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Sam Holtz, the owner of a small foundry, complained bitterly one day about the amount of defective material he was receiving. "The raw material is guaranteed to meet quality specifications so as to contain less than.005% impurities. For the past three weeks, though, our castings have been turning out rougher than they should. I'm sure that last shipment of raw material wasn't as pure as it should have been. What do I do now?"
In another plant, Joe White was wondering what to do about a new supplier of electronic components he had just purchased from. "I got a good price on the first shipment, and so signed an order for two more shipments. The bill I got for this last shipment is almost $600 over that of the first. I told the supplier to take it back or reduce the bill, and he said that his quotation gave him the right to increase prices as inflation and labor expenses rose for him. I know I could get the shipment for less, elsewhere."
Both these situations highlight the need to follow good purchasing management procedures to reduce the incidence of such problems.
In this section you will review the activities which lead to effective purchasing. Specifically, you will explore the procurement cycle which concerns decisions on:
how to determine the firm's purchasing needs
finding a supplier who will best satisfy purchasing needs
negotiating and making the purchase
communicating the purchase decision to the supplier and to relevant personnel within your firm, and
a follow-up procedure for evaluating your purchasing decisions
What is the function of purchasing management in a manufacturing firm? At first glance, it may seem to be to find and purchase a quantity of material for the best price. But price is not the only concern. Low-priced material may not be a bargain if it is of unacceptable quality or if delivery is not reliable.
Clearly, the purchasing function involves more than obtaining the best price. It also involves buying the best value, which means buying:
the right quantity and quality
at the best price
from suppliers who are reliable and provide good service
One way to obtain the best value on a purchase is to set purchasing objectives and carefully follow the procurement cycle. This is explained later in this section.
It is often helpful to state the goals of purchasing for your business. In this way, you will never lose sight of the purpose of the purchasing function and will be able to make more intelligent purchasing decisions.
Here is a sample list of purchasing objectives:
to provide an uninterrupted flaw of materials and services for company operations
to find reliable alternative sources of supply
to buy at the most economic order quantities
to buy the best value: a combination of right quality at the best price with the best supplier service
to maintain good relations with vendors
The Procurement Cycle
Effective procurement consists of a series of steps which form a cycle. The steps in the cycle can be described as follows:
1. Determine needs. Before you buy anything, it is necessary to know what you need to buy and how much. It is important to remember that determining what you need involves not only quantity, but quality decisions as well. Determining and specifying appropriate quality requirements, in some situations, is a more difficult task than deciding what quantity to buy.
2. Select the supplier(s). When there are many suppliers to choose from, it is not simple to choose those who will give the best value - not only in price but in service, and consistent quality as well. Selection of suppliers may also mean finding more than one acceptable vendor if the purchased product is so important that you would suffer substantial losses if it were not available. In such a situation, in case the primary supplier cannot meet your needs as a result of a heavy workload, strike, unavailability of raw materials, etc.
When deciding to use more than one supplier, you have to weigh these advantages against the possible disadvantages of higher price and poorer service when you buy smaller quantities from two vendors rather than larger quantities from a single, reliable one.
3. Negotiate the purchase. In addition to specifying quantities and obtaining agreement on price, this can involve guarantees, method of payment, containers and packaging, delivery dates and other details of the purchase. Proper documentation of the purchase agreement is part of negotiation and assures that any questions or disputes that may arise will be settled in line with your expectations.
4. Follow-up. Here you look at the quality of product and service as well as the accuracy of quantities to determine what improvements, if any, are needed for the future.
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