Supply Chain Management and Purchasing Principles KNEC Notes

TOPIC 1

SCM AND PURCHASING FUNCTION

Introduction:

Definitions:

  • Procurement: The term procurement is defined as the acquisition of merchandise or services at the optimum possible total cost in the correct amount and quality. These goods and services are also purchased at the correct time and location for the express gain or use of government, company, business or individuals signing a contract. Procurement function commonly encompass: purchase planning, standards determination, specifications development, supplier research and selection, value analysis, financing, price negotiation, making the purchase, supply contract administration, inventory control and stores/disposals and other related functions.

 

  • Supply chain management: Is a set of synchronized decisions and activities utilized to efficiently integrate suppliers, manufacturers, warehouses, transporters, retailers and customers so that the right product or service is distributed at the right quantities, to the right locations and at the right time in order to minimize system-wide costs while satisfying customer service level requirements. The objective of supply chain management (SCM) is to achieve sustainable competitive advantage.

 

ELEMENTS OF SCM : The key supply chain processes stated Lambert (2004) encompass:

  • Customer relationship management
  • Customer service management
  • Demand management
  • Order fulfillment
  • Manufacturing flow management
  • Supplier relationship management
  • Product development and commercialization
  • Returns management

 

  • Purchasing: Purchasing can be defined as a process of acquiring goods, services, or works in return for a price. The major type of activities under purchasing function entail: coordination with user departments to identify purchase needs, identification of potential suppliers, conduct of market studies for important materials, negotiation with potential suppliers, analysis of proposals, selection of suppliers, issuance of purchase orders, administration of contracts and resolution of related problems and lastly maintenance of a variety of purchasing records.

Purchasing activities involve buying decisions to ensure that: the right goods are in the right place, at the right time, at the right price, at the right quality and at the right quantity. These are sometimes referred to as the six R’s of purchasing.

  1. The right goods: In regard to this, the buyer specifies exactly what the organization requires (based on the needs) rather than simply buying from catalogue or what is on offer
  2. The right place: In making the buying decisions it is important to provide detailed instructions on how, when and where deliveries are to be made.
  3. The right time: This is an attribute of ensuring that the ordered item reaches the company at the stipulated time to facilitate efficient supply chain operations.
  4. The right price: Achieving the right price is an important task since this will affect the purchaser’s cost structure and ultimately the margin achieved (profitability).
  5. The right quality: The customer either specifies quality or expects the supplier to do so. The bottom line here is that the goods to be supplied should meet the user’s standards
  6. The right quantity: This entail fully supply of the ordered items. For instance if the buyer orders ten units then the supplier should exactly deliver the specified units that are ten.

 

Supply management: This is a process responsible for the development and management of a firm’s total internal and external supply system. The specific activities include:

  • Early purchase involvement (EPI) and early supplier involvement (ESI) in product design and subsequent specifications development for important items through the use of cross-functional teams
  • Conduct of all purchasing function and procurement process activities
  • Heavy use of cross-functional teams in supplier qualification and selection
  • Heavy use of purchasing partnering arrangement and strategic alliances with suppliers-to develop close and mutually beneficial linkages with key suppliers in the value chain and control quality and costs
  • Continuous identification of threats and opportunities in a firm’s supply environment
  • Development of strategic , long term acquisition plans for all major materials
  • The monitoring of continuous improvement in the supply chain
  • Active participation in the corporate strategic planning process

Its prudent to note that supply management concept represents the most advanced stage in the evolutionary development of purchasing/procurement.

Stores management: Entail planning, organizing and controlling the available stocks or supplies awaiting issue or transport to the customers. Stores operations compromise the following:

  • Receiving of goods from the suppliers or internal departments
  • Inspection to verify whether the goods supplied meet the specifications
  • Recording receipts and issue of supplies either manually or through computerized system
  • Provision of security to protect stocks against loss through theft, pilferage or misplacement
  • Maintenance: Protecting stocks against loss through deterioration from fire, water, bad weather etc.
  • Stock control: determining the range and quantities of stock or supplies to be held and their receipt and issue.
  • Stocktaking: checking of stocks and verification of stock records against actual physical quantities held in stock and also those at the work in progress stage and finished goods on hand.
  • Disposal of surplus: i.e. scrap, components or equipment identified as no longer in use or usable, donating, reuse or sale.
  • Implementation of health and safety regulations relating to stores and stores staff.

 

Material management: Can be defined as the planning, organizing and control of all aspects of inventory embracing procurement, warehousing, work-in process and distribution. The goal of materials management is to consolidate and efficiently handle core services. The specific materials management activities include:

  • Purchasing and supply management
  • Inventory management
  • Stores and warehousing
  • In-plant materials handling
  • Production planning, scheduling and control
  • Traffic and transportation

 

Logistics management: This is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and other related information from the point of origin to the point of consumption for the purpose of conforming to customers requirements. Logistics involves integration of information, transportation, inventory, warehousing, material handling and packaging. Logistical management includes the design and administration of systems to control the flow of materials, work in process and finished inventory to support business unit strategy. The overall goal of logistics is to achieve a targeted level of customer service at the lowest possible total cost. World class logistics firms create a competitive edge providing customers with superior service / information systems to monitor logistics performance on real time basis, identifying potential operational breakdowns and taking corrective action prior to customer service failure.

Scope of logistics management:

  • Concept of supply chain management: The supply chain can be likened to a well- balanced relay team in which the entire team is coordinated to run the race. The supply chain emphasis the process approach concerned with how a product or service is delivered to the customer. Supply chains are likened to value chains in that each activity within a value chain provides inputs after processing each input provides added value to the output which the ultimate customer receives in form of a product/service. It is worthwhile to underscore the fact that the supply chain concept emphasis the use of cross-functional teams which perfect their areas of specialization in aid of accomplishing the company’s set goals.

Objectives of supply chain management:

  1. Enhancing Customer Service/satisfaction
  2. Expanding Sales Revenue
  3. Reducing Inventory Cost
  4. Improving On-Time Delivery
  5. Improving quality
  6. Reducing Lead Time
  7. Reducing Transportation Cost
  8. Reducing Warehouse Cost
  9. Reducing / Rationalize Supplier Base
  10. Expanding Width / Depth of Distribution

 

Decision Phases In a Supply Chain

Successful supply chain management requires many decisions relating to the flow of

information, product, and funds. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame over which a decision phase has an impact. The distinct phases in supply chain set up entail:

 

  1. Supply chain strategy or design: During this phase, a company decides how to structure

the supply chain over the next several years. It decides what the chain’s configuration

will be, how resources will be allocated, and what processes each stage will perform.

Strategic decisions made companies include the location and capacities of production

and warehouse facilities, the products to be manufactured or stored at various locations,

the modes of transportation to be made available along different shipping legs, and the

type of information system to be utilized. A firm must ensure that the supply chain

configuration supports its strategic objectives during this phase.

 

  1. Supply chain planning: For decisions made during this phase, the time frame considered

is a quarter to a year. Therefore, the   supply chain’s configuration determined in the

strategic phase is fixed. The configuration establishes constraints within which planning

must be done. Companies start the planning phase with a forecast for the coming year (or

a comparable time frame) of demand in different markets. Planning includes decisions

regarding which markets will be supplied from which locations, the subcontracting of

manufacturing, the inventory policies to be followed, and the timing and size of

marketing promotions.

 

  1. Supply chain operation: The time horizon here is weekly or daily, and during this phase

companies make decisions regarding individual customer orders. At the operational

level, supply chain configuration is considered fixed and planning policies are already

defined. The goal of supply chain operations is to handle incoming customer orders in

the best possible manner. During this phase, firms allocate inventory or production to

individual orders, set a date that an order is to be filled, generate pick lists at a warehouse,

allocate an order to a particular shipping mode and shipment, set delivery schedules of

trucks, and place replenishment orders. Because operational decisions are being made in

the short term (minutes, hours, or days), there is less uncertainty about demand

information. Given the constraints established the configuration and planning

policies, the goal during the operation phase is to exploit the reduction of uncertainty and

optimize performance.

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PURCHASING

Definition and scope of purchasing:

Purchasing is defined as a process of acquiring goods, services and works in return for a price. All organisations invariably need input of goods and services from external suppliers or providers and to this extent therefore, purchasing function plays an integral part in ensuring the goods/services are provided to the company. The role and contribution of purchasing has increased quite steadily over the second half of 20th century with interest in the activity taking place in the last few years. The reasons behind this paradigm shift based on importance and recognition of purchasing entail:

  1. New management concepts
  2. Advanced technology
  3. Government policies
  4. Fewer but larger suppliers
  5. Competition hence the need for quality

The scope of purchasing function is in line with the following activities:

  1. Coordination with user departments to identify purchase needs
  2. Identification of potential suppliers
  3. The conduct of market studies for important materials
  4. Negotiation with potential suppliers
  5. Analysis of proposals
  6. Selection of suppliers
  7. Issuance of purchase orders
  8. Administration of contracts and resolution of related problems
  9. Maintenance of a variety of purchasing records
  10. Payment follow up
  11. Inspection and acceptance

Objectives of purchasing:

Purchasing objectives can be seen from two sides:

  • General managerial level
  • Functional or operational level

The general objectives are the five rights:  that is acquiring materials of:

  • The right quality
  • From the right supplier
  • In the right quantity
  • At the right time
  • At the right place

The perfection of the above purchasing rights invariably creates a desired service level necessary for optimal supply of materials.

The functional or operational level objectives of purchasing:

  1. To support the company operations with uninterrupted flow of materials and services
  2. To buy competitively-keeping abreast of the forces of supply and demand
  3. To buy wisely-Continual search for better values of quality, service, price relative to the buyer’s needs
  4. To keep stock investment and losses at a practical minimum
  5. To develop effective and reliable sources of supply
  6. To develop good relationships with the supplier community and good continued relationship with active suppliers
  7. To achieve maximum integration with other departments of the firm
  8. To handle the purchasing function proactively in a professional and cost effective manner.

 

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Relationship between the purchasing and supply function with other departments:

Some issues on which interaction and cooperation may take place between purchasing and other company departments include the following:

  • Purchasing and finance/accounts department:
  • Finance/accounts department prepares budget allocation for goods/services to be purchased in a given time period
  • The purchase department establishes and forwards to finance/accounts department value analysis report for goods/services to be purchased
  • Finance/accounts department briefs the purchasing department on issues based on supplier payment
  • Purchasing department gives accounts department information based on damaged items and obsolete items
  • Purchasing department gives out information based on stock movement to the accounts department
  • Purchasing/supplies department works together with accounts department during stock taking exercise which is based on assessing the variance status of the company’s inventory.
  • Stores personnel who works under purchasing/supplies department works together with the accounts personnel when it comes to the issue of receiving goods from the supplier(s). The accounts personnel checks whether the amount indicated in the invoice correspond with the amount indicated in the local purchase order (LPO).

 

Purchasing and design department:

  • Preparation of specifications for purchase of materials and components
  • Quality assurance or defect prevention
  • Value engineering and value analysis
  • Information to departments regarding availability of materials, suppliers and costs
  • Agreement of alternatives when specified materials are not available
  • Creation of library of books, catalogues, journals and specifications for joint use the design and purchasing departments

 

Purchasing and production (User department)

  • Preparation of material schedules to meet just in time requirements
  • Ensuring that delivery schedules are maintained
  • Control of inventory to meet production requirements
  • Disposal of scrap and obsolete items
  • Quality control or defect detection and correction
  • Approval of ‘first-off samples’
  • Make or buy decisions
  • General involvement in such techniques and systems as optimised production technology, computer integrated technology, materials requirement planning (MRP) and manufacturing resource planning (MRP 2)

 

Purchasing and human resource development:

  • Purchasing professionals gives out technical expertise when a prospective purchasing staff is being interviewed for a job.
  • Human resource personnel liaise with purchasing managers on checking the performance of purchasing employees through job appraisal analysis.
  • Human resource development relates with purchasing department when it comes to issues of arranging training and seminars for the purchasing staffs.
  • Human resource development work hand in hand with purchasing department through provision of motivational incentives for the purchasing staffs. This entail the acknowledgment of best employees through giving out Awards, presents and so on.
  • Purchasing department works also with human resource development on disciplinary matters of the employees.

 

Purchasing and marketing:

  • Provision of sales forecasts on which purchasing can base its forward planning of materials, components etc
  • Ensuring that through efficient buying, purchasing contributes to the maintenance of competitive prices
  • Obtaining materials on time to enable marketing and production to meet promised delivery dates to the end-customer
  • Exchange of information regarding customers and suppliers
  • Marketing implications on partnership sourcing

 

Purchasing and information technology department (IT):

Purchasing department and IT have an increasing number of interdependencies. In some cases IT function is outsourced the purchasing function. To this extent therefore its performance is evaluated accordingly the purchasing department. Also the manager of IT works closely with purchasing manager to develop automated procedures and reports in line with purchasing. To add on that IT department establishes computer devices to purchase and to this extent the IT manager prepares purchase order requisition (POR) for such items and forwards the same to purchasing department. On the other hand the purchasing department sources for such devices on behalf of the IT department.

 

Organisation and structures in supply organisation:

Organisational structure can be defined as the pattern of relationships among positions in the organisation and among members of the organisation. Organisation design and structure is concerned with such elements as:

  • The definition and allocation of specific tasks
  • The grouping of related tasks into manageable functions, divisions, departments, sections or other units
  • The allocation of responsibility within the organisation and to constituent functional units.

 

The supply function focus primarily on centralised and decentralized purchasing when building up the structures for the organisation. Centralized purchasing encompass grouping of purchasing tasks and specialist functions or services into one serving unit and under unified control. On the other hand decentralized purchasing entail division of purchasing function into sections whereeach section is mandated to control the functions within its scope. Here each department or branch is entirely responsible for its own buying.

 

  • Centralized purchasing: The advantages of concentrating purchasing in a strong central department with a responsibility of coordinating across functions include:

 

(1) Economies of scale: Centralized purchasing enables an organisation to use its purchasing power or leverage to the best effect, since:

  • Consolidation of quantities can take place resulting in quantity discounts
  • Suppliers dealing with a central purchasing department have an incentive to compete for the whole proportion of an undertaking’s requirements
  • Cheaper prices enabling suppliers to spread overheads over longer production runs
  • Specialist staff can be employed for each of the major categories of purchase
  • Lower administration costs e.g. it is cheaper to place and process one order for one million shillings than ten each for one million.

 

(ii) Coordinating of activity: 

  • Uniform policies can be adopted e.g. single sourcing, partnership sourcing etc.
  • Uniform purchasing procedures can be followed
  • Competitive buying between departments within the organisation is eliminate
  • Standardization is facilitated the use of company’s wide specification
  • The determination of order quantities and delivery dates is facilitated.
  • Staff training and development can be undertaken on a systematic basis.
  • Purchasing research into sources, quantities and supplier performance is facilitated
  • Suppliers find it more convenient to approach one central purchasing department.

       

  (iii)  Control of activity:

  •  The purchasing department may become either a separate cost centre i.e. a location within the organisation in relation to which costs may be ascertained or a profit centre.
  • Budgetary control may be applied both to the purchasing department and to the total expenditure on supplier.
  • Uniformity of purchase prices obtained centralized purchasing assists standard costing.
  • Inventories can be controlled, reduced obsolescence and loss of interest on capital locked up in excessive stocks.
  • Approaches such as Just-in-time and MRP ii can be implemented
  • Purchasing department performance can be monitored setting objectives and comparing actual results with pre-determined standards.

Disadvantages of centralized purchasing:

  • Centralized can result in many activities that involve expenditure and time without adding value.
  • Centralization can foster emphasis on functional objectives with a minimum concern for overall organisational goals.
  • User departments will resort to informal procedures if formal purchasing procedures are slow.
  • Training of managers with broad perspectives and wide understanding of business may be inhibited.
  • Employee identification with a specialist group or function can make it difficult to implement change. It is a more rigid structure.
  • Long chain of command.
  • Slow-decision making.
  • More bureaucratic.

 

(b)Decentralized Purchasing:

Advantages:

  • The local buyer will have better knowledge of the needs of his/her factory and local suppliers for improved service. It is more responsive to clients i.e. the user departments.
  • The buyer will be able to respond more quickly to emergency requirements.
  • Local purchase will be emphasized and this attribute will save on transport costs.
  • Local purchase will contribute to local prosperity of the local community etc.
  • Small and easy to manage.
  • Easy to install team spirit.
  • Fast in decision making

Disadvantages:

  • May lead to buying expensively for lack of economies of scale.
  • Duplication of purchases may result.
  • Standardization of materials and procedures may be difficult to implement.
  • Specialized staff training may not be possible
  • Rivals can emerge

 

TOPIC 2

QUALITY AND QUANTITY DETERMINATION

Introduction to concepts in quality management:

  1. Defin 1 : Quality: ISO 8402 defines quality as the totality of features and characteristics of a product that bears on the ability to satisfy stated or implied needs. In this definition, features and characteristic of product ‘ implies the ability to identify what quality aspects can be measured, or controlled, or constitute an acceptable quality level (AQL) and ability to satisfy given needs relates to the value of the product or service to the customer including economic value as well as safety, reliability, maintainability and other relevant features.

Define 2 : Crosdefines quality as conformity to requirements not goodness. He also stresses that the definition of quality can never make any sense unless it is based on what the customer wants i.e. a product is a quality product only when it conforms to the customer’s requirements.

Defin 3: Juran defines quality as ‘fitness for use’. This definition implies quality of design, quality of conformance, availability and adequate field service. Garvin has identified five approaches        to defining quality and eight dimensions of quality.

 Five approaches of quality:

  • The transcendent approach: quality is absolute and universally recognisable.
  • The product-based approach: quality is precise and measurable variable.
  • The use-based approach: quality is defined in terms of fitness for use or how well the product fulfils its intended functions
  • The manufacturing-based approach: quality is conformance to specifications i.e. targets and tolerances determined product designers.
  • The value-b ased approach: quality is defined in terms of cost and prices. Here, a quality product is one that provides performance at an acceptable price or conformance at an acceptable

 

 

FATORS TO CONSINDER IN QUALITY DETERMINATION (Eight dimensions of quality):

  • Performance: The product’s operating characteristics
  •  Reliability: The probability of a product surviving over a specified period of time under stated conditions of use.
  • Serviceability: the speed, accessibility and ease of repairing the item or having it repaired.
  • Conformance: The degree to which delivered products meet the pre determined standards.
  • Durability: Measures the projected use available from the product over its intended operating cycle before it deteriorates.
  • Features: ‘The bells and whistles’ or secondary characteristics which supplement the product the product’s basic functioning.
  • Aesthetics: personal judgements of how a product looks, feels, sounds, tastes or smells.
  • Perceived quality: Closely identified with the reputation of the producer. Like aesthetic, it is a personal evaluation.

 

  1. Specification:

Specification: A specification for an item has been defined as ‘a statement of the attributes of a product or service. It is basically a description of an item, its dimensions, analysis, performance or other relevant characteristics in sufficient detail to ensure that it will be suitable in all aspects for the purpose for which it is intended.

 

The value of specifications:

Specification will ensure that:

  • All commodities MUST be specified to satisfy their suitable for their intended purposes when put in place
  • Materials is of a consistent quality at all times
  • The inspection or testing is easy with specifications to be applied to goods purchased is notified in advance to the inspection section and to suppliers
  • In respect of the purchase of the specified items, all suppliers will have the same date on which to base the quotations

 

Preparation of specifications:

  • Avoid over-specification: This may lead to goods becoming more expensive and also may be difficult to find a manufacturer willing to quote
  • Avoid under-specification since this may lead to inferior goods and services
  • In order to be practicable, pay attention to convenience in handling and storage
  • If there is to be inspection after delivery, the specifications ought to state what tests are to be applied
  • If any special marking or packing is wanted, include the relevant instructions in the specifications.

 

PURPOSE OF SPECIFICATION

  • Comparison
  • Fitness of purpose
  • Communication
  • Evidence

 

D FEATURES OF GOOD SPECIFICATION

  • Simple
  • Clear
  • Short
  • Performance based
  • Open
  • Not conflicting with standards

 

 

METHODS OF MATERIAL SPECIFICATION

  • The idea of performance specification is that a clear indication of the purpose, function, application and performance expected of the supplied material or service is communicated and the supplier is allowed or encouraged to provide an appropriate product. In this case, the detailed specifications is in the hands of the supplier where applicable, performance specifications are to be preferred in that they allow a wider competition and enable suppliers to suggest new or improved ways of meeting the requirements.
  • Conformance specifications apply in situations where the buying organisation lays down clear and unambiguous requirements that must be met (In this case the specification is of the product, not the application). This type of specification is necessary where for example items for incorporation in an assembly are required or where a certain chemical product is to be acquired for a production process. It has been said that specifications restrict innovation.
  • Use of brand or trade name: This will be applicable under the following circumstances:
  • When manufacturing process is secrete or covered a patent
  • When manufacturing process of the vendor call a high degree of skill that cannot be exactly defined in a specification
  • When only small quantities are bought so that the preparation of the specifications the buyer is impracticable
  • By sample: The sample can be provided either buyer or seller and is useful method of specification in relation to printing and some raw materials e.g. cloth. When sample specifications are used:
  • The bulk must correspond with the sample in quality
  • The buyer must have a reasonable opportunity of comparing the bulky with the sample
  • The goods must be free from any defect making their quality unsatisfactory which a reasonable examination of the sample would not reveal.

 

  1. Grades of products eg A,B,C, ………… OR 1st, 2nd , 3rd …………………..
  2. Technical/Drawings/ illustration

 

F: FACTORS DETERMINING QUANTITY TO BUY

  • Demand
  • Inventory policy
  • Independent /Dependence demand
  • Service level
  • Market conditions
  • Production methods

 

G: METHODS OF DETERMINING QUANTITY TO BUY:

  1. Economic order quantity (E.O.Q)
  2. Simple average

Quality control and quality management-ISO 9000, 2000, TQM:

Quality control: Is concerned with defect detection and correction. Inspection activities can be classified as quality control processes, along with other activities which involve monitoring to ensure that defectives or potential defectives are spotted. Quality control can also be defined as a process employed to ensure certain level of quality or service. It may include whatever actions a business deems necessary to provide for the control and verification of certain characteristics of a product or service. The basic goal of quality control is to ensure that the pro ducts, service or processes provided meet specific requirements and are dependable, satisfactory and fiscally sound.

Quality assurance: Differs from quality control and is defined as all those planned and systematic activities implemented within the quality system and demonstrated as needed to provide adequate confidence that an entity will fulfil requirements for quality. Quality assurance can also be defined as a planned and systematic production processes that provide confidence in a product’s suitability for its intended purpose. It can also be defined as a set of activities intended to ensure that products and services satisfy customer’s requirements in a systematic and reliable fashion.

Two key principles characteristics of quality assurance entail:’ fit for purpose’’ (the product should be suitable for the intended purpose) and ‘’right first time’’ (mistakes should be eliminated). Quality assurance include regulation of the quality of raw materials, assemblies, products, components, services related to production, management production and inspection processes.

Quality assurance is concerned with defect prevention and has become synonymous with quality systems such as Kenya bureau of standards (KEBS), BS5750 and international counterpart ISO 9000. Quality assurance includes all activities connected with the

Factors determining quantity to buy

  1. Demand
  2. Inventory policy
  3. Independent/dependent demand
  4. Service level
  5. Market conditions
  6. Production method

 

Methods used in  determining quantity to buy

  1. Economic Order quantity (E.O.Q)
  2. Simple average.

 

 

TOPIC 3

DETERMINATION OF PRICE AND RIGHT TIME TO BUY:

PRICE

Defin 1: A value that will purchase a finite quantity, weight, or other measure of a good or service.

Defin 2 the sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale

As the consideration given in exchange for transfer of ownership, price forms the essential basis of commercial transactions. It may be fixed a contract, left to be determined an agreed upon formula at a future date, or discovered or negotiated during the course of dealings between the parties involved.

In commerce, price is determined what:

It is a criminal offense to manipulate prices (see price fixing) in collusion with other suppliers, and to give a misleading indication of price such as charging for items that are reasonably expected to be included in the advertised, list, or quoted price.

 

 

Price analysis:

This is the breaking down of a quoted price into its constituent elements for the purpose of determining the reasonableness of the proposed charge. Price analysis can also be defined as the examination of a seller’s price proposal comparison with reasonable price benchmarks, without examination and evaluation of separate elements of the costs and profit making up the price. The five tools that can be used to conduct price analysis include:

  • Analysis of competitive price proposal
  • Comparison with regulated , catalogue or market prices
  • The use of web-based e-procurement
  • Comparisons with historical prices
  • Use of the independent costs estimates

 

Advantages of price analysis:

  • It provides the buyer with a guide as to what he or she ought to pay
  • It highlights possible mistakes in quoting in the part of the vendor ie where the price is exceptionally low or high.
  • It provides a basis for subsequent negotiation that can be of benefit to both the vendor and buyer i.e. cost reduction leading to price reduction.
  1. Factors that influence prices of materials

1.      Market conditions :

Defin : Characteristic of a market into which a firm is entering or into which a new product will be introduced, such as number of the competitors, level or intensity of competitiveness, and the market’s growth rate. How changing market conditions can affect your business

In order to identify and deal with any potential problems, you should always be aware of any outside developments that could affect your business, and, if necessary, be ready to respond and change your plans quickly.

You should always be a ware of:

  • Interest and exchange rates – these can have an influence on the general trading climate and are not just a matter of direct costs. For example, interest rates may affect certain industries more than others and at different times, and foreign exchange rates could affect how easy or profitable it is to do business with another country.
  • Your competitors – both existing ones and new ones, and what their strengths and weaknesses are.
  • New technologies and innovations that could change the market and increase or reduce the dema nd for your existing product or service.

 

  1. Quality of materials
  2. Availability of materials
  3. Prices of alternative materials.
Prices of alternative products
(subsititutes in production)When producers decide what to produce, they always consider the prices of alternative outputs that they can produce with the same resources.Farmers producing corn will, for instance,  take the price of soya beans into account when they decide how much land to allocate for the production of corn.

An increase in the price of soya beans relative to that of corn will decrease the supply of corn.  It is more profitable for farmers to produce soya beans; consequently, they will shift more of their resources in producing soya beans.

 

An increase in the price of an alternative product  (soya beans ) will ceteris paribus  lead to a decrease in the supply for the other good (corn), and the supply curve for corn shifts to the left.  At the same price and at every other price a lower quantity is supplied than before the increase in the price of an alternative product.
  1. METHODS OF PRICING
  2. Fixed price

The term fixed price is a phrase used to mean the price of a good or a service is not subject to bargaining. The term commonly indicates that an external agent, such as a merchant or the government, has set a price level, which may not be changed for individual sales. In the case of governments, this may be due to price controls.

Bargaining is very common in many parts of the world, outside of retail stores in Europe or North America or Japan, this makes this an exception from the general norm of pricing in these areas.

Mitsui Takatoshi that it was begun the world and a fixed price was used.

A fixed-price contract is a contract where the contract payment does not depend on the amount of resources or time expended the contractor, as opposed to cost-plus contracts. These contracts are often used in military and government contractors to put the risk on the side of the vendor, and control costs.

Historically, when fixed-price contracts are used for new projects with untested or developmental technologies, the programs may fail if unforeseen costs exceed the ability of the contractor to absorb the overruns. In spite of this, such contracts continue to be popular. Fixed-price contracts tend to work when costs are well known in advance

 

  1. Cost Price

This is your own calculation of how much it cost you to actually produce your products.

It includes your time x hourly rate, material and marketing costs, but also overheads such as studio rent, telephone and transport. Costing your product or service correctly is the foundation of how you will price your work.

  You need to keep your cost price confidential, and do not share with others such as your retailers or competitors.

 

3.Variation  pricing :

In economics, price dispersion is variation in prices across sellers of the same item, holding fixed the item’s characteristics. Price dispersion can be viewed as a measure of trading frictions (or, tautologically, as a violation of the law of one price). It is often attributed to consumer search costs or unmeasured attributes (such as the reputation) of the retailing outlets involved. There is a difference between price dispersion and price discrimination. The latter concept involves a single provider charging different prices to different customers for an identical good. Price dispersion, on the other hand, is best thought of as the outcome of many firms potentially charging different prices, where customers of one firm find it difficult to patronize (or are perhaps unaware of) other firms due to the existence of search costs.

Price dispersion measures include the range of prices, the percentage difference of highest and lowest price, the standard deviation of the price distribution, the variance of the price distribution, and the coefficient of variation of the price distribution.

 

FACTORS IN DETERMINING RIGHT TIME TO BUY

  1. Lead Time

The amount of time that elapses between when a process starts and when it is completed. Lead time is examined closely in manufacturing, supply chain management and project management, as companies want to reduce the amount of time it takes to deliver products to t  he market. In business, lead time minimization is normally preferred.

INVESTOPEDIA EXPLAINS ‘Lead Time’

Lead time is broken into several components: preprocessing, processing and post processing. Preprocessing involves determining resource requirements and initiating the steps required to fill an order. Processing involves the actual manufacturing or creation of the order. Post processing involves delivery of products to the market. Companies look at each component and compare it against benchmarks to determine where slowdowns are occurring.

  1. Reorder level

 

 TOPIC 4

SOURCING

Topic 1 : Introduction to sourcing

Definition of sourcing

Sourcing is the process of identifying, selecting and developing suppliers.

The definition of sourcing can be simple or much more complex, the simple definition is “the process involved in identifying potential vendors, conducting negotiations with them to and then signing purchasing agreements with them to provide goods/or services that meet your company’s needs”

Sourcing generally refers to those decisions determining how components will be supplied for

production and which production units will serve which particular markets. Multinational firms have been pursuing integrated sourcing to a greater extent than before because such an operation allows them to exploit their competitive advantages (Kotabe and Murray, 1990). Sourcing can, next to the above, be defined as ‘the reorganization of tasks, functions and services of an organization, wherethe more effective managing of organizational and operational processes is the main issue (Huibers and Schut, 2006).

Huibers and Schut (2006) also state that ‘with sourcing, organizations can manage their

operational and organizational processes more effectively’. This can be done internally,

externally, national or international. Sourcing can be done concentration of activities, transferring the execution of services or processes to an external party or the transferring business activities abroad. In other words sourcing can have many forms depending on the organization it is applied to.

Types of vendors

  1. Vendors of manufacturer brand: These kinds of vendors are responsible for developing the merchandise and establishing an image for the brand. In some cases, the manufacturer will use its name as part of the brand name for a specific product.
  2. Vendors of private-label brands: In this case retailer buyers develop specifications for the merchandise and then contract with a vendor to manufacture it. The retailer is given the mandate to promote the brand but not the manufacturer.
  3. Vendor of licensed brands: This applies wherethe owner of a well-known brand name (the licensor) contracts with licensee to develop, produce and sell the branded merchandise.
  4. Vendors of generic products: This involves vendors of unbranded, unadvertised merchandise found mainly in grocery and discount stores.

 

Three of the main sourcing options that can be applicable for organizations to enhance their competitive advantage are:

  1. Internal sourcing (in sourcing).
  2. Local sourcing   :

 

  • Global sourcing is a term used to describe practice of sourcing from the global market for goods and services a cross geographical, political boundaries. Global sourcing often aim to exploit global efficiencies in the delivery of a product poor service. Some of these efficiencies include:

low cost, skilled lab our, low cost of raw material and other economic factors like tax or low trade tariffs.

Global sourcing is sourcing products and some times services irrespective of national

boundaries, For example it is particularly popular in European Economic countries in Europe and Asia. The rise of Chinese and Indian manufacturing capabilities has meant that sourcing from these countries has greatly increased in the past few years. This is because purchasing companies are seeking lower labor and production cost.

 

Definition 2: Global sourcing refers to the integration and co-ordination of procurement requirements across the worldwide business units of a single firm. It also implies that a particular organisation has adopted a single sourcing strategy for its worldwide business units and that this strategy is aimed at providing a competitive advantage to business units on a global scale. In order to be competitive most firms across the globe participate in global sourcing. Additional attributes in global sourcing include quality improvements, time-to-market reductions, availability improvements and synergy creation of company resources and global partnership.

It is worthwhile to underscore the fact that the bottom line as far as global sourcing is concerned is to meet or exceed product expectations while driving down production costs and streamlining the supply chain. The proliferation of technology to some extent has boosted this approach since transactions in the contemporary business environment are done just a click of a computers button.

 

Reasons for sourcing internationally:

  1. Competitiveness of overseas sources e.g. lower prices, improved deliveries, better quality etc
  2. Need for manufacturing flexibility
  3. Stringent quality standards
  4. Ever changing technology
  5. The buyer may prefer to buy from foreign source which offers products which have features which are not available domestically.
  6. Insufficient domestic capacity to meet demand to ensure continuity of suppliers owing to shortages or strikes
  7. Reciprocal trading and counter trade owing to policy reasons

 

Successful elements in sourcing abroad:

  1. Top management support
  2. Development of efficient communication skills and system
  3. Establishment of long term relationships with overseas suppliers
  4. Vast knowledge of international opportunities
  5. Good understanding of international rules under INCOTERMS

DIFFICULTIES IN BUYING ABROAD:

  1. Currency difficulties is experienced- fluctuations
  2. Legal difficulties incase of a dispute
  3. Delays in delivery
  4. Time required for negotiation is greatly increased
  5. Too much documentation e.g. bills of lading, certificate of origin customs entry form etc
  6. Import duties, procedures and insurance
  7. Communication problems

Benefits of international/global sourcing:

  1. Better prices
  2. Higher world class quality
  3. Counter-trade
  4. Improved customer service
  5. Improved competition position
  6. Increased availability of suitable suppliers

 Factors to consider when planning international procurement:

The following factors generally hamper planning for international purchasing:

  • International risks: These risks relate to:
  • Financial factors such as currency uncertainty, financial policy uncertainty and financial effect of economic performance
  • Economic factors such as performers of economic indicators etc
  • Political factors such as radical changes in government composition or policies
  • Operational environmental factors such as the legal structure of the country of export, the rules and procedures governing international trade.
  • Logistical barriers: Long distances mean increased transport costs and long delivery times, hampering the supplier in rendering a service
  • Customs regulations and duties: Import duties can disrupt prepared cost estimates at very short notice, political motives in the importing country can hamper purchases on specific foreign markets etc

 Nationalism: Local source preference is a factor that influences the development of an international purchasing policy and strategy.

Considerations  of source selection

  1. Flexibility of the vendor:
  2. The degree of service provision
  3. Effectiveness/efficiency of the vendor
  4. Reliability of the vendor
  5. Delivery capability
  6. Technical support the vendor
  7. Vendor’s capacity
  8. Financial clout
  9. Integrity of the vendor

 

SOURCES OF SUPPLIER INFORMATION

This is a comprehensive process based on identifying the available prospective suppliers in the market. Sources of information relating to potential suppliers encompass:

  1. Catalogue: This is a booklet containing details of items for sale the supplier. They contain valuable technical information and format of presentation is simple.
  2. Trade directories: These contain new product requirements, special/occasional requirements and emergency items.
  3. Yellow pages: Entail a classified telephone directory, often printed on yellow paper that lists subscribers the business or service provided.
  4. Sales persons: They can provide useful service information regarding suppliers
  5. Exhibition: This is a public display of products/services and it offers a great opportunity to talk with a number of potential suppliers in the same place at the same time.
  6. Trade Journals: This is a periodical containing new developments, discussions etc concerning a trade or profession.
  7. Business advisers: Local business-support organisations, such as chambers of commerce or      Enterprise Agencies often point out prospective suppliers to deal with.
  8. Professional peers: This entail informal exchange of information between buyers
  9. Information provided prospective suppliers
  10. Internet
  11. Press either print electronic press

 

METHODS OF SOURCING

 

  1. OPEN NATIONAL TENDERING

Invitation to Tender

The procuring entity/firm shall prepare an invitation to tender that sets out the following:

  • The name and address of the procuring entity;
  • The tender number assigned to the procurement proceedings the procuring entity;
  • A brief description of the goods works or services being procured including the time limit for delivery or completion;
  • An explanation of how to obtain the tender documents, including the amount of any fee;
  • An explanation of where and when tenders must be submitted and where and when the tenders will be opened; and a statement that those submitting tenders or their representatives may attend the opening of tenders.

 

Tender Documents

The procuring entity/firm shall prepare tender documents in accordance with this section and the regulations. The tender documents shall contain enough information to allow fair competition among those who may wish to submit tenders.

The tender documents shall set out the following:

  1. The specific requirements prepared under relating to the goods, work or service being procured and the time limit for completion
  2. If works are being procured, relevant and bills of quantities
  3. The general and specific conditions to contract will be subject, including any requirement that performance security be provided before the contract is entered into
  4. The tender number assigned to the procurement proceedings the procuring entity
  5. Instructions for the preparation and submission of tenders including;

 

  • The forms for tenders
  • The number of copies to be with the original tender
  • Any requirement that tender security be provided and the form and any such security
  • Any requirement that evidence provided of the qualification person submitting the tender
  • An explanation of where and when tenders must be submitted, a statement that the tenders will be opened immediately after the deadline for submitting them and an explanation of where the tenders will be opened
  • A statement that those submitting to their representatives may attend the o tenders
  • A statement of the period during which tenders must remain valid
  • The procedures and criteria to be used to evaluate and compare the tenders; a statement that the procuring entity may, at any time, terminate the procurement proceedings without entering into a contract; and

 

Modifications to tender

  1. A procuring entity may amend the tender documents at any time before the deadline for submitting tenders issuing an addendum.
  2. An amendment may be made on the procuring entity’s own initiative or in response to an inquiry.
  3. The procuring entity shall promptly provide a copy of the addendum to each person to whom the procuring entity provided copies of the tender documents.
  4. The addendum shall be deemed to be part of the ‘tender documents.

 

Advertisement of Tender

The procuring entity shall take steps reasonable to bring the invitation to tender to the attention of those who may wish to submit tenders. If the estimated value of the goods, works or services being procured is equal to, or more than the prescribed threshold for national advertising, the procuring entity shall advertise, at least twice in a newspaper of general nationwide circulation which has been regularly published for at least two years before the date of issue of the advertisement, and on its website in instances where the procuring entity has a website, the advertisement shall also be posted at any conspicuous place reserved for this purpose in the premises of procuring entity as certified the head of procurement unit.

 

Time for Preparing Tenders

The time allowed for the preparation tenders must not be less than the minimum period of prescribed for the purpose of this subsection

If the tender documents are amended when the time remaining before the deadline for submitting tenders is less than one third of the time allowed for the preparation of tenders, the procuring entity shall extend the deadline as necessary to allow amendment of the tender documents to be taken in account in the preparation or amendment of tenders.

 

Provision of Tender Documents

The procuring entity shall provide copies of the tender documents expeditiously and in accord with the invitation to tender.

The procuring entity may charge such fees may be prescribed for copies of the tender documents.

 

Tender security

A procuring entity may require that tender security be provided with tenders.

The procuring entity may determine the form and amount of the tender security, subject to such requirements or limits as may be prescribed.

Tender security shall be forfeited if the person submitting the tender:

  • Withdraws the tender after the deadline for submitting tenders but before the expiry of the period during which tenders must remain valid;
  • Rejects a correction of an arithmetic error
  • Refuses to enter into a written contract or fails to furnish any required performance security.

 

The procuring entity shall immediately release any tender security if :

  1. The procurement proceedings are terminated;
  2. The procuring entity determines that none of the submitted tenders is responsive; or
  3. A contract for the procurement is entered into.

 

Submission and Receipt of Tenders

A tender must be in writing, it must be signed and it must be sealed in an envelope. A tender and the envelope it is sealed in must bear the tender number assigned to the procurement proceedings the procuring entity. A tender must be submitted before the deadline for submitting tenders and any tender received after that deadline shall be returned unopened

 

  1. REQUEST FOR PROPOSALS

When request for proposals may be used

A procuring entity may use a request for proposals for procurement if:

  1. The procurement is of services or a combination of goods and services
  2. The services to be procured are advisory or otherwise of a predominately intellectual nature. Subject to any prescribed restrictions, a procuring entity may use a request for proposals for procurement if the procuring entity would be allowed to use another alternative procurement procedure for that procurement under

 

Notice inviting expressions of interest

The procuring entity shall prepare a notice inviting interested persons to submit expressions of interest.

The notice inviting expressions of interest shall set out the following

  • The name and address of the procuring entity.
  • A brief description of the services being procured and, if applicable, the goods being procured.
  • The qualifications necessary to be invited to submit a proposal.
  • An explanation of where and when expressions of interest must be submitted.

 

The procuring entity shall advertise the notice inviting expressions of interest in at least two daily newspapers of nation-wide circulation.

 

Terms of reference The procuring entity shall prepare terms of reference that set out the following –

  1. The specific requirements prepared under section relating to the services
  2. if applicable, the goods being procured and the time limit for delivery or completion

 

Determination of qualified persons

After the deadline for submitting expressions of interest the procuring entity shall examine each expression of interest to determine if the person submitting it is qualified to be invited to submit a proposal in accordance with the notice inviting expressions of interest.

Request for proposals to qualified persons

The procuring entity shall give each person who it determines is qualified to be invited to submit a proposal a request for proposals and a copy of the terms of reference. The request for proposals shall set out the following:

  • The name and address of the procuring entity.
  • The general and specific conditions to which the contract will be subject.
  • Instructions for the preparation and submission of proposals which shall require that a proposal include a technical proposal and a financial proposal.
  • An explanation of where and when proposals must be submitted.

 

EVALUATION OF PROPOSALS

The procuring entity shall examine the proposals received in accordance with the request for proposals.

For each proposal, the procuring entity shall evaluate the technical proposal to determine if it is responsive and, if it is, the procuring entity shall assign a score to the technical proposal, in accordance with the procedures and criteria set out in the request for proposals.

  1. For each proposal that is determined, under subsection (2), to be responsive, the procuring entity shall evaluate and assign a score to the financial proposal, in accordance with the procedures and criteria set out in the request for proposals.
  2. If the request for proposals provides for additional methods of evaluation, the procuring entity shall conduct such methods in accordance with the procedures and criteria set out in the request for proposals.
  3. The successful proposal shall be the responsive proposal with the highest score determined the procuring entity combining, for each proposal, in accordance with the procedures and criteria set out in the request for proposals, the scores assigned to the technical and financial proposals and the results of any additional methods of evaluation

 

REQUEST FOR QUOTATIONS When may it be used?

A procuring entity may use quotations for procurement if:

  1. Use a request for the procurement is for goods that are readily available and for which there is an established market,
  2. The estimated value of the goods being procured is less than or equal to the prescribed maximum value for using requests for quotations.

 

Procedure

This section sets out the procedure for a procurement using a request for quotations.

The procuring entity shall prepare a request for quotations that sets out the following:

  1. The name and address of the procuring entity.
  2. The specific requirements prepared under relating to the goods being procured.
  3. An explanation of where and when quotations must be submitted.
  4. Anything else required under this Act or the regulations to be set out in the request for quotations.

 

The procuring entity shall deal with the request for quotations in accordance with the following:

  1. The procuring entity shall give the request to such persons as the procuring entity determines;
  2. The request must be given to as many persons as necessary to ensure effective competition and must be given to at least three persons, unless that is not possible;
  3. The procuring entity shall give the request to each person early enough so that the person has adequate time to prepare a quotation.

 

The successful quotation shall be the quotation with the lowest price that meets the requirements set out in the request for quotations. The following shall apply with respect to the contract resulting from procurement a request for quotations:

  1. The procuring entity shall place a purchase order with the person submitting the successful quotation.
  2. The person submitting the successful quotation shall confirm the purchase order in writing.

 

If there will not be effective competition unless foreign persons participate, the following shall apply:

  1. The request for quotations must be in English.
  2. The technical requirements must, to the extent compatible with requirements under Kenyan law, be based on international standards or standards widely used in international trade.
  3. A person submitting a quotation may, in quoting prices or providing security, use a currency that is widely used in international trade and that the request for quotations specifically allows to be used.
  4. Any general and specific conditions to which the contract will be subject must be of a kind generally used in international trade.

 

TOPIC 5

ORDERING PROCEDURE

This is a set step process of acquisition of goods , services and works as recommended PPDA (2005)

A: IMPORTANCE OF FOLLOWING PURCHASE PROCEDURES

  1. Ensure public organisations get value for money
  2. Enhance transparency and accountability
  3. Ensure efficiency and effectiveness
  4. Promote competition and ensures that competitors are treated fairly use of competitive procurement methods
  5. Promotes integrity and fairness of procurement procedures
  6. Restore public confidence in procurement process
  7. Build public trust to stakeholders
  8. Facilitate promotion of local industry and economic development
  9. To ensure that goods and service are obtained at the right price, right quality, right quantity, from right source and delivered at the right place.
  10. Conformance to PPDA 2005
  11. Government /organizational policies

 

  1. PURCHASING/ORDERING PROCEDURE:

It is worthwhile to note that successful purchasing organisations follow a purchasing cycle or process to ensure that the important elements are not overlooked. Each material or service be procured, will require a different level of activity and priority. To this extent therefore, the purchasing function need to ensure that all the prescribed steps of purchasing are performed and executed.

 

Authority and controls:

Authority: This is the power to determine, adjudicate, or settle issues/disputes in any social set up. Authority assigned to a particular person or position holder must correspond with responsibilities articulated in various levels of authority. In acquisition of goods/ service the aspect of authority is evident since various persons have the autonomy to initiate or order goods/services for the companies. For instance, stores staff, field staff as well as unit leaders of various departments have the right to initiate purchasing through raising purchase order requisitions. Purchasing officers on the other hand have a leeway to order goods for the company.

Control: This is the power or influence applied in a working environment in order to complete successful task. Basically, the purchasing function has the power to regulate the aspect buying goods for the company. If a purchasing officer realizes that the requisition forwarded to him the stores/field staff/user departments entails order of goods which are plenty in the stores, he is entitled to re sent back the requisition to the originator. This attribute to some extent ensures that the company purchase what is needed and not what the originator of the requisition want.

 

Documentation in Purchasing:

  1. Requisition:

The stores staff/field staff or user department(s) initiates purchasing through preparation requisitions. Requisitions entail the code number of materials, description of the materials, quantity to order as well as the reason for ordering.

  1. Local Purchase order:

A purchase order (PO) is a commercial document issued a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. Acceptance of a PO a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the PO is accepted.

Reasons why companies use    LPOs.

  1. They allow buyers to clearly and explicitly communicate their intentions to sellers and protect the seller in the event of a buyer’s refusal to pay for goods or services.
  2. Sets out in writing the items ordered
  3. Sets out the prices of the items ordered
  4. Sets out the manner of delivery
  5. Shows the terms of payment e.g. cheque or cash
  6. Evidences the person who signed it and therefore this shows the person to take responsibility for it
  7. Allows the receiving department something to check against when the goods arrive
  8. Allows the paying department something to check against before making payment

 

  1. Request for quotation (RFQ):

This is a document sent the buyer to the supplier requesting the supplier to quote the prices accordingly. It is important to note that the RFQ should have clear information pertaining the items to be purchased. This should involve correct contacts of the supplier, ideal specifications and also the quantity to be purchased. The document can be accompanied other documents such as drawings, any additional information which enables the supplier to quote as per the buyer’s request.

  1. Quotation enquiry:

Formal statement of promise (submitted usually in response to a request for quotation) potential supplier to supply the goods or services required a buyer, at specified prices, and w ithin a specified period. It may also contain terms of sale and payment, and warranties. Acceptance of quotation the buyer constitutes an agreement binding on both parties.

  1. Consignment note:

This is a document prepared a consignor (Supplier) and countersigned the carrier as a proof of receipt of consignment for delivery at the destination. This document evidences the receipt of the goods an attribute which shows the truthfulness of the actual delivery of the consignment from the consignor to the consignee. The document is generally used as an alternative to bill of lading (especially in inland transport), it is generally neither a contract of carriage nor a negotiable instrument.

  1. Goods receipt note (GRN):

This is a document used to record the inward entry of any goods received at the premises of the organization. The document normally consist of the details of Quantity Received, Quantity Rejected and Quantity Accepted, Supplier name and Purchase order number. The practice of preparing GRNs is important as it promotes proper inventory control and restricts the unwanted, unauthorized entry of goods in the organization. The GRN preparation is a part of effective Inventory Control Management.

  1. Advice note:

This is a note sent to a customer (Buyer) a supplier of goods to advise him that an order has been fulfilled. The advice note may either accompany the goods or be sent separately. Also an advice note notifies the buyer that goods have been dispatched or are ready for collection. Copies of the advice note may be sent to relevant departments e.g. purchasing and stores

 

Other documents in purchasing

  • Quotation analysis
  • Delivery Note
  • Invoice
  • Credit Note

Management of purchasing records:

Management of records is the practice of maintaining the records of an organisation from the time they are created up to their eventual disposal. The practice of records management involve planning, organising, controlling and most importantly provision of authority to the ideal people who should access the records in question. Purchasing records are concerned with the storage of information. This information can be filled manually or through computer system. Computerization enables vast amounts of information to be stored, obviates duplication and ensures efficient retrieval of data. The distinct ways in which purchasing records may be managed entail:

  1. Filing of the records
  2. Updating of the records
  3. Archiving of the records
  4. Provision of security for the records
  5. Classification of the records
  6. Provision of tracking mechanism for easy retrieval of records
  7. Disposal of records

 

 

TOPIC 6

RECEIVING AND INSPECTION OF GOODS

Receiving of incoming goods

Introduction:

Receipt of goods in a working environment is a very important exercise since it accounts to verification of consignment from various quarters.  It calls for authorized personnel from various distinct departments to witness the entry process of the goods in question. The essence of advocating different personalities to come and check the goods is purely geared to enhance transparency and accountability in the whole process.

Categories of receiving

  • Receiving from supplier:

Once the buying company gives out the order to a specific supplier, its upon the supplier in question to find modalities of delivering the consignment to the company. The stores department together with accounts/user/quality departments inspects the goods in question to confirm whether they correspond with the outlined specifications.  The receipt of goods is only effected if the goods in question are in line with the company’s requirements. Conversely, if the goods are defective or wrong supply then the inspection team rejects it.

  • Receiving from sub stores:

Sub stores entail small stores houses which are put in place to serve distinct customers within a company. Most of the sub stores entail goods based on different materials. This means that the provision of service is basically in line with different range of customers.

  • Receiving from departmental store:

In some companies the receipt of goods may be based on departmental store which channels all the goods to respective entities. The issuance of goods may be based on consumption patterns of different users who are targeted. In manufacturing company departmental stores serves distinct users who are primary beneficiary of such goods.

  • Receiving from customers:

Goods may be received from customers in the following ways. One, in a situation wherea customer brings forth his own goods to used in manufacturing of his product, secondly a customer may bring goods to be received in some cases wherehis final product happens to have some short comings and that fixing of the same becomes necessary.

  • Transfers from other storehouses:

Goods are transferred from other storehouses to other respective departments within the company. This attribute arises in a situation wherea specified department happens to have some shortages of the products or perhaps if the goods in question are deemed to be obsolete and that there is a need for recycling them.

  • Returns from production of other department:

In some cases the production department returns goods that are deemed to be obsolete to stores department for disposal. Goods in question may be disposed through re-sale, auction, re-cycling etc.

  • Scrap arising:

Scrap entail waste, reprocessed materials in a production function. Ideally, materials are deemed to be scrap when they are no longer needed in perfection of different functions. Its upon the production operators to give out details pertaining the materials in question in order to facilitate a replacement of the same based on the ideal materials to be used.

Vendor quality rating:

These encompass modalities used companies to appraise suppliers. Vendor rating is the result of a formal vendor (Supplier) evaluation system. Vendors are invariably given standing, status or title according to their attainment of some level of performance. The key variables used in a supply chain set up entail:

  • Quality status i.e. conformance to specifications
  • Quantity- rate of order fulfilment
  • Time- lead time
  • Price competiveness.

The main objective of vendor rating are:

  • To motivate suppliers to improve performance
  • To apportion orders to deserving vendors for overall cost reduction
  • To select vendors for further development
  • To reduce the cost of inspection of incoming lots modifying sampling plans

Marshalling of receipt:

This entail proper package of receipts which are used in a supply chain set up. This exercise is paramount since it shows the reflection of company’s transactions in a given time period.

Receipt of capital items:

Capital goods include factories, machinery, tools, equipment, and various buildings which are used to produce other products for consumption. Capital goods, then, are products which are not produced for immediate consumption; rather, they are objects that are used to produce other goods and services. These types of goods are important economic factors because they are key to developing a positive return from manufacturing other products and commodities. Because of high financial clout associated with the acquisition of capital items key personalities in a company’s undertakings should be involved in receipt of the goods. This entail receipt of goods board of directors, chief executive officer (CEO) of the company and also Top level managers.

 

INSPECTION

Means examination, scrutiny, surveyor  probe on goods , services and works observation, sensing, gauging, testing, measurement, weighing There are several categories of inspection:

  1. Inspection for quality:

When goods are dispatched to the buying company, normally clear examination is carried out to establish whether the consignment corresponds with the stated features the company. The user department and perhaps the quality team of the buying company confirms the quality status of the supplied goods. If goods confirm to buying company’s requirements its upon the inspection team to endorse the receipt of the goods. However, if the goods does not confirm to the requirements then the goods are returned to the supplier.

  1. Inspection for quantity:

The quantity status is also very important aspect in inspection of the goods. Ideally, the buyer invariably expects the suppliers to dispatch all orders of the goods in order to bring forth the aspect of order fulfilment and perhaps ensure smooth flow of company’s operations.  The stores personnel in liaison with other members of the inspection team is duty bound to cross check whether the physical supplied goods corresponds with what is replicated in the delivery note. After confirmation is entitled to sign accordingly.

  1. Inspection for damages:

The members of the inspection are also entitled to examine whether the goods supplied are free from defects. This exercise is normally done before signing the delivery note. The buying company through the report of the inspection team is only reliable to accept only those goods which are fit for consumption. The damaged goods are exchanged the suppliers to facilitate the aspect of order fulfilment for the transaction.

  1. Who may inspect:

Ideally, in a receipt of goods exercise stores personnel, accounts representative and a representative of the user/quality department should be present. Normally, the stores personnel cross checks the quantity status, the accounts personnel checks quantity/the pricing of the goods while the user/quality personnel examines the quality status of the goods.

  1. Where goods may be inspected:

Most of the company’s policies is based on ensuring that all the goods are inspected at the stores bay since its the central point where transparency and accountability can be sustained in line with the supplied goods.

  1. Spot checks:

In some cases companies allow random examination of the goods in any specific point before goods reaches the stores. This attribute is also geared towards provision of transparency and accountability in line with the supplied goods.

Inspection and receiving procedure

  1. Appointment of committee
  2. Identification of what to be inspected
  3. Identification of what methods to be used inspected
  4. Collection of all documents needed
  5. Actual inspection starts
  6. Inspection report compiled
  7. Action taken ie reject or accept
  8. Follow-ups

 

Documentation used in inspection:

  1. Advice note:

This is a note sent to a customer (Buyer) a supplier of goods to advise him that an order has been fulfilled. The advice note may either accompany the goods or be sent separately. Also an advice note notifies the buyer that goods have been dispatched or are ready for collection. Copies of the advice note may be sent to relevant departments e.g. purchasing and stores

  1. Local Purchase order:

A local purchase order (PO) is a commercial document issued a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. Acceptance of a PO a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the PO is accepted.

Reasons why companies use    LPOs.

  1. They allow buyers to clearly and explicitly communicate their intentions to sellers and protect the seller in the event of a buyer’s refusal to pay for goods or services.
  2. Sets out in writing the items ordered
  3. Sets out the prices of the items ordered
  4. Sets out the manner of delivery
  5. Shows the terms of payment e.g. cheque or cash
  6. Evidences the person who signed it and therefore this shows the person to take responsibility for it
  7. Allows the receiving department something to check against when the goods arrive
  8. Allows the paying department something to check against before making payment
  1. Consignment note:

This is a document prepared a consignor (Supplier) and countersigned the carrier as a proof of receipt of consignment for delivery at the destination. This document evidences the receipt of the goods an attribute which shows the truthfulness of the actual delivery of the consignment from the consignor to the consignee. The document is generally used as an alternative to bill of lading (especially in inland transport), it is generally neither a contract of carriage nor a negotiable instrument.

  1. Delivery note – What is a delivery note?

Definition: A document accompanying a shipment of goods that lists the description, grade, and quantity of the goods delivered.

A delivery note describes what a package contains – including a description and the quantity of goods delivered. It also describes whether or not there are some goods that are not enclosed – therefore giving an overview of what the recipient has ordered and what has been sent to them.

In some cases, a copy of the delivery note is signed the recipient and then returned to the seller or consignor as a proof of delivery.

  1. Requisition:

The stores staff/field staff or user department(s) initiates purchasing through preparation requisitions. Requisitions entail the code number of materials, description of the materials, quantity to order as well as the reason for ordering.

 

 

  1. Request for quotation (RFQ):

This is a document sent the buyer to the supplier requesting the supplier to quote the prices accordingly. It is important to note that the RFQ should have clear information pertaining the items to be purchased. This should involve correct contacts of the supplier, ideal specifications and also the quantity to be purchased. The document can be accompanied other documents such as drawings, any additional information which enables the supplier to quote as per the buyer’s request.

  1. Inspection Certificate
  1. Quotation enquiry:

Formal statement of promise (submitted usually in response to a request for quotation) potential supplier to supply the goods or services required a buyer, at specified prices, and w ithin  a specified period. It may also contain terms of sale and payment, and warranties. Acceptance of quotation the buyer constitutes an agreement binding on both parties.

  1. Goods receipt note (GRN):

This is a document used to record the inward entry of any goods received at the premises of the organization. The document normally consist of the details of Quantity Received, Quantity Rejected and Quantity Accepted, Supplier name and Purchase order number. The practice of preparing GRNs is important as it promotes proper inventory control and restricts the unwanted, unauthorized entry of goods in the organization. The GRN preparation is a part of effective Inventory Control Management.

Other documents in purchasing

  • Quotation analysis
  • Delivery Note
  • Invoice
  • Credit Note

Management of purchasing records:

Management of records is the practise of maintaining the records of an organisation from the time they are created up to their eventual disposal. The practise of records management involve planning, organising, controlling and most importantly provision of authority to the ideal people who should access the records in question. Purchasing records are concerned with the storage of information. This information can be filled manually or through computer system. Computerization enables vast amounts of information to be stored, obviates duplication and ensures efficient retrieval of data. The distinct ways in which purchasing records may be managed entail:

  1. Filing of the records
  2. Updating of the records
  3. Archiving of the records
  4. Provision of security for the records
  5. Classification of the records
  6. Provision of tracking mechanism for easy retrieval of records
  7. Disposal of records

IMPORTANCE OF  INSPECT INCOMING GOODS

  1. Certainty
  2. Checking deviations  b/t Lpo and delivery note
  3. Control quality of products at early stages
  4. Embracing technologies like J.I.T
  5. Better inventory mgt

 

METHODS USED TO INSPECT INCOMING GOODS

  1. Sampling method
  2. Receiving goods
  3. Inspecting goods

 

OPTION OF TREATING REJECTED GOODS

  1. Outright rejection
  2. Replacement
  3. Resourcing
  4. Reduction in price

OPTIONS OF TREATING REJECTED GOODS

  1. Outright rejection
  2. Replacement
  3. Resourcing
  4. Reduction in price

 

 

 

 TOPIC 8

PHYSICAL DISTRIBUTION

Definition

Physical distribution is the group of activities associated with the supply of finished product from the production line to the consumers. The physical distribution considers many sales distribution channels, such as wholesale and retail, and includes critical decision areas like customer service, inventory, materials, packaging, order processing, and transportation and logistics. You often will hear these processes be referred to as distribution, which is used to describe the marketing and movement of products.

Accounting for nearly half of the entire marketing budget of products, the physical distribution process typically garnishes a lot of attention from business managers and owners. As a result, these activities are often the focus of process improvement and cost-saving initiatives in many companies.

Importance of Physical Distribution

The importance of physical distribution to a company can vary and is typically associated with  the type of product and the necessity it has to customer satisfaction. Strategically staging products in locations to support order shipments and coming up with a rapid and consistent manner to move the product enables companies to be successful in dynamic markets.

Physical distribution is managed with a systems approach and considers key interrelated functions to provide efficient movement of products. The functions are interrelated because any time a decision is made in one area it has an effect on the others. For example, a business that is providing custom handbags would consider shipping finished products via air freight versus rail or truck in order to expedite shipment time. The importance of this decision would offset the cost of inventory control, which could be much more costly. Managing physical distribution from a systems approach can provide benefit in controlling costs and meeting customer service demands.

Functions of Physical Distribution

The key functions within the physical distribution system are:

  • Customer service
  • Order processing
  • Inventory control
  • Transportation and logistics
  • Packaging and materials
  1. The customer service function is a strategically designed standard for consumer satisfaction that the business intends to provide to its customers. As an example, a customer satisfaction approach for the handbag business mentioned above may be that 75% of all custom handbags are delivered to the customer within 72 hours of ordering. An additional approach might include that 95% of custom handbags be delivered to the customer within 96 hours of purchase. Once these customer service standards are set, the physical distribution system is then designed to attain these goals.
  2. Order processing is designed to take the customer orders and execute the specifics the customer has purchased. The business is concerned with this function because it directly relates to how the customer is serviced and attaining the customer service goals. If the order processing system is efficient, then the business can avoid other costs in other functions, such as transportation or inventory control. For example, if the handbag business has an error in the processing of a customer order, the business has to turn to premium transportation modes, such as next day air or overnight, to meet the customer service standard set out, which will increase the transportation cost.
  3. Inventory control is a major role player in the distribution system of a business. Costs include investment into current inventory, loss of demand for products, and depreciation. There are different types of inventory control systems that can be implemented, such as first in-first out (or FIFO) and flow through, which are methods for businesses to handle products.
  4. First in-fir st out, or FIFO, is a method in which the new products coming into the warehouse replace existing products of the same SKU so that merchandise is cycled and does not expire or become old as more recent production is available. Flow through, on the other hand, is product that does not get processed in the warehouse. It is offloaded from an inbound trailer, pushed across the warehouse and onto outbound trailers for departure without being stored in the warehouse.

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The basic elements of specific functions that make up physical distribution include (i) Materials handling; (ii) inventory planning and control ; (iii) order processing ; (iv) transportation ; and (v) a communication system to integrate the physical distribution process.’

These components of Physical Distribution  are explained below:

  1. Materials Handling:

It involves moving products in and out of a stock. It consists of routine tasks that can be performed through mechanisation and standardisation. Efficiency is increased through use of electronic data processing to control conveyor systems, order picking and other traffic flaws.

The modern mechanised handling services and protective packaging have improved the level of customer service and at the same time lowered physical distribution costs. Material handling and packaging services have also speeded up the order processing and movement of consignments.

  1. Inventory Planning And Control:

Inventory refers to the stock of products a firm has on hand and ready for sale to customers. Inventories are kept to meet market demands promptly. Inventory is the link interconnecting the customer’s orders and the company’s production activity.

Infact the entire physical distribution management rotates around the inventory management. Inventory management is the heart of the game of physical distribution.

Marketing managers undertake an inventory planning to develop adequate assortments of products for the target market and also try to control the costs involved in obtaining and maintaining inventory.

Marketing managers generally take three decisions while conducting inventory management, viz, (i) how can the track be kept, on a day-to- day basis of location, amount and the condition of the inventory? (ii) How can inventory information best be channelled to production managers or buyers for resale to help them schedule their activities? (iii) What inventory information can other departments in the organisation use to help them perform their functions efficiently?

  1. Purchasing /Order Processing:

Order-processing and inventory control are related to each other. Order processing is considered as the key to customer service and satisfaction. It includes receiving, recording, filling, and assembling of products for dispatch. The amount of time required from the dates of receipt of an order up to the date of dispatch of goods must be reasonable and as short as possible.

It comprises in undertaking the processes that are needed to make certain orders processed quickly, accurately, and efficiently. The marketing manager has to decide about these along with such issues as what is the most efficient way to bill customers; how cans the paper work may be minimized? And how can the physical function of assembling orders more efficiently?

  1. Transportation:

It is an essential element of physical distribution. It involves integrating the advantages of each transportation method adopting containers and physical handling producers to permit transfers among different types of carriers.

For example, to place containers in railway flat cars and then load the containers on motor vehicles is called “piggy back” and if the containers are off loaded to water carriers, it is called “flash back.” Exchange of containers between air and truck carriers are referred to as “Air truck” or “birdy back”.

The marketing manager has to decide to (i) what mode or combination of modes of transportation (rail, truck, pipeline, water ways or air) should be used to transport products to warehouses and from there to customers? (ii) Should the transportation cost be reduced and the desired levels of customer service still maintained.

  1. Information flow/Communications:

It is a process of passing information and understanding from one person to another. This includes the information system which should link producers, intermediaries, and customers. Computers, memory systems, display equipment and other communication technology facilitate the flow of information among other members in the channel.

A manager to be successful must develop an effective system of communication. So that he may issue instructions, receive the reactions of the subordinates, and guide and motivate them.

  1. Organisational Structure:

The person in charge of the physical distribution should co-ordinate all Activities into an effective system to provide the desired customer service in the most efficient manner. Examples of organizational consideration are: (i) How can the five elements of physical distribution best be co­ordinated so that a team effort results? How can compartmentalization thinking be avoided? (ii) If a central head is established to direct all physical distribution activities, to whom should he report—The Head of the Marketing or The Chief Executive Officer?

 Importance of physical distribution

  • Facilitate supply chain
  • Buyer supplier relationship
  • Sources of employment
  • Contribute to GDP
  • It’s an after sale service

 

   D. MODES TRANSPORT

Transportation plays a major role in the economy. It increases the production efficiency and it links to the logistics system. Vehicle should have some characteristics which are used for easy transport of goods and services.

Transportation is generally of two types. They are public transport and transport for non generic-use. Public transport is nothing but which is used for meeting the needs of all sectors of the people for transportation of goods and services. Transport non-generic will be for the plant operations here the transportation means may be the non-transport enterprises.

Coming to the different types of transport which are usage generally are:
1.  Rail:
Advantages:

  • Ability of loading and unloading goods and services is more.
  • Frequency of delivering the goods over long distances is more.
  • Climatic conditions have no effect
  • No traffic or congestion easy movement of the vehicle.

Disadvantages:

  • Capital and initial investments are more.
  • High material usage for the construction and even the fuel consumption
  • The above are some of the advantages and disadvantages of using the rail.
  1. Road:
    Advantages:
  • High flexibity and ability to move the vehicles fastly.
  • Uses different routes to reach the destination quickly.
  • Does door to door service
  • High safety for the cargo.
  • Chance to select the carrier which is suitable for carrying the goods.

Disadvantages:

  • It mostly depends on climatic conditions.
  • High cost for long distances.
  • Productivity is low.
  • Some of the advantages and disadvantages are discussed above.
  1. Air:
    Advantages:
  • Highest speed
  • Even delivers goods to remote places.
  • High reliability

Disadvantages:

  • Highest cost of transportation.
  • Even adverse weather conditions effect the transportation.
  • Material and fuel consumption is costly.
  1. Water:
    Advantages:
  • It is economical mode for transporting heavy loads and even cargo.
  • It is the safest mode which provides convenience to the people without accidents.
  • Cost of construction and maintenance is very low.
  • It even provides international transport

Disadvantages:

  • It is highly affected the weather conditions.
  • It requires large initial investment
  • It is a slow process.

 

FACTORS TO BE CONSINDERRD IN SELECTING TRANSPORTATION MODE.

  1. Cost of Service:

The cost of transportation adds to the cost of the goods so it should always be kept in mind. Rail transport is comparatively a cheaper mode of transport for carrying heavy and bulky traffic over long distances. Motor transport is best suited and economical to carry small traffic over short distances. Motor transport saves packing and handling costs.

Water transport is the cheapest mode of transport. It is suitable to carry only heavy and bulky goods over long distances where time is not an important factor. Air transport is the most costly means of transport but is particularly suited for carrying perishable, light and valuable goods which require quick delivery.

  1. Speed of Transport:

Air transport is the quickest mode of transport but it is costliest of all. Motor transport is quicker than railways over short distances. However, the speed of railways over long distances is more than that of other modes of transport except air transport and is most suitable for long distances. Water transport is very slow and thus unsuitable where time is an important factor.

  1. Flexibility:

Railways, water and air transport are inflexible modes of transport. They operate services on fixed routes and at preplanned time schedules. The goods have to be carried to the stations, ports and airports and then taken from there. Motor transport provides the most flexible service because it is not tied to fixed routes or time schedules. It can operate at any time and can reach the business premises for loading and unloading.

 

  1. Reliability/Regularity of Service:

Railway service is more certain, uniform and regular as compared to any other mode of transport. It is not much affected weather conditions. On the other hand, motor transport, ocean transport and air transport are affected bad weather such as heavy rains, snow, fog, storms etc.

  1. Safety:

Safety and security of goods in transit also influence the choice of a suitable means of transport. Motor transport may be preferred to railway transport because losses are generally less in motor transport. Water transport exposes the goods to the perils of sea and, hence from safety point of view, sea transport is thought of as a last resort.

  1. Nature of Commodity:

Rail transport is most suitable for carrying cheap, bulk and heavy goods. Perishable goods which require quick de livery may be carried through motor transport or air transport keeping in mind the cost and distance.

  1. Availability
  2. Other Considerations:

A number of special services such as warehousing, packing, loading and unloading are also taken into consideration while deciding about a mode of transport. From the above discussion it is clear that each mode of transport is suited for a particular type of traffic.

The rail transport is particularly suited for carrying heavy and bulky goods over long distances. Motor transport is suitable for carrying small consignments over short distances. Air transport is suited to light and precious articles which are to be delivered quickly. Ocean transport is appropriate for carrying heavy bulky goods over long distances at the cheapest possible cost

 

DOCUMENTS USED TO FACILITATETRANSPORTATION OF GOODS

  1. Air way bill: This is the consignment note used for carriage of goods air. It is basically a receipt for goods for dispatch and is prima facie evidence of the conditions of carriage.
  2. Bill of lading: This is a receipt for goods shipped on board a vessel, signed the person who contracts to carry them and stating the conditions in which the goods were delivered to (and received by) the ship.
  3. Packing list: This is a document that sets out details of the packing of the goods. The documents are required customs authorities to enable them to make spot checks or more thorough checks on the contents of any particularly content.
  4. Bill of Entry : A declaration an importer or exporter of the exact nature, precise quantity and value of goods that have landed or are being shipped out. Prepared a qualified customs clerk or broker, it is examined customs authorities for its accuracy and conformity with the tariff and regulations. See also customs entry.
  5. Consignment note:

This is a document prepared a consignor (Supplier) and countersigned the carrier as a proof of receipt of consignment for delivery at the destination. This document evidences the receipt of the goods an attribute which shows the truthfulness of the actual delivery of the consignment from the consignor to the consignee. The document is generally used as an alternative to bill of lading (especially in inland transport), it is generally neither a contract of carriage nor a negotiable instrument.

  1. Goods receipt note (GRN):

This is a document used to record the inward entry of any goods received at the premises of the organization. The document normally consist of the details of Quantity Received, Quantity Rejected and Quantity Accepted, Supplier name and Purchase order number. The practice of preparing GRNs is important as it promotes proper inventory control and restricts the unwanted, unauthorized entry of goods in the organization. The GRN preparation is a part of effective Inventory Control Management.

 

  1. Advice note:

This is a note sent to a customer (Buyer) a supplier of goods to advise him that an order has been fulfilled. The advice note may either accompany the goods or be sent separately. Also an advice note notifies the buyer that goods have been dispatched or are ready for collection. Copies of the advice note may be sent to relevant departments e.g. purchasing and stores

 

 

 

 

 

 

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