Page 321 - DMGT501_OPERATIONS_MANAGEMENT

Unit 14: Purchasing

Notes
Sourcing Strategy
The company official explained that the reason for setting up its purchasing office now
was mainly due to the integration of its worldwide sourcing operations from January this
year in which Indian vendors were also being included. Fiat expects the strategy would be
central in helping the group achieve its growth and margin expansion plan for 2007-2010
under which it plans to buy €8.5 billion of components from the 'best-cost countries',
including India and China by 2010.
Mr Coda said that the components will be related to engine components - gears, axles,
castings, glass in which India has a cost advantage.
"We have an engine plant in Poland that can produce 800,000 units. So there is a huge
opportunity to supply engine parts there," he cited.
Fiat is already engaged with 50 suppliers in the domestic market for global sourcing. But,
the company did not elaborate on the expansion plan of their supply base.

The international purchasing office would be headed by Mr Neeraj Hans with a team of 15
employees which is expected to grow to 50 by the year-end.
Source: thehindubusinessline.com

14.2 Purchasing Cycle

Purchasing can be both from the internal supply chain and the external supply chain, however,
the purchasing department normally is associated with the external supply chain. Purchasing
identifies, selects and evaluates potential suppliers, develops detailed specifications for the
products or services needed by a firm, certifies the quality of supplier's goods and services,
negotiates contractual terms and conditions, and develops long-term relationships with key
suppliers. Sourcing activities ensure that the company has suitable sources for the goods and
services it needs. In effect, purchasing activities link a firm with its upstream suppliers. Purchasing
has a dual role, one is that of a buyer and the other is a facilitator and an external liaison with
suppliers. The primary functions of purchasing are in the following areas:

1. Defining specifications for the purchased good or service
2. Developing criteria for supplier selection
3. Classifying suppliers according to performance
4. Evaluating the make or buy decision

5. Expediting and follow-up

14.2.1 Defining Specifications

Specifications for goods specify the physical dimensions of the part, tolerances that will allow
the part to fit with other parts, strength and durability, size and shape and the required
performance levels. Though setting these standards begins in design, purchasing should carry
through to ensure that the acquired services or goods will do the job. The drawings and tolerances
should be clearly defined and not subject to different interpretations.
In some cases, designers may specify tolerances that cannot be met or that can be met only with
a significant increase in purchase price. The purchaser may have firsthand knowledge about
possible alternatives that will cost less. Because this is often the case, input from the purchasing
department in the early stages of product design can be useful and enhance the speed of product
development and new product introduction.

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