Download Purchase and Materials Management and more Lecture notes Production Planning and Control in PDF only on Docsity!
Subject: Purchasing and Materials Management Course Code: POM-325 Author: Dr. Vijender Pal Saini Lesson No.: 1 Vetter: Dr. Sanjay Tiwari Purchasing and Materials Management
Structure
1.0 Objectives 1.1 Introduction 1.2 Purchasing Management 1.3 Important of Purchase Management 1.4 Purchasing Activities 1.5 Types of Purchase 1.6 Purchasing Cycle 1.7 Characteristics of a Purchasing Manger 1.8 Materials Management 1.9 Classification of manufacturing materials 1.10 Objectives of Materials Management Department 1.11 Relationship between Materials Management Department and other Departments 1.12 Risks to be Considered by Purchase Material Manager 1.13 Summary 1.14 Key Words
1.15 Self-assessment questions 1.16 References/Suggested readings
1.0 Objectives
After going through this lesson, you will be able to: Understand the concept of Purchasing and Materials Management. Identify purchasing activities and know the importance of purchase management. Describe the concept of Materials Management and explain the relationship between Materials Management Department and other Departments
1.1 Introduction
Purchasing
Purchasing describes the process of buying. It is the learning of the requirement, identifying and selecting a supplier, negotiation price. Purchasing is an element of the wider function of procurement and it includes many activities such as ordering, expediting, receipt and payment. Purchasing is responsible for obtaining the materials, parts, supplies and services needed to produce of a product or provide a service. (Joyce, 2006) Purchasing can be divided into two broad categories, large and small purchases, based on seven characteristics of purchased product – volume, specificity, technological complexity, essentiality, fragility, variability, and economic value. (Parikh, 2005)
Bulk Purchase
with sale forecasts and production schedules. In some books, you will find the terms like purchasing, procurement, supply chain, materials management, supply material and logistics interchangeably. But there is a hair-line difference in all these terms.
Important Terms
Purchasing
Purchasing describes the process of buying. It covers the knowledge of the requirements, identifying and selecting a supplier and negotiating price
Procurement
It is a broader term. It includes purchasing products required for production, stores, traffic, receiving, inspection and salvage.
Materials Management
It includes planning, organising, communicating, directing and controlling of all those activities mainly concerned with the flow of materials into an organisation. Material management views material flows as a system.
Logistics Management
It is the planning and controlling of the flow of raw material in a cost effective manner from the suppliers or point of origin to the manufacturing and then flow of finished goods for consumption in the customers’ hands.
1.2 Purchasing Management
Purchasing management is concerned with the planning and controlling of the acquisition of suppliers' goods and resources, to fulfill the administrative and strategic objectives of the organization. In practice, purchasing managers have to deal with both customers internal as well as external. He/she has to respond creatively to internal customers' need on the one hand and to maintain a mutually profitable relationship with suppliers on the other. This dual-role perspective of purchasing management has, in recent years, been increasingly recognized as comprising complex tasks in the integration of internal/external and upstream/downstream supply chain management activities. (Fung, 1999) The part of supply chain management that focuses on the management of inbound goods and services into a firm.
1.3 Importance of Purchase Management
For Cost Effective Production
Purchasing is responsible for learning of the internal requirements, locating and selecting suppliers, obtaining the materials, parts, supplies and services needed to produce a product or provide a service. A purchase manager is responsible for negotiation of price with suppliers too. You can get some idea of the importance of purchasing when you consider that in manufacturing industry more than 60 percent of the cost of finished goods comes from purchased parts and materials. Furthermore, the percentages for purchased inventories are even higher for retail and wholesale companies, sometimes exceeding 90 percent.
Organization can realize major benefits from their focus on purchasing management as mentioned below:
From a Top Management Perspective:
There are five rights that every management expects from their purchasing executives:
Right Quantity Right Quantity Right quality Right Time Right Supplier Right Cost
From Functional Perspective:
Uninterrupted flow of materials and services Buying at competitive prices Avoiding under-inventory and over-inventory To have good relationship with other departments
In nutshell, purchase management has the following benefits:
Cost reduction or improvement (required utmost to be competitive in market) Improved material delivery (required for smooth flow of production)
Shorter cycle time, including product development cycle times (helpful in fast production) Quality improvement (required to satisfy or win the hearts of the customers ultimately)
Manufactures spend an average of 55 cents out of every dollar of revenues on goods and services, purchasing and clearly a major area for potential cost savings. This fact was recognized first by many Japanese companies in the 1980s when superior management of relationships with supplies gave Japanese automobile companies a $300 to $600 per car cost advantage. (A. T., 1994)
What car/automobile companies buy: Tires, Brakes leathers, Clutches, Wires, Steel plates, Glasses, Paint, Fabric, Aluminum sheets, Electronic components, Carpets etc.
What soft-drink producers buy : Bottles, Sweetner, Carbonation, Flavouring substances, Caps, Cardboards, Plastic Containers, etc.
What software companies buy : Computers, Hardware, Chairs, Tables, Wires, Data Cables, etc.
What hotels/restaurants buy: Vegetables, Utensils, Air conditioners, Gas Stoves, Carpets, etc.
So, we see that different industries require different types of materials according to their requirements.
There are mainly two types of purchases; the individual purchase and the organizational purchase.
Individual Purchase
Individual or personal purchase includes those types of items or products which are purchased for personal or family consumption.
Factors influencing individual purchase behavior:
In general mainly there are four types of influence factors:
Cultural Factors Social Factors Personal Factors Psychological Factors
Organizational Purchase
A purchase will be considered to be organizational if it is made in the name of a company or organization, regardless of size, from a medium sized company up to a multinational or state company. Organization consists of business, industries, retailers, wholesaler, government and non- government organizations.
Business and industries purchase materials for business use or as a raw material to produce other product. Wholesalers/Retailers/traders buy product for resell at profit.
Government organisations purchase products for use in offices or provide services to people. Non-government organizations purchase products to provide services to their client.
Consumer Purchasing / Decision making Industrial Purchasing / Decision- making Less risky More risky Emotional decision-making Rational / Analytical decision-making Personal purchasing is sometimes unplanned or on the spot or abrupt buying influenced by promotional activities
Scientific purchasing as whole organization’s profitability affects
1.6 Purchasing Cycle
The purchasing cycle begins with a request from within the organization to purchase material, equipment, supplies, or other items from outside the organization, and the cycle ends when the purchasing department is notified that a shipment has been received in satisfactory condition, and managerial accounting is actively involved in each step. (Joyce,
- The main steps in the cycle are as under:
Recognition of need Description of need Selection of suppliers Determination of prices
The purchasing manager is involved in large activities of purchasing materials consistently involving very large financial deals. So, he has to be loyal to the organisation and he has to prove his loyalty from time to time.
Computer Literacy
The purchase manager must be well skilled in computer as he requires use of computer in many activities. If he is computer literate, then he can work efficiently.
Technical skills
Now-a-days, in production a very highly sophisticated technology is used. Purchase manager must have technical understanding of the business. The purchase manager has enough technical background to understand the production process, the supplier’s processes and scheduling system in order to making improvement.
Ability to Make Decision
The purchasing manager has to take quick decisions in line with procurement strategy of organization vis-à-vis liaison with other departments. He or she has to take decisions with quality, market, economic, social and political environment and issues taken into account.
Innovative
Innovation is very necessary for survive in the market in present competitive market condition. So, a purchase manager should take innovative decisions related to purchase
techniques, maintaining quality, inventory stock, inventory control, re-ordering level and order processing.
Bargaining Power
It must be the prime motive of the purchase manager that organization can purchase more and best materials with less cost. For this a purchase manager should have good bargaining power.
1.8 Materials Management
Material management is defined as the planning, acquiring, storing, moving and controlling of materials as per the requirement of the organisation. Materials management is basically related with the smooth flow of materials. The major activities covered under materials management are the anticipation of the materials required in the organisation from time-to- time. It involves ordering and obtaining materials from the suppliers, introducing the materials to the organisation and monitoring the status of materials. It helps to optimize the usage of facilities, personnel and funds and to provide service to the user in the line with the organizational aims. Materials management is the coordination and control of the various material activities. The key material activities are:
Purchasing Activities It involves mainly identification of materials needs, market research, maintaining materials records etc. Procurement Activities
Packaged Materials
These are materials that are packaged together to prevent damage during transportation and deterioration when they are stored.
MRO Supplies
These materials are required for maintenance, repairing, and operating supplies used in the manufacturing process regularly for the smooth manufacturing, i.e. soap, lubricating oil, grease, plastic and rubber parts, screw driver, nuts etc.
Loose Materials
These are materials that are partially fabricated and that should be handled individually.
1.10 Objectives of Materials Management Department
The primary objectives of Materials Management department are: Low Procurement price High inventory turnover Low cost of acquisition and possession Continuity of supply Consistent quality Low payroll costs Favorable supplier relations Maintenance of good records
The secondary objectives of Materials Management are:
New materials, processes and products Economic make or buy decisions Standardization Product improvement (Khana, 2012)
1.11 Relationship between Materials Management Department and other
Departments
Materials Management Department plays a very important role in an organization and it must have good relationship with other departments. The departments that are mostly involved are: Production, Engineering design, Quality control, and Finance Department.
Materials Management Department and Production Department
The materials management department must have good relationship with production department. Materials Management is responsible for the purchase of all materials required by the production department. If the needed materials are not supplied at right time then the production process can halt and generate huge losses. So, for the smooth functioning of the production department, the materials department must be vigilant about the latest requirements.
Materials Management and Engineering Design Department
If both materials management and engineering design department work together then the much required innovative strategies can be formulated and implemented. Both departments
Selection of type of contract for specific material procurement; Vender evaluation criteria; Pilling up of the inventory and controlling of the same; Management of surplus materials; and Any one of the above or all of the above, or combinations. (Dey, 2001)
1.13 Summary
The smooth functioning of the production department depends upon a large extent on the right type of materials purchased at right time at right quality and at right cost. The right cost of materials leads to good saving. It is possible through efficient buying. The purchase manager must be technically skilled, innovative, intelligent, vigilant and efficient in bargaining. Heavy competition has generated the importance of efficient purchasing. For any industrial project, the purchasing is main function that contributes in the timely execution and delivery. The corporate policy indicates the guidance map for purchasing. It includes the purchasing strategies, plans, programmes and goals. The purchasing department must have good coordination with other departments like finance, engineering, production, quality department, etc. The purchasing department is responsible for avoiding any type of over-inventory or under-inventory. The purchasing department helps in the clearance of all the bills of external parties like suppliers, etc. Every organisation must adopt scientific and analytical way of identifying the need and type of materials, right supplier and smooth flow of materials.
1.14 Key Words
Purchasing
Purchasing describes the process of buying. It covers the knowledge of the requirements, identifying and selecting a supplier and negotiating price
Procurement
It is a broader term. It includes purchasing products required for production, stores, traffic, receiving, inspection and salvage.
Materials Management
It includes planning, organising, communicating, directing and controlling of all those activities mainly concerned with the flow of materials into an organisation. Material management views material flows as a system.
Logistics Management
It is the planning and controlling of the flow of raw material in a cost effective manner from the suppliers or point of origin to the manufacturing and then flow of finished goods for consumption in the customers’ hands.
1.15 Self-assessment Questions
- What is purchasing management? Explain its characteristics.
