Purchasing Management

Question 1

What is the purchasing function responsible for?

Answer 1

It is responsible for buying all goods and services that are needed by all the departments in the business.

Question 2

What is the economic principle?

Answer 2

The purchasing price and stockholding costs are kept as low as possible in order to maximise profit and thereby improve profitability.

Question 3

What are the 3 categories of goods and services within the context of purchasing management?

Answer 3

1. Products used in the business to carry out the activities of the business (e.g. stationary or computers).
2. Products bought with the aim to resell them.
3. Goods bought to be used in the manufacturing process (e.g. clothing factory buying material/buttons/thread etc).

Question 4

What 6 things are the purchasing department’s responsibility to find?

Answer 4

• the right ethical supplier to deliver…
• the quality
• the right quantity
• the right time
• the right place
• the best price

Question 5

Explain the purchasing cycle.

Answer 5

1. Identify the business need.

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2. Assess and select suppliers.

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3. Place order.

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4. Receiving of order.

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5. Assessing orders against invoice.

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6. Send resources to departments or warehouse.

Question 6

Expand on the concept of identifying business needs under the context of purchasing management.

Answer 6

Begins with continuous research, which is undertaken to ensure the needs of different departments and customers are satisfied by obtaining the most suitable services/products.
At this stage in depth detail is decided on what should be ordered (such as type/size/colour/quantity). New and alternative products/services and improved technology must be researched in order to buy the best quality product that will provide good value for money.

Question 7

Expand on the concept of assessing and selecting the best supplier under the context of purchasing management.

Answer 7

It is important to select a supplier that will deliver on the needs of the business:
At the right time
Required quantity
Required quality
Right place
Reasonable price.

Most suitable suppliers be found (Porters six forces!) while considering both local and international suppliers.

Question 8

Expand on price as a factor to consider when assessing and choosing the best supplier.

Answer 8

Purchasing price does not = lowest price, but must be most reasonable price based on quality/quantity (bulk savings)/after sales service/time of purchase (e.g. season)/transport costs/discounts.

Price is often determined by the quantity ordered. If large volumes are ordered (Basic Clothing), the business can negotiate bulk discount. This can make the cost per unit lower.
Cash discount can be granted if the buyer pays cash or if the debtor settles early. Price charged for resources has an impact on the final cost of the goods/services sold to the consumer. Therefore: plays a big role in the competitive advantage of the
business in a market place.

Question 9

How does the season affect discounts in agricultural and manufactured products?

Answer 9

Agricultural products –> cheaper during high season
Manufactured –> cheaper just before the end of the season

Question 10

Expand on capacity as a factor to consider when assessing and choosing the best supplier.

Answer 10

Capacity describes the ability of a supplier to supply the right quality goods or services in the right quantity. (QQ).
If the supplier does not have the capacity to supply the necessary resources, it can impact the businesses production system and on the retail floor. This results in unnecessary delays and can have detrimental effects on the profits of the business.

Question 11

Expand on support as a factor to consider when assessing and choosing the best supplier.

Answer 11

Need to considered the type of the support that is offered by the supplier. For example: Does the supplier offer training on new equipment? Is there a guarantee on equipment? Does the supplier deliver resources ordered?

Question 12

Expand on labour as a factor to consider when assessing and choosing the best supplier.

Answer 12

Need to look at the labour situation of the supplier. Any possible labour unrest (e.g Strikes) could have a negative impact on the business receiving orders on time (e.g. current affairs such as taxi strikes).

Question 13

Expand on reputation as a factor to consider when assessing and choosing the best supplier.

Answer 13

Need to check the reputation of the supplier and all the role players in the supply chain (e.g, ensuring they are ethical.) - it is important that supplier has a good reputation. If supplier is involved in unethical business practices, the brand of the business could impact on the sales and profit of the business.

Question 14

Expand on delivery as a factor to consider when assessing and choosing the best supplier.

Answer 14

Supplier must be able to deliver the resources on time. Could look at the suppliers warehouse capacity (quality and quantity!), their transport, distribution facilities (e.g. warehouses), all logistical processes (from the order –> delivery).

Question 15

Expand on the concept of placing one’s order under the context of purchasing management.

Answer 15

It is the job of purchasing management to:

Ensure that correct goods are delivered by timeous placing of orders and follow-up.

Make use of a stock control system in order to maintain correct inventory levels (ensuring they’re not over-stocked or under-stocked).
E.g: E.P.O.S.S.E (Electronic Point of Sale and Scanning Equipment) - when each item is received it is scanned in and captured using the bar code and when it is sold, which informs the purchasing clerk when to order more products.

Question 16

Expand on the concept of the receiving of goods ordered under the context of purchasing management.

Answer 16

The business will have discussed the time frame for the delivery of resources by the supplier. When raw materials or products are delivered, a control system should be implemented in order to ensure the quality is acceptable, goods are not damaged, the correct quantity is received.

The warehouse clerk must be in charge of this process through:
1. Supplier issues a delivery note that is used when the quantity ordered is checked against the quantity actually delivered. Any problems should be immediately reported if goods are damaged.
2. Warehouse clerk will complete a goods received voucher to inform the purchasing department that goods have been received in a good condition.
3. Detailing the volume and type of stock entered into a computerised system to keep record of stock on hand. If the system is not electronic, a set of stock cards are used to keep a record of the stock (e.g. saved to the cloud).
4. Invoice is forwarded to the financial function to pay for the goods received. The business must have enough space available to store the products.

Question 17

Expand on the concept of the assessing orders against the invoice under the context of purchasing management.

Answer 17

The purchasing function
must double check that
all goods are ordered and
have been received.

Question 18

Expand on the concept of sending resources to departments warehouse under the context of purchasing management.

Answer 18

Resources to be stored are sent to the warehouse. Resources might be sent directly to the production department or other department. Then the purchasing manager should ensure that the necessary internal distribution channel is in place (remember the new textile distribution centre).

Question 19

Define ‘stockpiling’ and comment on why it is important.

Answer 19

The process of ensuring there is sufficient stock available when needed.

This is important to ensure that:
- Any duplication of stock is eliminated.
- The smallest sum of minimum working capital is tied up in stock.

Question 20

Define ‘warehousing.’

Answer 20

The storage of resources until they are needed by the different business functions.

Question 21

What are functions of warehousing?

Answer 21

Storage, consolidate, break bulk and mixing, and postponement.

Question 22

Expand on storage as a function of warehousing.

Answer 22

Warehouses store resources until they are needed by the business. The business should ensure there are always more resources that what is needed in the warehouse (meet the demand of customers).

In case of unexpected emergency or delay in the delivery process (current affairs - taxi strike in CT). This is called buffer stock - business must be careful no to have too much buffer stock= opportunity cost. Buffer stock will protect the business until such time as the products or resources are received.

Question 23

Expand on consolidation as a function of warehousing.

Answer 23

Resources or products are supplied by a variety of suppliers (e.g T-shirt factory supplying T-shirt to MRP Clothing, PnP clothing).

Warehouse acts as the central point (DC=Distribution Centre) for all products to be kept until they are transported to where they are needed (own transport/couriers). All resources needed for production go to a central place (e.g. T-shirt factory). They are moved to the manufacturing plant once all the different elements have been received.

Question 24

Expand on break bulk and mixing as a function of warehousing.

Answer 24

The business is able to purchase large quantities at a low price, which is called purchasing economies of scale. The bulk stock is then broken up and distributed to where it is needed. Large quantities of the same stock item will be delivered to the warehouse.

Question 25

Expand on postponement as a function of warehousing.

Answer 25

Delays occur when products need to be assembled/labelled/packaged according to special orders that have been placed.
Different elements are kept at warehouses (labels/boxes/bubble wrap). The products are then put together and dispatched.

Question 26

Expand on types of stock related to the clothing industry (no description needed).

Answer 26

Raw materials / semi-finished goods / finished or manufactured goods / perishable stock / capital goods / dangerous material.

Question 27

Give a definition of raw materials as a type of stock in the clothing industry.

Answer 27

Products that are extracted in the primary sector
EG: cotton, silk,leather, feathers, wool, glass, wood, plastic (polyester)

Question 28

Give a definition of semi-finished goods as a type of stock in the clothing industry.

Answer 28

Goods that have already been processed but are not yet ready for final
consumption
EG: denim material/fabrics to manufacture jeans/jackets

Question 29

Give a definition of finished or manufactured goods as a type of stock in the clothing industry.

Answer 29

Goods that are ready to be used by the final consumer (individuals or
another business)
EG: Levi Jeans

Question 30

Give a definition of perishable stock as a type of stock in the clothing industry.

Answer 30

Can be in the form of raw material, semi-finished goods of finished goods
and requires special storage facilities
EG: make up/nail polish/cosmetics

Question 31

Give a definition of capital goods as a type of stock in the clothing industry.

Answer 31

Machines and equipment (sewing machines) that are used during the
manufacturing process. The value of capital goods depreciates (loses it’s
value) over time due to wear and tear

Question 32

Give a definition of dangerous material as a type of stock in the clothing industry.

Answer 32

Most be stored according to prescribed regulations. Might have to have a
sign warning people about flammable and toxic materials e.g fire
extinguishers.

Question 33

Expand on quantity management in the context of purchasing management.

Answer 33

There should always be enough goods and services available in the business to meet the needs of the business and its external
consumers.
Min and max stock levels have to be balanced by looking at holding costs, ordering costs and availability of emergency stock.
The business has to the most economic ordering quantity.

Question 34

What does EOQ stand for and what is it?

Answer 34

Economic Ordering Quantity : the quantity of a particular stock item which can be obtained regularly and stored at the lower possible unit cost.

Question 35

Name two important aspects to consider of quantity management.

Answer 35

Stock ordering costs (e.g. transport/fuel prices/accidents/maintenance of vehicles, insurance) and storage holding costs (insurance, stock control and EPOSSE.

Question 36

Why do so many business prefer to keep the amount of stock they hold as low as possible?

Answer 36

Can reduce expenses = more profit.
Control costs are easier to control with low amounts of stock.

Question 37

What are some reasons why businesses keep more stock than what it is available on their shelves?

Answer 37

• May have to keep stock of items not sold
• Buffer stock is kept in case there is a delay in delivery.

Question 38

What is the JIT system?

Answer 38

Just in Time system. The purchasing department plans and controls the different purchasing activities so that resources or products arrive at the business just before they are needed. The advantage of this is that stock levels do not exceed the demand. However, the supplier used must be reliable and the business may require a back up supplier.

Question 39

What are economies of scale?

Answer 39

The business being able to benefit from
cost advantages due to the size of the businesses, volume of output ability and the scale of its operations (lowest input to produce the highest output). If the business is able to process large amounts of stock at a time due to the size of its operations, the business can buy large quantities. This means that the business can negotiate bulk discounts which = lower cost per unit.
E.g: transportation costs to the business & distribution costs will be less per unit if the truck is filled to maximum capacity.

Question 40

Define diseconomies of scale.

Answer 40

A situation where the size and scale of operations have a negative impact on the cost efficiency of the business (higher input cost with lower output).

Question 41

How is the decision between cash vs credit made?

Answer 41

This decision (cash or credit) will depend on the amount of cash available in the business (little cash will increase the possibility of credit purchases).

Question 42

What is a negative aspect of purchasing goods on credit?

Answer 42

Suppliers may charge interest for goods bought on credit (if goods cost more = negative impact on economies of scale). If purchasing on credit, it is important to have proper financial management skills.

Question 43

Why do some business prefer to buy on credit?

Answer 43

• Improves the cash flow of the business
• Cash remains in the bank for longer
• If the goods are sold by the time the supplier has to be paid, the business will have already collected the money
• The business can use its capital elsewhere or keep it invested and earn interest (increases the cash flow of the business).