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Four Buying Situations Routine order Procedural problem Performance problem Political problem Cost trade-offs to Be Considered by the Purchasing Executive Reducing Ordering Costs Results in a Smaller Economic Order Quantity Supplier Development Defined Objectives of Systems Contracts and Stockless Purchasing Lower inventory levels. Reduce the number of suppliers. Reduce administrative cost and paperwork. Reduce the number of purchases of small dollar value and requisitions that purchasers have to handle. Provide the opportunity for larger dollar volumes of business to suppliers. Provide for timely delivery of material directly to user. Standardize purchase items when possible. Key Performance Measures Price effectiveness Cost savings Workload Administration and control Efficiency Vendor quality and delivery Material flow control Regulatory, societal, and environmental measures Procurement planning and research Competition Inventory Transportation Copyright ? 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-* CHAPTER 12 Procurement * The savings associated with volume buying include: Lower per-unit purchasing prices Lower transportation costs Lower warehouse handling costs Lower order-processing costs Lower production lot quantity costs Lower stockout costs ± The costs of carrying inventory include: Capital costs associated with the inventory investment Inventory service costs (insurance and taxes) Storage space costs Inventory risk costs Cost savings associated with volume buying* Inventory carrying costs ? Source: Douglas M. Lambert and Jay U. Sterling, “Measuring Purchasing Performance,” Production and Inventory Management Review 4, no.6 (June 1984), p. 52. Reprinted with permission from PIM Review, June 1984. Copyright 1984 by T.D.A. Publications, Inc., Hollywood, FL. Lowest total costs (EOQ) Ordering cost Total cost Size of order Inventory carrying costs Annual cost (dollars) A systematic organizational effor
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