1. The Purchasing Function
Chapter 3
The Purchasing
Function

2. THE PURCHASING DEPARTMENT’S FUNCTION IS TO:
The three most important elements of the purchasing department’s function are to:
PROVIDE APPROPRIATE LEVELS OF SUPPLY
AT THE APPROPRIATE LEVEL OF QUALITY
FOR THE LOWEST TOTAL COST
3-2

3. 1- PROVIDE APPROPRIATE LEVELS OF SUPPLY
To provide the right product or service in the correct amounts needed.
The other important element is the availability. That is the product or the service must be available at the right time.
Just in time is important here.

4. 2- The correct quality
If PPG; a paints company sends Ford a lower quality, then Ford may have to issue a recall to repaint cars.
As a supplier if your customer is improving his quality, you need to improve your quality too.
Here we talk about the right quality-
TQM is significant.

5. 3- PURCHASE PRICE Vs. TOTAL COST
PURCHASE PRICE = THE DOLLAR VALUE PAID
TOTAL COST = PURCHASE PRICE + DELIVERY + STORAGE + SERVICE
Each Riyal saved through careful purchasing can have a direct impact on the bottom line.
3-5

6. METHODS TO EXAMINE AND COMPARE COSTS
TOTAL COST OF OWNERSHIP
ECONOMIC ORDER QUANTITY (EOQ)
VALUE ANALYSIS
3-6

7. 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
Many companies are outsourcing services so that they can reduce the total cost of ownership.
3-7

8. ECONOMIC ORDER QUANTITY
THE QUANTITY THAT MINIMIZES
ORDERING COSTS
AND
STORING COSTS
3-8

9. EOQ Inventory costs include: Paying for additional space for storage
Insurance
Handling costs
Interest on the money that the firm would lose by having to pay early for supplies used later.

10. EOQ
Forward buying: buying in large quantities than are currently needed because the discount is greater than carrying costs.
A balance is required between ordering costs and inventory costs in order to minimize the total costs.

11. OUTCOME: GREATER VALUE FOR LESS COST
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
Unnecessary elements
3-11

12. Purchasing philosophy
1- The adversarial purchasing philosophy: is to have several vendors for each product.
Creates competition
Lower prices
2- Partnership purchasing: maximizing the benefits of collaboration between the buyer limited number of suppliers.

13. Purchasing philosophy
The partnership purchasing philosophy seek out the best suppliers they can fin and then work to develop close relationships.
Ford reduced the number of suppliers from 2500 to 1000 in order to create strong relationship with suppliers.
Single sourcing is an option.
Effective purchasing is an important contributor to the profit of any org

14. STEPS IN THE BUYING PROCESS
Evaluation of product performance
Step 7
Selection of an order procedure
Step 6
Evaluation of proposals and selection of a supplier
Step 5
Acquisition and analysis of proposals
Step 4
Search for qualified suppliers
Step 3
Development of detailed specifications
Step 2
Definition of the product-type needed
Step 1
Recognition of a need
EXHIBIT 3-3
3-14

15. BUY-PHASES NEW TASK MODIFIED REBUY STRAIGHT REBUY
COMPLETE BUYING PROCESS REQUIRED EMPHASIZES
PRODUCT DEFINITION AND SPECIFICAIONS
MODIFIED REBUY
EMPHASIZES SUPPLIER SEARCH AND EVALUATION
STRAIGHT REBUY
EMPHASIZES NEED RECOGNITION AND PURCHASE
3-15

16. 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
3-16

17. 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
3-17

18. IMPROVE PERFORMANCE: STAYING AHEAD OF PURCHASING TRENDS
REDUCE PURCHASING COSTS
CUTBACK ON EMPLOYEES
REDUCE NUMBER OF VENDORS/ TRANSACTIONS
BUILD RELATIONSHIPS
CENTRALIZE PURCHASING ACTIVITIES
USE THE INTERNET
3-18

19. IMPROVE PERFORMANCE: STAYING AHEAD OF PURCHASING TRENDS (continued)
OUTSOURCE IN-HOUSE ACTIVITIES
Outsourcing is the process of finding another org to supply the buying org with a product or service, usually one that was previously created in house.
Example: the network structure
Early supplier involvement (ESI) is one outsourcing strategy where companies use suppliers to help design new products or processes.
3-19

20. Make or buy Outsourcing is one result of a make or buy decision.
Its much better to outsource the intangibles (services) not tangibles.
Like marketing research and advertising for example.
In outsourcing, stronger relationships with sellers is very important and communication.

21. IMPROVE PERFORMANCE: STAYING AHEAD OF PURCHASING TRENDS (continued)
CROSS-FUNCTIONAL TEAMS – MADE UP OF COMPANY DEPARTMENTS, SUPPLIERS, CUSTOMERS
INCREASE PROFESSIONALISM THROUGH CERTIFICATION PROGRAMS AND ESTABLISH A CODE OF ETHICS
3-21

22. SALES SURVIVAL QUESTIONS: CAN YOUR SALESPEOPLE ANSWER THE FOLLOWING QUESTIONS?
WHAT IS A CROSS-FUNCTIONAL TEAM?
CAN YOU RECOGNIZE ONE AT YOUR CLIENT’S ORGANIZATION?
DO YOU KNOW HOW TO GET YOUR COMPANY INCLUDED IN YOUR CLIENT’S CROSS-FUNCTIONAL TEAM?
WILL YOUR COMPANY GIVE YOU THE PEOPLE RESOURCES TO SUPPORT YOUR CLIENT’S NEEDS?
3-22

23. 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 3-9
3-23

24. Changing company focus: MAKE-OR-BUY
Changing company focus: MAKE-OR-BUY? Purchasing Determines Who Provides Best Value for Lowest Cost
Best-Value Provider
Action
In-House
Partner
Training
Transaction Processing
Paper Processing
Product Design
Product Manufacturing
Component Part Manufacturing
R&D
Marketing
Sales
Advertising
Research
Support
Human Resources Administration
3-24

25. MAKE-OR-BUY DECISION ANALYSIS Components or 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
ACCEPTABLE RISK
Buy the Products,
Components or Services
UNACCEPTABLE RISK
Retain Production and
Provide Services
3-25

26. 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
3-26