GRADUATE DIPLOMA IN PURCHASING AND SUPPLY CHAIN MANAGEMENT
2014-2017
MODULE – 1 – PRINCIPLES OF PURCHASING & MATERIALS MANAGEMENT
Topic - All Procurement managers needs to justify their respective
purchases to the management hierarchy for control purposes. Explain
as to how the procurement Managers use sparingly the basic
fundamentals to have as effective procurement process in the company.
Name - Amila Priyanjith Perera
Index No. – 29
Contents
1. Introduction…………………………………………………………. …01
2. Organizational and purchasing hierarchy………………….……..02
3. Basic Fundamentals of purchasing………………………………..03
4. How the fundamentals are used by procurement managers….05
5. Deming cycle………………………….………………………………..06
6. EOQ (Economic Order quantity)……………………………………08
7. JIT (just-In-Time)………………………………………………………10
8. MRP (Manufacturing resource planning)……………………….…11
9. Synopsis………………….……………………………………………..14
Introduction
What is procurement?
Procurement considered being a very old profession and it emerged with
the introduction of trade (about 5000 years ago) although there weren’t
any procurement policies and planning then with time it facilitated.
Procurement means to acquire or obtain goods, services and work that
are essential to an organization from an outside external source.
Now it involves in the process of selecting suppliers and negotiation of
contracts with them (if required by the organization), establishing
payment terms, assessing, going out for bids, meeting with each of the
suppliers before picking a successful supplier. Procurement is, basically,
the root term that includes purchasing and purchasing is a subset of
procurement. Purchasing generally refers to buying goods or services
and it may include receiving and payment as well. Since both
procurement and purchasing have a very similar sort of definition, in the
business world, people use both these terms mutually.
To avoid confusion, in short Procurement deals with the sourcing
activities, negotiation, and selection of goods and services that are
usually of importance to an organization. Purchasing, however, is the
process of how goods and services are ordered. Purchasing can usually
be described as the transactional function of procurement for less
essential goods or services. Procurement is important as it consumes
60-80% of materials cost in any organization so it is up to procurement
managers to understand how important their job is to the organization.
01.
Below is a sample organizational hierarchy of a small business and the
purchasing department comes under Manager P&MM
Below is a sample structure of a large scale purchasing department
02.
Basic Fundamentals of purchasing
To help the procurement managers to have an effective procurement
process in the company, 8 basic fundamentals in purchasing have to be
considered. They are: Right Item
 Right Quality
 Right quantity
 Right source
 Right time
 Right place
 Right price
 Right attitude
Right item
When purchasing something for use in an organization (it could be raw
materials used in production, intermediate goods or capital equipments
that will aid in production process) or even something for our own use,
we must always select the right item and it should serve its purpose as
required.
Right Quality
In any good or service the main aspect that defines and would help to
measure about how good it is and how well it performs its duty is quality.
Quality can be measured in different ways. If an item is of good quality
and it has passed its quality standards with zero defects it means that it
is fit for use, its buyers will have a good impression about it and would
allow placing a higher added value for it. But also it should be noted that
the best quality is not always the right quality so it is in the hands of the
procurement managers to choose the material with right quality before
buying.
03.
Right Quantity
Quantity may refer to the extent, volume, size, energy of anything that
can be expressed as a numerical value. Buying the right quantity will
balance the extra costs associated with larger and smaller
quantities. These quantities must be right as required by the
organization.
Right Source
“Source” in purchasing, is where the procurement managers purchase
material from, to be used in production. The term “source” may also be
referring to the supplier. So right source is also a key consideration in
purchasing as all other “8R’s”
Right Time
This means that the materials to be used in production or for sale must
be available when needed So that production will not held up due to
want of materials. To do so the materials must be purchased from the
suppliers at just the right time.
Right Place
This means that the materials purchased from the suppliers must be
delivered to the right place where the store or the production department
is located or to some other convenient place where the materials are
required.
04.
Right Price
The procurement of materials is determined by the price charged for
them. All efforts should be made to procure the materials at just the right
price because a slight reduction of the price for just one unit will result in
a larger monetary gain when buying in bulk.
Right attitude
Attitude refers to the buying behavior of the procurement managers,
their expression of favor or disfavor towards the suppliers they deal with,
towards the materials they check before buying or even towards the
supplier’s market.
How basic fundamentals are used by procurement
managers
Right item
The materials that the procurement managers purchase should serve its
purpose as required as the materials they buy is what will pass on to
every other stage in the production process and if the wrong materials
have been purchased or ordered the cost will have to borne by the
purchasing department in the organization.
E.g.:- the procurement manager in a garment factory was asked to buy
textile fabric, color green, size 60 inches in length to 100 mts. “Nina
cambell” branded. But the procurement manager has purchased JAB
branded textile fabric which is cheaper but which cannot be used to
produce garments meeting its quality standards. In which case we can
say that the procurement managers have not purchased the Right item.
05.
Right quality
The right quality is determined by the cost of materials and the technical
characteristics as convenient to the specific requirements. The right
quality should be clearly shown and should be described in terms of
specifications that are given to the procurement managers. The
technical staff in the purchasing department makes the quality decisions.
There are some management concepts like total quality management
(TQM), 6 sigma, etc. to measure the right quality of the materials. TQM
is expansion and combination of all function and processes of a
business through a procedure of continuous improvement (kaizen). TQM
involves every function and every employee in purchasing department in
satisfying customer’s needs and satisfaction, both internal and external.
The 7 features of TQM that purchasing managers must consider is
continuous improvement, employee empowerment, customer focus, use
of quality tools, product design, managing supplier quality and process
management. TQM applies Deming cycle which professor Edward
Deming introduced i.e. Plan, Do, Check, Action (PDCA).
06.
The Deming cycle is used: As a model for continuous improvement.
 When starting a new improvement project.
 When making a new planning process when purchasing or
improving the current process.
 When collecting data about the market and diagnosing and finding
the root cause when having problems PDCA cycles maybe useful.
Prof. Edward Deming explained that all activities must be controlled so
that’s why he introduced PDCA cycle.
 Plan - All activities must be planned.
 Do
- The plans need to be done as planned.
 Check - After the planning has been done it needs to be checked
against the plan. If there are any problems that have been found
those must be rectified.
 Action - If the activities are checked and found no problems then it
must be continued to the action point.
This cycle is useful for every activity to attain desired results for the
organization when managing materials.
The other method of measuring quality is 6 sigma.
6 sigma is a mode of removing any defects in any process from
manufacturing/procurement of materials to transactional and it could be
for a good or service.
07.
Right Quantity
The right quantity = the required quantity
The right quantity should be no more no less. The right quantities must
be purchased by procurement managers and make sure that stocks
keep up with the appropriate levels that there will not be any interference
to the flow of production when needing materials.
EOQ (Economic Ordering Quantity)
To determine and purchase the right quantity of materials economic
ordering quantity (E.O.Q). Maybe useful. The EOQ is the quantity that
results in the lowest total of variable cost. The ordering cost consists of
the cost of ordering and processing deliveries from paper processing
such as paper, typing, to postage, filing etc. If it’s a bulk order, the
annual required materials will be met with lower ordering cost as the
number of orders placed is less. But storage costs will be higher
including cost of insurance and taxes etc.
If few orders involving large quantities are placed, the delivery costs will
be higher but the ordering cost will decrease because there are a less
number of orders.
i.e. – EOQ makes - Lower stocks
- Fewer orders
- No reduction of service
The basic EOQ Formula is:-
08.
Where D = annual requirements of the materials in units
C = Ordering cost per order
1P = Cost per unit
Cc = Storing cost, carrying cost as the value of materials stored.
Right Source
Finding the right source means not only to find suppliers who supply the
right items but also it is important to have a good buyer and supplier
relationship so it will benefit the procurement managers. Selecting the
right source is not easy, procurement managers can’t assume that the
first supplier they deal with would be the best but he may not be. So the
selection of the right source must be done by some survey, negotiating
with the suppliers dealt with, analyze the results and rate the suppliers in
an order and select the best supplier the procurement managers think
would benefit them the most.
Procurement managers having a good relationship with the suppliers will
be able to benefit from longer payback periods, get information from
them about the likely market conditions, Price trends, the current
situation of the industry and the business environment that may also
help the organization’s marketing department.
09.
Right time
The procurement managers should make sure they purchase the
materials at the right time. If they purchase materials at the wrong time,
when the materials are not required for production they will have to stock
them until its needed this may cause an increase in storage costs,
deterioration, risk of low sales for a certain product that production will
have to be stopped temporarily and the purchased materials will not be
needed. In such cases huge losses will have to be borne by the
purchasing department.
Or in other way if it runs out of stock, whole production process will be
stopped and that the blame is for the purchasing managers because
they have not ordered the materials on time. Therefore to purchase
materials at the right time, firstly purchasing managers need to find the
lead time.
The lead time is the total time required to manufacture an item including
time taken to prepare the order, progression time, configuring time, test
run time, delivery time, check-up time and time taken to clear up the
materials damaged or not up to the right specifications. Then the
purchasing managers with the authority of the organization itself need to
determine a stock control system such as a JIT system or MRP system.
Inventory Control Systems
JIT (Just-In-Time)
It is a stock control system which ensures that materials, goods, or labor
are arrived or restocked exactly when needed in the production process.
JIT focuses on purchasing materials as a response to actual orders.
E.g.:- in a car manufacturing company named ABC, the company
assembles the car engine on Wednesday and the chassis is assembled
on Friday. By having Just-In-Time system ABC have the parts delivered
exactly one day before they need it in production so the engine will be
delivered on Tuesday and the chassis on Thursday.
10.
In this example the parts delivered to assemble the car has been arrived
at the right time. Because they have an inventory control system that
suits them best.
MRP (Manufacturing Resource planning)
Materials resource planning is a complete system of ordering of raw
materials, production scheduling of equipment and manpower based on
forecast orders.
E.g.:- in a car manufacturing company named XYZ the purchasing
managers make use of MRP for purchasing of vehicle parts and
supplying of those parts to production department for a 4 weeks period.
Procurement manager finds the lead time is 1 week from the time the
order is placed for the supplier to the time the materials are delivered to
the production. The purchase department has 26 parts stocked. 1st week
order is 15, 0 in 2nd week, 7 in 3rd week, 17 in 4th week. Since 26 parts
are stocked at present, purchasing manager need not order anymore for
the first two weeks and until the parts have been supplied to production
in the 3rd week. After the first week delivery they will still have 11 parts,
since no order has been placed for 2nd week, the same stock of 11 will
remain until 3rd week order of 7, on estimation the old stock will be
reduced to 4 parts and they will require 17 next week. So the
procurement managers need to order 13 new parts at the beginning of
the 3rd week so it could be used in production for the 4th week.
The advantage of MRP is its ability to organize the inventory so
materials are ready when needed and the production process doesn't
stall for lack of materials needed. It means that the MRP’s forecast order
system helps the procurement managers to deliver the materials at the
right time.
11.
Right Place
There is nothing much to explain in detail as to what the “right place”
refers to and how it’s useful for the procurement managers. It simply
means to deliver the right materials purchased to the right location where
it’s used.
E.g.:- 1) If materials have to be delivered to some other place for storage
it should be delivered to a warehouse or store and it should be the
correct warehouse not to some other warehouse.
2) If materials have to be exported to be produced, the container
must be delivered to the port not to the airport.
3) If any paperwork or documents need to be delivered to an office
department belonging to the same company, those documents must be
delivered to the right office department not anywhere else.
So to deliver materials to the right place, the procurement manager
should provide correct details as to where exactly it must be delivered to,
check the material size and weight, shipment sizes, security, loading,
unloading, number of shipping containers needed. The budget they have
in order to deliver the materials. These must be taken into account by
the procurement manager.
Right price
As we have discussed earlier that procurement of materials is
determined by its price and that a slightly lower price could affect the
whole production causing larger monetary gain and vice-versa. But we
should also note that the lowest price materials are not the best material
and also the low priced materials you find first may not be the lowest
materials in the market. Purchasing managers may still be able to find
materials with even more lower price by doing some survey and buying
those materials but by not harming the specifications or the quality of the
materials which would add to cost.
12.
To get materials for the right price, procurement managers need to find
proper sources of supply getting the prices of their materials, listing them
down and comparing those with the prices of other suppliers.
The price stands as an agreement between the buyer and seller. In this
way the procurement managers will be able to find the materials for the
right price.
Right Attitude
As mentioned earlier. Attitude involves the buying behavior of the
procurement managers from the suppliers. As procurement managers
it’s not just buying an item even if that item follows all the considerations
and the 8R’s. It is important that the purchaser, all its board members
and employees and the supplier establish a good mutual relationship
with each other and to ensure the faith and belief of the continuation of
this relationship. Also to conserve the environment for the future
generation who will take on the organization from then on and also to
help the suppliers also to improve their environment protection activities
and to do environmentally friendly procurement activities by purchasing
materials which is harmless to the environment.
13.
Synopsis
As we have now clearly understood the basic fundamentals that help the
procurement managers when they make a purchase, we now know how
expert procurement managers do their role so well but also it needs
some skill to make decisions, some talent also such as the ability to
comfortably talk about the price and the credit terms, pay-back periods,
discounts with the suppliers, Knowledge of the available suppliers, the
current capacity that must be maintained or be changed, and the impact
of the economy to their job, patience needed to negotiate matters, have
general understanding about alternative procurement processes,
knowing and working the details in order to get value for the money
spent , the confidential information must be kept within and the legal
aspects of purchasing and how it affects the organization, be able to
propose better supply management strategies, learn from senior
purchasing managers or even from the experienced subordinates
without being arrogant.
These are the additional skills that procurement managers should have
and it is important that the procurement managers practice these
fundamentals in their day-to-day activities and in the right situation to
gain benefits to the organization as I explained in the introductory stage
in my assignment.
So as for my assignment topic of sparingly using fundamentals in
purchasing by procurement mangers is concluded.
14.
Words – 3030
Reference
 Handout
 Notes
 Book – world class supply management by Burt, Dobler, starling.
– Purchasing and materials management P.Gopalakrishnam.
 Internet - http://www.linkedin.com/
- http://www.mbanetbook.co.in/
- http://finance.tufts.edu/