BOLA: Operations Management and Purchasing

Operations Management and Purchasing Systems
Purchasing represents major expenditure (% turnover) of any business and needs to be managed and controlled.
Purchasing Objectives.
Buy to meet demand/requirements so that supplies are:

available when, where, in wanted form (min.effort to use)
at least cost for quality
purchasing dept. overheads, accumulated costs (cash flow and warehsg) are minimised and timely delivery.
The BUYER is the key - takes responsibility for placing an order.

Exercise.

Why is purchasing for the Channel Tunnel project different from Sainsbury's? Why is purchasing for Sainsbury different from Harrods? Why are futures markets important for PG Tips or Kelloggs? What are the advantages/disadvantages for purchasing of centralising or decentralising operations.
What staff skills are required? How might these skills apply to engineers, quantity surveyors? Why might economists and statisticians/mathematicians be useful?
What are the essential skills of a buyer?

Purchasing management are responsible for:

Purchasing Strategy
Ensuring that the organisation has the right policies to secure strategic advantage from its purchasing operations. Such advantage may be secured by forging supplier relationships, enhancing the quality of goods and services procured, integrating purchasing and design technology, minimising purchasing and inventory holding costs, using plant and equipment to the best advantage, optimising benefits available from investment and funding of purchased items.

Administration.
i.e. creating and maintaining the purchasing organisation, information systems, staffing and training, resource (budgetary) allocation and control, maintaining/improving procedures. Organisation depends on scale of operations. Skimping on staff abilities and computer power in this area is a false economy

Procedures and methods must cover e.g.

Instructions and terms of contract including cancellation, containers, transport, contract security, credit control (items on consignment), receipt arrangements, quality control and data recording.
Catalogues, drawings and specs are important PO system tools. These define standard names, stock numbers, dimensions, quality and performance limits (or legalities).
Notifying catalogue changes is important. One part change can ripple through the total production system. Deletion or launch of products must be phased with purchasing + stock. A new production item will require a bill of materials which will include data on supplier approval, designs/samples, inspection/testing and relationships with production schedules.
Purchase orders and records have to be processed properly. Requests + authorisation for new stock items involve interplay between invoices received, out-sourcing of consignments, production call-offs from purchase orders, invoice payments (PO accounting) and reconciliation with GRNs (goods-received notes).
Re-stocking must be co-ordinated with sales forecasts and production schedules.
Purchasing staff can work with item information, drawings, commodity groupings to identify discount opportunities.
Data collection, storage and output can hamper the purchasing operation if procedures and methods become out-of-date or ossified. Purchase control requires exception reporting and summary report information so that managers can spot trends. Masses of unstructured listing data may be unhelpful for establishing the overall picture is.
Purchasing staff may work closely with systems analysts to define the requirements for effective information/database systems.
Procedures need to be sharp and sensitive to market changes. Methods and procedures require regular review. A good intelligence system is required to measure the performance of systems. Hence the DP department will be closely involved with purchasing. Existing DP systems may need fine tuning with new reports or extensions to on-line update/query and batch-based information processing systems.

Audit and monitoring procedures
Stocks are assets. Warehousing is costly. So purchasing systems which enable

operations to function with minimum stock
fast-response ordering and delivery to compress the time between ordering, supply
warehousing costs to be identified
effective stock taking - to update information on book and actual stock
... are clearly important areas to monitor and audit.
Note in retailing and distribution, losses due to theft or damage can be high.

What Research goes into Purchasing?
Supplier investigation - competencies, capacities and credit rating, timing and progress. Supplier loading and duplication of sources. Advising suppliers on how to meet company quality requirements. Competitor information. Economic forecasting. Internal and contractor tooling schedules.
Purchase targets and attainment. Set financial targets for incorporation into company profit plan. Value analysis - use of effective processes and cheaper/better materials. Quality requirements and control methods.
Research can include investigations into the latest processes and manufacturing methods
Consider:
Control by value, turnover - 80/20 rule (how valid is this generalisation?). Budget variances. Open-to-buy. Cost control and effectiveness for each buying area.
New model and major change control. Ensure no delay in setting up a line or introducing new items. Check all production requirements to ensure documentation is complete (specification, timetable and parts list). Vet drawings and specs.
Supply protection - multi-sourcing, stock holding. Progress purchase orders relative to delivery. Test samples before quantity production. Set up intelligence service to anticipate eventualities, interruptions.

Purchase Order Processing
Before purchasing we work from drawings and specifications, production plans and manufacturing (or factoring out) budgets. Items must be catalogued and decision made whether to make or buy-in. Which suppliers are to be approached. Requisitions or releases must specify expected rate of usage or absolute quantity required. Some orders may require 'formal inquiries' or options followed by negotiations before a firm order is placed (Boeing 747's).
The PO is a document confirming the contract. The contract is formal and written but there can be verbal elements to it and conditions relating to packaging, transport and accounting. The order may be a simple one page sheet. It may equally be a letter of contract or book covering contract definition. The law of the country with which the order is placed may require specific features to be embodied in the contract e.g. it should be signed by both parties.
PO copies will be needed by

production control (to call off quantities at rate needed for production).

warehouse - to create space and prepare for receipt

accounts dept - to check invoice prices as goods are received. If reconciliation is not effected then an invoice query will be raised to Purchasing dept to check prices/conditions notified in amendments to the PO. If disputed, balance of monies owing may have to be delayed till dispute is settled. Sound supplier relationships are important here.

Exercise
Evaluate he itmportance of the Internet and Intranets for purchasing. What are TraderNet portals? How may the use of Internet enhance purchasing effectiveness?
Standing agreements may be negotiated with the supplier covering

just-in-time communications and computer-to computer links
warranties
early payment discounts
inspection/testing requirements
copyright/patent safeguards under development orders

Note several kinds of purchase orders and their implications for just-in-time and computer-to-computer communications

Quantity PO's - specific quantity on a due date. Single or multi-item.
Blanket PO's - no specific qty but covers requirements over a stated/unstated period for call-forward for prodn on an 'as required' basis (average or peak weekly requirements). BPO's can be for fixed time period or open-ended.
Company-wide PO - one PO issued to a supplier for delivery at =>2 locations.

Database Systems and Purchasing
From the purchasing database and its related stock, production and sales data, purchasing analysts can evaluate purchasing in many different ways e.g. expenditure by commodity area, supplier performances, expenditure against target etc.
Items on the database may be so constructed as to indicate their material, components, labour overhead contents etc so that the purchasing database may be interrogated by part number/category, by purchase order, by "used in (another assembly", by supplier etc.
The Purchasing Data/Accounting System and Control
A requisition is authorisation for a PO raised in the originating department. The Purchase order and purchase ledger accounting system operates to keep control of actual purchase orders, expenditure and the cash flows generated. Normally requisitions require authorisation (signature) to ensure that money required is available. A hierarchy of authorisations may be required depending on the purchase amount.
In manufacturing the PO chain can be complex - casting, assembly with other parts, part finishing - may all involve movement of goods between various suppliers. Control of movement, right of inspection of books and premises can be written into the contract (Marks and Spencer suppliers). If carriage of goods is not tied into the contract clearly - a muddle can occur as to who pays for what.
Buying and Negotiation.
Negotiation skills include:

Identifying sources. Making assessments. Establishing sound relationship based on win-win and mutual respect. Use of latest techniques and methods to aid communications.
Negotiating and complete sale. Preparation for the negotiation. Quick thinking using ratios of performance. Attention to detail. Sense of humour, patience and self-control.
an analytic approach to problems, questioning and listening skill, ability to summarise.

Developed and maintained by Chris Jarvis