McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3 The Purchasing Function

THE PURCHASING DEPARTMENT’S FUNCTION IS TO: 1.PROVIDE APPROPRIATE LEVELS OF SUPPLY 2.AT THE APPROPRIATE LEVEL OF QUALITY 3.FOR THE LOWEST TOTAL COST 3-3

PURCHASE PRICE Vs. TOTAL COST PURCHASE PRICE = THE DOLLAR VALUE PAID TOTAL COST = PURCHASE PRICE + DELIVERY + STORAGE + SERVICE 3-4

METHODS TO EXAMINE AND COMPARE COSTS 1.TOTAL COST OF OWNERSHIP 2.ECONOMIC ORDER QUANTITY (EOQ) 3.VALUE ANALYSIS 3-5

TOTAL COST OF OWNERSHIP OF A TANGIBLE PRODUCT TOTAL COST OF OWNERSHIP = PRODUCT PRICE + DELIVERY + INSTALLATION + MAINTENANCE / REPAIR + POWER COSTS + SUPPLY COSTS + OPERATING COSTS + FINANCING 3-6

ECONOMIC ORDER QUANTITY THE QUANTITY THAT MINIMIZES ORDERING COSTS AND STORING COSTS 3-7

USING VALUE ANALYSIS THE OBJECTIVES OF VALUE ANALYSIS: REDUCE COSTS AND/OR IMPROVE DESIGN What is New Currently Alternatives Being Done Being Considered COMPARE BENEFITS RECEIVED FUNCTIONS OF PRODUCT COST OF MATERIALS WORK PROCESS INVOLVED OUTCOME: GREATER VALUE FOR LESS COST 3-8

Step 8 Evaluation of product performance Step 8 Evaluation of product performance Step 7 Selection of an order procedure Step 7 Selection of an order procedure Step 6 Evaluation of proposals and selection of a supplier Step 6 Evaluation of proposals and selection of a supplier Step 5 Acquisition and analysis of proposals Step 5 Acquisition and analysis of proposals Step 4 Search for qualified suppliers Step 4 Search for qualified suppliers Step 3 Development of detailed specifications Step 3 Development of detailed specifications Step 2 Definition of the product-type needed Step 2 Definition of the product-type needed Step 1 Recognition of a need Step 1 Recognition of a need EXHIBIT 3-3 STEPS IN THE BUYING PROCESS 3-9

BUY-PHASES 1.NEW TASK COMPLETE BUYING PROCESS REQUIRED EMPHASIZES PRODUCT DEFINITION AND SPECIFICAIONS 2.MODIFIED REBUY EMPHASIZES SUPPLIER SEARCH AND EVALUATION 3.STRAIGHT REBUY EMPHASIZES NEED RECOGNITION AND PURCHASE 3-10

VENDOR ANALYSIS RATINGS A RATING FORM SHOULD LIST  The most important product attributes  The most important service support attributes  Pricing variables  Delivery variables  Quality variables  Supplier capabilities 3-11

PURCHASING PARTNERSHIPS ARE MADE WITH VENDORS WHO PROVIDE: HIGH-PURCHASE-VOLUME MATERIALS, COMPONENTS OR STRATEGIC PRODUCTS INFORMATION AND TRAINING FOR EFFECTIVE PRODUCT USE SERVICES REQUIRING SPECIALIZED KNOWLEDGE FOR COST REDUCTIONS AND/OR PERFORMANCE MATERIALS UNAVAILABLE ELSEWHERE 3-12

IMPROVE PERFORMANCE: STAYING AHEAD OF PURCHASING TRENDS 1.REDUCE PURCHASING COSTS CUTBACK ON EMPLOYEES REDUCE NUMBER OF VENDORS/ TRANSACTIONS BUILD RELATIONSHIPS CENTRALIZE PURCHASING ACTIVITIES USE THE INTERNET 3-13

IMPROVE PERFORMANCE: STAYING AHEAD OF PURCHASING TRENDS (continued) 2.OUTSOURCE IN-HOUSE ACTIVITIES TRAINING MANUFACTURING PROCESSING ACTIVITIES INVOLVE SUPPLIERS (ESI) 3-14

IMPROVE PERFORMANCE: STAYING AHEAD OF PURCHASING TRENDS (continued) 3.CROSS-FUNCTIONAL TEAMS – MADE UP OF COMPANY DEPARTMENTS, SUPPLIERS, CUSTOMERS 4.INCREASE PROFESSIONALISM THROUGH CERTIFICATION PROGRAMS AND ESTABLISH A CODE OF ETHICS 3-15

SALES SURVIVAL QUESTIONS: CAN YOUR SALESPEOPLE ANSWER THE FOLLOWING QUESTIONS? 1.WHAT IS A CROSS-FUNCTIONAL TEAM? 2.CAN YOU RECOGNIZE ONE AT YOUR CLIENT’S ORGANIZATION? 3.DO YOU KNOW HOW TO GET YOUR COMPANY INCLUDED IN YOUR CLIENT’S CROSS- FUNCTIONAL TEAM? 4.WILL YOUR COMPANY GIVE YOU THE PEOPLE RESOURCES TO SUPPORT YOUR CLIENT’S NEEDS? 3-16

SUCCESSFUL CROSS-FUNCTIONAL PURCHASING TEAMS DEPEND ON: APPROPRIATE LEADERSHIP FACE-TO-FACE COMMUNICATION CONTINUITY– IN IT FOR THE LONG TERM TOP-LEVEL COMMITMENT to provide for key individuals’ full participation EMBRACING DIVERSITY of experience, backgrounds, outlooks, and corporate philosophy EXHIBIT

Changing company focus: MAKE-OR-BUY? Purchasing Determines Who Provides Best Value for Lowest Cost Best-Value Provider ActionIn-HousePartner Training Transaction Processing Paper Processing Product Design Product Manufacturing Component Part Manufacturing R&D Marketing Sales Advertising Research Support Human Resources Administration 3-18

MAKE-OR-BUY DECISION ANALYSIS ACCEPTABLE RISK Buy the Products, Components or Services UNACCEPTABLE RISK Retain Production and Provide Services RISK ASSESSMENT FINANCIAL RISKS Resource Allocation Investment of Resources Accurate Cost Analysis Legal Issues MARKETING RISKS Customer Impact Supplier Impact MANUFACTURING RISKS Reliability Expertise Equipment Patent Protection POLITICAL RISKS Management commitment/ willingness to partner Turf Battles Internal Strife 3-19

ETHICAL ISSUES FOR BUYERS KEY REQUIREMENT: EVERY COMPETITOR HAS AN EQUAL OPPORTUNITY TO SELL TO THE BUYER AND HAS EQUAL ACCESS TO INFORMATION AS A BUYER, YOU MUST  PROVIDE EQUAL ACCESS TO THE BUYING OPPORTUNITY  BE TOTALLY RESPONSIBLE TO YOUR EMPLOYER 3-20