Guide to Purchasing Management in a Manufacturing Business

Jim Black, 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 procedures to reduce the incidence of such problems.

In this guide 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 a buyer 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.

Purchasing Objectives

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.

Determining Purchasing Needs

Determining Quantity

The quantity of material you will need to buy depends on:

a. how much material you will use in production

b. how much may be lost through damage or defects

c. what you have in inventory when you place the order, and

d. the average inventory you are willing to carry

To hold total costs of materials, including purchase price and inventory carrying costs, as low as possible, it is desirable to separate purchased components into A, B, and C categories.

These categories are determined by the characteristics of the materials, their use, and their supply. The more erratically used, expensive, perishable and/or exceptionally bulky class "A" components are generally kept under tight inventory control. Status of these components is reviewed frequently and they are purchased in relatively small quantities against a production schedule (see next heading - Determining Quantity Based on Production Schedule).

Class "B" components are less expensive than the "A" components and are either erratically used or perishable or bulky. They are best controlled using perpetual inventory records which show an order point and the quantity to be bought. In this way, purchasing is a fairly routine activity except during the seasonal or annual review periods when all ordering decisions are evaluated.

Class "C" components are the least important components of the inventory. These "C" components can be kept on a simple visual control system where an order is placed whenever reserve stock has to be used. These materials are usually ordered infrequently and in fairly large quantities.

Everyone Requirements To be familiar with the Decision Making Process. All of us rely on information, and techniques or tools, to
assist us in our daily lives.

When we head out To eat, the restaurant is the tool that supplies us with all the information required to decide what to purchase
and how much to spend.

Running a Business also needs making decisions using techniques and information - how much stock to preserve, what price to sell
it in, what credit arrangements to provide, just how many people to hire.

Decision Making Process in business is the systematic process of identifying and solving issues, of asking questions and finding
answers. Decisions usually are created under conditions of uncertainty. The future is not known and sometimes even the last is
suspect. This guide opens the door for company owners and managers to learn about the variety of techniques that may be utilised
to boost your decision making process in a world of doubt, change, and uncontrollable circumstances.

A General Approach to Decision Making Process. Whether or not a scientist, an executive of a significant corporation, or a small
business owner you can gain from boosting your decision making abilities. The general solution to systematically solving issues is
the same. The next 7 step approach to better management decision making may be used to examine virtually all issues faced by a
business.

State the problem. A issue first has to exist and be realized. What's the problem and why is it a issue. What is ideal and how do
current operations vary from that ideal. Describe why the symptoms (what is going wrong) and the causes (why is it going wrong).
Try to define all terms, theories, factors, and relationships. Quantify the issue to the extent possible. If the issue, not
accurately and quickly filling customer orders, attempt to ascertain just how many orders were incorrectly filled and the length
of time it took to fill them.

Define the Objectives. What are the goals of the analysis. Which objectives are the most critical. Objectives are said by an
action verb like to decrease, to increase, or to improve. Returning to the customer dictate problem, the significant goals would
be: 1) to raise the proportion of orders filled correctly, and 2) to reduce the time necessary to order and process. A
sub-objective could include to simplify and streamline the order fulfilling process.

Grow a Diagnostic Framework. Next establish a diagnostic framework, that is, determine what approaches are going to be utilized,
what kinds of information are required, and also how and where the information is to be found. Is there likely to be a consumer
survey, a review of company documents, time and motion tests, or some thing else. Which are the assumptions (facts assumed to be
correct) of the study. What are the standards used to evaluate the study. What time, funding, or other limitations are there. What
kind of quantitative or other specific processes will be used to analyze the information. (Some of which will be covered shortly).
In other words, the diagnostic framework establishes the extent and methods of the whole study.

Collect and Analyze the Data. The next step is to gather the information (by following the methods created in Step 3. Raw
information is then tabulated and organized to facilitate analysis. Tables, charts, graphs, indicators and matrices are a number
of the standard tactics to arrange raw data. Analysis is your critical requirement of audio business decision making. What does
the data show. What facts, patterns, and trends could be viewed in the information. Many of the qualitative methods covered below
can be used during the step to determine facts, patterns, and trends in data. Of course, computers have been used extensively
during this step.

Generate Alternative Solutions. After the analysis was completed, some specific conclusions about the character of the issue and
its resolution must have been reached. The next step is to develop alternative solutions to the problem and position them in order
of the net benefits. But how are choices best generated. Again, there are some well established techniques such as the Nominal
Group Method, the Delphi Method and Brainstorming, amongst others. In all these methods a group is involved, all of whom have
examined the data and analysis. The method will be to get an informed group suggesting a variety of feasible solutions.

Develop an Action Plan and Implement. Select the ideal solution to this problem but be sure to understand clearly why it is best,
which is, how it achieves the objectives established in Step 2 greater than its options. Then create an effective method (Action
Plan) to implement the solution. At this stage an important organizational consideration arises - who will be responsible for
seeing the implementation through and what authority does he have. The chosen manager should be responsible for seeing that all
deadlines, tasks, and reports are performed, fulfilled, and composed. Details are all important in this step: reports, programs,
tasks, and communication are the key elements of any activity program. There are lots of methods available to decision makers
implementing an action plan. The PERT method is a method of laying out an entire interval like an action program. PERT is going to
be covered soon.

Evaluate, Acquire Feedback and Monitor. Following the Action Plan has been implemented to Solve a issue, management must evaluate
its own effectiveness. Assessment Standards have to be determined, feedback stations developed, and observation performed. This
Step ought to be performed after 3 to 5 weeks and at 6 weeks. The target is to answer the bottom line question. Has the issue been
solved?

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