Supplement to Chapter 14 MATERIALS MANAGEMENT AND PURCHASING Materials. All physical items used during a production process.

Material Management. The purchasing, storage, and movement of materials during production, and the distribution of finished goods. Purchasing The purchasing function is responsible for obtaining material inputs for the operating system. Purchasing Interfaces Purchasing is the connecting link between the organization and its supplies. Operating units. Constitute the main source of requests for purchased materials, and close cooperation between these units and the purchasing department is vital if quality, quantity, and delivery goals are to be met. Legal. Contract negotiations, drawing up bid specifications for non-routine purchases, and to help interpret legislation on pricing, product liability and contracts with suppliers. Accounting. Responsible for handling payments to suppliers and must be notified promptly when goods are received in order to take advantage of possible discounts. Design and engineering. Prepare material specifications. Receiving. Determine whether quality, quantity, and timing objectives have been met, and move the goods to temporary storage. Suppliers. Learn what materials will be purchased and what kinds of specifications will be required in terms of quality, quantity, and deliveries. Purchasing Objectives 1. To determine the quality and quantity and when an item is needed 2. To obtain a reasonable price 3. To maintain good relations with suppliers 4. To maintain sources of supply 5. To be knowledgeable about prices, new products, and new services that becomes available. Purchasing Cycle. Series of steps that begin with a request for purchase, and end with notification of shipment received by satisfactory condition. Main steps: 1. The requisition is received by purchasing. The requisition includes (a) a description of the item or material desired, (b) the quantity and quality necessary, (c) desired delivery dates and (d) who is requesting the purchase. 2. A supplier is selected. Vendor ratings may be referred to in choosing among vendors, or perhaps rating information can be relayed to the vendor with the thought of upgrading future performance. 3. The order is placed with a vendor. 4. Monitoring orders. 5. Receiving orders. Value Analysis. Examination of the function of purchased parts and materials in an effort to reduce cost and/or improve performance. 1. Select an item that has a high annual dollar volume. This can be a purchased part or material or a service. 2. Identify the function of the item. 3. Obtain answers to questions such as these: a. Is the item necessary, does it add value or can it be eliminated? b. Are there alternative sources for the item? c. Can the item be provided internally? d. What are the advantages of the present arrangement?

e. What are the disadvantages of the present arrangement? f. Could another part, material, or service be used instead? g. Can specifications be made less stringent to save cost or time? h. Can two or more parts be combined? i. Can more (less) processing be done on the item to save on cost? j. Do suppliers/providers have suggestions for improvements? k. Do employees have suggestions for improvements? l. Can packaging be improved or made less costly? 4. Analyze the answers obtained plus answers to other questions that arise, and make recommendations. Make or Buy This issue can arise in a number of ways, such as in response to unreliable suppliers, idle capacity of an organization, the desire to achieve greater control over the production process, and increasing costs. The following factors are taken into account in deciding whether to make or buy: 1. Cost to make versus cost to buy, including start-ups costs. 2. Stability of demand and possible seasonality. 3. Quality available from suppliers compared with a firms own quality capabilities. 4. The desire to maintain close control over operations. 5. Idle capacity available within the organizations. 6. Lead times for making versus buying. 7. Who has patents, expertise, and so on, if these are factors 8. Stability of technology; if a technology is changing, it may be better to use a supplier 9. The degree to which the necessary operations are consistent with, or in conflict with, current operations Vendor Analysis. Evaluating the sources of supply in terms of price, quality, reputation, and service. The main factors to look at when a company selects a vendor are: 1. Price 2. Quality 3. Services 4. Location 5. Inventory policy of supplier 6. Flexibility Determining Prices Prices are determined in essentially three ways: published price lists, competitive bidding, and negotiation. Organizations buy products and services that have fixed or predetermined prices. This is generally the case for standard items that are bought infrequently and/or in small quantities. For large orders, competitive bidding is often used. This involves sending requests for bids to potential suppliers, which ask vendors to quote a price for a specified quantity of items or for a specified service to be performed. Negotiated purchasing is used for special purchasing situations when specifications are vague, when one or a few customized products or service are involved, and when few potential source exist. Contractors and suppliers need a reasonable profit to survive. A take-it-or-leave-it approach or one that capitalizes on the weaknesses of the other party will serve no useful purpose and may

have detrimental effects that surface later. The most reasonable approach is one of give and take, with each side giving and receiving some concerns. Centralized Purchasing. Purchasing is handled by one special department. Decentralized Purchasing. Individual departments or separate locations handle their own purchasing requirements. Suppliers as Partners Purchasing/supply operations identified nine areas in which potential ideas from suppliers could lead to improved competitiveness: 1. Reduce the cost of making the purchase 2. Reduce transportation costs 3. Reduce production costs 4. Improve product quality 5. Improve product design 6. Reduce the time it takes to get the product to market 7. Improve customer satisfaction 8. Reduce inventory costs 9. Introduce new products or processes Logistics. Movement of materials and supplies. Movement within a Facility. 1. From incoming vehicles to receiving 2. From receiving to storage 3. From storage to the point of use 4. From one work center to the next, or to temporary storage 5. From the last operation to final stage 6. From storage to packaging/shipping 7. From shipping too outgoing vehicles Traffic Management. Overseeing the alignment of incoming and outgoing goods. Bar Codes. Patterns of black lines and white spaces that can be read by scanning devices, containing a variety of information.