Purchasing 4

Purchasing management
Chapter 4:
Materials Management
Instructor: Arafat AL-JIBRINI
Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. 1-1
LEARNING OBJECTIVES
1. To identify the activities of materials management.

2. To identify the four functions of inventory.
3. To understand the relationship between
purchasing and materials management.
4. To determine how materials management concept
makes a contribution to profitability.
MATERIALS MANAGEMENT
• Definition - Materials management is the

planning and control of the flow of materials that
are part of the inbound logistics system.
• The purpose of materials management

• To support the transformation of raw materials
and component parts into shipped or finished
goods
Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
3
THE FIVE FUNCTIONS OF INVENTORY
1. Pipeline inventories
2. Cycle inventories
3. Buffer stock
4. Seasonal
5. Decoupling
4
• These five basic functions of inventory are fundamental to
1. Achieving smooth flow
2. Reasonable equipment utilization and materials
handling costs.
3. Maintenance of good customer services
• Periodically, an inventory audit of the five functions must
be performed to compare the “should have” and the actual
investment (units) for each function.
• Inventory is treated as a current asset for accounting purposes.
MATERIALS REQUIREMENTS PLANNING AND
CAPACITY REQUIREMENTS
• When planning to acquire materials, whether raw

materials, component parts, or finished goods,
the capacity must considered for both the buyer
and seller.
• Each materials acquisition must be translated
into capacity requirement by the supplier.
• Capacity –the number of units a firm should
produce under normal conditions.( finished goods or
end item values)
• In general, inventory is stored capacity.
THROUGHPUT TIME
• The delay between receipt of raw materials and

the availability of the finished goods produced
from is Throughput time.
• TPT should be as short as possible. Consumers prefer
to obtain goods or services in the shortest possible
time.
• If TPTs are long, it is more likely that the
customer’s requirements will change.
ORDER CYCLE
• Order Cycle as a Link, A link or pipeline that facilitates the flow

of information and materials
• Characteristics
• Length :The distance between supplier and customer
• Modes :Method by which information is sent and material moved
• The Trade-off
• Speed, reliability, inventory, and cost
The shorter the order cycle, the quicker the customer is served and the less
inventory the customer needs. If you have a reliable supplier who can
supply you every day, you would order just enough to satisfy your daily
requirement.
8
ORDER CYCLE
Order Cycle as a Set of Activities
• Activities
• Order preparation by Customer
• Order transmission by Customer
• Order processing by Supplier
• Order transportation by Supplier
• Order receipt by Customer
Tasks:
1. Physical receipt
2. Unloading
3. Inspection
4. Storage location decision
5. Move to storage
6. Documentation
9
LEAD TIME
• Lead time ‫اﻟﺘﻮرﯾﺪ ﻓﺘﺮة‬: the time between

issuing an order and receiving it.
• If lead time is short the customer will be
more satisfied.
CUSTOMER SATISFACTION
•
Purchasing Management and Logistics Chapter
8
“Supplier Selection and
Evaluation”
Instructor: Arafat
ALjebrini
1
Current Global Trends
▪ Produce quality products at reasonable prices
▪ Buying organizations are reducing the supplier base
▪ Increasingly important role for the purchasing and

professional purchasing managers
4
▪ The Process:
1. Determine what product or service is under
consideration.
2. Consider the in-house capability.
Benefits of Outsourcing
▪ Vertical integration
▪ Expanding into areas that are at different points on the same
production path
▪ More control vs. Greater competence requirement in each of the areas
▪ Outsourcing
▪ A delegation of production capabilities
▪ Concentrate on true core capabilities vs. loss of control and non-
core capabilities
6
Outsourcing and Supplier Selection
▪ The selection of the correct supplier is the most

important purchasing activity.
▪ The buying firm must spend extensive time analyzing and

carefully selecting the correct supplier.
▪ Periodic supplier evaluations are needed to ensure

continuous supplier performance achievement.
7
The 4Pure Supply Management Relationships
1. Counter-productive relationships
▪ Lose-Lose
2. Transactional or competitive relationships
▪ Win-Lose
3. Cooperative or Collaborative relationships
▪ Win-Win
9
Key Suppliers Evaluation Criteria
• There are two main categories of supplier evaluations: process-based evaluations and
performance-based evaluations.
• The process-based evaluation is an assessment of the supplier’s production or service

process. The process-based evaluation assess the company before its product or
service has been delivered.
• Performance- based evaluations are based on objective measures of

performance( such as delivery reliability, cost and quality defect rate). Performance-
based evaluations assess the company after its product or service has been delivered.
Three Common Supplier Performance Based
Evaluation Systems
• The three general types of supplier evaluation systems in use today are:
– the categorical method, – the cost-ratio method, and – the linear
averaging method.
• In general, the guiding factors in determining which system is best are

ease of implementation and overall reliability of the system.
• It must be pointed out the interpretation of the results from any of

these three systems is a matter of the buyer’s judgment.
12
Advantages of Multiple Sourcing
▪ The main arguments for multiple sourcing are competition and assured supply.
▪ Multiple sources also can guarantee an undisrupted supply of parts. – If
something should go wrong with one supplier, such as a strike or a
major breakdown or natural disaster, the other supplier (s) can pick up the slack
to deliver all the needed parts without a disruption.
▪ Improve market intelligence and improved supplier evaluation
effectiveness.
15
Advantages of Single Sourcing
▪ The major arguments in favor of single sourcing are that

with the certainty of large volumes that the supplier can
enjoy lower costs per unit and increased cooperation and
communication to produce win-win relationships between
buyer and seller.
▪ Single sources should be able to provide lower costs per
unit compared to multiple sources by reducing the
duplication of operations in areas such as setup.
16
The End,,,
PURCHASING MANAGEMENT
CHAPTER 5
INVENTORY
MANAGEMENT
Instructor: Arafat aljebrini
Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights 1-1
reserved.
LEARNING OBJECTIVES
1. To learn the relationship between the

purchasing function and inventory control.
2. To learn the primary reasons for holding inventory.
3. To identify the necessary requirements for effective
inventory management.
4. To learn about ABC analysis.
5. To identify the cost components of the classical
EOQ model.
6. To learn the basic assumptions of the EOQ model.
7. To learn about quantity discounts.
8. To learn about service levels.
DEPENDENT VERSUS INDEPENDENT
DEMAND
• • In order to manage the various types of inventory, attributes
of the items first must be analyzed in terms of cost, lead time,
past usage, and the nature of demand.
• • The nature of demand is perhaps the most important
attribute. The nature of demand can be either independent
or dependent.
• • Independent demand is unrelated to the demand for other
items. In other words, an independent item must be
forecasted independently.
• • Dependent demand is directly derived from demand for
another inventoried item demand
Importance of Inventory Control
■ Five uses of inventory:

■ The decoupling function
■ Storing resources
■ Irregular supply and demand
■ Quantity discounts
■ Avoiding stockouts and shortages
■ Decouple manufacturing processes.
■ Inventory is used as a buffer between stages
in a manufacturing process.
■ This reduces delays and improves efficiency.
Copyright © 2012 Pearson Education

6-4
■ Storing resources.
■ Seasonal products may be stored to satisfy
off-season demand.
■ Materials can be stored as raw materials,
work-in-process, or finished goods.
■ Labor can be stored as a component of
partially completed subassemblies.
■ Compensate for irregular supply and
demand.
■ Demand and supply may not be constant over
time.
■ Inventory can be used to buffer the variability.
6-5
■ Take advantage of quantity discounts.

■ Lower prices may be available for larger
orders.
■ Extra costs associated with holding more against
inventory must be balanced lower
purchase price.
■ Avoid stockouts and shortages.
■ Stockouts may result in lost sales.
■ Dissatisfied customers may choose to buy
from another supplier.

6-6
Inventory Decisions
■ There are two decisions in

fundamental
controlling inventory:
■ How much to order.
■ When to order.
■ The major objective is to minimize total
inventory costs.
■ Common inventory costs are:
■ Cost of the items (purchase or material cost).
■ Cost of ordering.
■ Cost of carrying, or holding, inventory.
■ Cost of stockouts.
6-7
Inventory Cost Factors
ORDERING COST FACTORS CARRYING COST FACTORS
Developing and sending purchase orders Cost of capital
Processing and inspecting incoming
inventory Taxes
Bill paying Insurance
Inventory inquiries Spoilage

Utilities, phone bills, and so on, for the
purchasing department Theft
Salaries and wages for the purchasing

department employees
Supplies, such as forms and paper, for the Salaries and wages for warehouse
purchasing department employees
Utilities and building costs for the
warehouse
Supplies, such as forms and paper, for the
warehouse
Table 6.1
6-8
Inventory Cost Factors
■ Ordering costs are generally independent

of order quantity.
■ Many involve personnel time.
■ The amount of work is the same no matter the
size of the order.
■ Carrying costs generally varies with the
amount of inventory, or the order size.
■ The labor, space, and other costs increase as the
order size increases.
■ The actual cost of items purchased can vary
if there are quantity discounts available.

6-9
ABC CLASSIFICATION OF INVENTORY
ITEMS
• The purpose of ABC analysis is to divide the inventory into
three groups based on the overall inventory value of the
items.
• Group A items account for the major portion of
inventory costs.
• Typically about 70% of the dollar value but only 10% of the quantity
of items.
• Forecasting and inventory management must be done carefully.
• Group B items are more moderately priced.
• May represent 20% of the cost and 20% of the quantity.
• Group C items are very low cost but high volume.
• It is not cost effective to spend a lot of time managing these items.
ABC CLASSIFICATION
11
Summary of ABC Analysis
INVENTOR
Y GROUP DOLLAR INVENTOR ARE QUANTITATIVE CONTROL
USAGE (%) Y ITEMS TECHNIQUES USED?
(%)
A 70 10 Yes
B 20 20 In some cases
C 10 70 No
Table 6.8
Copyri
ght ©
2012
Pearso
n
Educat
ion
6-12
INDEPENDENT DEMAND
we are concerned with the control of end items.

Primary Inventory Functions
1. Pipeline inventory
2. Cycle stocks
3. Seasonal inventories
4. Safety stocks
5. Decoupling stocks
13
Economic Order Quantity
■ The economic order quantity (EOQ) model

is one of the oldest and most commonly
known inventory control techniques.
■ It is easy to use but has a number of
important assumptions.
■ Objective is to minimize total cost of
inventory.
Copyright © 2012 Pearson Education 6-14

Inventory Costs in the EOQ Situation
Mathematical equations can be developed using:

Q = number of pieces to order
EOQ = Q* = optimal number of pieces to order
D = annual demand in units for the inventory
item
Co = ordering cost of each order
Ch = holding or carrying cost per unit per year
Number of Ordering
Annual ordering cost = orders placed cost per
× per year order

6-15
Inventory Costs in the EOQ Situation
Mathematical equations can be developed using:

Q = number of pieces to order
EOQ = Q* = optimal number of pieces to order
D = annual demand in units for the inventory
item
Ch = holding or carrying cost per unit per year
Average Carrying cost
Annual holding cost = inventory per unit per
× year

6-16
Finding the EOQ
According to the graph, when the EOQ assumptions

are met, total cost is minimized when annual
ordering cost equals annual holding cost.
Solving for Q

Economic Order Quantity (EOQ) Model
Summary of equations:

Sumco Pump Company
■ Sumco Pump Company sells pump housings to
other companies.
■ The firm would like to reduce inventory costs by
finding optimal order quantity.
■ Annual demand = 1,000 units
■ Ordering cost = $10 per order
■ Average carrying cost per unit per year = $0.50

6-19
Sumco Pump Company
Total annual cost = Order cost + Holding cost

6-20
CLASSICAL EOQ MODEL
ASSUMPTIONS
1. Demand is continuous at a constant rate
2. Constant lead time
3. Constant unit price
4. Fixed-order cost per order

21
CLASSICAL EOQ MODEL
ASSUMPTIONS (CONT.)
6. Instantaneous replenishment
7. No shortages allowed
8. No demand uncertainty
9. No quantity discounts available

22
Reorder Point: Determining When
To Order
■ Once the order quantity is determined,
the next decision is when to order.
■ The time between placing an order and its
receipt is called the lead time (L) or delivery
time.
■ When to order is generally expressed as a
reorder point (ROP).
ROP = Demand Lead time for a

× per day new order in days
=d×
Copyright © 2012 Pearson Education L
6-23
Procomp’s Computer Chips
■ Demand for the computer chip is 8,000 per year.

■ Daily demand is 40 units.
■ Delivery takes three working days.
ROP = d × L = 40 units per day × 3

days
= 120 units
■ An order based on the EOQ calculation is placed
when the inventory reaches 120 units.
■ The order arrives 3 days later just as the
inventory is depleted.

6-24
Quantity Discount Models
■ Quantity discounts are commonly available.
■ The basic EOQ model is adjusted by adding in the
purchase or materials cost.
Total cost = Material cost + Ordering cost + Holding

cost
where
D = annual demand in units
C = cost per unit
Ch = holding or carrying cost per unit per
year
6-25
■Quantity discounts
Because are
unitcommonly
cost is nowavailable.
variable,
■ The basic EOQ model is adjusted by adding in the
Holdingcost.
purchase or materials cost = Ch =
IC
I = holding co s t as a percentage of the unit cost (C)
Total cost = Material cost + Ordering cost + Holding
cost
where
D = annual demand in units
C = cost per unit
Ch = holding or carrying cost per unit per
year
6-26
■ A typical quantity discount schedule can look like

the table below.
■ However, buying at the lowest unit cost is not
always the best choice.
DISCOUNT NUMBER
DISCOUNT QUANTITY DISCOUNT COST ($)
DISCOUNT (%)
1 0 to 999 0
5.00
2 1,000 to 1,999 4
4.80
3 2,000 and over 5
4.75
Table 6.3

6-27
Brass Department Store
■ Brass Department Store stocks toy race cars.
■ Their supplier has given them the quantity
discount schedule shown in Table 6.3.
■ Annual demand is 5,000 cars, ordering cost is $49, and
holding cost is 20% of the cost of the car
■ The first step is to compute EOQ values for each
discount.

6-28
Brass Department Store Example
■ The second step is adjust quantities below the

allowable discount range.
■ The EOQ for discount 1 is allowable.
■ The EOQs for discounts 2 and 3 are outside the
allowable range and have to be adjusted to the
smallest quantity possible to purchase and
receive the discount:
Q1 = 700
Q2 = 1,000
Q3 = 2,000

Brass Department Store
The third step is to compute the total cost for each

quantity.
ANNUAL ANNUAL ANNUAL

UNIT ORDER MATERIA ORDERIN CARRYIN
DISCOUNT PRIC QUANTIT L COST ($) G COST ($) G COST ($)
NUMBER E (C) Y (Q) = DC = (D/Q)Co = (Q/2)Ch TOTAL ($)
1 $5.00 700 25,000 350.00 350.00 25,700.00
2 4.80 1,000 24,000 245.00 480.00 24,725.00
3 4.75 2,000 23,750 122.50 950.00 24,822.50
The final step is to choose the alternative with the

lowest total cost.
Table 6.4
6-30
The END,,,
6-31
CHAPTER 6
JUST- IN-TIME (LEAN)
PURCHASING
INSTRUCTOR: Arafatj Aljebrini

Learning Objectives
1. To understand lean production systems.

2. To identify the relationship between JIT and purchasing.
3. To identify critical JIT-purchasing advantages.
4. To identify the activities needed to implement JIT
purchasing.
5. To critically analyze the impact of JIT purchasing on a
buying firm.
Introduction to Lean Purchasing
► JIT: An approach to purchasing that

requires long-term agreements with few
suppliers.
► The key lean principles focus on people,
postponement, efficiency, and the elimination of
waste. All of these key business principles have a
direct effect on the purchasing function.
Lean Purchasing
•JIT has evolved as a novel manufacturing concept

based on a philosophy of trust and commitment of
the entire organization. The benefits of
implementing a JIT system impact all entities
involved in supply-chain management
Lean Production Systems
• In its simplest form, “the manufacturing process” is a
composition of the material flows. Just-in-time (JIT) is
designed to manage the flow of materials, components, tools,
and associated information.
• JIT is also referred to as lean production.
• An organization driven by a JIT philosophy can improve
profits and return on investment by reducing inventory levels,
reducing variability, improving product quality, reducing
production and delivery lead times, and reducing setup costs.
• The JIT (lean) system is a powerful management tool that could
easily determine the success or failure of the manufacturing
system.
Significance Of Lean Purchasing
• The cost of raw materials has traditionally, been a serious
concern of top management.
• Over the years, material cost as a proportion of total cost of the
end product has risen sharply and is as high as 80 percent in some
instances.
• Consequently, the role of the purchasing function in a
manufacturing organization has become increasingly
important.
• The just-in-time production control system focuses on reducing
both raw materials and work-in-process inventories.
• Specifically, JIT requires that the right materials are
provided to work stations at the right time
JIT
PURCHASING
• The function of purchasing is to provide a firm with
component parts and raw materials.
• Purchasing also must ensure that high-quality products are
provided on time, at a reasonable price.
• A comparison of critical elements associated with
JIT purchasing and traditional purchasing
approaches follows:
Comparison between TP and JIT
Purchasing
► Reduced Order Quantities.
• One of the most crucial elements of the just-in-time
system is small lot sizes.
• Traditionally, long and infrequent production runs have in the
past been considered beneficial for the overall productivity of a
manufacturing organization.
• However, long production runs usually lead to high levels of
raw-material and finished-goods inventories.
► Frequent and “on-time” Delivery Schedules
• Supplier performance can be measured more accurately under
the JIT purchasing approach compared to the traditional one.
• In order to obtain small lot sizes for production, the order
quantity size needs to be reduced and corresponding delivery
schedules need to be made more frequent.
► Reduced Lead Times
• To be able to maintain low inventory levels, it is critical that
replenishment lead times be as short as possible.
• The JIT philosophy inherently attempts to reduce lead times for order
completions. Under traditional purchasing practices, the lead time is made
up of the following components: paperwork lead time, manufacturing
time for supplier, transportation lead time, and time spent on receiving
and inspection.
► High Quality of Incoming Materials.
► Reliable suppliers.
Comparison between TP and JIT
Purchasing
Traditional Purchasing JIT Purchasing
Order quantities Based on trade-offs between Based on small lot sizes for
ordering and Carrying costs production
Delivery schedules Infrequent, primarily infrequent Frequent because of small
because of high ordering costs lot sizes and low ordering
involved costs
Delivery windows Relatively wide Very narrow
Delivery lead times Relatively long and relaxed Stringent and reduced
significantly
Parts quality Responsibility of quality function Responsibility of supplier
in the organization
Supplier base Fairly broad Considerably smaller
Purchasing Benefits
► Reduced Inventory levels. JIT purchasing facilitates reduction

in inventory levels and the associated inventory holding costs.
Which basically stresses continuous improvement and
elimination of waste.
► Improved Lead-Time Reliability. • Compared to traditional
purchasing approaches, delivery lead times under the JIT system
are considerably shorter.• Lead-time reliability is usually much
better for just-in- time systems.• This implies higher levels of
customer service and lower safety stock requirements for the
company.• Lower levels of safety stock contribute significantly
to reduced working capital requirements for the firm.
► Scheduling Flexibility. • JIT emphasizes scheduling flexibility
by aiming for reduced purchasing lead times and setup times.•
Such flexibility prevents confusion in the manufacturing plant
and offers unique competitive advantages to manufacturing firms
since they are capable of adapting to changes in the environment
more quickly.
► Improved Quality and Customer Satisfaction •JIT
purchasing results in improved quality and corresponding
levels of higher customer satisfaction.• High-quality incoming
materials result in savings associated with reduced rework and
scrap
► Reduced Costs of Parts• As cooperation and relationships between
suppliers and manufacturers build up in a JIT system, so do the
opportunities to conduct an extensive value analysis and focus on
reducing the cost of parts purchased.• A comprehensive JIT progress
report indicates that supplier costs were reduced by 11 percent when
they adopted the JIT system in cooperation with their customers.
► Fewer suppliers
► Reduction in warehouses
► Dependable delivery
► More personal relationship with suppliers
► Long-term relationships that help to certify suppliers
► Receiving inspection is reduced and in some cases
eliminated
► Lowered variety in suppliers
► Reliable delivery schedules
► High quality materials used
► Reduced waste
Cost Decreases
► It is well documented that JIT reduces physical inventory level
Reductions in physical inventory will also have a favorable
impact on:1. Reduced insurance premiums associated with the
storage of inventory.2. Reduced inventory holding costs 3.
Reduced labor cost in store rooms and material handing costs.4.
Reduced clerical and administrative costs.5. Reduced waste
from the manufacturing process.6. Reduced obsolescence
costs.7. Reduced deprecation of handling and storage
equipment. Each of the cost savings will result in a leaner more
profitable operation
Implementation of JIT Purchasing
► Some of the common problems associated with implementing the JIT
system are as follows.
1. Lack of cooperation from suppliers. The suppliers see little incentive
in adopting the JIT approach when the primary benefits of the program go to
the buyer.
To increase cooperation from suppliers, the following supplier’s expectation
should be met: 1. A long-term business agreement 2. A fair return on
supplier investment 3. Adequate time for thorough planning 5. Correct and
firm specifications 6. Parts designed to match supplier’s process capability 7.
Smoothly timed order releases
8. A fair profit margin 9. Fair dealings with regard to price 10. A
minimum number of change orders 11. Prompt payment of invoices
2. Lack of top management support• Implementation of the JIT
philosophy requires a cultural change in the organization.• Such a
concept cannot be implemented successfully without total support
from top management.• However, another survey of U.S.
manufacturing firms indicated that 48 percent of the firms did not
receive total support from top management in their efforts to
implement the just-in-time manufacturing system. To solicit top
management support persuade them to visit companies that
implement JIT and to see the positive outcomes of implementing it.
3. Lack of employee readiness and support• Many firms report
lack of support from their employees as being one of the major
problems encountered in the implementation of JIT (Lean)
purchasing.• Very often, such resistance is encountered because the
employees are required to change their long-standing work habits,
or because they interpret the new system as being a threat to their
jobs.• Also, the JIT system requires most employees to assume more
problem-solving responsibilities on the job, which may lead to
additional frustration.
4. Lack of support from design engineering personnel
• Design engineering is responsible for making technical
specifications for the materials a company buys.• Quite often, the
purchasing function in an organization does not receive adequate
support from engineering functions, and, as a result, purchasing is
often unable to advise suppliers on material quality design
options.• Thirty-nine percent of the firms surveyed using JIT
practices in the United States indicated that they had serious
problems regarding lack of support from engineering
5. Low product quality• If suppliers fail to provide materials of
adequate quality on a regular basis, production
slow-downs and stoppages will occur regularly.• The study reports
that 53 percent of American manufacturing firms implementing JIT
cited this factor to be a major obstacle
6. Lack of support from carrier companies• The slide shows the
huge sums of money that the purchasing function of some major
firms spends every year in order to move materials in and out of the
factory.• Few buying firms, however, work closely with carriers to
develop long-term relationships that provide for highly structured
delivery schedules that lower costs for the buying firm.• Buyers
have traditionally accepted terms offered to them by the carriers
with regard to their inbound freight.
7. Lack of communication• Effective development and
implementation of the just-in-time system requires integration of
important functional areas such as purchasing, manufacturing,
quality, production, and transportation.• Lack of proper
communication among these areas poses a major obstacle to the
implementation of JIT.• While there is no easy solution to this
problem, the purchasing function in an organization must assume
the responsibility of calling on top management regularly for
leadership and support.
Demands on Purchasing of JIT
► Reduced number of suppliers

► Stable and good communication throughout a firm
► Locating suppliers nearby because of the more frequent
delivery schedule required.
► Long-term relationships
► Helping suppliers to increase quality
► Not to get hung up by single sourcing
► Buying from small firms
The End
11
3. On time shipment.
4. On time receipt. Customers place orders based on need
dates. Sometimes the need date is called the “drop dead
date”. ”if I don’t receive the order by the 15th of the month,
I’m dead.”
5. Complete shipment.
6. Quality
7. Flexibility: is the extent to which a supplier
can accommodate a customer’s request.
8. Responsiveness to inquiry.
CUSTOMER SATISFACTION
• To summarize, customer want

1. Short lead time.
2. Good quality.
3. High value.
4. Customized products.
5. Postal service.
COSTS OF CUSTOMER SATISFACTION
OF “GOOD QUALITY”
1. Reducing prevention costs.
2. Reducing inspection costs.
3. Minimizing rework or renewal costs.
4. Building supplier’s reputation.
5. Gaining of a customer’s capacity.
6. The customer vows ‫ ﯾﺤﻠﻒ و ﯾﻘﺴﻢ‬again to buy the product.
Purch
asing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
1-14
THE COSTS OF CUSTOMER
DISSATISFACTION OF “POOR QUALITY”
1. Increasing prevention costs.
2. Increasing inspection costs.
3. Maximizing rework or renewal costs.
4. damaging supplier’s reputation.
5. Loosing of a customer’s capacity.
6. The customer vows ‫ ﯾﺤﻠﻒ و ﯾﻘﺴﻢ‬never again to buy the
product.
Purch
1-15
QUALITY
•Quality means meeting

customer’s expectation.
•Quality means zero defects.
•Quality means free.
•Quality means fitness for use.
•Quality means when customer come back
and products don’t.
FACTORS CONTRIBUTE TO A
CUSTOMER’S PERCEPTION OF QUALITY
1. The reputation of the supplier is important.
2. Advertising.
3. Customers often believe that high-priced materials are
also high in quality.
Classification of products:
• Best buy
• Acceptable
• Not acceptable.
“Best buy” implies a product with high value. Value, in turn, is
the ratio of quality and price.
Purch
1-17
Value=(Quality/price)×100
Suppose we have comparable products of three
manufacturers. The quality ratings and prices of the three
products are shown below:
*Best buy
Quality is a value in the range 1to 10 with 10 being the highest
possible rating.
Product Quality Rating Price Value

A 9 $110 8.2*
B 7 $137 5.1
C 7 $105 6.7
PRODUCT DESIGN
• Design is setting the specifications for a material or product.

• Specifications result in the functional and aesthetic
characteristics of the product.
• A product designer’s job is to capture, in the product’s
design, the expectations of the customer.
• A Materials manager’s job is to ensure that products are

made in the least costly way so that the item qualifies as a
best buy.
19
QUALITY LEVEL
• Quality level is the degree to which the product

functionally satisfies customers.
• Approaches to quality
• Subjective quality
• Objective quality
• The degree to which material conforms to specifications
• High quality products must both:
• Conform closely to specifications
• Objective Quality
• Satisfy consumer expectations
• Subjective Quality
• However, objective quality can be too high.
SPECIFYING MATERIALS
• Disagreements between supplier and customer about

quality often stem from misunderstanding about material
specification.
• Suppliers frequently interpret specifications in ways
customers never intended.
• Qualified suppliers, given identical specifications.
• Raw Material-- theses are semiprocessed materials intended
for further processing. Called commodities ‫ ﺳﻠﻊ و ﺑﻀﺎﺋﻊ‬which
are homogeneous. The output of one producer is
indistinguishable from that another.
• For example: raw stock, oil, coal, copper, wheat, lumber
and cotton.
• Purchased Parts– which include semifinished items that
will be further processed and finished materials that will
become components of finished end items.
• The usual way of specifying purchased parts in
a made-to-order environment is with a graphic
description-engineering drawings.
• In a make-to-stock environment the purchased parts are
specified by an industry or independent test
organization
MRO MATERIALS AND
SPECIFICATION
• Maintenance Materials
• Periodical expected replacement in a piece of equipment
• Resupply by original equipment manufacturer
• Specified by manufactured part number and the
model number of the unit
• Repair Materials
• Unexpected replacement
• Usually not carried as inventory
• Specified by various ways such as drawings
and photographs
23
MRO MATERIALS AND SPECIFICATION
(CONT.)
• Operating Supplies
• Essential parts of the end item
• Unit value or size is too small to plan or
control usage unit by unit
• Standard items
• Specified by manufacturer or industry codes
24
The End,,,,

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Purchasing management

Instructor: Arafat AL-JIBRINI

1. To identify the activities of materials management.

• Definition - Materials management is the

• The purpose of materials management

• When planning to acquire materials, whether raw

• The delay between receipt of raw materials and

• Order Cycle as a Link, A link or pipeline that facilitates the flow

• Lead time ‫اﻟﺘﻮرﯾﺪ ﻓﺘﺮة‬: the time between

▪ Produce quality products at reasonable prices

▪ Buying organizations are reducing the supplier base

▪ Increasingly important role for the purchasing and

▪ The selection of the correct supplier is the most

▪ The buying firm must spend extensive time analyzing and

▪ Periodic supplier evaluations are needed to ensure

• The process-based evaluation is an assessment of the supplier’s production or service

• Performance- based evaluations are based on objective measures of

• In general, the guiding factors in determining which system is best are

• It must be pointed out the interpretation of the results from any of

▪ The major arguments in favor of single sourcing are that

Instructor: Arafat aljebrini

1. To learn the relationship between the

■ Five uses of inventory:

Copyright © 2012 Pearson Education

■ Take advantage of quantity discounts.

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■ There are two decisions in

Bill paying Insurance

Inventory inquiries Spoilage

Salaries and wages for the purchasing

■ Ordering costs are generally independent

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we are concerned with the control of end items.

■ The economic order quantity (EOQ) model

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Mathematical equations can be developed using:

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Mathematical equations can be developed using:

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According to the graph, when the EOQ assumptions

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Total annual cost = Order cost + Holding cost

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1. Demand is continuous at a constant rate

2. Constant lead time

3. Constant unit price

4. Fixed-order cost per order

9. No quantity discounts available

ROP = Demand Lead time for a

■ Demand for the computer chip is 8,000 per year.

ROP = d × L = 40 units per day × 3

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Total cost = Material cost + Ordering cost + Holding

■ A typical quantity discount schedule can look like

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■ The second step is adjust quantities below the

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The third step is to compute the total cost for each

ANNUAL ANNUAL ANNUAL

2 4.80 1,000 24,000 245.00 480.00 24,725.00