Notesale: Turn your study into money

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What can happen when purchasing &
supply is not involved in specifying
...
2-1

How it should work!
 P&S should be informed & involved early
 Specifying should involve interaction at various
levels
 It should be a cross-functional process
 P&S should contribute its market knowledge…
 …and facilitate suppliers’
involvement to promote innovation & best
solutions

ITC

M2:U5:5
...
2-1

Purchasing & supply in your company’s
specification process
• Is it involved? Why or why not?

• Which problems could it help to resolve if it were
more involved?

ITC

M2:U5:5
...
2-4

Taking account of all the needs
(Continued…)

 Raw materials & components
 Requirements & capabilities of equipment
 Compatibility with other
materials/components

Transportation, handling & storage
 conditions & facilities
 operating personnel

ITC

M2:U5:5
...
2-2

Considering all of the requirements:
• Consumers

Consumers

• Installation personnel

• Maintenance staff

Maintenance
Installation

ITC

M2:U5:5
...

Functional budgets are an important source
of planning information for P&S
Purchases are often a large part of
a firm’s total cost (i
...
, its budget)
The more precisely a budget is drawn up, the
better it will serve the company
...
3-1

Budgeting for operational requirements:
P&S can help by…
 Providing information on historical expenditure
 Estimating costs through its market knowledge
& contacts with suppliers
 Use the current price
 Adjust the current price
 Obtain budget prices from suppliers
 Negotiating prices with suppliers in advance

ITC

M2:U5:5
...
3-1

Budgeting for operational requirements
• How much does P&S participate? Is it sufficient?

• If yes, how does it budget costs based on expected
prices? Where does it get the price information?

ITC

M2:U5:5
...
3-3

Action Point

5
...
3-4

Budgets are an important source of
information
You also need face-to-face
consultations with managers
...
3-5

(Continued…)

Consolidate the information you obtain
into a table like the following:
Purchasing & supply function: summary of planned purchases for
the period: ______________
Function

ITC

Type of
purchase

Purpose

Product or
service

Product
code

Budgeted
amount

M2:U5:5
...
operational purchases
 Show purchases for a particular product-line
 List purchases by categories of purchase
items
 List purchases ranked by level of expenditure
ITC

M2:U5:5
...
4-1

Rank purchase items in order of expenditure:
Add all of the expenditures for a given
item
Group related items
Include expenditures related to the
purchase of services
Include expenditures incurred by
individuals
ITC

M2:U5:5
...


…

12

Tuning devices for portable radio sets

etc
...


…

45
46

Transistors
Micro-valves

etc
...
4-3

100%

Visualising the 80/20 rule
100%

80%
Cumulative
annual
purchase
expenditure

Vilfredo Pareto

20%

100%
No
...
4-4

Action Point

5
...
4-5

Corporate targets:
• For product-lines
• For projects
• For ongoing operations
E
...
: “Reduce lead
time for delivery to
market of our
product-line ‘A’ by
20 days
...
g
...
g
...
4-6

The supply objectives are the starting
point for setting supply targets
Individual supply targets are needed for key items
that are important to meeting your supply objectives
Many less important items can be grouped
and share standardised supply targets

ITC

M2:U5:5
...
grouped supply targets
Overall supply
objective

Individual targets

Grouped targets

Frequent modification The item is standard
or re-design required
...

service quality
Complex and/or of
New item
...

not critical
...

Spare
parts
for
capital
supply
equipment
ITC

M2:U5:5
...
grouped supply targets
Overall supply
objective

Individual targets

Grouped targets

When complex and/or When standard and
new
...

When expensive to buy When inexpensive
...

cost is low
...

When operating/
When operating/
Minimising the
total cost of
disposal costs are high
...

ITC

M2:U5:5
...
4-2

Individual vs
...
For each indicate why such targets are
required
...
4-59a

Components/materials for product/service:
PIP
rating

Supply objectives
 Identify competitive

L

suppliers and source
speakers & components
 Ensure performance

M

reliability is improved
 Reduce average lead-

L

M

H
ITC

time of critical path
components by at least
10 days
 Ensure a 95% availability
rate of spare parts

 Modernise tools and

equipment
 Reduce supply cost of
components by 12%

Overall PIP rating

Portable AM/FM radio sets
Supply targets

Speakers

Transistors

Secure contract
with supplier by
30 November L

Tuning devices

N/A

N/A

N

N

Upgrade reliability Maintain reliability Maintain
reliability rating of
rating from 98
...
9%
to 99
...
8%
L
Reduce lead time Reduce lead time
by 10 days
by 7 days

L

N

Maintain 2 weeks’
average stock at
each centre

Maintain 2 weeks’
average stock at
each centre

Reduce delivered
cost by 15%

Reduce delivered
cost by 5%

M
H

H

L
L

L

Reduce lead
time by 10 days

L

Maintain 2 weeks’
average stock at
each centre

M

Reduce delivered
cost by 10%

M

M

M2:U5:5
...
4-11

Action Point

5
...

H M L N
2
...

H M L N
4
...

H M L N
ITC

M2:U5:5
...


$ 14,700 $ 16,000

80% of items = 20% of value

$ 63,000
Max
...
4-13

The supply positioning model:
H

placing the items

Microvalves

Speakers

Tuning
devices

M

Electric
motors

Impact
Transistors

L

Valves

Confce
...


Cleaning
Suppl
...
4-14

The supply positioning model as a basis for prioritising
H

Microvalves

Speakers

H

Give your highest priority
to items that represent
high levels of both
expenditure and of impact!

M

M

Tuning
devices

Electric
motors

Impact

L

L
Confce
...


Cleaning
Suppl
...
4-15

Action Point

5
...

Expenditure rank

Product or service

Annual
expenditure

Impact
rating

Highest
Medium – high

20% of
items

Medium
Low-medium
Low

ITC

80% of
items

M2:U5:5
...
4-4 (Cont’d)

Prioritising purchased items
...


Max
...
4-17

Supply objectives &
targets
 Ensuring the right quality
 Ensuring availability
 Ensuring the lowest possible
total cost
 Securing needed supplier
support

ITC

M2:U5:5
...

differentiation:
Use performance specifications to
Contribute to optimised
encourage design creativity
...

Use quality brand names to
Ensure latest possible
differentiate
...

differentiate products
...

expertise/experience
...

ITC

M2:U5:5
...

Use performance specifications to
cost of acquisition and
encourage design creativity
...

Use standards as they are cheaper
than custom designs
...


Avoid quality brand names as these
will be more expensive
...
5-3

The implications of supply objectives / targets on the
specification method and type
(Cont’d)
Main focus of the supply
objective / target
Ensuring availability:

Ensure continuity of supply
availability, minimise leadtime and secure on-time
delivery
...


ITC

Impact on the specification
Method and type

Use standards as this usually means
that the product will be more widely
available

Use quality brand names when this is
likely to give you better service
...


M2:U5:5
...
5-5

Action Point

5
...
Product/service:__________________________
Approach:

2
...
Product/service:__________________________
Approach:

ITC

M2:U5:5
...

quality
 Include quality inspection and testing
requirements
...

 Date and place of delivery
...

 Special transport requirements and methods of
transport
...

 When certain information will be provided to the
supplier
...

 Quantity pre-shipment inspection requirements
...
5-7

What can be included in a purchase specification

(Cont’d)

Required service levels
...

Requirement for technical support or assistance
in commissioning of complex equipment
...

Maintenance requirements
...

Cost targets

Maximum purchase price
...

Maximum total cost of ownership
...

ITC

M2:U5:5
...

What the supplier is responsible for
...

Legal requirements Legislation to comply with
...


4
ITC

M2:U5:5
...
6-1

(Paper-based or electronic)
Minimum information required:

 Unique requisition number
 Requisition's name, location & signature
 Budget approver’s name & signature
 Description & codes of the required
goods/services
 Required quantity

Use simplified
menu-based form
for common
purchases!

 Required delivery date
 Delivery details/restrictions
 Cost allocation/budget line reference
ITC

M2:U5:5
...
6-3

Materials Requirements Planning: integrates bills of
materials & production schedules, and serves to
automatically schedule orders (e
...
, under an overall
contract set up by purchasing & supply)
Electronic commerce:
 Buyer’s & supplier’s computers communicate directly
(generally through the Internet)
 Buyer company can keep track of the status of its
orders on the supplier’s computer
 Both achieve substantial savings in administrative costs
and reduced lead-times
ITC

M2:U5:5
...
6-5

 Corporate purchasing cards
 Blanket or “call-off” contracts
 Low value order forms
 Using petty cash

ITC

M2:U5:5
...

May require additional approvals
 Technical approval
 Project approval
 Board approval (high level expenditures)

The effect of tax allowances & grants
Decisions can be postponed & may depend on
economic conditions: order patters are thus
erratic
...
6-7

Placing an order commits an
organisation to expenditure!
 Must be carefully controlled by procedure
 Can be undertaken both by purchasing & supply and by
other functions
 Different positions in the P&S function will have
different levels of authority to commit expenditure
 People responsible for committing expenditure should
be different from those authorising a purchase, to
reduce the risk of fraud
...
6-8

Action Point

5
...
Are the procedures written down?
2
...
Are there different processes for different value
purchases?
4
...
6-9



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