Chapter 17 Purchasing & Quality Copyright 2006 Prentice Hall Publishing Company 1 Purchasing,...

Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 11Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality

Purchasing, Quality Control, and

Vendor Analysis


Supply Chain Supply Chain ManagementManagement

A key determinant of a A key determinant of a company’s ability to competecompany’s ability to compete

Shaving 2% from a company’s Shaving 2% from a company’s CGS can increase net income by CGS can increase net income by as much as 28%as much as 28%

Requires a sound purchasing planRequires a sound purchasing plan

Components of a Components of a purchasing planpurchasing plan

Right Quality

Right Vendor

Right Time

Right Quantity

Right Price

The Purchasing

Plan


The Purchasing PlanThe Purchasing Plan

QualityQuality Total Quality ManagementTotal Quality Management Deming’s 14 PointsDeming’s 14 Points

QuantityQuantity Economic Order Quantity Analysis Economic Order Quantity Analysis

(EOQ)(EOQ) Economic Order Quantity with Economic Order Quantity with

UsageUsage PricePrice

Purchase DiscountsPurchase Discounts


TimeTime Reorder Point AnalysisReorder Point Analysis

VendorVendor Sources of SupplySources of Supply Vendor Rating ScaleVendor Rating Scale

(Continued)(Continued)

The Purchasing PlanThe Purchasing Plan


QualityQuality

““Higher quality is less expensive to produce Higher quality is less expensive to produce than lower quality.” -- W. Edwards Demingthan lower quality.” -- W. Edwards Deming

The endless pursuit of quality produces lower The endless pursuit of quality produces lower costs, higher productivity, greater market costs, higher productivity, greater market share, and more satisfied customers.share, and more satisfied customers.

Experts estimate that the cost of “bad Experts estimate that the cost of “bad quality” ranges from 20% to 30% of sales.quality” ranges from 20% to 30% of sales.

Quality


Total Quality Management (TQM) is a Total Quality Management (TQM) is a philosophy that strives for getting philosophy that strives for getting everything a company does for a everything a company does for a customer customer right the first timeright the first time..

TQM involves a life-long process of TQM involves a life-long process of continuous improvement; a continuous improvement; a successful TQM process requires a successful TQM process requires a company to change company to change everythingeverything it it does.does.

QualityQualityQuality


Implementing Implementing TQMTQM

1. Use benchmarking to discover the 1. Use benchmarking to discover the best practices that will produce best practices that will produce quality results. quality results.

2. Shift from a management-driven 2. Shift from a management-driven culture to a participative, team-culture to a participative, team-based one.based one.

3. Modify the reward system to 3. Modify the reward system to encourage teamwork and encourage teamwork and innovation. innovation.

Success requires following 11 principles:Success requires following 11 principles:


4. Train workers constantly to give them 4. Train workers constantly to give them the tools they need to produce quality the tools they need to produce quality and to upgrade the company’s and to upgrade the company’s knowledge base. knowledge base.

5. Train employees to measure quality 5. Train employees to measure quality with the tools of statistical process with the tools of statistical process control (SPC).control (SPC).

6. Use Pareto’s Law to focus TQM efforts.6. Use Pareto’s Law to focus TQM efforts.7. Share information with everyone in 7. Share information with everyone in

the organization.the organization.

Implementing Implementing TQMTQMSuccess requires following 11 principles:Success requires following 11 principles:


8. Focus quality improvements on 8. Focus quality improvements on astonishing the customer.astonishing the customer.

9. Don’t rely on inspection to 9. Don’t rely on inspection to produce quality products and produce quality products and services. services.

10. Avoid using TQM to place blame 10. Avoid using TQM to place blame on those who make mistakes.on those who make mistakes.

11. Strive for continuous 11. Strive for continuous improvement in processes as well improvement in processes as well as in products and services. as in products and services.

Implementing Implementing TQMTQMSuccess requires following 11 principles:Success requires following 11 principles:


Deming’s 14 PointsDeming’s 14 Points

1. Constantly strive to improve 1. Constantly strive to improve products and services.products and services.

2. Adopt a total quality philosophy.2. Adopt a total quality philosophy.

3. Correct defects as they happen 3. Correct defects as they happen rather than rely on mass rather than rely on mass inspection of end products.inspection of end products.

4. Don’t award business on price 4. Don’t award business on price alone.alone.


5. Constantly improve the system 5. Constantly improve the system of production and service.of production and service.

6. Institute training.6. Institute training.

7. Institute leadership.7. Institute leadership.

8. Drive out fear.8. Drive out fear.



9. Break down barriers among staff 9. Break down barriers among staff areas.areas.

10. Eliminate superficial slogans and 10. Eliminate superficial slogans and goals.goals.

11. Eliminate standard quotas.11. Eliminate standard quotas.



12. Remove barriers to pride in 12. Remove barriers to pride in workmanship.workmanship.

13. Institute vigorous education and 13. Institute vigorous education and retraining.retraining.

14. Take demonstrated 14. Take demonstrated management action to achieve management action to achieve transformation.transformation.



Economic Order Economic Order QuantityQuantity

Cost of units = D x CCost of units = D x C Holding (Carrying) costs = Q/2 x HHolding (Carrying) costs = Q/2 x H Setup (Ordering) costs = D/Q x SSetup (Ordering) costs = D/Q x S

.... seeks to minimize total inventory .. seeks to minimize total inventory costs. costs.

Three major inventory costs to Three major inventory costs to consider:consider:

EOQ and Carrying Costs

If Q is ...If Q is ... Q/2, Average InventoryQ/2, Average Inventory Q/2 x H, Carrying CostsQ/2 x H, Carrying Costs

500500

1,0001,000

2,0002,000

3,0003,000

4,0004,000

5,0005,000

6,0006,000

7,0007,000

8,0008,000

9,0009,000

10,00010,000

250250

500500

1,0001,000

1,5001,500

2,0002,000

2,5002,500

3,0003,000

3,5003,500

4,0004,000

4,5004,500

5,0005,000

$312.50$312.50

625625

1,2501,250

1,8751,875

2,5002,500

3,1253,125

3,7503,750

4,3754,375

5,0005,000

5,6255,625

6,2506,250

EOQ and Ordering Costs

If Q is ...If Q is ... D/Q, # Orders per YearD/Q, # Orders per Year D/Q x S, Ordering CostD/Q x S, Ordering Cost

500500

1,0001,000

2,0002,000

3,0003,000

4,0004,000

5,0005,000

6,0006,000

7,0007,000

8,0008,000

9,0009,000

10,00010,000

800800

400400

200200

134134

100100

8080

6767

5858

5050

4545

4040

$7,200$7,200

3,6003,600

1,8001,800

1,2061,206

900900

720720

603603

522522

450450

405405

360360

Solving for EOQSolving for EOQ

H

SD2EOQ

where D = Annual demand for productS = Setup (ordering) cost for a single run (order)H = Holding (carrying) cost per unit per year

EOQ and Total EOQ and Total

CostsCostsIf Q is ...If Q is ... Q/2 x HQ/2 x H Total CostsTotal Costs

500500

1,0001,000

2,0002,000

2,4002,400

3,0003,000

4,0004,000

5,0005,000

6,0006,000

7,0007,000

8,0008,000

9,0009,000

10,00010,000

$7,200$7,200

3,6003,600

1,8001,800

1,5001,500

1,2061,206

900900

720720

603603

522522

450450

405405

360360

$620,000$620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

D x CD x C

$313$313

625625

1,2501,250

1,5001,500

1,8751,875

2,5002,500

3,1253,125

3,7503,750

4,3754,375

5,0005,000

5,6255,625

6,2506,250

D/Q x SD/Q x S

$627,513$627,513

624,225624,225

623,050623,050

623,000623,000

623,075623,075

623,400623,400

623,845623,845

624,350624,350

624,889624,889

625,450625,450

626,025626,025

626,610626,610

Calculating Total CostCalculating Total Cost

S

Q

DH

QCD

2Total Cost

Total Cost =

Cost of Units

+ Carrying Cost

+ Ordering Cost

EOQ and Total EOQ and Total CostsCosts

EOQ with UsageEOQ with Usage

PU-1H

SD2EOQ

where D = Annual demand for productS = Setup (ordering) cost for a single run (order)H = Holding (carrying) cost per unit per yearU = Usage rate P = Production rate


DiscountsDiscounts

Trade discounts - established on a Trade discounts - established on a graduated scale and depend on a graduated scale and depend on a company’s position in the channel of company’s position in the channel of distribution.distribution.


Trade Discount StructureTrade Discount Structure

Manufacturer sells for $80.Manufacturer sells for $80.

Wholesaler buys at $80;Wholesaler buys at $80;sells at $100.sells at $100.

Retailer buys at $100;Retailer buys at $100;sells at $175.sells at $175.

Customer buys at $175.Customer buys at $175.


Quantity discounts - offer price breaks Quantity discounts - offer price breaks on large-volume purchases.on large-volume purchases.

Cash discounts - offered as incentives Cash discounts - offered as incentives to pay early. (e.g. “2/10, net 30”) to pay early. (e.g. “2/10, net 30”)

DiscountsDiscounts

Trade discounts - established on a graduated Trade discounts - established on a graduated scale and depend on a company’s position in scale and depend on a company’s position in the channel of distribution.the channel of distribution.

The Cost of Foregoing a Cash The Cost of Foregoing a Cash DiscountDiscount$1,000 invoice 2/10, net 30$1,000 invoice 2/10, net 30

DayDay

AmountAmount

00 1010 3030

$1,000$1,000$980$980

20 days20 days

$20$20

R = R = IIP x TP x T

= $20$20$980 x 20/360$980 x 20/360

= = 36.735%36.735%


Simple Reorder Point Simple Reorder Point ModelModel

Reorder Point = (L x U) + SReorder Point = (L x U) + S

L = Lead time for an order (days)L = Lead time for an order (days)

U = Usage rate for the item (units per day)U = Usage rate for the item (units per day)

S = Safety stock (units)S = Safety stock (units)

wherewhere

Simple Reorder Point ModelSimple Reorder Point Model


Reorder Point Model Reorder Point Model (assuming normally distributed (assuming normally distributed demand)demand)

Reorder Point = DReorder Point = DLL + (SLF x SD + (SLF x SDLL))

DDLL = Average demand during lead time for = Average demand during lead time for an order (units)an order (units)

SLF = Service level factor (the appropriate Z SLF = Service level factor (the appropriate Z score)score)

SDSDLL = Standard deviation during lead time = Standard deviation during lead time (units)(units)

wherewhere

Reorder Point without Safety Reorder Point without Safety StockStock

Reorder Point with Safety Reorder Point with Safety StockStock

The Shift from No Safety Stock to Safety The Shift from No Safety Stock to Safety StockStock


Vendor CertificationVendor Certification

1. Determine important criteria in selecting 1. Determine important criteria in selecting a vendor.a vendor.

2. Assign “weights” to each criterion to 2. Assign “weights” to each criterion to reflect its relative importance.reflect its relative importance.

3. Develop a grading scale for each criterion.3. Develop a grading scale for each criterion.

4. Compute a weighted score for each 4. Compute a weighted score for each vendor:vendor:

Weighted Score = Weight x GradeWeighted Score = Weight x Grade

5. Choose the vendor with the highest 5. Choose the vendor with the highest weighted score.weighted score.


Supply Chain Supply Chain Management (SCM)Management (SCM) GoalsGoals

Reduce inventoryReduce inventory Get products to market fasterGet products to market faster Improve customer satisfactionImprove customer satisfaction

Web-based SCMWeb-based SCM Share production plans, shipment Share production plans, shipment

schedules, inventory levels, sales schedules, inventory levels, sales forecasts, and actual sales forecasts, and actual sales real-timereal-time with vendors with vendors


Legal Issues in Legal Issues in PurchasingPurchasing

The concept of The concept of titletitle, the right to ownership of , the right to ownership of goods, has been replaced by:goods, has been replaced by:

IdentificationIdentification - Goods must be in existence - Goods must be in existence and identifiable from all other similar goods.and identifiable from all other similar goods.

Risk of lossRisk of loss - determines which party incurs - determines which party incurs the financial risk if the goods are damaged, the financial risk if the goods are damaged, destroyed, or lost before they are transferred. destroyed, or lost before they are transferred.

Insurable interestInsurable interest - gives the right to either - gives the right to either party to a sales contract to obtain insurance party to a sales contract to obtain insurance to protect against lost, damaged, or to protect against lost, damaged, or destroyed merchandise as long as he has a destroyed merchandise as long as he has a “sufficient interest” in them.“sufficient interest” in them.

Chapter 17 Purchasing & Quality Copyright 2006 Prentice Hall Publishing Company 1 Purchasing,...

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