Professional Documents
Culture Documents
Chapter Three: Purchasing and Materials Management
Chapter Three: Purchasing and Materials Management
Purchasing and
Materials Management
Review of Chapter Two
1. 4-stage relationship development process: Essence of each stage
Awareness – buyers & sellers engage in “arms-length” evaluations
of potential partners;
Exploration – interaction occurs and tentative associations may
form;
Expansion – increasing dependence between exchange partners.
One party has made a successful request for adjustment & start to
seek more from current partners;
Commitment – partners adapt & resolve disputes internally in order
to sustain the relationship.
2. Mechanisms to sustain strategic relationships
House calls; trading places; managing dependence; supplier
pledges; contracts and ownership
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Learning Objectives
• Understand the basics of supply chain management
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The Objectives of Purchasing
1. Secure appropriate levels of the supply of the right
product or service (Quantity)
+
2. Secure the correct level of quality (Quality)
+
3. Secure the lowest total cost (Cost)
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Quality: What is “appropriate” quality?
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Quantity: What is “Economic Order Quantity”?
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Cost: What is the total cost of ownership?
The total cost of ownership is the purchase price PLUS costs
associated with installing, using, maintaining, insuring, supplying,
and servicing the product.
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What Companies Really Pay for Ownership?
• Cost of ownership goes beyond the price paid for a product
• TOTAL COST OF
OWNERSHIP = PRODUCT PRICE
+ DELIVERY
+ INSTALLATION
+ MAINTENANCE / REPAIR
+ POWER COSTS
+ SUPPLY COSTS
+ OPERATING COSTS
+ FINANCING
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Value Analysis
The objectives of value analysis:
• Reduce costs and/or
• Improve design
COMPARE
What is - Benefits received New
Currently Alternatives
- Functions of product
Being Done Being
- Cost of materials Considered
- Work process involved
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Purchasing Philosophy
Adversarial Purchasing Philosophy
- A traditional purchasing philosophy
- The firm utilizes several vendors for each product (just give any vendor
a portion of its business)
- Developed in order to increase competition among the buyers
- Consequences: lower prices while increasing the level of service and
attention paid to the account
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Purchasing partnerships are made with
vendors who provide:
• High-purchase-volume materials, components or strategic
products
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Supplier Evaluation
Buy-Grid Model – A general model of rational organizational decision making
- Buy-phase model (go through 8 steps beginning with problem recognition,
search, evaluate and select)
- Buy-class model (the type of buying decision based on the experience of
the buyer with a purchase of a particular product: new buys & straight
rebuys & modified rebuys)
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Step 8
Step 8
Evaluation of product performance
Evaluation of product performance
Step 7
Step 7
Selection of an order procedure
Selection of an order procedure
Step 6
Step 6
Evaluation of proposals and
Evaluation of proposals and
selection of a supplier
selection of a supplier
Step 5
Step 5
Acquisition and analysis of proposals
Acquisition and analysis of proposals
Step 4
Step 4
Search for qualified suppliers
Search for qualified suppliers
Step 3
Step 3
Development of detailed specifications
Development of detailed specifications
Step 2
Step 2
Definition of the product-type needed
Definition of the product-type needed
Step
Step1 1
Recognition
Recognitionofofa aneed
need
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Buy-class Model
Type of buying decisions
1. New buys
- Follow complete buying process (all steps taken)
- Never purchase before
- With emphasis on product definition & development of product specification
3. Modified rebuys
- The same product or product type is being purchased
- But most of the decision steps are still taken
- Comparison advertising works
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Trends in Purchasing
1. Reducing purchasing costs
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Trends in Purchasing
One trend is reducing purchasing costs:
- Cutback on employees through early retirement and layoffs
- Reduce number of vendors/transactions – buying more in the
same amount of time by buying more from the same vendors,
reduce shopping around
- Build relationships – increases the importance of developing
strategic relationships with customers
- Centralize purchasing activities – the concentration of
purchasing within company headquarters for closer
supervision and strategizing
- Internet makes centralization easier to accomplish
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Trends in Purchasing
The second trend is outsource in-house activities
- Outsourcing: the process of buying products/services from another
firm, usually one that was previously created in-house. E.g., a company
hires an ad agency to do all of its advertising, an exhibit company to
handle all of its trade shows, and a marketing research firm to conduct all
of its research. Then the company can focus on its core business.
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Make-or-buy Decision Analysis
RISK ASSESSMENT
FINANCIAL RISKS MARKETING RISKS
Resource Allocation Customer Impact
Investment of Resources Supplier Impact
Accurate Cost Analysis
Legal Issues
MANUFACTURING RISKS POLITICAL RISKS
Reliability Management commitment/
Expertise willingness to partner
Equipment Turf Battles
Patent Protection Internal Strife
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Purchasing in Government
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Ethics in Purchasing
1. What is ethics? – Ethics are moral codes of conduct, rules for how
someone should operate that can be followed as situations demand
2. Two basic dimensions guide ethical issues in purchasing:
fairness (any competitor has equal opportunity to sell to the buyer and
equal access to information from the buyer) and responsibility to the
buying organization.
3. Two worrisome activities: gift giving and information access &
use.
4. Why should any “for profit” firm be concerned with ethics? –
any trade-off of short-term profits for long-term ethics is short-sighted. In
the end, buyers will support those that have earned their trust and value
their reputation.
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