At this point, we deal with the topics of ‘‘purchasing price’’ and ‘‘supply cost,’’ the latter related to direct and consumable materials.
Purchasing price is only a part of total supply cost, even if it is the most important part.
A lower purchasing price does not necessarily lead to a lower supply cost, in case of higher costs due to specific delivery conditions or supplied product quality level (production rejects or reworking during production process or in after sales assistance). In critical situations, it is necessary to investigate on ‘‘non qual- ity’’and/or ‘‘low service level’’ related costs.
The scheme in Fig.7.3 represents the purchasing cost composition that is normally the most relevant part of User/Purchaser ‘‘variable transformation cost’’.
The gross profit is to cover the company’s general expenses charged to the supplier, including R&D (except what is charged to the purchaser, on specific initiative), as well as taxes and working capital remuneration.
During negotiations, the ‘‘buyer’’ tries to obtain from the supplier a detailed proposal about costs, so that benchmarking analysis can be easily run. This is necessary specifically when it is not possible to use purchasing tenders, as a consequence of constraints on supply assignment. Either way, the ‘‘buyer’’ nor- mally operates in relation to well-defined cost targets, assigned by the Purchaser Department (once cost/benefit analysis has been run).
Let us now see the composition of total supply cost for ‘‘direct materials’’, as shown in Table7.3
To evaluate the supply process of direct materials, it is necessary to compare the several supply sources, considering all the above items of cost.
Normally, an accounting system is unable to process data related to indirect costs automatically (bullets 2., 3., 4. and 5.). As a result, it is necessary to run specific extra-accounting analysis, to examine details of specific critical situations.
Indicators normally used to evaluate Purchasing Department ‘‘performance’’ are:
A. Economic Indicators
1) Purchasing Effectiveness=annual incidence of economy on purchasing price, considering the same product and raw materials and labour cost factor trends, according to statistical data recognized by the company.
2) Cost Target Achievementrelative to new products (evaluation shared with the company’s other departments in charge of the Purchasing process).
PURCHASING COST
= VARIABLE TRANSFORMATION
COST (FOR PURCHASER) PRODUCT’S RAW MATERIALS AND
COMPONENTS REQUIREMENT (SUB-FORNITURES)
TRANSFORMATION PROCESS ADDED VALUE (included depreciations in charge to Producer)
SOLD PRODUCTS DELIVERY AND WARRANTY COST
GROSS PROFIT
Fig. 7.3 Cost of sale composition for a supplier
The above indicators are checked and elaborated by the Finance and Administration Departments.
B. Indirect Indicators
3) Supply Quality Level Index (comparison with annual average values) according to statistical evaluations made by the Quality Department.
4) Supplier Service Level Index, according to statistical evaluations made by the Supply Chain Management Department, by applying criteria demon- strated inSect. 6.6.
C. Functional Indicators
5) Lead Timebetween purchasing request and order emission ‘‘on initiative’’.
6) Supplier Range Management Effectiveness, equal to the reduction of number of suppliers and the ‘‘turn-over’’, obtained by selecting and intro- ducing new competitive sources of supply.
7) Purchasing Burden Cost Incidenceon value of managed supplies.
In addition to the above-mentioned indicators, it is important to estimate the achievement of quality targets and new product ‘‘time-to-market’’, which depends on cooperation of the supplier.
7.7 ‘‘E-procurement’’ Techniques
In Sect. 2.3, we saw the importance of an information technology system for integrated production system management (PDM system). The order acquisition process is also included in this.
The introduction of ‘‘E-Business’’ techniques, supported by the Internet and Intranet, allow for an efficient process of research and assignment of orders to the suppliers, particularly for direct and consumable materials, the latter treated as Table 7.3 Composition of total supply cost
1. Supply direct costs Purchasing price, included cost for packaging and transport for deliveries to the facilities charged to the suppliers 2. Indirect costs for logistics
management
Costs for transport to delivery points near to final user plants, costs for receiving, warehousing and transferring of material to manufacturing systems
3. Costs for ‘‘non quality’’ Costs consequent to defective materials and components of supplied products
4. Costs for ‘‘lack of service’’ Costs consequent to interruptions in production process due to delays in delivery
5. Fixed costs for ‘‘material management’’ departments
Purchasing, direct material management and arrival material qualification department
Commodities, and for standard working means. For this reason, we deal with utilization of these techniques in the following ways.
By ‘‘e-Procurement’’, we mean the order acquisition process for goods and services using WEB networks and modern ‘‘information technologies systems’’
described inChap. 2: the process begins with research into the most convenient supplier, including order acquisition and emission (consequent to transaction), and ending with final delivery verification, which activates automatic payment and invoicing.
A Selected Suppliers catalogue is managed through the company’s intranet, so that transactions and orders can be done directly, assuring privacy of information and constant control of the supply process through the company’s information technology system.
Benefits obtainable from the utilization of a modern ‘‘e-Procurement’’ system can be:
• optimization of processes, with purchasing cost and time reduction;
• ‘‘on line’’ availability of updated information about goods and service offers;
• possibility of running purchasing tenders through ‘‘on-line pools’’;
• automation of communication between Suppliers and Users, even those at great distances;
• electronic management of documents (offer requirements, orders, technical specifications…), reducing the need for paper documentation;
• integration between Purchaser and Supplier information technology systems.
This method allows minimization of cost related to information and adminis- tration in Purchaser/Supplier relationships. The difficulties in the adoption of
‘‘e-Procurement’’ are due to the characteristics of pre-existing information tech- nology systems and data protection issues.
The utilization of these techniques is very useful for the acquisition process but cannot be independent of a supplier’s evaluation criteria for capacity and avail- ability, as specified inSect. 7.4.