Purchasing Management

Purchasing Management
Prepared by : Anton Sudarmedi
Date : 1 May 2000
A. Purchase Management
In Manufacturing Industries the average cost expensed for purchase materials is about 60% of the production cost. Spent to purchase all raw materials.

In electronics industries the cost expensed is around 90% of the production cost.

Based on the above fact the purchasing must able to improve the efficiency of money expenses by organizing and the purchase activity with long term plan and control.

1. Internal Strategy.
Internal strategy is the strategy within the purchasing division to improve the performance of the division.
- Training, training for the purchasing staffs is very important for self improvement and improve the staff performance.
- Set the Target, Reduce cost and delivery on time, development and improvement of Supplier quality.Apply for services, engineering, financial, maintenance, stockiest, sales and quality.
- Become Information center.
- Advertise function of purchasing.
- Involved in management meeting.
- Give greetings to people whom help purchasing function.
2. External Strategy
External strategy is the strategy to improve purchasing performance based on the external conditions.
- Get information about technology, future technology and what is the supporting information.
- Do the supplier able to grow together and can support the company when the capacity of the product increase in the future ?
- Which technology must be secured and which can be expose for information purpose.
- What is the management thinking about supplier from local and abroad ?
- How far does price and quality can affect the decision making when purchasing the product ?

3. Supply-Base Management

1. Reduce the suppliers count.
2. Focusing the performance on to improvement of quality and on time delivery.
3. Develop long term relationship
4. Be careful with new suppliers.

Long term relationship with suppliers.
1. Loyalty of the supplier will grow and will be actualized in investing their capital.
2. Suppliers will take part in the business.
3. They will take care the service and customer satisfaction.
4. All cost tend to decrease.

Supplier Development
Purchasing staffs must spend their time, energy and money to help the supplier to achieve what company needs.
Purchasing must consider business agreement for product life-supply and life of technology.

B. Purchase Function (Definition of Purchasing)

In organization the higher Purchasing function in organization structure, the higher Purchasing as the contributing factor in the business. Otherwise the Purchasing will only as administrative job only.

Negotiation, increase the process of reducing or adding materials, creating relationship and contract are the job of Purchasing that will add the value of purchasing.

Job description and organization is the tool that will help to balancing work and improve the performance to the better way.

The better control is if the Purchasing can determine the job as per commodity (Specialization based on Commodity). One commodity must be handled by one Purchaser in the long time period in order to understand the market situation and condition.

Purchasing Function ideally consist of three factors :
1. Manager
2. Purchaser (buyer)
3. Administration job.

- Manager jobs :
Translate company target and objective to the purchasing staffs, act as media for each divisions in the organization, improve staff skills and doing purchasing function.
- Purchaser (buyer)
Doing purchasing , create supply system, create business control with supplier and buy materials or services needed.
- Administration job
Data collecting, data storage, secretarial.

C. Supply Base Management

- Introduction
Supply base management is the basic of Purchasing management that have relation with supplies and supplier problems.

Stockiest is one of the biggest invest that involving big amount of money too. Therefore purchasing must understand at least in minimal about below :
1. Logic reason to make inventory or stock.
2. The cycle of inventory or stock.
3. The flow of inventory pipeline and how to control the flow.
Technical way in supply base management
1. How to search supplier
2. How to evaluate supplier performance
3. Counseling and driving supplier as per company objective.

- Inventory Management

a. Kind of Inventory :
1. Raw material
2. Work-In-Process (WIP)
3. Finished goods
4. Maintenance, repair and operating supplies (MRO)

b. Inventory Pipeline :
1. Inventory -po-production-Transit - WIP - Finished goods - Costumer

c. Cycle influence ( process time)
d. Lot size dependant
e. Analysis tools
1. ABC system
Note : Pareto law 80/20 : 80% of inventory cost come from 20% of materials or
80% of materials representing 20% of cost.

2. Inventory – turn – over (Inventory cycle)
Cost of goods sold
= Inventory turn over
Inventory cost
If the inventory turn over three times in a year its mean the inventory that will be kept must enough for 17 week (52 divided by 3).
f. Stockiest Alternative
1. Contract System
2. Consigned system
g. Supply Resources
1. Existing supplier
2. Ask to other employee
3. Yellow pages
4. Publishing
5. Internet
6. Ask to sales
7. Embassy

h. Finding Supplier
1. Observe previous purchase
2. Existing supplier
3. Ask to other employee
4. Yellow pages
5. Publishing
6. Internet
7. Ask to sales
8. Embassy

i. Initial Evaluation
Perform small order quantity and low risk to new supplier.

j. Supplier Evaluation
1. How long supplier do their business
2. Who is the management (owner)
3. Who are they customer
4. Must be long term business
5. Is there Labour organization
6. Allocation expense for R&D
7. Quality Control System
8. Capacity
9. Cost history

k. Make or Buy
Decision make or buy are depend on :
1. The material not sold in the market
2. The existing suppliers can not supply
3. Believe that the materials cost can not reduce or can not make it better with low cost.

l. How many supplier are enough ?
Conventional policy explained that the more suppliers the more can have competitive price. However now as the industry growth there is new policy which is the opposite of the conventional policy, the less suppliers the better, the reason are :
1. If buyer separate the business become to difference sources, the business volume of every suppliers will be small and their influence will be limited.
2. Because two suppliers can not make the same quality of product exactly same.
3. If buyer(purchaser) change the supplier suddently, suppliers will
4. Purchaser
5. To much suppliers
Because of the above reasons, there is a need to make the strategy to reduce the
As below:
1. Reduce supplier to become two supplier only for each item.
2. Consolidate items in one suppliers.
3. Separate suppliers based on their business.

m. Efficiency due to small count of supplier
The aim to reduce suppliers is to create good relationship between suppliers and the company, with the good supplier. The long term relationship will create a mutual relationship that will improve the supplier performance such as delivery, service and quality.