Chapter 7
Planning and controlling Purchases and Materials Usage

It is appropriate that the proper amounts of RM. be on hand to meet the production needs. It should be planned in the following 4     sub-budgets:

1. Materials and parts Usage Budget- Necessary RM. needed for planned production (by product and region)
2. Materials and Parts Purchases Budget- The purchasing of RM must be planned in accordance to time of delivery and amount              (Quantity). There must also be a consideration for delivery times and the production cycle.
   
Ending inventories must be considered.

3. Materials and parts    inventory- Specifies the planned levels of inventory     (cost and quantity). A policy   must be outlined which     discusses the amount of s    afety stock.
4. Cost of materials and parts Used Budget- Planned cost of the materials used in the production process.

The goal of this process is to     have control of RM. and an accurate cost of the DM.
       
Control means:
    1. Proper usage of RM
    2. Reduction of Waste
    3. Quality Control of RM (and WIP)
    4. Negotiation of pricing
    5. Negotiation of delivery schedules



Direct Materials:
DM. that are an integral part of the finished goods
DM can be distinctly and identifiable traced back to
    to the RM from the finished goods. DM are usually a variable cost.
Indirect Materials:
IM. that are used on the     finished goods process, but are not an integral part.
They cannot easily be directly     traced to each product.
    Ex. Grease, glue, lubricants
The RM. budget must be created     to meet the production      budget . RM budget should be identified in terms of the      production plan and the             usage rates:
   
Usage rates are determined by:
    1. Past experience
    2. Engineering
    3. During the development of the product.



The bottom line in determining usage rates is that here must be
communication up and down the line. The primary lead is with the production manager
   
Realistic estimates and careful planning of RM. can reflect in tremendous cost savings.


Purchasing Budget:
1. The quantities of each RM.
2. The timing of Deliveries
3. Estimated cost- The     purchasing department should consider creating relationships with different     suppliers so that they
    can establish relationships.
   
Materials and Parts Inventory Policies
The following things should be considered:
1. Timing and quantity of     manufacturing needs
2. Quantity discounts
3. Availability of parts
4. Lead time
5. Perishablity
6. Storage Facilities and cost of Storage
7. Cash requirements
8. Expected changes in RM. prices
9. Opportunity cost
10. Protection against shortages

Economic Order Quantities (EOQ)
Reorder point-The point when the existing inventory level will sustain production during the waiting time of delivery.
       
Safety Stock
    Review example on Page 245



    Just in Time Purchasing   
    -Minimize inventory levels
    -Materials and parts are not purchased until needed

Estimating Unit Costs for RM.
    -Must be realistic
    -Historical data can be used to help
    -General economic trends may influence the cost
    -Future cost trends
    -Consider - Discounts,transportation, handling costs
   
Planning, coordinating, and control aspects of RM.
-Proactive vs. reactive
-Anticipate problems
    Coordination
-Purchasing and warehousing
-Ensuring that the received items are being properly
    invoiced from supplier
-STandards of quality
-Standard Cost
-Overstocking

Home work - 7.3 and 7.6
CHAPTER 7
KEY POINTS

1. RM AND PARTS BUDGET
2. RM AND PARTS INVENTORY
3. EOQ
4. JUST IN TIME
5. COST OF RM AND PARTS