Chapter 1-Part 2

Selecting Suppliers
• The right supplier

▪ Can supply the quality needed
▪ Has the capacity to deliver the quantity needed
and on time (JIT deliveries)
▪ Makes a profit, but at a good price
▪ Contributes to the improvement of product
Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Chapman, Arnold, Gatewood, and Clive All Rights Reserved
Sourcing
• Sole sourcing
• Only one supplier is available
• Patents, technical specs, raw material, location
• Multiple sourcing
▪ Use of more than one supplier for an item
▪ Competition results in lower price, better
service
▪ Continuity of supply
• Single sourcing
▪ Decision to select one supplier
▪ Long-term partnership
Factors in Selecting Suppliers
• Technical ability
• Manufacturing capability
• Reliability
• After-sales service
• Location
• Lean capabilities
• Other considerations
• Price

Technical Ability
• Do they have the technical capability?

• Is there a program of product development
and improvement?
• Can they assist in improving your product?
• Their products become part of your product

Manufacturing Capability
• Can they consistently meet the specifications and

quality desired?
▪ Quality control programs
▪ Competent personnel
• Do they have good manufacturing planning and
control systems?
▪ To supply information on delivery

Reliability
• Reputable
• Stable
• Financially strong

After-Sales Service
• Service organization
• Supply of spare parts
• Technical support

Supplier Location
• Location may affect delivery time

• Local inventories
• May be required for after-sales service
▪ Will your customers require service?

Lean Capabilities
• Accurate, on-time deliveries

• Value relationship
• Work in partnership to remove waste
• Information and delivery systems in place for
quick shipments

Other Considerations
• Credit terms
• Reciprocal business
• Health and safety record
• Willingness to hold inventory

Price
• Not always the lowest

• May include other services
• Price considerations
▪ Landed cost – price plus handling and delivery
▪ Total cost of ownership issues

Identifying Suppliers
• Salespersons of supplier company

• Internet
• Catalogues
• Trade magazines
• Trade directories
• Information obtained by salespeople

Supplier Selection
• Ongoing relationship
• Mutual benefit
• Supplier can depend on future business
• Buyer can be
▪ Assured supply of quality products
▪ Technical support
▪ Product improvements
▪ Problem solving

Supplier Selection
Factors Things that must be considered as

part of what we will be buying
Weights The relative importance of each of
the factors
Rating How well each supplier compares
on each factor
RankingThe weight times the rating

Supplier Ranking
1. Select the factors

2. Assign a weight to each factor
3. Rate the suppliers for each factor
4. Rank each supplier
 Multiply the weight by the rate for each
factor

Supplier Ranking
Figure 7.1 Supplier rating

Supplier Ranking
• Includes the input of many people

• Includes many factors
• Narrows the choice by eliminating lowest scores
▪ Previous example shows two main contenders

Price Determination
• Direct influence on company’s profit

• 50% of cost of goods sold (COGS)
• Mixture of
▪ Function
▪ Quantity
▪ Service
▪ Price
“You get what you pay for”

Basis for Pricing
• Fair price
▪ Competitive
▪ Gives seller a profit
▪ Allows buyer to make a profit
• Upper limit
▪ Established by buyers
• Lower limit
▪ Established by sellers

Analyzing Costs
• Fixed Costs
▪ Costs incurred no matter the volume of sales
• Equipment
• Insurance
• Overhead
• Variable Costs
▪ Costs which vary with the volume produced
• Direct labor
• Direct materials

Analyzing Costs
Total cost = fixed cost + (variable cost/unit)(volume)
Unit cost = total cost

volume
= fixed cost + variable cost per unit
volume

Break-Even Point
• The volume of sales where total revenue equals

total costs
• A seller must have sufficient volume to make a
profit
• Knowing the seller’s break even point is useful in
negotiations
▪ Increased volume may lower price paid

Break-Even Analysis

Break Even Point -example
Fixed Cost = $5,000 Variable Cost = $6.50 / unit

Selling Price = $15 per unit
Average cost for 1000?
Average Cost = $5,000 ÷ 1000 + $6.50
= $11.50 per unit
To find the Break-even Point
Let X = Number of Units
$15X = $5,000 + $6.50X
$8.50X = $5,000
X = 588.2 units
The volume must exceed 588.2 units to make a profit
Price Negotiation
• Buyer needs knowledge of seller’s costs

• Buyer must have sufficient clout
• Should benefit both supplier and buyer
• Savings must justify the time and effort required

Negotiations - Type of Product
• Commodities
▪ Price is determined by the market
▪ Concern for future contracts
• Standard products
▪ Price set by catalogue listings
▪ Little room for negotiation
• Small value items
▪ Try to reduce ordering costs or increase volume
• Made-to-order items (negotiation possible)
▪ Quotations from a number of sources
Impact of MRP on Purchasing
Purchasing - two categories of activity

• Procurement
▪ Establishing specifications, selecting suppliers,
determining price, negotiations
• Supplier scheduling and follow-up
▪ Same as production activity control
▪ Execute the master schedule and the MRP
▪ Ensure good use of resources, minimize WIP,
provided the desired level of customer service

Planner/Buyer Concept
• Production activity control

▪ Controls the flow of work through the plant
▪ Schedules need for components
• Purchasing
▪ Coordinates the flow of goods from suppliers
Plans are going to change!

Planner/Buyer Concept
• Responsibility of planning and buying

• Works with the Master Scheduler and other
Planner/Buyers
• Handles fewer components
• Smoother flow of information
▪ Knowledge of factory needs
▪ Matches material requirements with supplier
capabilities

Planner/Buyer Responsibilities
• Determining material requirements

• Developing schedules
• Issuing shop orders
• Issuing material releases to suppliers
• Establishing delivery priorities
• Controlling orders in the factory and to suppliers
• Handling all activities associated with buying and
production scheduling
• Maintaining close contact with suppliers

Contract Buying
• Long term contract with a supplier for small

volume items
▪ Authorize releases against the contract when
goods are needed
• Supplier may be given a copy of the material
requirements plan
• Requires close coordination
• Works best with planner/buyer concept

Supplier Responsiveness and
Reliability
• Material requirements often change
• Suppliers must be able to react to change
• Flexibility
▪ In volume
▪ In products needed
• Reliable
▪ In delivery promises

Close Relationship with Suppliers
• Supplier flexibility and reliability

• The need to understand each others capabilities
and constraints
• Cooperation and teamwork
• Very frequent communications
• Between the buyer/planner and the supplier’s
production planner

Electronic Data Interchange (EDI)
• Electronic exchange of information between

customers and suppliers
▪ Purchase orders
▪ Invoices
▪ Material requirements plans
• Reduces time involved
• Avoids costly paperwork
What is EDI?




Vendor-Managed Inventory
• Supplier maintains an inventory of certain items

at the customer’s plant
• Customer only pays for the inventory when it is
actually used
• Usually for standard, small value items
▪ Fasteners
▪ Electrical components

The Internet
• Internet
▪ Open public access to posted information
▪ Valuable source of supplier and product
information
• Intranet
▪ Internal to company personnel only
• Extranet
▪ Between participating companies

Environmentally Responsible
Purchasing
• Why the Purchasing Department?
• First-hand knowledge of price trends, waste
products
• Contact with salespeople
• Familiarity with company’s needs or uses of
material
• Knowledge of legislation for transportation and
handling of environmentally-sensitive materials

Environmentally Responsible
Purchasing
• The 3 R’s
▪ Reduce
▪ Reuse
▪ Recycle

Reduce -
The most important of the 3R’s
• Purchasing’s contact with suppliers of new ‘green
products’
▪ Water based cleaners
▪ Low VOC (volatile organic compounds)paints
▪ Lead free solder
• Contact with suppliers
▪ Returnable containers
▪ Lean operations (reduce waste)

Reuse
• Reprocessing of scrap
• Packaging materials
• Sale of by-products

Recycle -
The least effective of the 3R’s
• Suppliers are often a good source of disposal /
refund
• Empty containers
• Regrind plastics
MT

Purchasing and the Supply Chain
• Flow of physical materials

• Flow of money
• Flow of information
• Flow of materials back to the company - Reverse
logistics
• Bullwhip effect
▪Growing fluctuations of uncertainty and
material demands through each node of the
supply chain

Purchasing and the Supply Chain
• Customer relationship management (CRM)

• Build and maintain strong customer base
• Supplier relationship management (SRM)
▪ Build and maintain close, long-term
relationships with key supplies
• Bullwhip effect
▪Growing fluctuations of uncertainty and
material demands through each node of the
supply chain

Bullwhip Effect
Figure 7.3. Bullwhip effect

Supply Chain Management
Organizational Implications
• Total cost focus
▪ Not just price
▪ Includes transportation, storage, handling
▪ Value stream mapping
▪ Mutual value analysis with suppliers
▪ Cross-functional teams for decision-making
▪ Centralized vs. decentralized purchasing
▪ Mutually advantageous supplier negotiations

Organizational Implications
• Information sharing
▪ Costs
▪ Schedules
▪ Inventory levels
• Measurement systems
▪ All aspects of the supply chain
• Growth in electronic business (Internet)
• Consideration of environment for acquisition,
storage, use and disposal of materials

Savings
• More effective product specifications
• Leveraging through volume discounts and
supplier consolidation
• Lower costs through long-term contracts and
efficient communications
• Lower payment costs
▪ Credit cards
▪ Electronic commerce
▪ Blanket orders
▪ Reduced environmental costs

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Selecting Suppliers

• The right supplier

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Do they have the technical capability?

• Their products become part of your product

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Can they consistently meet the specifications and

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Location may affect delivery time

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Accurate, on-time deliveries

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Not always the lowest

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Salespersons of supplier company

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Factors Things that must be considered as

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

1. Select the factors

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Figure 7.1 Supplier rating

• Includes the input of many people

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Direct influence on company’s profit

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Total cost = fixed cost + (variable cost/unit)(volume)

Unit cost = total cost

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• The volume of sales where total revenue equals

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Fixed Cost = $5,000 Variable Cost = $6.50 / unit

• Buyer needs knowledge of seller’s costs

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Purchasing - two categories of activity

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Production activity control

Plans are going to change!

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Responsibility of planning and buying

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Determining material requirements

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Long term contract with a supplier for small

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Supplier flexibility and reliability

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Electronic exchange of information between

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.