Make vs Buy Decision

1. Make vs Buy Decision D0394 Perancangan Sistem Manufaktur Pertemuan IX - X

2. Average Manufacturing Costs • On average, manufacturing firms generate approximately 10% profit from operations. • Typical breakdown of total costs: • Labor (8%) • Materials (50%)* • Overhead costs (32%) • * On average, manufacturing firms spend about 50% of their sales dollar in raw material, component, and supply purchases.

3. Purchasing Objectives: Four Major Objectives of Purchasing: • Obtain the required quantity and quality of goods and services • Obtain the lowest cost • Ensure top notch service and timely delivery • Maintain good supplier relationships and Develop potential suppliers

4. Purchasing • No longer just order takers…. • Purchasing needs to know • material • performance • availability • suppliers 7

5. Purchasing Functions: • Determine purchasing specifications (correct quality, quantity, and delivery requirements) • Select the right source • Negotiate terms and conditions • Issuing and monitoring of purchase orders

6. Purchasing Cycle: • Receive and analyze purchase requisition • Select suppliers • Determine the right price • Issue purchase orders (PO’s) • Monitor PO’s • Receiving and accepting goods • Approving supplier’s invoice for payment

7. Purchasing Cycle Step 1: Receive and analyze purchase requisition Minimum Required Information: • Identity of requestor, approval, and charge number/account • Specification • Quantity and unit of measure • Required delivery date and place • Additional supplemental information

8. Purchasing Cycle Step 2: Select Suppliers • Routine items typically have preferred suppliers • New/unusual items may require vendor search and RFQ for comparison • Some companies require multiple source solutions (McDonnell-Douglas preferred 3, single source required justification documentation) • Many firms today are opting for fewer suppliers • Use of supply chain management is growing

9. Factories & warehouses End customer Supply Chain Management • Apply a total systems approach to managing the entire flow of • information • materials • and services Raw material suppliers 3

10. Partnership Relationship • Continuing relationship involving • a commitment over an extended time period, • an exchange of information, and • an acknowledgement of the risks & rewards of the relationship. 9

11. Purchasing Cycle Step 3: Determine the Right Price • Tied directly to supplier selection • Price negotiation- • Focuses on quantity (net and gross) • Frequency of orders • Total usage “Refunds” are becoming popular • Supplier maintained inventory (pay as you use philosophy)

12. Purchasing Cycle Step 4 & 5: Issue PO’s and Follow-up • POs are legal offers to purchase • Purchasing must follow-up on open PO’s • Monitor past due PO’s and critical need components • Work with suppliers • Take corrective action • Expediting components, alternative supply sources, reschedule production, etc.

13. Purchasing Cycle Step 6 & 7: Receiving and Paying Suppliers • Reconcile PO’s and receivers • Correct damages, variance or discrepancies • Verify information for payment • PO number • Receiving report • Invoice

14. Outsourcing • Purchased items account for 60 to 70% of the cost of goods sold. • Outsourcing allows firms to focus on their core competencies. • Organizations outsource when they decide to purchase something they had been making in-house. • Typically handled by materials management function. 4

15. Make or Buy • Current trend favors outsourcing all activities that do not directly represent or support core competencies. • Are there any dangers associated with aggressive outsourcing? What are the implications for JIT production? 5

16. Purchasing Inputs • Marketing • Engineering • Manufacturing

17. Functional Specifications • By Brand • By Specification • Physical and Chemical Characteristics • Materials & Methods of Manufacture • Performance • By Engineering Design • Miscellaneous • “Gimme one just like the last one”

18. Good Specifications • Are not to tight or loose • Allow for multiple sources • Assign responsibility

19. Supplier Selection • Types of Sourcing • Sole Source • Multiple Source • Single Source • Select based on: • Technical Ability • Mfg. Capability • Reliability • After sale service • Location • Price

20. Four Categories of Product • Commodities • Standard Products • Items of small value • Make to order items

21. Purchasing Anatomy • Specifications • Supplier Selection • Price Determination • Negotiation Procurement Purchasing • Order Release • Schedule Delivery • Follow up Schedule and Follow up

22. Price Determination “you get what you paid for” • Fair Price- One that is competitive, gives the seller and buyer an opportunity for profit • Fixed Costs- Costs incurred without respect to sales volume • Variable Costs- Costs directly associated with sales volume (labor, material, etc.) • Breakeven Point- The convergence of profit and loss. . . financial equilibrium

23. Break-Even Example Q:To make a particular component requires an overhead (fixed) cost of $5000 and a variable unit cost of $6.50/unit. What is the total cost and the average cost of producing a lot of 1000? If the selling price is $15/unit, what is the break-even point? A: Total cost = fixed cost + (variable cost/unit)(# of units) = $5000 + ($6.5 x 1000) = $11,500 Average cost = Total cost / # of units = $11,500 / 1000 = $11.50/unit Break-even point: Let X = # of units sold $15X = $5000 + $6.5X $8.5X = $5000 X = $5000 / $8.5 = 588.2 units