Purchasing and Its Management

1. Purchasing and Its Management Prepared by: Bhakti Joshi Presented on: August 06, 2013

2. Case Study A company does not have a production facility for its dairy whitener and cheese-related products but outsources from another dairy and sells the products through conventional distribution systems The dairy has a contract with the company such that company’s requirements can be met within a short span of time The products are shipped from Stock Keeping Units (SKUs) and then to Carrying and Forwarding Agents (C&FAs) and then to Authorised Wholesalers (A&Ws). – PRIMARY SALES A&Ws sell products to retailers, independent wholesalers and institutions such as hotels and restaurants – SECONDARY SALES

3. Case Study (Contd…) Company facilitates for factory 8 C&FAs and 185 A&Ws in Eastern region. Biggest C&FA is in Kolkata and known as the “mother” depot. Distributors are located in and around Kolkata

4. Case Study (Contd…) The dairy operates with a three months’ rolling plan and is capable of meeting the current requirements of the company The average transportation time from the dairy to the biggest C&FA depot located in Kolkata is 20 days The desired closing balance of stock in Kolkata depot is 25 days planned sales volume (primary sales plan minus availability plus desired closing balance equals order quantity) The distributors also stock 30 days’ inventory every month. The last 10 days’ sales accounts for 40-45% of total sales in the month

5. Questions for the Case Study • What is the role of the company? • How much time is needed for transportation of products between the “mother” depot to other distributors? • What will be needed for all agents to maintain inventory? • Is this system efficient? Why?

6. Introduction to Purchasing … a process of buying. • Determining purchasing needs • Selecting supplier/s • Negotiating a price • Arriving at a price • Specifying terms and conditions • Issuing contract or order • Following up to ensure proper delivery and payment Reference to the principles of 5 R’s of Purchasing: Right Source Right Quality Right Price Right Time Right Quantity

7. 5R’s of Purchasing • Right Price • Determined by costing the production process of the supplier • Determined by allowing reasonable profit for the supplier and insisting and helping to reduce cost • Right Quantity • Ensuring no excess and no shortage • Ensuring overall minimum cost for inventory. • Right Quality • Adhering to mutually accepted standard by supplier and customer at the time of finalizing the purchase order • Right Place • Where the item is going to enter the value stream? • If the item is not available here when needed, then its made availabile in the short-run • Right Time • Decided by production schedule for meeting customer’s requirements.

8. Purchasing Ethics: Examples • A purchasing team member accepted a gift from a supplier • A purchasing team member has a personal relationship with a supplier • A purchasing team member owns a supplier’s stock • A specific criteria for selection and bidding of suppliers is documented and followed for every project • In a competitive bidding situation, the purchasing team provided certain information to one supplier that was not provided to other suppliers

9. Purchasing Ethics: Influences • Managing costs • Building trust and relationships • Making profit/revenue (individual or for the company? • And?? • Is this important? Why?

10. Conflict 1 Stability Versus Flexibility Raw materials and sub-assembly suppliers want manufacturers to commit to purchase large quantities in stable volumes with flexible delivery dates. Alternatively, manufacturers desire long-term commitments from their suppliers with the lowest volume discounts possible and highest service and fearful of overcommitting in the face of customer demand fluctuations

11. Conflict 2 Controlling Costs of Production Manufacturers want to reduce their acquisition and production costs by engaging in large production runs. However, that leads to setting goals against inventories that may rise in warehouses and among distribution centres. Conversely, reducing inventories may involve warehouses and distribution centres transporting smaller quantities and possibly increasing purchasing and transportation costs

12. Conflict 3 Small demand versus big demand A large end user may want to buy four of a non-standard pack size that the distributor can only buy in minimum quantities of six. The distributor doesn’t want to lose the customer but has no use for the additional two items. The additional two items become dead stock if customer doesn’t purchase it.

13. Purchasing Management This involves taking up responsibility to purchase items for the organisation and accordingly requires knowledge of: • Supply chain • Business and Tax laws • Invoicing • Inventory procedures • Transportation • Logistics related issues

14. Supply Chain • To match supply to demand in an efficient manner • Considerations to centralisation and decentralisation of supply • Resources considered: • Product and service flow • Information flow • Financial flow

15. Supply Chain Management • "Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. • It also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. • It integrates supply and demand management within and across companies with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. • It includes all of the logistics management activities, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology."

16. Definition Implies SOURCE CUSTOMERS SERVICE PROVIDERS Suppliers Intermediaries Third Party • Transportation • Distribution (Wholesale/Retail • Marketing • Sales

17. Effective Supply Chain • Establishing trust and confidence with allied partners • The speed of information communicated • Utilising standardised approaches for communication • Accessibility and visibility in data across allied partners • Ability to monitor, measure and capture risks or unplanned events • Metrics to measure performance and addressal to problems related to operations or management

18. Inventory Management …a stock or storage of goods …overseeing and controlling • Involves creating a purchasing plan that ensures items available for purchase • Involves creating a track of existing inventory and its use • What are the types of inventory? • Raw materials and purchased parts • Work in Progress • Finished goods inventories or merchandise • Maintenance and repairs (MRO) inventory • Goods-in-transit to warehouses or customer

19. Nature & Importance of Holding Inventory • Larger the reduction in holding inventory, the higher the ROI • Uncertainty in demand • Insecure supply of raw materials • Wide variety of products • Smoothen production requirements • Avoiding stock-out or situation in which demand or requirement for an item cannot be fulfilled

20. Inventory Management in Services? Resource-Facing Service (RFS) Customer-Facing Service (CFS) …interacts with customer …Supports CFS …Not seen or purchased directly by customers …are used only inside of IT to build CFS • WHAT ARE THE INVENTORIES TO BE MANAGED IN THE FOLLOWING EXAMPLES? • Food service • Hotel service • Financial Services • BPOs • KPOs Food items like? No. of rooms Accounts, Monetary Instruments

21. Email: bhaktij@gmail.comWebsite: www.headscratchingnotes.net

22. Sources • http://books.google.co.in/books?id=ZQr8T0tmH88C&printsec=frontcover&dq=purchasing&hl=en&sa=X&ei=jN3sUavXCY-h7Aaw24CICQ&redir_esc=y#v=onepage&q=purchasing&f=false • http://wiki.answers.com/Q/What_are_the_5_R's_of_purchasing • http://books.google.co.in/books?id=idUvzwpOc14C&printsec=frontcover&dq=purchasing+management&hl=en&sa=X&ei=HiztUZ3oIdD44QTxmoDAAw&redir_esc=y