PRODUCTION REPORTING

Production reporting provides feedback of what is actually happening on the plant floor. PAC needs this information to establish proper priorities and to answer questions regarding deliveries, shortages and the status of orders. Once the data are collected, they must be sorted and appropriate reports produced. Types of information needed for the various reports include:

- Order status;

- Weekly input/output by department or work center;

- Exception reports on such thing as scrap, rework and late shop orders;

- Inventory status;

Due date – present date Lead time remaining

CR = Actual time remaining

Lead time remaining

=

- Performance summaries on order status, work center and department efficiencies and so on.

7 PURCHASING

7.1 INTRODUCTION

If purchasing is carried out effectively, all departments in the company are involved. Obtaining the right material, in the right quantities with the right delivery (time and place), from the right source and at the right price are all purchasing functions.

The purchasing department has the major responsibility for locating suitable source of supply and for negotiating price. Input from other departments is required in finding and evaluating sources of supply and to help the purchasing department in price negotiation. Purchasing is everyone’s business.

Purchasing and profit leverage

On the average, manufacturing firms spend about 50% of their sales dollar in the purchase of raw materials, components and supplies. This give the purchasing function tremendous potential to increase profits.

Income statement Income statement

(sales increases 10%) Income statement (reduced purchase cost)

Sales 100 110 100

Cost of good sold

Purchases (50%) 50 55 (-2%) 49

Other expenses (40%) 40 - 90 44 - 99 40 - 89

Profit before tax 10 11 11

If the firm can reduce the cost of purchases from $50 to $49, a 2% reduction, it would gain the same 10% increase in profits.

Purchasing objectives

Missed deliveries can create havoc for manufacturing and sales, but purchasing can reduce problems for both areas, further adding to profit. The objectives of purchasing can be divided into 4 categories:

- Obtaining goods and services of the required quantity and quality, - Obtaining goods and services at the lowest cost,

- Ensuring the best possible service and prompt delivery by the supplier, - Developing and maintaining good supplier relations and developing

potential suppliers.

To satisfy these objectives, some basic functions must be performed:

- Determining purchasing specifications: right quality, right quantity and right delivery (time and place);

- Selecting supplier (right source);

- Negotiating terms and conditions of purchase (right price);

Purchasing cycle

The purchasing cycle consists of the following steps:

- Receiving and analyzing purchase requisitions;

- Selecting suppliers. Finding potential suppliers, issuing requests for quotations, receiving and analyzing quotations, and selecting the right supplier;

- Determining the right price;

- Issuing purchase orders;

- Following up to assure delivery dates are met;

- Receiving and accepting goods;

- Approving supplier’s invoice for payment.

Receiving and analyzing purchase requisition. At a minimum, the purchase requisition contains the following information:

- Identify of originator, signed approval and account to which cost is assigned;

- Material specification;

- Quantity and unit of measure;

- Required delivery date and place;

- Any other supplemental information needed.

Selecting suppliers. For routine items, a list of approved suppliers is kept. If the item has not been purchased before, a search must be made. If the order is a small value or for standard items, a supplier can be found in a catalogue, trade journal, ...

Requesting quotations. For major items, it is usually desirable to issue a request for quotation. This is a written inquiry that is sent to enough suppliers to be sure competitive and reliable quotations are received. After the quotations are analyzed. For items where specifications can be accurately written, the choice is probably made on price, delivery and terms of sale. For items where specifications cannot be accurately written, the items quoted will vary. The quotations must be evaluated for technical suitability. The final choice is a compromise between technical factors and price. Usually both the issuing and purchasing departments are involved in the decision.

Determining the right price. The purchasing department is also responsible for price negotiation and will try to obtain the best price from the supplier.

Issuing a purchase order. A purchase order is a legal offer to purchase. Once accepted by the supplier, it becomes a legal contract for delivery of the goods according to the terms and conditions specified in the purchase agreement. The purchase order is prepared from the purchase requisition or the quotations and from any other information needed.

Following up and delivery. The supplier is responsible for delivering the items ordered on time. The purchasing department is responsible for ensuring that suppliers do deliver on time. If there is doubt, purchasing must find out in time to take corrective action. This might involve expediting transportation, alternate source of supply, working with the supplier to solve its problems or rescheduling production.

The purchasing department is also responsible for working with the supplier on any changes in delivery requirements.

Receiving and accepting goods. When the goods are received, the receiving department inspects the goods to be sure the correct ones have been sent, are in the right quantity and have not been damaged in transit. If the goods are received damaged, the receiving department will advise the purchasing department and hold the goods for further action.

A copy of the receiving report is then sent to the purchasing department noting any variance or discrepancy from the purchase order. If the order is considered complete, the receiving department closes out its copy of the purchase order and advises the purchasing department. If it is not, the purchase order is held open awaiting completion.

Approving supplier’s invoice for payment. When the supplier’s invoice is received, there are 3 pieces of information that should agree: the purchase order, the receiving report and the invoice. All discounts and terms of the original purchase order must be checked against the invoice. It is the job of purchasing department to verify these and resolve any differences. Once approved, the invoice is sent to accounts payable for payment.