Purchasing

 The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance in an organization

Why Purchasing is Critical The Changing Global Competitive Landscape  To compete globally. you need to purchase globally  Global purchasing efforts are supported by advances in information systems .

Why Purchasing is Critical Financial Impact  For the average manufacturer. half of the value of shipments comes from materials  Purchasing represents a major opportunity to increase profitability .

491 $18.Why Purchasing is Critical Financial Impact .968 $16.I Lowe¶s Company Earnings and Expenses Sales COGS Pretax earnings $26.109 .359 Every dollar saved in purchasing for increases pretax profit by one dollar Every dollar saved in purchasing inventory lowers total assets by one dollar Selected Balance Sheet Items Merchandise inventory Total assets $3.465 $2.

6% to 18.465 $2.359 $26.990 ROA increases from 14.913 Selected Balance Sheet Items Merchandise inventory $3.968 Total assets $16.491 $18.849 $15.Why Purchasing is Critical 3% purchasing reduction in COGS Earnings and Expenses Current With 3% saving Pretax earnings increase by $554 (23.4%) Sales COGS Pretax earnings $26.491 $17.109 $3.2% .911 $2.

 From initiation to completion of transactions and completion of a material cycle 5-6 .Purchasing Process  Variations of processes of purchasing across the industries.

Purchasing Process  Typically involves the following transactions:  Recognition of the need ± the process in which purchase department is formally informed about the need of a particular item (or more) by the user department  Quotation request ± once purchase request (PR or Indent) is received and understood clearly. the purchase department sends the request documents to all potential suppliers asking them 5-7 .

    Evaluating the Quotations and selection of the supplier Placement of the purchase order Receiving the goods Release of Payments for the goods 5-8 . Cont.Purchasing Process«.

The Purchasing Process Needs identification Description No Supplier identification and evaluation Is there a preferred supplier? Yes Supplier selection & contracting Purchase order preparation Follow up and expediting Receipt and inspection Settlement & payments Records maintenance Order cycle .

Includes how supplier will be evaluated .The Purchasing Process Needs Identification Needs identification ‡ Purchase requisition ± An internal document completed by a user that informs purchasing of a specific need ‡ Reorder point system ± A method used to initiate the purchase of routine items. each item has a predetermined order point and order quantity ‡ Statement of Work/Scope of Work (SOW) ± Terms and conditions for a purchased service. Typically.

The Purchasing Process Description Description The communication of a user¶s needs to potential suppliers in the most efficient and accurate way possible ‡ Description by market grade/industry standard ‡ Description by brand ‡ Description by specification ‡ Description by performance characteristics ‡ Description by prototypes or samples .

The Purchasing Process Supplier Identification and Evaluation Supplier identification and evaluation The amount of effort increases as: ‡ The complexity of the product or service increases ‡ The amount of money that is committed increases ‡ The length of the proposed buyer-supplier relationship increases .

The Purchasing Process Supplier Identification and Evaluation .II Supplier identification and evaluation Criteria for supplier assessment: ‡ Process and design capabilities ‡ Management capability ‡ Financial condition and cost structures ‡ Planning and control systems ‡ Environmental regulation compliance ‡ Longer-term relationship potential .

I ‡ Competitive bidding Supplier selection & contracting ‡ Negotiation ‡ Fixed-price contracts ‡ Cost-based contracts .The Purchasing Process Supplier Selection .

The Purchasing Process Supplier Selection .II Preferred supplier Supplier selection & contracting A supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process .

III Competitive bidding is most effective when: Supplier selection & contracting ‡ The buying firm can provide qualified suppliers with clear descriptions of the items or services ‡ Volume is high enough to justify the cost and effort ‡ The firm does not have a preferred supplier .The Purchasing Process Supplier Selection .

IV Negotiation is most effective when: Supplier selection & contracting ‡ The item is new or technically complex with only vague specifications ‡ The purchase requires agreement about a wide range of performance factors ‡ The supplier must participate in the development effort ‡ The supplier cannot determine risks and costs without input from the buyer .The Purchasing Process Supplier Selection .

delivery times Two basic types of contracts: ‡ Fixed-price ² price does not change for life of contract ‡ Cost-based ² price tied to cost of selected key input or economic factor .The Purchasing Process Supplier Selection .V Contracting is most effective when: ‡ There is a large amount of money involved Supplier selection & contracting ‡ The business needs specific requirements that need to be put into writing such as quality levels.

The Purchasing Process The Order Cycle ‡ Purchase order preparation Purchase order preparation Follow-up and expediting Receipt and inspection Settlement and payment Records maintenance 74% of firms currently have electronic data interchange (EDI) with some part of their supply base ‡ Follow-up and expediting ‡ Receipt and inspection ‡ Invoice clearance and payment ‡ Records maintenance .

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