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McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
Chapter 3
The Purchasing
Function
THE PURCHASING DEPARTMENT’SFUNCTION IS TO:
1. PROVIDE APPROPRIATE LEVELS OF SUPPLY
2. AT THE APPROPRIATE LEVEL OF QUALITY
3. FOR THE LOWEST TOTAL COST
3-3
Case study: Abilene Heavy Equipment Tires
3-4
Abilene Heavy Equipment Tires sells tires for off-road mining and forestry vehicles and construction equipment. The company also retreads the tires and provides services at the mine or construction site. Because customers’ equipment is considered production equipment, a flat tire means a loss of production. Quality service is an important element in Abilene’s business.Ken Arthur is the manager of Abilene’s service business. His responsibilities include managing a fleet of 12 heavy-duty pickup trucks that are used to reach customers’ equipment in the field for service. Ken buys three trucks each January, retiring each truck after four years of service. For the previous two years, he purchased Dodge trucks from the Abilene Dodge dealer, dealing directly with owner Don Tanksley.Today, December 20, Don stopped by Ken’s office. After saying hello and asking after the family, Don said, “Come on, Ken, I want to show you something I have outside in the truck.” As they walked outside, Don continued, “I know you like to hunt and I thought you might appreciate this little Christmas present. You’ve been a good customer for nearly 10 years, and I’d like to say thank you with this.” From the inside of his truck, Don pulled out a new Browning Citori shotgun.Ken eyed the new gun with appreciation, knowing that it retailed for at least $1,200. The custom carving on the stock, with Ken’s initials, probably added another $500 to the cost of the gun. He held it, admiring the balance, and then sighted the gun as if about to shoot. He thought about how nice it would be to use this at the annual dove hunt that Abilene sponsored for its customers.1. Is there any ethical problem with Ken accepting the gift? Why or why not?2. What factors could affect your decision?
Case 3.1 Human Performance Systems
Joyce Davis leaned back in her chair and reflected on the sales call she made that morning. Her company, Human Performance Systems (HPS), provides safety training in order to bring manufacturers into compliance with OSHA regulations. She also had the data to prove that the training saved companies money by reducing the number of manufacturing accidents. What Joyce couldn’t understand was why Bob Jackson, owner of Jackson Molding, was so adamant that he couldn’t afford the training.
“Bob, you can’t afford not to do this,” she told him. “You have had three accidents
this month, losing 23 workdays.” (Three employees missed five days each, and another missed eight, for a total of 23.)
“I don’t pay them for lost workdays. That makes them more careful.” He stared at her defiantly. “Therefore, I don’t need training.”
1. What benefits could Human Performance Systems’ training provide Jackson
Molding? Think through the various ways HPS could save Jackson money,
among other benefits.
2. What is important to Bob? Why?
Transactional vs. Relational MarketingTransactional exchange Relationship exchange
Objective To make a sale (sale is end result and measure of success)
Customer needs satisfaction (customer buys value)
To create a customer (sale is beginning and relationship is the measure of success)
Customer integration (interactive value generation)
Customer understanding
Anonymous customerIndependent buyer and seller
Well-known customerIndependent buyer and seller
Market tasks and performance criteria
Assessment on the basis of products and prices.
Focus on gaining new customers
Assessment on the basis of problem-solving competence
Focus on value enhancing of existing customers
Core aspects of exchange
Focus on productsSales is a conquestDiscreet even (episodic perspective)Monologue to be aggregated
Focus on serviceSale as a agreementContinuing process (historic holistic
perspective)Individualized dialogue
Reasons to buy
Factor Percent
Product Quality 72.7%
Service 53.4%
Availability of Product 50.8%
Total Purchasing Costs 40.5%
Price of Product 32.2%
Supplier’s supports in urgent situations 26.9%
Ease of Contact with suppliers 18.6%
Technical supports 15.2%
Brand name 11.0%
Source: Calners Advertising Research ReportsSource: Calners Advertising Research Reports
PURCHASE PRICE Vs. TOTAL COST
• PURCHASE PRICE = THE DOLLAR VALUE PAID
• TOTAL COST = PURCHASE PRICE + DELIVERY + STORAGE + SERVICE
3-8
METHODS TO EXAMINEAND COMPARE COSTS
1. TOTAL COST OF OWNERSHIP
2. ECONOMIC ORDER QUANTITY
(EOQ)
3. VALUE ANALYSIS
3-9
TOTAL COST OF OWNERSHIP OF A TANGIBLE PRODUCT
• TOTAL COST OF
OWNERSHIP = PRODUCT PRICE
+ DELIVERY
+ INSTALLATION
+ MAINTENANCE / REPAIR
+ POWER COSTS
+ SUPPLY COSTS
+ OPERATING COSTS
+ FINANCING
3-10
ECONOMIC ORDER QUANTITY
THE QUANTITY THAT MINIMIZES
ORDERING COSTS
AND
STORING COSTS
3-11
USING VALUE ANALYSIS
THE OBJECTIVES OF VALUE ANALYSIS:
• REDUCE COSTS AND/OR
• IMPROVE DESIGN
What is New
Currently Alternatives
Being Done Being
Considered
COMPARE
BENEFITS RECEIVED
FUNCTIONS OF PRODUCT
COST OF MATERIALS
WORK PROCESS INVOLVED
OUTCOME: GREATER VALUE FOR LESS COST
3-12
Step 8Evaluation of product performance
Step 8Evaluation of product performance
Step 7Selection of an order procedure
Step 7Selection of an order procedure
Step 6Evaluation of proposals and
selection of a supplier
Step 6Evaluation of proposals and
selection of a supplier
Step 5Acquisition and analysis of proposals
Step 5Acquisition and analysis of proposals
Step 4Search for qualified suppliers
Step 4Search for qualified suppliers
Step 3Development of detailed specifications
Step 3Development of detailed specifications
Step 2Definition of the product-type needed
Step 2Definition of the product-type needed
Step 1Recognition of a need
Step 1Recognition of a need
EXHIBIT 3-3
STEPS IN THE BUYING PROCESS
3-13
BUY-PHASES
1. NEW TASKCOMPLETE BUYING PROCESS REQUIRED EMPHASIZES
PRODUCT DEFINITION AND SPECIFICAIONS
2. MODIFIED REBUYEMPHASIZES SUPPLIER SEARCH AND EVALUATION
3. STRAIGHT REBUYEMPHASIZES NEED RECOGNITION AND PURCHASE
3-14
Buy Phase and Marketing Techniques
Marketing Mix and Buy-Phases
Brand Relevance and Buying Situations
VENDOR ANALYSIS RATINGS
A RATING FORM SHOULD LIST
The most important product attributes
The most important service support attributes
Pricing variables
Delivery variables
Quality variables
Supplier capabilities
3-17
PURCHASING PARTNERSHIPS ARE MADE WITH VENDORS WHO PROVIDE:
HIGH-PURCHASE-VOLUME MATERIALS, COMPONENTS OR STRATEGIC PRODUCTS
• INFORMATION AND TRAINING FOR EFFECTIVE PRODUCT USE
• SERVICES REQUIRING SPECIALIZED KNOWLEDGE FOR COST REDUCTIONS AND/OR PERFORMANCE
• MATERIALS UNAVAILABLE ELSEWHERE3-18
IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS
1. REDUCE PURCHASING COSTS
• CUTBACK ON EMPLOYEES
• REDUCE NUMBER OF VENDORS/ TRANSACTIONS
• BUILD RELATIONSHIPS
• CENTRALIZE PURCHASING ACTIVITIES
• USE THE INTERNET3-19
IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS
(continued)
2. OUTSOURCE IN-HOUSE ACTIVITIES
• TRAINING
• MANUFACTURING
• PROCESSING ACTIVITIES
• INVOLVE SUPPLIERS (ESI)3-20
IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS
(continued)
3. CROSS-FUNCTIONAL TEAMS – MADE UP OF COMPANY DEPARTMENTS, SUPPLIERS, CUSTOMERS
4. INCREASE PROFESSIONALISM THROUGH CERTIFICATION PROGRAMS AND ESTABLISH A CODE OF ETHICS
3-21
SALES SURVIVAL QUESTIONS:
CAN YOUR SALESPEOPLE ANSWERTHE FOLLOWING QUESTIONS?
1. WHAT IS A CROSS-FUNCTIONAL TEAM?
2. CAN YOU RECOGNIZE ONE AT YOUR CLIENT’S ORGANIZATION?
3. DO YOU KNOW HOW TO GET YOUR COMPANY INCLUDED IN YOUR CLIENT’S CROSS-FUNCTIONAL TEAM?
4. WILL YOUR COMPANY GIVE YOU THE PEOPLE RESOURCES TO SUPPORT YOUR CLIENT’S NEEDS?
3-22
SUCCESSFUL CROSS-FUNCTIONAL PURCHASING TEAMS DEPEND ON:
• APPROPRIATE LEADERSHIP
• FACE-TO-FACE COMMUNICATION
• CONTINUITY– IN IT FOR THE LONG TERM
• TOP-LEVEL COMMITMENT to provide for key individuals’ full participation
• EMBRACING DIVERSITY of experience, backgrounds, outlooks, and corporate philosophy
EXHIBIT 3-9
3-23
Changing company focus: MAKE-OR-BUY?Purchasing Determines Who Provides Best Value for Lowest Cost
Best-Value Provider
Action In-House Partner
•Training
•Transaction Processing
•Paper Processing
•Product Design
•Product Manufacturing
•Component Part Manufacturing
•R&D
•Marketing
•Sales
•Advertising
•Research
•Support
•Human Resources Administration
3-24
MAKE-OR-BUY DECISION ANALYSIS
ACCEPTABLE RISKBuy the Products,
Components or Services
UNACCEPTABLE RISKRetain Production and
Provide Services
RISK ASSESSMENT
FINANCIAL RISKS
Resource Allocation
Investment of Resources
Accurate Cost Analysis
Legal Issues
MARKETING RISKS
Customer Impact
Supplier Impact
MANUFACTURING RISKS
Reliability
Expertise
Equipment
Patent Protection
POLITICAL RISKS
Management commitment/
willingness to partner
Turf Battles
Internal Strife
3-25
ETHICAL ISSUES FOR BUYERS
KEY REQUIREMENT: EVERY COMPETITOR HAS AN EQUAL OPPORTUNITY TO SELL TO THE BUYER AND HAS EQUAL ACCESS TO INFORMATION
AS A BUYER, YOU MUST
PROVIDE EQUAL ACCESS TO THE BUYING OPPORTUNITY
BE TOTALLY RESPONSIBLE TO YOUR EMPLOYER
3-26