THE PURCHASING MANAGEMENT FUNCTION
6. THE PURCHASING MANAGEMENT FUNCTION
LEARNING OUTCOMES: After you have read this topic you should be able to:
Explain other concepts or approaches to the provision of materials to a business Discuss the role and importance of the purchasing function in the success and efficiency of a
business Describe certain management aids at the disposal of the purchasing manager Discuss the purchasing function and the nature of purchasing activities in a business perspective
6.1. PURCHASING IN PERSPECTIVE
The purchasing function is that function that satisfies the business’s needs in the most effective way (lower prices)
The activities of the purchasing function
Select suppliers Purchase and arrange for the transport of materials to the business Decide what prices to accept Determine quantity and quality of materials/services Expedite and receive materials Control warehousing and inventory holding
Purchasing management involves the planning, organising, leading and controlling of all activities relating to the purchase of materials and services from an external source aimed at increasing the business’s profitability. Purchasing managers use management aids to facilitate their task e.g. benchmarking, purchasing budgets, purchasing policy, and techniques include negotiation, purchasing research, price analysis and learning curves.
6.2. BROADENING THE PROVISION FUNCTION
Materials management- combines all materials provision activities under one head- the materials manager. This eliminates the conflicting objectives of different materials provision activities by combining them under one person- (materials manager).
Logistics Management- integrates all movement (transport) and warehousing activities, place of purchase (materials) - transformation process to the final consumer. Certain activities of purchasing, operations and materials managers are under logistics manager.
Supply chain management- an extension of system approach (internal functions of the business
i.e. marketing, finance, production, human resources) are managed as an integrated fashion, the fashion, the flow of materials in all the linked organisations, from the raw product to the end i.e. marketing, finance, production, human resources) are managed as an integrated fashion, the fashion, the flow of materials in all the linked organisations, from the raw product to the end
Specific activities include information systems, purchasing product scheduling, orders, inventory management, warehousing, client services and recycling.
6.3. THE IMPORTANCE OF THE PURCHASING FUNCTION TO THE BUSINESS
Purchasing costs are the greatest expense to any business. It has been found that in retailing businesses approximately 90% of each rand is spent on purchases and 60% in manufacturing costs. Therefore purchasing costs is an area where cost savings can make a vital contribution to the profit of a business.
Inventory Holding: Stock is held to prevent disruptions in the production or operational processes. The aim is to keep inventory levels low without risking an interruption in the operational process. The reason behind this is large sums of operating capital is tied up in inventory and could earn revenue if invested elsewhere. Effective purchasing management can eliminate inventory holding.
Profit Leverage: This means that if purchasing costs constitute a major portion of the total costs of a business, a saving in purchasing costs has greater profit potential that a similar increase in sales e.g. 4% reduction in purchasing costs can make the same contribution to profitability as an increase of 20% in sales. The contribution of effective purchasing to profitability differs in each business.
Contributions to the marketing of products: Purchasing materials of the right quality and price at the right time, manufacturers can offer final products in the right quantities at a competitive price of the right time in the market.
6.4. THE MANAGEMENT TASK OF THE PURCHASING MANAGER
Purchasing planning-this means managing the purchase function for the future. Purchasing objectives and plans are drawn applying the resources (people, physical facilities and funds) to achieve these objectives. Purchasing planning must be conducted in consultation with other functional management areas (marketing, operational and financial). The following levels are essential in purchasing planning.
-Strategic level: Purchasing manager provides input to business planning. Involves long-term planning and includes elements such as purchasing research, availability forecasting and purchasing policy.
-Tactical or middle management level: covers medium term needs, budgeting, the purchasing system and organisation, purchasing methods negotiation, development of human resources etc.
-Operations level: short term and includes planning the tasks of expediting, keeping records and -Operations level: short term and includes planning the tasks of expediting, keeping records and
Purchasing objectives that can be derived from the business’s objectives Business Objectives
Purchasing Objectives
To retain market share To provide materials of the right quality in the correct To move from the specialty market
quantities at a competitive price
to the general market To seek new and larger suppliers and develop a new To develop specific new products
materials flow system to handle larger quantities and a and services
greater variety items while keeping total inventory To develop an overall production
volume as low as possible
capacity plan, including an overall To seek or develop new suppliers make or buy
To develop systems that integrate capacity planning To initiate a cost reduction plan
together with a policy of make or buy To standardise materials and reduce suppliers
The place of the purchasing department in the organisational structure Affected by 3 elements
Centralization or decentralization
Centralized structure-allows for the standardization of purchases cost saving because of volume orders offered at discounts. Gives the business increased buying power lower prices negotiated. Decentralization- suited to a business that has plants geographically dispersed, who supports local suppliers. Buyers have close contact with users and reaction time to the requests is quicker. Combination of centralized and decentralized - the middle course. Centralization offers long- term contracts on behalf of the entire business. Decentralization provides the special needs and
small purchases of the plant.
Integration of purchasing and materials flows of activities Organisation of provision activities according to the materials management approach Figure 6.1
Director: Materials
Operations
Materials
Purchasing
Inventory
Materials
planning and
Systems
Manager
control
handling, and
control
Managers
Manager
operations
Manager manager
Internal organization of the purchasing department-organization- may comprise an informal structure in which buyers purchase any material/service, processing any queries on their desk. The buyer is responsible for all purchases from a specific supplier-in case of strategic materials. Can be divided into:
Purchasing and negotiation- purchasing staff responsible for choosing suppliers Follow-up and expediting-solving problems with suppliers Administration-preparation and dispatch of purchasing documents, records etc. Purchasing research- collection, analysis and classification of information whereby decisions are
made. Inventory holding- warehousing and inventory Disadvantage- staff becomes stereotyped and cannot develop further
Co-ordination with other functional management areas
The purchasing department has to operate in co-ordination with other departments to make an optimal contribution to the business. Finance, marketing and production are areas that are closely co-ordinate with the purchasing department.
Cross functional teams
This is meant to show the ability of the purchaser to work with groups and show leadership qualities. The following applications are identified: Commodity sourcing strategy Sourcing Supplier evaluation Supplier certification New product development
Control in the purchasing department
Purchasing control ensures that purchasing objectives are pursued within acceptable and accepted standards or norms/guidelines.
-The assessment of purchasing management
Management performance should be evaluated like other activities as it influences overall job performance. Management is intangible and difficult to measure quantitatively.
-The assessment of purchasing activities
Aim of the purchasing department is to supply the business effectively with the right materials, quality and price. Certain criteria must be used to realize the effectiveness of the activities. Price proficiency – comparing prices and determining discounts Supplier’s performance-receiving late deliveries (no of time), rejected orders etc. Timeliness – examining the rescheduling of orders, shortages etc. Cost-saving- comparing cost with previous periods Workload: orders and requisitions Purchasing costs: expression of administrative purchasing costs as a percentage Inventory holding: calculation of inventory turnover and enquiries into inventory losses and
obsolescence of stock Relationship performance: survey or scrutiny of supplier turnover
Relationship with other functional management areas: monitoring the replies to the requests of the purchasing function
6.5 THE PURCHASING CYCLE
The steps in purchasing cycle are divided into 3 categories: The notification phase –the purchasing department is informed –need The order phase-processes the order by acknowledging the documentation process The post order phase- dealing with problems and making payments
Steps
The development and description of a need Choice of supplier Determine prices Placing an order/concluding a contract Expediting and follow up Receipt, inspection and discrepancies Paying for the order Closing the order
6.6 QUALITY DECISIONS AS A PURCHASING ACTIVITY The role of quality
3 factors are important Quality Supplier service Price
Quality is the most important of the above. It forms an inseparable part of other purchasing activities.
6.7 DECIDING ON PURCHASING QUANTITIES The need for inventory holding
Marketing and production /operations budgets solely exist on estimates, and because of unreliable delivery and quality, inventory holding exists. Inventory is held in 2 reasons.
To ensure that the operations process can continue without interruptions (shortage of materials) To utilize cost savings
Implications of inventory positions Disadvantages
of
too much
Disadvantages of too little inventory inventory
Operating capital is tied up Higher unit prices as a result of smaller orders with the resultant opportunity
More urgent with concomitant higher order and interest costs
and transport costs and strained relations with Losses in terms of
suppliers
depreciation, obsolescence, Cost of production or job interruptions and the damage and theft
accompanying strained relations with users or Costs in terms of storage
marketers in the business
space (rental or interest), Lost sales because of empty shelves in the more warehouse staff and
retailer and the resultant negative influence on equipment
and
bigger
its image
insurance premiums
Inventory costs
Inventory carrying costs- keeping inventory (storage, salaries, insurance) Inventory ordering costs-costs of placing an order Total inventory costs-sum total of inventory carrying costs
Inventory control systems
Inventory must be controlled so that optimal inventory level can be maintained, so that the best service can be offered at the lowest possible price (cost). Systems of fixed order quantities- each time new inventory is required, a fixed quantity is
ordered. The cyclical ordering system – inventory is checked and review at fixed intervals is a
supplemented by an order to bring the inventory level to a maximum. Materials requirements planning system (MRF)- computer assisted system whose aim is to
maintain minimum inventory levels Just-in-time (JIT)-a production scheduling system not an inventory system. Eliminates the holding
of inventory, suppliers are to deliver materials in time (when they are needed)
6.8 THE SELECTION OF SUPPLIERS
Affirmative action- addressing the inequalities of the past, increasing pressure on South African businesses to give disadvantaged suppliers the opportunity to enter the market
Materials or service not available-if a need or service is required and not available from the
market, a contract can be entered into with another supplier to provide the service/product Normal performance appraisal – indicates supplier’s weakness, help to maintain long-term ties with suppliers.
6.9 PRICING DECISIONS
The best price: price is a decisive factor. Lowest price is not always the best. A buyer must obtain the highest value for the business. Prices must be reasonable and allow the purchaser to become
competitive in the market.
Preferences in price comparison
Purchasers adopt a policy of allocating a specified preference percentage to certain suppliers. In some instances, preferences are statutorily enforced. The purchasing policy may also be examined.
The influence of inflation
If suppliers request a price increase, they should substantiate it, and the buyer can conduct a cost of price analysis, to determine whether it is justified.
Factory influencing the scheduling of purchases
Internally – business policy may present buyers from buying speculatively and not able to use bargain offers.
Externally- concern market conditions and government regulations Recessions- favourable buyers’ market, decrease in price because of decrease in demand. Boom period- economic activities are high and demands increase
Market structures and the scheduling of purchases
Stable markets- buyers purchase materials to obtain optimum inventory of materials. Unstable markets- major price fluctuations in price and availability of materials Structured markets- facilitate international trade
Policies for purchasing at the right time
Scheduling purchases according to needs Advance purchasing Speculative purchasing
Minimum purchases
6.10 NEGOTIATIONS IN PURCHASING
Negotiation between buyer and seller requires a common understanding about the assignment and execution of the contract.
Negotiation is used mainly in cases where:
Unique or complex materials are purchased for the first time The supplier is in a strong position in the market There are few suppliers in the market There is price collusion between suppliers A buying transaction is accomplished by a service or maintenance contract Price increases are requested
TOPIC 7