Purchasing by Michael Harding, Warren Harding, Mary Lu Harding

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Covers major details that pertain to purchasing supplies and services for business operations. Topics include prudent purchasing strategies, inventory management, dealing with supply sources, negotiating prices, making capital equipment purchases, measuring purchasing performance, and much more. This new edition includes pertinent updates on how market developments impact the modern purchasing function. Titles in Barron's Business Library series are currently being revised and updated, and re-set in an attractive new paperback format. They are written especially for men and women starting a company or managing a small-to-medium-size business. Emphasis is on practical problem solving, and examples cited in these books are based on realistic business situations.

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Table of Contents

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Chapter 1: Organization and Administration

Communication channels also reveal the relationship of purchasing to the larger organization. To whom do the members of purchasing communicate on a regular basis? Normally there are strong ties to the finance, quality, and materials-management functions. Is there also a strong link to the technical-design community? Is there significant input to the sales plan and the production plan?

ORGANIZATION OF THE PURCHASING FUNCTION

The organization of purchasing should follow from a definition of the work to be done and which work is adding value to the organization.

Value-added work is work that creates a business difference. Non-value-added work is work that serves an administrative function but does not affect the results of the business. For example, negotiation of a business arrangement with a supplier is value-added work. Expediting a shortage, although necessary in the short term, is not an activity that adds value to the business. In general, establishment of relationships, agreements, and contracts with the supplier base constitutes the value-added work of purchasing. Establishment and maintenance of purchase orders and the clerical administration that accompanies those tasks are not adding value to the business. A major premise of this book is that it is in purchasing's interest to maximize the resources devoted to value-added work and to minimize the administrative tasks that add no value. Yet when asked why they spend so little time on the value-added tasks, purchasers commonly respond that they are so buried in daily paperwork and fire fighting that they have no time to do the things they really want to do. This is a self-fulfilling prophecy. If no time is spent on business arrangements that can simplify the paperwork, the result is that purchasers must devote more attention to that paperwork. (Reduction of paperwork is discussed in more detail in Chapters 6 and 16.)

Job descriptions and functional organization can help shift the balance of work toward the value-added variety. Job descriptions for the position of purchaser and any higher positions should emphasize establishment of business arrangements with suppliers as a primary task and requisitioner satisfaction as a primary measurement. Emphasis on placing purchase orders and on expediting delivery should be minimized. Those functions may still be performed, but if they are not stressed as primary functions, they will command less time and attention.

Proper organization of purchasing also assists the shift toward value-added work. In general, the flatter the organizational hierarchy and the more comprehensive the responsibility of purchasers, the greater the ease with which work shifts toward value-added tasks.

Division of labor within purchasing is also important. Purchasers must have control of their items long enough to do the work of creating sound business arrangements.

The most common division of work among purchasers is by commodity. If a person is responsible for a commodity in its entirety, all requisitions for that commodity will come to him or her. He or she will be able to develop a unified vision that encompasses requisitioners' needs, the demand for the commodity, the suppliers, and the kind of arrangements that best satisfy requisitioners while lowering costs and administration for purchasing. A commodity should remain with the same person long enough for him or her to learn the market and negotiate appropriate arrangements for supply (at least two years).

Many manufacturing companies have combined the jobs of buyers and inventory planners into a single function called buyerplanner. Buyer-planners have greater awareness of demand patterns and more control over order patterns and inventory levels. Combining two jobs into one means that more work must be done per item. Buyer-planners normally manage fewer items per person than do buyers. Buyer-planners receive an MRP (materials requirements planning) report or a demand signal from the user community, plan and maintain an appropriate inventory level, select, contract, and manage the supplier base, and structure the resupply mechanism with suppliers to ensure a smooth flow of incoming materials. They may also place purchase orders, if that is the resupply mechanism of choice.

Some companies focus more on material management and inventory levels and less on the purchasing portion of the buyerplanner function. Thus, the quality of goods purchased, prices paid, and formation of supplier partnerships can become subservient to the value and amount of inventory carried. If this happens, inventory levels-not the effectiveness of the entire supply system-may become the primary measure of the contribution of the buyer-planners.

Broadening the scope of purchasers makes them significantly more valuable to the organization and is much more rewarding for the individual. Any change that broadens job scope or flattens the organizational hierarchy should be implemented if possible.

Another purchasing function that deserves close scrutiny is expediting. In some organizations, there is a separate function called expediting. In others, expediting is performed by purchasers. To choose which alternative is appropriate for your organization, consider several factors. The first is whether the work itself is value added or not. Expediting a late delivery may be viewed as a necessary part of the purchasing process. However, the reason that expediting is needed at all is that an event that was scheduled to happen did not. If commitments that were made were kept, expediting would not be necessary. A shift of emphasis away from paperwork and toward establishment of a better buyer-supplier relationship may ultimately make expediting unnecessary...