Business Economics

Business Economics WEEK 3 W/C 25th February 2013 INTRODUCTION Course 17832 Advanced Diploma Management

Homework tasks last week • Please complete 16.1 and 16.3 from the textbook chapter. • How did you go? 3

Purchasing Planning -Materials Management • The purpose of materials management is to obtain efficiency of operations through integration of • 1) material acquisition, • 2) material movement • 3) material storage.

Purchasing Planning – Materials Management • When transportation and inventory costs are substantial, a focus on materials management is appropriate. 5

Purchasing Planning - Materials Management • Some of the basic functions of materials management: • Shipping • Purchasing • Warehousing (Raw Material, End Material) • Order Processing • Production And Inventory Control • We are focused on Purchasing.

Purchasing Planning – Materials Management One of the major issues that materials managers might encounter is the method of Purchasing/ Procurement. 7

Purchase Planning – market Analysis • Due to the increased importance of purchasing function within organisations, analyses of the supply market is often conducted. • The purchasing function: • has an overall understanding of the entire value chain and the role of the company in creating value • is an active player on the supply market with a view to attracting and retaining attractive suppliers • works alongside suppliers who are capable of strengthening the company’s core competence

Purchase Planning – Market Analysis • In the purchase planning process you need to conduct analysis of the supply market through: • Gathering information about new materials and suppliers • Monitoring the prices • Staying oriented in new legislation, procedures and developments

Assessment of Suppliers • When choosing suppliers you should focus on technical, financial and administrative issues. You should also check that the supplier has: : • High level in technology and knowledge • Adequate facilities for production and storage • Effective system for quality control

Assessment of Suppliers • Profitable cooperation with suppliers • Good economy • Effective logistics control • Acceptable ethical and social attitudes • Satisfactory environmental standards.

Assessment of Suppliers • An assessment of suppliers should ensure that the suppliers: • Deliver goods of high quality • Offer a good service of delivery • Can sell at competitve prices.

Assessment of suppliers • All the listed factors ensure that suppliers: • Can supply products of high quality • Can provide good service • Can sell products at competitive prices

Assessment of suppliers • Entering into a strategic cooperation with a new supplier demands an assessment of: • The supplier’s strategy compared to that of the company • The supplier’s skill and will to cooperate around the development of new products • Whether the supplier’s competencies can help create competitive advantages.

The Purchasing Function • Negotiates, draws up and signs contracts with the chosen suppliers. • Contracts might include frameworks for prices, price adjustments, the size of consignments, delivery deadlines, terms of delivery and terms of payment. .

The Purchasing Function • A purchasing system: • Ensures that orders are issued to suppliers at the right time and in accordance with the agreements that have been reached. • ensures that once orders have been placed they can be completed as agreed, requiring the inspection of product type, number of units delivered, quality level, delivery deadlines, point of delivery and other factors.

Purchasing Process –steps • Preparing a purchase voucher • Examining potential suppliers • Obtaining price quotations • Comparing price quotations • Choosing suppliers • Monitoring and inspecting consignments • Complaining (if necessary)

Preparing a purchase voucher • Internal order form • Contains information about • Number of products • Technical specifications • Delivery deadlines

Examining potential suppliers For routine purchases, suppliers are chosen from list of authorised suppliers. Purchases subject to framework agreement – an order is sent to the selected supplier. For new purchases suppliers need to be evaluated and new suppliers sort.

Obtaining price quotations • Quotations should normally contain the following main points: • quantity • quality • price • delivery deadline • terms of delivery • terms of payment • special term

Comparing price quotations • Company’s need to be able to compare: • Taste quality – design, colour etc • Terms of delivery • Delivery deadline • Delivery precision • Terms of payments • Any special terms

Comparing price quotations • Other factors that need to be considered when comparing quotations include: • Assessment of each supplier’s ability to produce the products required in the required quantity and expected quality. • The supplier’s ability to meet the delivery deadlines should also be assessed.

Choosing a supplier It is essential to choose a supplier that based on objective and subjective criteria. At this point negotiations will take place to achieve better terms than what was in the initial quotation.

Monitoring and inspecting The Purchasing department has received the order confirmation, it monitors the delivery process to find out whether deliveries have been carried out as agreed. Suppliers will usually inform buyers of any delays or other problems arising in connection with delivery. Purchasing departments will contact their suppliers shortly before the delivery deadline to confirm that delivery will be made as agreed.

Monitoring and inspecting This assists in avoiding delays in delivery from having a knock-on effect in the company’s logistics system. When the products arrive, they are checked to ensure that the quantity and quality correspond to the agreement. When the supplier’s invoice is received, it is checked to ensure that all prices and discounts have been included as agreed.

Purchase simulation exercise 26

The Buying Game • In your groups you are to go to the following link: http://www.thebuyinggame.org/ • Instructions are as follows:

The Buying Game • You are to answer each of the six questions and IMPORTANT you cannot sit in the middle. You MUST answer the questions accurately. • At each section you are to click onto the section “Meet some people who might be in your supply chain”. You are to summarise in your words each of these sections and if, after reading the section, it influenced your answer. • You are to comment on what each of the questions relates. • You are to compile a profile of your groups buying ability and how you rated overall in the buying game. • Each group is to submit the task by email

Purchasing planning – other factors 29

Purchasing Planning - Materials Management • Other methods to consider in the purchasing process include: 1) Electronic Ordering 2) Stockless Purchasing 3) Standardisation 4) Just in Time Purchasing.

Electronic Ordering • Electronic ordering reduce paper transactions. • Paper transactions include purchase order, receiving document, authorization to pay, etc. • Transactions between firms are increasingly done via Electronic Data Interchange (EDI). • EDI is a standardised data transmittal format for computerized communications between organisations.

Electronic Ordering • It provides data transfer for any business application, including purchasing. • For example, data for a purchase order (such as order date, due date, quantity, part number, order number, address, etc.) are fitted into standard EDI format.

What is Stockless Purchasing • This means that the supplier maintains the inventory for the purchaser. • Here, the cost of stocking inventory has been temporarily transferred from the purchaser to the supplier.

Stockless Purchasing • Consignment inventories • If the supplier can maintain the stocks for a variety of customers who use same products, then there may be net savings in this option. • If not, purchasing costs may go up.

Standardization • Rather than obtaining a variety of components similar in labeling, coloring, packaging, etc. the purchasing manager/agent should try to have those components standardised. • For every component that is standardised, there is one less invoice, one less item to be inventoried, etc.

Just In Time Purchasing Just In Time (JIT) purchasing is directed toward the reduction of waste (that is present at incoming inspection, excess inventory and poor quality)and delay.

Just In Time Purchasing • Waste and delay is present in all production processes. (not only in purchasing) • JIT approach can be applied to all areas of production. • The Basic JIT Approach: Material Should Add Value every moment it is in stock.

Goals Of Just In Time Purchasing 1- JIT tries to reduce all non-value-added activities. • (If purchasing personnel can select more reliable Suppliers, purchased items can be received without counting, inspection etc)

Goals Of Just In Time Purchasing 2- Elimination of in-plant inventory. • No raw material inventory is necessary if materials are delivered exactly to where they are needed. • Parts should be delivered in small lots directly to the using department as needed. • Elimination of inventory allows managers to see production problems that are hidden behind those inventories.

Goals Of Just In Time Purchasing 3- Elimination of In-Transit inventory • In-Transit inventory is the inventory flowing between the plant and material suppliers. • It can be reduced by encouraging suppliers to locate near the plant. • (The shorter the flow of material the less inventory and the less transportation costs.)

Goals Of Just In Time Purchasing • To reduce In-Transit inventory is to have inventory on Consignment. • Under a Consignment arrangement the supplier maintains title to the inventory. • The supplier would usually locates its warehouse where the user has its stockroom.

Goals Of Just In Time Purchasing 4- Quality And Reliability Improvement • To obtain improved quality and reliability: • Suppliers And Purchasers must have mutual understanding and trust. b) Suppliers’ long term commitment to the relationship should be increased.

Homework tasks • Please complete 16.6 from the textbook chapter. 43

Business Economics