Purchasing. . .

The Process of Buying

Chapter 7

March 5, 2001

IM417 Manufacturing Resources

Analysis
Southeast Missouri State University
Compiled by Bart Weihl
Spring 2001
1

Average Manufacturing Costs

On average, manufacturing firms
generate approximately 10% profit from
operations.
Typical breakdown of total costs:
Labor (8%)
Materials (50%)*
Overhead costs (32%)
* On average, manufacturing firms spend about
2
50% of their sales dollar in raw material,

Purchasing Objectives:
Four Major Objectives of Purchasing:
1. Obtain the required quantity and
quality of goods and services
2. Obtain the lowest cost
3. Ensure top notch service and timely
delivery
4. Maintain good supplier relationships
and Develop potential suppliers
3

Purchasing
No longer just order takers.
Purchasing needs to know

material
performance
availability
suppliers
4

Purchasing Functions:
Determine purchasing specifications
(correct quality, quantity, and delivery
requirements)
Select the right source
Negotiate terms and conditions
Issuing and monitoring of purchase
orders
5

Purchasing Cycle:
1.
2.
3.
4.
5.
6.
7.

Receive and analyze purchase requisition

Select suppliers
Determine the right price
Issue purchase orders (POs)
Monitor POs
Receiving and accepting goods
Approving suppliers invoice for payment

Purchasing Cycle Step 1:

Receive and analyze purchase requisition
Minimum Required Information:

Identity of requestor, approval, and charge

number/account

Specification

Quantity and unit of measure

Required delivery date and place

Additional supplemental information

Purchasing Cycle Step 2:

Select Suppliers

Routine items typically have preferred suppliers

New/unusual items may require vendor search

and RFQ for comparison

Some companies require multiple source solutions

(McDonnell-Douglas preferred 3, single source required
justification documentation)

Many firms today are opting for fewer suppliers

Use of supply chain management is growing

8

Supply Chain Management

Apply a total systems approach to
managing the entire flow of

information
materials
and services
Raw
material
suppliers

Factories &
warehouses

End
customer
9

Partnership Relationship
Continuing relationship involving

a commitment over an extended time

period,

an exchange of information, and

an acknowledgement of the risks &

rewards of the relationship.
10

Purchasing Cycle Step 3:

Determine the Right Price

Tied directly to supplier selection

Price negotiation

Focuses on quantity (net and gross)

Frequency of orders

Total usage Refunds are becoming popular

Supplier maintained inventory (pay as you

use philosophy)

11

Purchasing Cycle Step 4 & 5:

Issue POs and Follow-up

POs are legal offers to purchase

Purchasing must follow-up on open POs

Monitor past due POs and critical need

components

Work with suppliers

Take corrective action

Expediting components, alternative supply

sources, reschedule production, etc.

12

Purchasing Cycle Step 6 & 7:

Receiving and Paying Suppliers

Reconcile POs and receivers

Correct damages, variance or discrepancies

Verify information for payment

PO number

Receiving report

Invoice
13

Outsourcing
Purchased items account for 60 to 70% of the
cost of goods sold.
Outsourcing allows firms to focus on their core
competencies.

Organizations outsource when they decide to

purchase something they had been making inhouse.

Typically handled by materials management

function.
14

Make or Buy
Current trend favors outsourcing all
activities that do not directly represent
or support core competencies.
Are there any dangers associated with
aggressive outsourcing? What are the
implications for JIT production?
15

Purchasing Inputs
Marketing
Engineering
Manufacturing

16

Functional Specifications
By Brand
By Specification
Physical and Chemical Characteristics
Materials & Methods of Manufacture
Performance

By Engineering Design
Miscellaneous
Gimme one just like the last one
17

Good Specifications
Are not to tight or loose
Allow for multiple sources
Assign responsibility

18

Supplier Selection
Types of Sourcing
Sole Source
Multiple Source
Single Source

Select based on:

Technical Ability
Mfg. Capability
Reliability

After sale service

Location
Price

19

Four Categories of Product

Commodities
Standard Products
Items of small value
Make to order items
20

Purchasing Anatomy

Procurement

Specifications
Supplier Selection
Price Determination
Negotiation

Purchasing
Schedule
and
Follow up

Order Release
Schedule Delivery
Follow up
21

Price Determination
you get what you paid for
Fair Price- One that is competitive, gives
the seller and buyer an opportunity for profit
Fixed Costs- Costs incurred without respect
to sales volume
Variable Costs- Costs directly associated
with sales volume (labor, material, etc.)
Breakeven Point- The convergence of
profit and loss. . . financial equilibrium
22

Break-Even Example
Q:To make a particular component requires an overhead
(fixed) cost of $5000 and a variable unit cost of
$6.50/unit. What is the total cost and the average cost
of producing a lot of 1000? If the selling price is
$15/unit, what is the break-even point?

A: Total cost = fixed cost + (variable cost/unit)(# of

units)
= $5000 + ($6.5 x 1000) = $11,500
Average cost = Total cost / # of units
= $11,500 / 1000 = $11.50/unit
Break-even point: Let X = # of units sold
$15X = $5000 + $6.5X
$8.5X = $5000
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For Next Week. . .

Do Problems:
7.1
7.2
7.3
PREPARE for Test #2. . . 15% of the final
grade
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