supply activity
 QUALITY the most important factor in purchasing. Vital
in JIT and MRP
 Determining the right quality:
 Engineers and designers – technical considerations
important
 End user and/or marketing function – commercial
considerations (company image, after sales service)
 Description of quality:
 Specifications –general method of describing quality –
dimensions, tolerance, uniformity
 Standardisation - across industry
 Other: Market grades, brands, SABS standards,
engineering drawings and samples.
Quality decisions - a purchasing and
supply activity (continued)

 Control of quality:
 Inspection – samples of delivered materials or
services are subjected to tests by quality
controllers
 Supplier certificate agreement
 SABS – ISO 9000 to ISO 9004 and ISO
14000 international standards.
 Deciding on purchasing and supply
quantities 151
 Need for inventory-holding
 Helps ensure the operations process continues without
interruption
 Allows businesses to utilise cost savings through longer
production runs and volume discounts
 Page 152 summarises the implications of inventory
positions
 Inventory costs
 Inventory-carrying costs – storage, insurance etc
 Inventory-ordering costs – office overheads
 Total inventory costs – carrying cost. Ordering cost and
opportunity cost.
 Deciding on purchasing and supply
quantities (continued)
 Inventory-control systems
 The system of fixed order quantities – page 153. a fixed
quantity is ordered every time
 The cyclical-ordering system – page 156 – check on
stock levels cyclically and order to replenish to
maximum level
 The materials requirements planning (MRP)157 system
– Inventory maintained at a minimum using a computer
to calculate the total need for material based on sales
and this is worked backwards to determine the quantity
of raw materials and components required
 Deciding on purchasing and supply quantities
(continued)
 Inventory-control systems
 The just-in-time (JIT) system 160 – this is a production
system not an inventory system. Materials delivered on the
day required. Discuss the feasibility in SA ??
 The quick-response (QR) 163 and automatic-
replenishment (AR) systems. Manufacturer provides
products to its retail customer in the exact quantities on a
continuous basis with minimal lead times resulting in
minimal stock levels.
 The efficient consumer response (ECR)165 system –
reduce cycle time (time from order placement to receiving
of the good)
 The selection and management of
suppliers 167
 The selection process of suppliers:
 Compilation of a list of suppliers – register, Internet, phone
book, adverts
 Reduce list to a short list – based on location, reputation etc
 Short list suppliers requested to give a quote or
negotiations with them are started – best value, quality,
service and delivery
 Choose a supplier – based on above as well as past
performance
 Evaluation of supplier performance. – makes future
supplier choice easier
 The selection and management of
suppliers (continued)
 Developing suppliers for various reason
 Black economic empowerment (BEE) through
purchasing
 Materials or service not available – ask someone to
manufacture for you
 Normal performance appraisals – encourages
suppliers to perform better
 Long-term relationships with suppliers – trust, co-
operation, inter dependence, info sharing, risk and
benefit sharing, joint problem solving
 Pricing decisions 174
 Price determination Low price not always the best
option !
 Low price may = low quality, high inventory, ends
up adding on costs
 Best Value is what is being looked for
 Methods depend on nature of materials and the value of the
transaction
 Standard goods – price lists, catalogues, adverts good to
look at. Quotes used
 Specialist Goods – closed tenders. Negotiations involve
 Timing of purchases 176

 The ‘right’ time to buy determines the price paid for the
material. The aims of buying at the right time are:
 Ensure business is supplied on an ongoing basis
 Reduce risk of price fluctuations
 Keep inventory-holding at an optimal level.
 Factors influencing the scheduling of purchases:
 Internal factors – availability of funds, purchasing policy,
physical factors such as space for storage
 External factors – market conditions, government regulations
(import permits). Lead times and supplier reliability
 OUTSOURCING VR
INSOURCING
 Steps necessary when outsourcing 178/179
 Advantages of Outsourcing
 Disadvantages of outsourcing 180
 Advantages and disadvantages of insourcing 181
 DOCUMENTS FOR THE
PURCHASING FUNCTION
182
 RFI – request for information
 RFP – request for price
 RFQ – Request for Quote
 The assessment of purchasing and
supply activities

 Control points used to gauge effectiveness of

purchasing and supply activities:
 Price proficiency
 Supplier performance
 Timeliness
 Cost-saving
 Workload
 Purchasing costs
 Inventory-holding
 Relationship performance with suppliers
 Relationship with other functional management areas.
Control in the purchasing and supply
function
 Control is essential
 Measures need to be put in place to ensure
purchasing and supply objectives are pursued within
acceptable and accepted standards or norms
according to policy
 Specific attention should be given to the
management task in the purchasing and supply
function, and the performance of purchasing and
supply activities
 An evaluation sheet asking about leadership,
relationships with suppliers, effectiveness, new ideas
etc
 The assessment of purchasing and
supply management
 The aim of the purchasing and supply function is to supply the
business in the most effective way with the right materials of
the desired quality, quantities and price at the right place and
time
 It is essential that management performance be evaluated, just
like other activities of the purchasing and supply function
 Management is intangible and difficult to measure
quantitatively
 Use of an evaluation sheet or questionnaire can be used to
assist in the assessment of management performance
 https://create.kahoot.it/details/b19e834d-1108-
4923-a66d-157296d48b73
 ..\VIDEO DOWNLOADS\From cow to consumer.mp4

 ..\VIDEO DOWNLOADS\Supply Chain.mp4

 ..\VIDEO DOWNLOADS\Coke value chain

analysis.mp4

..\..\AB Varsity College 2016 Sem 1\Woolworths South

Africa Wins Supply Chain

Award.mp4http://opepiimraipur.blogspot.co.za/2011/06/mc-
donalds-fast-food-restaurant-jit.html
 Summary
 Purchasing and supply function important:
 Significant influence on profitability of business
 Greatest spender of business revenue
 Function makes it possible for business to sell final products at
competitive prices
 Should be planned, organised and controlled
 Main purchasing activities are quality, quantity, price,
supplier selection and timing
 Different purchasing and supply activities do not occur
in isolation, but integrated
 Integration allows system to operate as a whole