Purchasing - Assignment Example

Purchasing How the purchasing function contributes to the achievement of an organisation’s objectives. Purchasing means determination of need, finalising supplier, contracting and delivery monitoring. It is a service function which also gives profit. Materials amount to large values therefore purchasing has to be tackled and supervised at highest level. Purchasing demands capacity building of employees, and deserves highly trained, competent personnel. Direct purchasing involves the establishment of mutually beneficial long-term relationships between buyers and suppliers.

Transactional purchasing means repetitive purchase from same supplier under a blanket contract. Purchasing effects new product development. Feedback given by purchasers is of immense value for developers. Sometimes make-or-buy decisions are required to be made. Determining whether to purchase a part from an outside supplier or produce the part internally is called make or buy decision. Many times supplier certification is required to ensure quality and effective supply chain management SCM. Supplier certification ensures that the supplier has been a part of a formal education program, has demonstrated commitment to quality and delivery, and has proven consistency in his processes.

Purchasing should indicate money available with firm and its potential to contribute in success of firm. According to IMA, the modern purchaser is a direct creator of value in the company (IMA). The firms are directly responsible select appropriate standards and structures for efficient purchasing. Firms should constantly review measurement control systems to improve own performance as well as supplier performance. Internet use in buying has led to the terms "E-purchasing" or "E-procurement.” Use of IT in purchasing, SCM and overall business has many advantages.

In global sourcing, it is the building block of business. Communication needed in competitive bidding, purchase order placement, order tracking, and follow-up are enhanced by the speed and ease provided by establishing online systems. Use of IT / E commerce results on short cycles, price reduction in goods and services , low staffing and improved control. IT transforms firms into trading networks and virtual corporations. IT helps in improving SCM standards and provides the information along the supply chain that is critical to its successful operation.

A significant impact of IT relates to the quality of information available within the supply chain. Companies can develop networks to distribute information, such as about new products, delays or changes. Suppliers, manufacturers and wholesalers can receive orders and payments electronically through secure connections. Technology allows parties within the supply chain to identify challenges, such as delays in manufacturing or shipment. A control mechanism is essential for purchasing in a firm.

A typical control model contains three basic elements (Cornia):- 1. A controlling system. 2. System that is subject to control (controlled system). 3. An environment which can impact the two other systems both positively and negatively Appropriate information sources and criteria to evaluate and select suppliers. Materials required by firms depend on the nature of their products and services. Buyers may face procurement problems due to different types of sourcing for different materials.

The materials include consumables, capital goods or goods for resale each with its peculiar problems. Purchase of each item require different kind of knowledge for example consumables are goods acquired for use in an organization, the goods are meant for conversion, they are not acquired for resale. These may be procured in different shapes like raw materials, supplementary materials, semi- manufactured products and components. On the other hand Capital goods are also required which are meant for the production of other goods but not for consumption or resale.

In both cases a deep understanding with supplier is required for after sales services specially for technical products. In large procurement discounts must be secured to bring down price of final product. Strong relationship between buyer and supplier is required for easy communication and problem solving. A well thought strategy is required by purchasing firms to effectively deal with suppliers and find their core competence. The different types of buyer and supplier relationships have been identified in due course of time depending on dependence and control on each other.

When more suppliers are available and buyer can choose between them he can exercise control which include results, flow, processing, prices and behaviours etc. When there is only one supplier he enjoys freedom and control over buyer. The prime focus of buyer is to secure supply for production units. Interdependence of buyer and supplier may be called as partnership. Both of them realise in this case that mutual benefits are attached to common good. Selection of sole supplier is extremely important.

For selection of supplier buyer must consider his competence, capacity, potential, behaviour, firm culture, choices and work processes etc. The relationship can often be coercive for one or the other. Carter’s 10 Cs of supplier evaluation or selection is named after ray Carter (Carter’s 10 Cs). These 10 Cs offer a very comprehensive means of ensuring that a rigorous approach is adopted with regard to supplier evaluation and that it is fair to all potential suppliers. These include Competency, Capacity, Commitment, Control, Cash, Cost, Consistency, Culture, Clean and Communication.

How an organisation ensures that the regular quantities and quality of goods (inventory) and services are purchased . The purchasers have to identify and assess their type of relation ship with suppliers depending on factors like nature of product, other suppliers available and market shares etc. The buyer must ensure that buyer’s needs and expectations on agreed price are being met, conformance is being ensured, non-conformance is being eliminated and reduced variability and continuous improvement is being accomplished.

It is very important to note that many firms in the market have improved quality of goods and services purchased by reducing number of suppliers. Quality ensures low losses therefore supplier quality program is essential for large volume of businesses. Monitoring of quality and consistency of goods and services is a critical requirement for success of a business. The decisions may be taken independently or jointly with supplier. The aspects like culture, politics, legal, financial and social issues must be taken into consideration.

A purchasing specialist in the firm must oversee all the purchasing cycle from start to end. Capacity building must be done in the purchasing firm to have detailed knowledge about goods, equipment, material and supplies used in the relevant industry/business. Continuous evaluation of new suppliers and sub contractors is also essential. Firms must realise that procurement personnel are required to be specialised in their jobs and remain cross functional. In many firms spending on services is considered a secondary target for cost reduction not realising that it may account for 30 to 70 % of firms purchase dollars.

A good automated system of purchasing will surely ensure contract compliance and monitoring of SCM during all stages. It needs to be understood that services purchase is often more complex than goods purchase however often top management views it other way round. The result is allocation of wrong type of resources which means inefficient out put. Often goods are purchased while giving exact specifications whereas these are not stated well in case of services. For purchase of services an effective statement of work (SOW) will ensure that the firm receives what it is paying for.

For big orders consortium making is an effective way of getting quality goods or services. Another method of good input is a reverse auction which is an online, real-time dynamic auction between a buying organization and a group of pre-qualified suppliers who compete against each other to win the business to supply goods or services that have clearly defined specifications for design, quantity, quality, delivery, and related terms and conditions. The role of the major national and transnational organisations and agencies which influence international purchasing.

Global sourcing is essential for medium to large scale businesses. Global sourcing occurs when buyers purchase goods and/or services from sellers located anywhere in the world. It is an efficient method to buy cheap goods and services .It is not limited to any specific industry or service. The sources of market power for transnational business are multifaceted, extending beyond concentrated market power. The multinational companies are now very powerful in many respects. These companies have access to critical information, power and funds which ensures that they get minimum competition.

These firms are often present in over 100 countries and exercise power even more than few local governments (FAO). Commodity prices depend not only on supply, but also on forecasts about the future availability of supply. The diversification of business by multinational firms is used as a tool to spread risk. By using commodity exchange these firms maximise profit and minimise risks. These firms have access to huge funds using which they manipulate price by advance payments and hoarding. The global nature of their operations gives these firms a political voice in dozens of countries simultaneously, creating a powerful force for policies that reflect their interests.

In USA top four firms in agricultural business control 40% of market. This type of control is also visible in global trade as well. A small number of firms control large parts of international commodity trade for example 90 % coffee trade is dominated by just three companies. Same is happening in US beef trade market where four companies dominate 81 % market share. The domination of these firms is horizontal as well as vertical. As an example a US firm Cargill is the biggest grain exporter in USA as well as the world.

It dominates wheat, soybeans, corn and cotton markets in the world and also ranked seventh largest food and beverage company. It is also a major player in beef packing, ethanol, steel, fertilizer production and financial services. Nestle is another multinational which plays a dominant role in manipulating commodity prices. These firms establish joint ventures in different industries and influence every stage of SCM. A firm Dole owns plantations and canning facilities, and has the marketing power to bring pineapples from fields in the Philippines to consumers in many countries.

Vertical integration is evident in the United States poultry industry where virtually all chicks raised for consumption as poultry are exchanged for money only when the meat processor sells them to the supermarket. All stages of production, from the hatching and rearing of the chicks to the slaughter of birds, are internal to the company. As another example a firm Li & Fung, a giant in the apparel industry enjoys enormous competitive advantage even though it manufactures no clothing (PWC) .Whether a company seeks to reduce costs, improve time-to-market for new systems, or gain access to a large pool of skilled resources, global sourcing provides an attractive alternative.

Global business is meant to cut costs, offer competition and grab market share however lately it has become a manipulation tool in the hands of multinational firms. Works cited Corina .Methods and Techniques for Controlling the Performance of the NPR Purchasing Process. .North University of Baia Mare Web.18 June 2011 http://www3.ekf.tuke.sk/konfera2008/zbornik/files/prispevky/corina_pop_sitar.pdf Carter’s 10 Cs of Supplier Evaluation functions throughout the world, increasing efficiency and further reducing costs.

Choosing a sourcing model to achieve a strategic vision. Web.18 June 2011.http://www.valuestreamguru.com/?p=401 FAO. The role of transnational corporations. Trade Reforms And Food Security. Web.18 June 2011 http://www.fao.org/docrep/005/y4671e/y4671e0e.htm IMA.Web.18 June 2011 http://www.ima-devinci.com/fonction_achats_EN.php PWC. Web.18 June 2011 www.pwc.com/us/outsourcing