Global Purchasing: A Study of Purchase Process at Swisher Systems Corporation - Essay Example

GLOBAL PURCHASING A STUDY OF PURCHASE PROCESS AT SWISHER SYSTEMS CORPORATION TABLE OF CONTENTS Page 3 2 Introduction – Purchasing 4 3 Purchasing Methods at Swisher 5 4 Recommendations 7 5 Bibliography 8 1 Abstract Swisher System Corporation, a small Industrial Heating company, is unable to expand and the reason appears to be unusually high Inventory holdings that blocks capital holds it back. Old purchase methods relying on the MRP systems and ignoring modern software systems for tracking inventory needs and selecting suppliers are other reasons that contribute to its stagnation. The entire purchase system covering both Bottleneck and Strategic Products has been explained together with the advantage of Inventory control using the Production Planning and control system and recommendations have been made for switchover to modern purchase methods to enable release of capital for company expansion. 2 Introduction - Purchasing Purchasing is central to any organization’s activity. They need to purchase raw materials, components and machinery in order to produce or manufacture products. It is stated by Williams (1975, 1985) that an organization’s primary purpose is to reduce negotiations around transactions and to reduce the scrutiny of the same later on. This means that good bargaining and settlement of beneficial terms and conditions ensure that problems do not surface later during delivery or the manufacturing process. It is clear that the profits that will be made on the sale of the product will be largely determined through the effective purchase itself. It is the responsibility of the purchasing department to make what is known as an effective purchase. A purchase is effective when the best price is obtained subject to best delivery schedule and in conformity to the quality parameters that have been explained and accepted by both the supplier and the purchaser. Apart from this, the terms and conditions must also be suitable and not detrimental to the purchaser. There are three types of purchase. One is purchase of Routine Products that are of low financial value not complex and their nature, quality, consistency and value can be determined easily. They are readily available and purchase departments do not spend too much time on their procurement as otherwise the procurement can become more costly than the product itself. Here the relationship with the supplier is nominal. The other type is purchase of Bottleneck Products that are products with a low financial risk and a high complexity. Professional purchasers spend time and money in their determination and in simplifying the relationship with the supplier in order to reduce their complexity. The supplier has the power in this relationship (Five Force Analysis: Porter M.E) and the purchaser is concerned about the security of his supply. He has to carefully work out a plan to convince the supplier to sell to him on terms that will benefit both parties. Good supplier relationship is important to close deals. The third type of purchase is the Strategic Purchase. Strategic products are those with high financial risk and high complexity. In this case purchasing activities are aiming at close relationships with suppliers, since here the supplier assumes great importance due to the high complex nature of the product over which he has control. At the same time the supplier also understands that there are few buyers for such complex products. Therefore a mutually beneficial arrangement is necessary for both. Negotiations will be tough but certainly with a positive frame of mind as both sides need each other. The quantity to be purchased is also a matter of great concern. Inventory turnovers should be quick and large in order to free capital for productive purposes. If capital is blocked into large inventories that will be held over a longer period then capital costs for such idle and non-productive capital should be added to the cost of inventory to show its actual value. It is a fallacy to consider holding large inventories bought at discounted prices as profitable. In such cases the real profit margin is actually reduced by higher financing costs that are not reflected in the direct product cost, but reflected in the financial accounts as indirect overhead costs. 3 Purchasing Methods at Swisher At Swisher Systems Corporation, the problem is with purchase of both the Bottleneck products and Strategic products. At Swisher Purchase is handled by just one person, Mr. Watson, Director of Purchase, and the company has around 150-200 active suppliers. Watson has excellent personal relationship with all suppliers and his negotiations are built around on time delivery. In his view the top priority is for the production department to always have materials on hand. Second priority goes to quality of product with third allotted to the price. These are followed by the flexibility of the supplier to meet sudden requirements as well and the supplier’s own financial strength. For him a big discount is more important than covering the actual requirement. If larger than required quantity can be bought at lower price then it is considered a good buy. He considers it an achievement when he can buy a high value item at a discount, even if its requirement is low and spaced in production schedule. Swisher has been in business for 55 years now and yet is a small company with a stagnant turnover of $ 20 million annually. It spends 40% of its revenues on purchases and at any point in time hold as inventory worth $ 12 million that is equivalent to 60% of revenue. It has a turn of inventory twice a year. The high overhead of 25% consists of 5% of indirect nature that reflect additional financial costs of holding large inventories. Purchasing is done using the SIM 4500 software that keeps data of suppliers and inventory and is capable of selecting best suppliers for each item based on several criteria. However this manually overridden by Watson regularly as he prefers to select his supplier based on his concepts explained above. Purchase orders are placed through Material Requirement Planning system (MRP) which is heavily tilted in favour of holding inventories at high levels to avoid shortfalls in production lines. But even this system is not fully utilized at Watson prefers to take requirements from individuals working in production lines and matching the held inventory and arriving at his own conclusion about what should be ordered. 4 Recommendations Purchase methods employed at Swisher result in unplanned and costly inventories. A common supplier has been used for purchase of capacitors and solenoids. The over all purchase budgets appears to be synchronized with planned budget but in reality it is totally inefficient. Prices paid for capacitors are almost double the previous rate and the reason given out to Engineering is that this is compensated by discounted price of solenoids. What has been ignored by purchasing is that capacitors are much more frequently used compared to solenoids. The result is that on one hand production costs will go up and on the other holding cost of unwanted inventory also rise. No doubt there will be other cases similar to this where discounted products have resulted in bloated inventories and production has been deprived of efficiently purchased requirements. That this has been done under the misconception of good bargains is inexcusable. In purchasing top priority must be for buying against need as under a Just in Time (JIT) system. Buying under MRP should be replaced with a Production Planning system that will ensure that purchase is made against actual requirements only, subject to holding optimum minimum levels for each item. This will also ensure that there is no overstocking and will eliminate huge inventories of unwanted raw materials and components. Purchasing also needs to be efficient and all criteria, besides the price, must be considered prior to selection of the right supplier. This will reduce or even eliminate the holding costs and will improve profitability. Purchased budgets can therefore be trimmed and a substantial portion of capital can be used to expand business by investing in assets rather than holding inventories. 5 Bibliography Porter, M.E. "Competitive Advantage", The Free Press, New York, 1985 Williamson, O.E., 1975. Markets and Hierarchies: analysis and antitrust implications. Fre Press, New York. Williamson, O.E., 1985. The Economic Institutions of Capitalism: Firms, markets, relationalcontractual relationship. Free Press, New York. Read More