Chapter 1-Part 1

Introduction to
MATERIALS MANAGEMENT
CHAPTER 1
Purchasing
IntroductiontotoMaterials
Introduction MaterialsManagement,
Management,8e 8e Copyright © 2017 by Pearson Education, Inc.
Chapman,Arnold,
Chapman, Arnold,Gatewood,
Gatewood,and
andClive
Clive All Rights Reserved
Supply Chain Management
The design, planning, execution, control, and

monitoring of supply chain activities with the
objective of creating net value, building a
competitive infrastructure, leveraging
worldwide logistics, synchronizing supply with
demand, and measuring performance globally.
Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Chapman, Arnold, Gatewood, and Clive All Rights Reserved
Procurement
The business functions of procurement

planning, purchasing, inventory control,
receiving, incoming inspection, and salvage
operations.

Purchasing
“the process of buying”

Requires input from
▪ Marketing
▪ Engineering
▪ Manufacturing
▪ Manufacturing Planning and Control
• What materials to order
• When to order them

Purchasing and Profit Leverage
• On average 50% of sales revenue used for

▪ Raw materials
▪ Components
▪ Supplies
• Tremendous potential to increase profits

Income Statement
Sales $100
Cost of Goods Sold
Purchases $50
Other expenses $40 90
Profit Before Tax $ 10
Assume a profit before tax of 10%

Income Statement
(With Sales Increase)
Sales $110
Cost of Goods Sold
Purchases $55
To increase profits by $1, sales must increase by 10%

Income Statement
(With Reduced Purchase Cost)
Sales $100
Cost of Goods Sold
Purchases $49
To increase profits by $1, decrease costs by 2%
• A 10% increase in sales has the same impact on

profits as a 2% decrease in the purchase cost
• Leverage effect is 5:1
Objectives of Purchasing
• Obtain goods and services

▪ Of the required quantity and quality
▪ At the lowest possible cost
▪ Ensure best possible service and delivery
▪ Develop and maintain good supplier relations
▪ Select products and suppliers that minimize the
impact on the environment

Purchasing Functions
• Determining purchasing specifications

▪ Right quality
▪ Right quantity
▪ Right time (delivery)
▪ Right place (delivery)
• Selecting supplier
▪ Right source
▪ Negotiating terms and conditions (right price)
▪ Issuing and administration of PO’s and agreements

Outsourcing
“…having suppliers provide goods and services that

were previously provided internally.”
APICS Dictionary 14th edition
• Availability of educated offshore workforce

• Internet communications
• Multimodal supply chains
• Company concentrating on core competencies

Offshoring
• Special type of outsourcing

• Outsourcing to a company in a different country
• Internet and efficient shipping can make
attractive

Outsourcing
• Shift from working with inside staff (operations)
to working with outside suppliers
• Emphasis on contracts
• Services as well
▪ Cafeteria
▪ Cleaning
▪ Maintenance
▪ Information Technology
▪ Finance
Better, faster, cheaper
Purchasing Cycle
1. Receive and analyze purchase requisitions

2. Select suppliers, issue quotations
3. Determine the right price
4. Issue purchase orders
5. Follow up to ensure correct delivery
6. Receive and accept the goods
7. Approve invoice for payment

Purchasing Cycle
P2P Cycle
SAP

Receiving and Analyzing Requisitions
• From planners (MRP system) and all other users

• Purchasing will
▪ Identify originator, account number, approvals
▪ Check material specifications
▪ Verify quantity and unit of measure
▪ Verify delivery date and place
▪ Ensure all supplemental information

Selecting Suppliers
• Often from a list of approved suppliers

• Input from engineering and design

Requesting Quotations
• Written inquiries sent to enough suppliers (RFQ)

▪ To ensure competitive and reliable quotes are
received
• Quotes are analyzed for
▪ Price
▪ Total cost
▪ Compliance to specification
▪ Terms and conditions of sale
▪ Delivery
▪ Payment terms
Determining the Right Price
• Not always the lowest

• May involve negotiations
• Responsibility of the Purchasing Department

Issuing a Purchase Order
• Legal document
• Forms a contract with the supplier upon
acceptance
• Copies to
• Supplier
• Originator
• Accounting
• Receiving
• Purchasing file

Follow-up and Delivery
• Ensure on-time delivery

• Negotiate any changes
• Take corrective action
▪ Expedite as required
▪ Find alternative sources of supply
▪ Work with suppliers to resolve problems
▪ Reschedule production

Receiving and Accepting Goods
• Receiving inspects goods for correct quantity and

any damage
• Accepts goods and generates a receiving report
▪ Send to quality for further inspection
▪ Hold goods damaged in transit
• Copies to Accounting, Purchasing

Approving Invoice for Payment
• 3-way match
▪ Original Purchase Order
▪ Receiving Report
▪ Invoice
• Price including discounts
• Quantity
• Send approval to Accounts Payable

Establishing Specifications
Purchasing can help to make the “best buy”
• Quantity requirements
• Price requirements
• Functional requirements

Quantity Requirements
• Small volume
▪ Find a standard item
• Large items
▪ Design for economies of scale
▪ Reduce cost
▪ Satisfy functional needs

Price Requirements
• Represents economic value

• Relates to the use of the item
• Relates to the selling price of the finished product

Functional Specifications
• What the item is expected to do

• Set by the end user
▪ Performance expectations
▪ Aesthetic expectations
• Example: functional specifications for a car
▪ Run reliably?
▪ Make you look cool?
▪ Safety?
▪ Fuel efficiency?

Functional Specifications and
Quality
• Quality and product planning
▪ Meeting the expectations of the marketplace
• Quality and product design
▪ Determining the specifications
• Quality and manufacturing
▪ Meeting the specifications
• Quality and use
▪ Satisfying customer expectations

Value Analysis
“the systematic use of techniques that identify a

required function, establish a value for that
function, and finally provide that function at the
lowest overall cost.”
APICS Dictionary 14th edition

Functional Specification
Description
1. Brand
2. Physical and chemical specifications
▪ Material and method of manufacturing
▪ Performance
3. Engineering drawings
4. Miscellaneous methods

Description by Brand
• Items are patented

• Special supplier expertise
• Small quantity
▪ Not worth the effort of developing
specifications
• Preferred by
▪ Customers
▪ Buyer

Description by Brand
• Reputation of the supplier

▪ Guarantees / warranties
• Limits competition
▪ Higher price
▪ Easy to inspect
• Product liability is the responsibility of seller
• Specify “by brand or equivalent”

Description by Specification
• Physical and chemical specifications

▪ Buyer-defined
• Material and method of manufacture
▪ Environmental or food issues
• Performance specifications
▪ State what the item is supposed to do
▪ Uses supplier expertise

Specifications
• Carefully designed
• Too loose - May not give the desired
performance
• Too detailed – Costly to develop and may limit
suppliers
• Should allow for multiple sources
• Provide standard for performance
• Can be difficult to do, e.g., colors
• May be more expensive than standard products
• Used when volume is sufficient to warrant costs
Standard Specifications
• Set by government and nongovernmental
agencies
▪ Examples - SAE 10W30 motor oil, Underwriters
Laboratories (UL), ASME steel standards
• Widely known and accepted
• Lower in price
• Adaptable to customers needs
• Market grades
▪ Describe many aspects of a product
▪ Example - Eggs: Grade A small, medium or large
Engineering Drawings
• Detailed description of parts

▪ Finishes
▪ Tolerances
▪ Materials used
▪ No other way to describe the item
• Expensive to produce
• Can be used for inspection

Miscellaneous Attributes
• Samples
• Used for colors / patterns
• Combination of methods
▪ Example: specifying curtains
• Drawing of the window dimensions
• Fire or safety rating
• Type of material to use
• Samples of pattern desired


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Introduction to

The design, planning, execution, control, and

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

The business functions of procurement

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

“the process of buying”

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• On average 50% of sales revenue used for

• Tremendous potential to increase profits

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Assume a profit before tax of 10%

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

To increase profits by $1, sales must increase by 10%

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

To increase profits by $1, decrease costs by 2%

• A 10% increase in sales has the same impact on

• Obtain goods and services

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Determining purchasing specifications

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

“…having suppliers provide goods and services that

• Availability of educated offshore workforce

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Special type of outsourcing

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

1. Receive and analyze purchase requisitions

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• From planners (MRP system) and all other users

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Often from a list of approved suppliers

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Written inquiries sent to enough suppliers (RFQ)

• Not always the lowest

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Ensure on-time delivery

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Receiving inspects goods for correct quantity and

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Purchasing can help to make the “best buy”

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Represents economic value

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• What the item is expected to do

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

“the systematic use of techniques that identify a

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Items are patented

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Reputation of the supplier

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Physical and chemical specifications

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Detailed description of parts

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

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