published 01/04/2023 By Michael W. Gozzo Purchasing 1,319 Views

PURCHASING and COST:

There are various costs associated with Purchasing – directly or indirectly incurred:

  • Purchasing Process cost factors:
    • Acquisition cost
      • Create a PO, review & approval
      • Problem resolution, expediting
      • Receiving and inspection & AP (Accounts Payable – Invoice approval)
  • Commodity Process Cost factors:
    • Cost of Design
      • Custom vs. standard
      • Tools – who owns?
    • Logistics costs
      • Freight, storage & customs
    • Cost of Quality
      • Failure, qualifying & preventive (MORE DETAIL FOLLOWING)
  • Purchasing Operational Performance Costs – these relate to how Purchasing executes its practices and the potential effects incurred:
    • Delivery – that could create stock -outs
      • Long lead times requiring storing extra inventory buffers
      • Late deliveries requiring workarounds and overtime
    • Quality – see below regarding MORE COST OF QUALITY
    • Equipment impact – Loss of productive capacity because of lateness or quality of goods/services

    The role & objective of Purchasing is to keep internal customers operating to ensure the planned cost of goods are maintained according to the business plans. This is done by providing three R’s:

    1. Right material
    2. At the right time
    3. With the right quality

    MORE ON THE COST OF QUALITY:

    The Cost of Quality is the cost of conformance and the cost of non-conformance. There are three (3) costs:

    • Prevention costs – activities to ensure conformance (typically the least costly)
    • Appraisal costs – activities involved in measuring & evaluating (usually the second greatest cost)
    • Failure costs – internal & external (to an organizations practices)
      • Usually the greatest/highest of all the cost of quality

      What follows are some examples of each of these costs – so you can see the reality of the occurrence:

      LEVERAGING TECHNOLOGY:

      Today’s technology has developed significant tools for the purchasing profession. However, we find ourselves NOT UTILIZING THEM!

      One of those tools is SUPPLIER RELATIONSHIP MANAGEMENT (SRM). This tool works with most ERP systems. It provides the capability to:

      • Sourcing Process Improvements:
        • Simplified repeatable sourcing reduces cycle time and cost
        • Comparisons easy: price & criteria visibility
        • Standardizes purchasing decisions
      • Communication improvement
        • Faster and can be fully automated
        • Capability to check supplier’s inventory
      • Establish supplier rating measurement & reporting
        • Monitors the effectiveness of programs (like VMI – Vendor Managed Inventory)
      • Reports on adherence to contract performance criteria

      Look for more insight in the next (4th) article entitled, "RISK MANAGEMENT & INVENTORY"!