Chapter 2: Purchasing Organization in the Enterprise Flashcards
Types of purchases
Raw materials
semi finished products and components
finished products
maintenance repair and operating items
production support items
services
capital equipment
They often receive a grade indicating the quality level
Raw materials
Are purchases category in that includes items such as petroleum coal lumber and metals discovered in zinc
Raw materials
It includes all the items purchased from suppliers required to support an organization’s final production
Semi finish products and components
This includes single part number components subassemblies assemblies subsystems and systems
Semi finished products and components
This category also includes purchased items that require no major processing before resale to end customers
Finished products
It includes anything that does not go directly into a organization’s product however these items are essential for running a business this includes spare machine parts office and computer supplies and cleaning supplies
Maintenance repair and operating items
Items that include the materials required to pack and ship final products such as pallets boxes master shipping containers tape bags etc
Production support items
Most common type includes machine repair snow removal data entry consultants and the management of cafeteria services
Services
Involves buying assets intended for use exceeding one year
Capital equipment
Purchasing functions
Product design
product specifications
Target costing
Supplier selection
Supplier location
inventory management
The intent is to enhance the design with the inputs of all the key stakeholders
Product design
Is a clear complete and accurate statement of the technical requirements of a material an item or a service end of the procedure to determine if the requirements are met
Specification
This approach first determines what an acceptable selling price will be to compete in the marketplace and subtract a desired contribution margin to arrive at an acceptable cost
Target costing
Product target cost equals
Projected selling price minus the desired profit contribution
The factors in selecting is the product quality, on time delivery performance, facility proximity, industry position, financial stability, etc
Supplier selection
It is one of the criteria used in selecting vendors, it is especially important because of the emphasis on reducing supply chain response time
Supplier Location
The function and compassing the physical receipt of the material the inspection of the shipment for conformance with the purchase order for quantity and damage and identification and delivery of destination
Receiving
A document used by the receiving function of a company to inform others of the receipt of goods purchase
Receiving report
When an Organization has several plants located in different geographical regions, there are two alternatives. One, to have a ____________________ located at the ______. The other, to have a _________________ set up in _________.
centralized purchase department, headquarters
decentralized purchasing department,
each plant
refers to purchasing all the requirements under the central point of the organization.
Centralized Purchase
defines centralized procurement as a purchasing system in which all the departments of a company with a wide geographical distribution can make purchases through a common purchasing organization.
Business Dictionary
is a purchase of all required goods and services by a single department for all the branches of the entire company. Generally, a purchasing manager heads the department.
centralized procurement
is beneficial in finding the best deals with local vendors for the corresponding location of the company department.
Centralized procurement
It not only aids in avoiding duplicity of orders, but also promotes advantages arising from the high volume bulk discounts, lower transportation and inventory management costs.
Centralized procurement
is an indispensable solution for those who feel difficulties in managing long-running transitions and mending fences.
Centralized purchasing
Combining the requirements of Plants and buying in bulk leads to substantial
reduction in purchase cost.
Centralized Purchasing
There is only one department dealing with limited items, a high order of purchase skill can be expected.
Centralized Purchasing
_____ of materials in an emergency is possible.
Inter-Plant transfer
(Under Centralized Purchasing)
Surplus Materials in one Plant can be utilized in meeting the requirements of another.
Centralized Purchasing
The _____________at Headquarters may lay down common policies, procedures and systems for all the plants.
Centralized Purchase Department
(Under Centralized Purchasing)
periodic reporting system may be established between the plants and the Centralized Purchase Department at Headquarters.
Centralized Purchasing
Organizations having ________ would benefit by adopting a judicious blend of ____________ and _________.
Multi-plant operations,
Decentralized setup with Centralized control.
(Under Centralized Purchasing)
Advantages of Centralized Purchasing
- Overhead expense reduction
- Better relationships within the organization
- Advanced control
- Team cohesion
- Saved money
- More benefits
First and probably the most important feature of centralized purchasing is the reduction in overhead costs for the enterprise. Separate facilities require not only individual lease agreements, but also separate utility deposits, insurance policies, security features, office equipment, network, etc.
Overhead Expense reduce
Interpersonal communication in recent years has been consistently placed high as an important requirement for conducting successful job performance in the organizations. Communication is what makes a team strong. In a centralized office, where employees and managers have the opportunity to interact in person, atmosphere is much more pleasant, than in departments where colleagues communicate via telephone or email. Company meetings, conferences and training seminars that are held in a group setting increase employee productivity and rally team.
Better relationships within the organization
Management teams may operate more efficiently and cost-effectively in a centralized office. Managers who are often absent or spread out among various departments are typically less effective due to the absence of regular contact with employees.
Advanced control
Employees who work together as a collective group get to know one another’s work styles and approaches as their own. That’s why such teams are typically better able to collaborate on projects as a group. A centralized office also increases its ability to be consistent across all channels, with employees all working under the same set of guidelines with regard to brand development and customer service directives.
Team cohesion
Centralized purchasing has many cost-saving features. Purchasing manager can buy in bulk at reduced costs, can better manage inventory and assess company needs. Moreover, in centralized procurement there is no need to employ individual managers for individual locations. It’s obvious that addition of duplicate staff positions implies additional costs. Fortunately, in centralized purchasing you don’t have to bother about that.
Saved money
Other key advantages of centralized procurement
- avoidance of duplication
- saved time
- knowledge resource sharing
- reduced transportation costs
- increased specialization
- better relationships with the buyers
- uniformity in purchasing policies.
Disadvantages of Centralized Purchasing
● Complex management of the company in case organization becomes too large;
● Difficulties with timely replacement of defective materials;
● High probability of delays – often requisitions for goods have to be sent from distant areas;
● Difficulties with purchasing materials from local suppliers in caseof an emergency;
● Centralized purchasing is not suitable, if branches are located at different geographical locations
______________has to work in close coordination with all Decentralized Purchase Departments at Plants and Finance Department at Headquarters. Only an atmosphere of mutual trust will ensure that these departments will work towards the total organizational objectives.
Centralized Purchase Department at Headquarters
___________is just the reverse of centralized purchasing.
This is suitable for organizations running more than one plant.
Under this type, each plant has its purchasing agents. In other words, every department makes its purchases.
This also calls localized purchasing.
Also, ____________ is quite flexible and can quickly adjust following the requirements of a particular plant.
Decentralized purchasing
More attention can pay by the departmental head to buying problems as he will be carrying the limited number of activities in his department and he can hold responsible for the purchase of goods and the overall performance of the plant.
The serious drawback which emerges from this type is the lack of uniformity in purchasing procedure in the organization.
Decentralized purchasing
At the same time, uniformity in prices cannot ensure and every departmental head may not possess the caliber of an expert buyer.
This method also poses the problems of coordination among various departments of the organization and usually leads to unplanned buying.
In comparison to centralized buying, this method involves a lesser economy in purchasing.
Decentralized purchasing
Advantages of Decentralized Purchasing
● Materials can purchase by each department locally as and when required.
● Timely availability of materials.
● Materials are purchasing in the right quantity of the right quality for each department easily.
● No heavy investment requires initially.
● Less cost of internal transport.
● Lower chance of obsolescence.
● Purchase orders can place quickly, and.
● The replacement of defective materials takes little time.
MEANING:
___________is the retention of powers and authority concerning planning and decisions, with the top management, knows as ___________
Centralized, Centralization
MEANING:
_________is the dissemination of authority, responsibility, and accountability to the various management levels know as _________.
decentralized, Decentralization
TERMS OF PURCHASE:
_________is Due to the large scale order, better terms of purchase may be available,
Centralized
TERMS OF PURCHASE
but __________in Less favorable terms may be available.
Decentralized
NATURE:
____________is usually involves two people; a manager and his subordinate.
Centralized
NATURE:
_________involves the entire organization; from the top management to individual departments
Decentralized
ADVANTAGE:
_________is proper coordination and Leadership,
Centralized
ADVANTAGE:
__________ is sharing of burden and responsibility
Decentralized
CONTROL:
________ is controlling by the manager or the delegator controls it.
Centralized
CONTROL:
__________ control rests with the respective departments or classes
Decentralized
NEED:
_________need all organizations to need delegation to get things done, Delegating authority is essential to assign responsibility.
Centralized
NEED:
______________is an optional mode of working, Organizations can also work in a centralized manner.
Decentralized
RESPONSIBILITY:
____________ is the delegator can delegate authority but the responsibility remains with him, the delegator is accountable for the task.
Centralized Responsibility
RESPONSIBILITY:
__________ is the head of the departments responsible for the
activities performed under him, Therefore, responsibility is fixed
at the department-level.
Decentralized
INVOLVES:
______ is involves in Systematic and consistent reservation of authority
Centralized
INVOLVES:
______ involves Systematic dispersal of authority.
Decentralized
“Everywhere Production goes, __________follow behind like a shadow.”
Costs
_______ is the act of buying the goods and services that a company needs to operate and/or manufacture products.
Purchasing
Given that the purchasing department of an average company spends an estimated __________ of every revenue dollar on items ranging from raw materials to services, there has been greater focus on purchasing in recent years as firms look at ways to lower their operating costs.
50 to 70 percent
______is now seen as more of a strategic function that can be used to control bottom-line costs.
Purchasing
_________ is the cost incurred in procuring the raw materials/input goods.
Purchase Cost
● Requisition, soliciting bids, purchase order, shipping advice,
invoice, and payment.
● Regarded as unacceptably slow, expensive, and labor intensive.
● Purchasing was seen as essentially a clerical function.
● Purchasing simply was not considered to be a high-profile or career fast-track position.
Traditional Purchasing Process
● New concept of total cost of ownership (TCO).
● Instead of buying the good or service that has the lowest
price, the buyer instead weighs a series of additional factors
when determining what the true cost of the good or service is to his
or her company.
● These factors can include “price, freight, duty, tax,
engineering costs, tooling costs, letter of credit costs, payment
terms, inventory carrying costs, storage requirements, scrap
rates, packaging, rebates or special incentive values, [and]
warranty and disposal costs.”
Modern Purchasing Process
Purchasing Cost Reduction Ideas
- BULK BUYING
- OPPORTUNITY BUYING
- LOCAL VENDORS
- PARTNERSHIP WITH MAJOR VENDORS
- E PROCUREMENT
- BUYING MATERIAL FROM TAX EXEMPTED AREA
- ALTERNATE MATERIAL
- TRY MERGE IN TRANSIT
- VENDOR MANAGEMENT INVENTORY (VMI)
“Planning for the_______ is one way to reduce the cost.”
purchases
The companies which have greater geographical presence or are multi locational can achieve better price by buying bigger volumes instead of buying for
individual units. Central buying policies are recommended for such unit .
_________ results in annual contracts for a period of six – twelve months for entire year requirement with prices being finalized for the entire period .
BULK BUYING
Most of the commodities and raw material has seasonal cycle of prices as they peak and fall in intervals .Hence we can book maximum amount of our requirement when prices are low.
OPPORTUNITY BUYING
Vendors should be located in close vicinity of company
which helps in keeping low inventory as well as low freight cost
LOCAL VENDORS
It is highly recommended to have partnership with vendors in either having equity or technical collaboration so as to pass on savings to the customer . Which results in cost reduction in manufacturing cost. Most of the Automobiles Majors has this kind
PARTNERSHIPS WITH MAJOR VENDORS
Putting up tenders and requirement on Internet and setting up auction for requirement on web which helps in reaching out more numbers of vendor base . This also helps in cutting cost when we opt for conventional way of asking tender/quotation .
E Procurement
Most popular way of _________ is reverse auction , where the lowest price bidder takes away the order.
procurement strategy
In several countries the federal/ State govts provide tax havens for manufactures for certain period say 10- 15 years .Hence buying from these areas helps in cutting cost .In common parlance it is called ________. Look out for such places prior to placing orders.
BUYING MATERIAL FROM TAX EXEMPTED AREA
TAX HOLIDAYS
○ Select high cost items and replace it by some low cost material.
○ Eg; steel by plastic/aluminium.
ALTERNATE MATERIAL
The concept of in-transit product merging—where, for example, two things are shipped from different locations and then married in transit so that they reach the customer as a single shipment—can be seen as a technique for reducing inventory .
TRY MERGE IN TRANSIT
With the appropriate incentives, allowing suppliers to assume the responsibility for replenishment of your inventory, because of their visibility into both their own inventory and production schedule and your demand data, can almost always reduce your inventory.
VENDOR MANAGED INVENTORY (VMI)
__________is an evaluation and approval process that businesses can use to determine if prospective vendors and suppliers can meet their organizational standards and obligations once under contract. The end goal is to secure a low-risk, best-in- class vendor and supplier portfolio.
Vendor assessment
__________both furnish services or goods
Vendors and suppliers
The term ________applies to business-to-business (B2B) and business-to-consumer (B2C) sales relationships
vendor
_______applies only to B2B relationships.
supplier
Benefits of Vendor Assessment
- Risk Mitigation
- Lower Regulatory Compliance Risk
- Scope of Service and Contract Compliance
- Decrease in Security and Cyber Risk
By carefully vetting vendors and suppliers, you can lower the regulatory, contract, and security risks of working with entities outside your company.
● Risk Mitigation
Confirm compliance with the laws, regulations, and standards that apply to your business. If your vendor is in another country or you sell to another country, check those countries’ legal requirements, too. For example, if you do business in the European Union, the General Data Protection Regulation (GDPR) applies.
○ Lower Regulatory Compliance Risk
Conduct a legal review of contract terms, nondisclosure agreements (NDAs), or partnership agreements to ensure that you’ve set favorable conditions and mitigated any risks.
○ Scope of Service and Contract Compliance
The threat of cyber risk grows as we increasingly move our work to the cloud. Therefore, it’s crucial to protect all your customer and company data. Your selection process should focus on assessing a third-party vendor or supplier to store your data. First, identify and evaluate the type of data that vendors and suppliers may need to access, and decide whether they need to access all, some, or none of it to do their work. It’s crucial to ensure the vendor takes the proper measures to encrypt and protect your data. Once you Identify potential partners, have them complete a questionnaire that thoroughly covers security management system details.
○ Decrease Security and Cyber Risk
Supplier Performance Monitoring
- Financial Health
- Expertise
- Operational Performance
- Business Process and Practices
- Behaviours and Cultural Factors
sales, profitability, liquidity, return on investment (ROI),
debt ratio, transparency of finances (Aiter et al., 2011).
● Financial health
network capabilities, quality and production capabilities, technical level compared to sector average, spread of technical creation, investment in R&D (Aiter et al., 2011).
● Expertise
on-time delivery, lead time, responsiveness, inventory management and control, order acceptance, processing and fulfilment, customer service, preventive maintenance, hours of operations training (Aiter et al., 2011).
● Operational performance
how a supplier provides a product or a service at the best value, on time and as required (Aiter et al., 2011).
● Business processes and practices
the improvement culture, information capabilities, intention of coordination (Aiter et al., 2011).
● Behaviours and cultural factors:
10 C Model of Supplier Evaluation
- Competency
- Capacity
- Commitment
- Control
- Cash
- Cost
- Consistency
- Culture
- Clean
- Communication
Ask vendors to provide evidence of proven quality with other customers, and review their training and development procedures, qualification records, essential personnel background and abilities, and recruitment methods.
Competency
Look into prospective partners’ current and forecasted orders and customers, along with how that impacts the ability to meet your current and projected requirements. Ask for operational statistics around quality- or service-level challenges, which should be readily available if the supplier is ISO 9000 accredited. To learn more about this accreditation read “The Ultimate Guide to ISO 9000.”
Capacity
Review the policies and procedures the company uses on an ongoing basis to monitor and manage quality and adherence to industry standards, such as ISO 9000 and HIPAA.
Commitment to Quality
Ensure that your future partner will be able to deliver consistently high levels of quality and service throughout the life of the contract. For example, look for a vendor that assigns an account manager as a single point of contact dedicated to quality control and oversight; this indicates the vendor’s commitment to high performance.
Consistency of Performance
Review whether the product or service can be delivered at a reasonable price and keep your vendor or supplier in business.
Cost:
Of course, you want to work with a financially stable entity. Request the most recent fixed and current asset lists, profit and loss (P&L) statements, and credit rating documentation.
Cash and Finance
Ensure that your vendor or supplier will set up and manage (or conform to your existing) communications channels, whether in person with your account manager and other key personnel, via virtual meetings, or with collaboration software.
Communication
Ask for evidence of how the company manages inventory, quality control operations procurement, marketing, distribution and health, and safety.
Control of Internal Processes
Vendor and supplier services and products should conform to legal and environmental standards and requirements.
Clear (Corporate Social Responsibility)
Determine if you and your potential partner share values and working philosophies before you enter into a contract. A similar outlook makes for smoother work relationships and helps you establish long-term partnerships.
Culture
Different Methods of Vendor Evaluation
- Commercial
- Technical
- Records
- Before the Fact
- After the Fact
T or F
There is no single vendor evaluation method that covers every circumstance. To evaluate vendors, take into consideration your business and the vendor classification, as well as whether the vendor is a prospect or already under contract, and if you’re conducting a post award review.
True
When considering the commercial side of any potential vendor or supplier, keep in mind their reputation, market dominance, market and advertising presence, awards, ability to deliver promptly, and existing clients.
Commercial
A technical evaluation is centered on standards for compliance, innovation, technical equipment, and scientific capabilities.
Technical
In this type of vendor evaluation, you collect data from public sources, such as financial records, industry news items, and award notices.
Records
In this type of evaluation, the evaluator plans and starts gathering data public data sources and vendor or supplier endorsement or reviews early in the history of the project. Replies to RFIs and RFPs with substantiating documents should provide many of the necessary answers, too.
Before-the-Fact
For this evaluation, review a first engagement or shipment and assess performance and process. Ask critical stakeholders about successes, failures, and operations. Responses provide data for decisions, future planning, and discussions after an event is complete.
After-the-Fact
refers to the purchasing of requirements of each production center in an organization.
Decentralized Purchase
Disadvantages of Decentralized Purchasing
● Organization losses the benefit of a bulk purchase.
● Poor layout of space.
● More finance requires.
● Duplicate purchase of materials.
● Specialized knowledge may be lacking in purchasing staff.
● There is a chance of over and under-purchasing of materials.
● Fewer chances of effective control of materials.
● Less technical skills obtains.
● More clerical work, and.
● Lack of proper co-operation and co-ordination among various departments
