Chapter 7 - Purchasing Flashcards
Definition of Purchasing
The acquisition of needed goods and services at optimum cost from competent reliable sources to maintain a smooth flow of goods and services for manufacturing and or any business activity
Roles of Purchasing
- Identify requirements for goods/materials/services
- Find reliable suppliers
- Price negotiations
- Comparison of delivery terms
- Establish order quantities
- Write request for bids & awarding supply contracts
- Coordinate delivery with warehouse
- Product testing & quality control
- Manage budget & payment
- Identifying requirements for good/materials/services
Determine the specific needs & criteria to obtain the necessary items or services
If need screw, what type & size
- Find reliable suppliers to meet requirements
Evaluate & select suppliers
Asses trustworthiness, performance history to make sure they can deliver on time and with good quality
- Negotiate price
Discuss and reach agreement on the price
Goal is to arrive and a mutually acceptable & fair pricing for both parties
- Comparison of delivery terms
Evaluate & compare aspects related to delivery
Asses terms, & condition & logistics associated with the delivery
- Establish order quantities
Determine appropriate quantity to be ordered
Asses demand, inventory levels, production requirements, & cost considerations
- Write request for bids & awarding supply contracts
Select bids from potential suppliers & award contracts for the provision of goods, materials & services
- Coordinating delivery with warehouse
Managing timing & logistics of delivery
Align delivery with the warehouse’s ability to accommodate & store them
- Product testing & quality control
Evaluate & verify quality, performance & compliance of goods
Conduct test, inspections to ensure goods meet the standards
- Managing budget & payments
Plan, monitor, & control financial resources to ensure effective budget allocation, expenditure tracking & timely payment of financial obligations
6 Areas of Purchasing
- Market Trends
- Fluctuations in Raw Material
- Distribution Channel
- Outsources to Experts
- Networks with Peers
- Develop Collaborative Relationships with Suppliers
- Market Trends
Direction of a financial market or asset price within a certain period
Factors affecting: Investor sentiment, supply & demand, economic condition, political
- Fluctuation in Raw Material
- Fluctuation will affect cost of goods and goods sold to the customer
Buying when the price fluctuate will benefit the company
- Distribution Channel
Buy directly from the manufacturer
Lower prices
- Outsources to Experts
Outsource purchasing to expert than focus on specific areas better
Their relationship with supplier may give them preferential pricing
- Network with Peers
Strong networks of business connection can make purchasing easier
Network of peers can help identify suppliers that can offer a variety of prices & quality, depending on your budget
- Develop Collaborative Relationships with Suppliers
Good relationships with supplier can improve the purchasing process
Example of inventory Types
- Raw Material - Used to produce finished products
- Work in Progress - Needs additional work
- Finished goods - Completely produced & ready for sale
- Component - Used to create & finish products
- Maintenance, Repair & Operations (MRO) Goods - Used withing manufacturing, without directly making up any part of the finished product (Batteries)
Inventory Management Terms
- Re-Order Level (ROL)
- Re-Order Level Quantity (ROQ)
- Economic Order Quantity (EOQ)
- Lead Time
- Stock Out
- Service Level
- Buffer Stock
- Inventory Turnover
- Stockholding & Stockholding Costs
Re-Order Level (ROL)
Stock level where a replenishment order must be initiated
Re-Order Level Quantity (ROQ)
Quantity ordered when ROL is reached
Economic Order Quantity
Most economic quantity to order to achieve optimum cost
Lead Time
Total time from stock reached ROL until goods are delivered and ready for issuance
Stock Out
Stock unavailable when needed
Service Level
Percentage ratio of complete quantity of goods issued to the quantity requested
Buffer Stock
Extra stock to avoid stock out due to usage or longer lead time
Inventory Turnover
Number of times the average inventory is sold per year
Stockholding & Stockholding Costs
Stockholding - Inventory held on hand
Stockholding Costs - Cost of holding stock
Benefits of Inventory
- Take advantage of quantity discount
- Avoid stockout
- Accurate order fulfilment
- Inventory speculation
- Increased customer satisfaction
Technique for Inventory Management
- Buffer / Safety Stock
- Activity Based Costing (ABC) Method
- Just-In-Time Inventory
Buffer Stock
Additional inventory to cater for emergency cases
Activity Based Costing (ABC) Method
Prioritize inventory management effort by focusing on more valuable items (Category A), while allocating less attention to lower-value (Categories B &C)
