Page 163 - DMGT525_MATERIALS_MANAGEMENT

Materials Management

Notes the most important factor. Where material stability is not a problem, further considerations
need to be made: Will demand for the material change significantly in the near term? Are
funds available to finance forward purchases? Are materials-handling equipment and
warehousing facilities available if necessary? Having satisfied questions like these, a
conscientious buyer can maximize corporate assets utilization through forward buying
techniques. This case will focus on the use of forward buying in anticipation of a price
increase.
Forward buying in this case is done to minimize the impact of a price increase, which is
another way of effectively delaying the price increase for a period of time. To what extent
(in terms of amount of material or forward period of time) should forward buying be
done? It should be done to the extent that it maximizes asset utilization—the net savings
accrued as a result of the forward purchase is maximized against having made no forward
purchase at all. How does a purchasing agent determine how far ahead to buy? One would
expect the net savings obtained to first increase with each increment purchased, due to low
price advantages. Then, as additional increments are purchased, the savings should decline,
due to cost disadvantages. To do the job well, the purchasing agent must be able to
identify the purchase quantity that generates the maximum savings. In order to identify
the maximum savings, an equation must be developed which describes the various cost
factors and savings.

Question
Critically analyze the above case?

Source: http://connection.ebscohost.com/c/articles/4524039/forward-buying-profit-maximization

11.4 Summary

 Purchasing research is not only the study of substitute materials to get over a recent
problem of procurement, but also a long range study of the requirements of the present as
well as anticipated products.
 Cost aspects are useful when dealing with the supplier on a one-to-one basis.
 Price forecasting, based upon the time-series methods of computing trends and business
cycles, or based upon the understanding of the influence of various economic/business
parameters should be of some interest to the purchasing executive who would like to keep
the costs low.
 There are two basic approaches to forecasting prices: fundamental analysis and technical
analysis.
 Fundamental price analysis is based on the notion that the underlying supply/demand
conditions in a given market ultimately determine price.

 Technical analysis often deals with the timing of pricing decisions within a given price
range.
 Forward Buying’ which means buying the quantities now, but for the requirements of a
future period of time.
 With economic liberalization and therefore, competition with the multinational
corporations, prices and, therefore, costs have to be kept low.
 Management must decide whether a component, service, or finished product should be
produced in the firm’s own facilities or bought from an outside source.

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