Purchasing. . .
The “Process of Buying”
Part I
1
Average Manufacturing Costs
On average, manufacturing firms generate
approximately 10% profit from operations.
Typical breakdown of total costs:
 Labor (8%)
 Materials (50%)*
 Overhead costs (32%)
* On average, manufacturing firms spend about 50%
of their sales dollar in raw material, component, and
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supply purchases.
Purchasing Objectives:
Four Major Objectives of Purchasing:
1. Obtain the required quantity and quality of
goods and services
2. Obtain the lowest cost
3. Ensure top notch service and timely
delivery
4. Maintain good supplier relationships and
Develop potential suppliers
3
Purchasing
Purchasing needs to know
material
performance
availability
suppliers
4
7
Purchasing Functions:
Determine purchasing specifications
(correct quality, quantity, and delivery
requirements)
Select the right source
Negotiate terms and conditions
Issuing and monitoring of purchase orders
5
Purchasing Cycle:
1.
2.
3.
4.
5.
6.
7.
Receive and analyze purchase requisition
Select suppliers
Determine the right price
Issue purchase orders (PO’s)
Monitor PO’s
Receiving and accepting goods
Approving supplier’s invoice for payment
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Purchasing Cycle Step 1:
Receive and analyze purchase requisition
Minimum Required Information:
 Identity of requestor, approval, and charge
number/account
 Specification
 Quantity and unit of measure
 Required delivery date and place
 Additional supplemental information
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Purchasing Cycle Step 2:
Select Suppliers
 Routine items typically have preferred suppliers
 New/unusual items may require vendor search
and RFQ for comparison

Some companies require multiple source solutions
(McDonnell-Douglas preferred 3, single source required
justification documentation)
 Many firms today are opting for fewer suppliers
 Use of supply chain management is growing
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Supply Chain Management
Apply a total systems approach to managing
the entire flow of
information
materials
and
services
Raw
material
suppliers
Factories &
warehouses
End
customer
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3
Partnership Relationship
Continuing relationship involving
a
commitment over an extended time period,
an
exchange of information, and
an
acknowledgement of the risks & rewards
of the relationship.
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9
Purchasing Cycle Step 3:
Determine the Right Price
 Tied directly to supplier selection
 Price negotiation
Focuses on quantity (net and gross)

Frequency of orders
 Total usage “Refunds” are becoming popular
 Supplier maintained inventory (pay as you use
philosophy)
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Purchasing Cycle Step 4 & 5:
Issue PO’s and Follow-up
 POs are legal offers to purchase
 Purchasing must follow-up on open PO’s

Monitor past due PO’s and critical need components
 Work with suppliers
 Take corrective action

Expediting components, alternative supply sources,
reschedule production, etc.
12
Purchasing Cycle Step 6 & 7:
Receiving and Paying Suppliers
 Reconcile PO’s and receivers
 Correct damages, variance or discrepancies
 Verify information for payment

PO number

Receiving report

Invoice
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Outsourcing
Purchased items account for 60 to 70% of the cost
of goods sold.
Outsourcing allows firms to focus on their core
competencies.
 Organizations
outsource when they decide to purchase
something they had been making in-house.
Typically handled by materials management
function.
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4
Make or Buy
Current trend favors outsourcing all
activities that do not directly represent or
support core competencies.
Are there any dangers associated with
aggressive outsourcing? What are the
implications for JIT production?
15
5
Purchasing Inputs
Marketing
Engineering
Manufacturing
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Functional Specifications
By Brand
By Specification
Physical and Chemical Characteristics
Materials & Methods of Manufacture
Performance
By Engineering Design
Miscellaneous
17
Good Specifications
Are not to tight or loose
Allow for multiple sources
Assign responsibility
18
Supplier Selection
Types of Sourcing
Sole Source
Multiple Source
Single Source
Select based on:
Technical Ability
Mfg. Capability
Reliability
After sale service
Location
Price
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Four Categories of Product
Commodities
Standard Products
Items of small value
Make to order items
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Purchasing Anatomy
Procurement
• Specifications
• Supplier Selection
• Price Determination
• Negotiation
Purchasing
Schedule
and
Follow up
• Order Release
• Schedule Delivery
• Follow up
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Price Determination
“you get what you paid for”
Fair Price- One that is competitive, gives the
seller and buyer an opportunity for profit
Fixed Costs- Costs incurred without respect to
sales volume
Variable Costs- Costs directly associated with
sales volume (labor, material, etc.)
Breakeven Point- The convergence of profit
and loss. . . financial equilibrium
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Break-Even Example
Q:To make a particular component requires an overhead
(fixed) cost of $5000 and a variable unit cost of
$6.50/unit. What is the total cost and the average cost of
producing a lot of 1000? If the selling price is $15/unit,
what is the break-even point?
A: Total cost = fixed cost + (variable cost/unit)(# of units)
= $5000 + ($6.5 x 1000) = $11,500
Average cost = Total cost / # of units
= $11,500 / 1000 = $11.50/unit
Break-even point: Let X = # of units sold
$15X = $5000 + $6.5X
$8.5X = $5000
X = $5000 / $8.5 = 588.2 units
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