Purchasing Targets

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Purchasing Targets

Seneca

'If a man knows not what harbor he seeks,
any wind is the right wind'.

Lucius Annaeus Seneca.

How a buyer knows if he (she) did a good job ?
The answer seems very simple: A buyer did a good job if he (she) did better than the target. So, a Purchasing Target serves to measure the Purchasing Performance.

A Purchasing Target has a 2nd mission.It serves to keep and survey the profitability of the company.

The question is how to fix a correct purchasing target.

In this section, you will have some information about this fundamental point.

Purchasing Targets - Transport

Francis SOLER R

Define Global Transport Purchasing Targets at the beginning of every semester.

By "global" I understand for all items.
Define this Global Transport Purchasing Targets by volume (cubic yard or meter) or weight (kilo, pound or tonne) for all the items.

- Consider in your global calculation all these factors :
- Volume or Weight best transport batch
- Frequency of the loop
- Transport type
- Customs fees (if any)
- Customs taxes (if any)
- Distance (in kilometers or miles)
- Load capacity.
- Start point of the transport (city and country)
- End point of the transport (city and country)

Elements for a Purchasing Item Target

Francis SOLER R

A Purchasing Global Item Target is always linked to a single item to be delivered in a single and specific location in your company.

There are six main elements in a Global Purchasing Item Target.

A number: 60

A Currency: US Dollar

A City name: TOLEDO, OH 43612

A Country name: USA

A Purchasing Unit: Gallon

A Quantity: 100

Scope of Purchasing Targets

Francis SOLER R

There are two different targets for two different scopes:

The IBP Target: It is the target defined in the Initial Business Plan.

It is the target in the development phase.

If your company is developing a new product for the market or for one specific customer, the top management is defining an Initial Business Plan.

In this document we make assumptions concerning the sales price, production volumes, and... purchasing targets!

The perimeter of these targets can be for one final product or for a list of clearly defined items. (see Item Purchasing - Card ID)

Who is defining the Purchasing Targets?

Francis SOLER R

Defining purchasing target is an internal negotiation process between the purchasing dpt and the top management.

The process can be carried out in three phases:

1st Phase: Input

In this phase the buyer is looking for information about the item:

Engineering Dpt.: Raw Material, Technical specifications and drawings.
Marketing and Sales Dpt.: Forecast quantities and historical quantities.
Controlling Dpt.: Historical quantities and current market prices for the item itself or similar items
Current Supplier and/or Potential Supplier : Prices and process proposals.
Production Dpt: Process productions.
R & D Dpt: Alternative products and alternative process.
Logistics Dpt : Current and alternative packaging specifications and transport requirements.

At the end of this phase the buyer can propose a Manufacturing Target and Logistics Targets (packaging and transport).

Purchasing Targets and Budget

Francis SOLER R

If you are spending some of your time defining your Purchasing Targets by Item, you will save later a lot of time while calculating your purchasing budget.

Let's go step by step.

First, you define your purchasing targets by item, manufacturing and logistics.

You can say at this moment that it represents a lot of administrative tasks.

Let's look closer at this point.

I will make two assumptions:

Smart (ER) Purchasing Targets

Francis SOLER R

Define for you, for your team, for every member of your purchasing team and for yourself SMART purchasing targets.

If this is the first time you hear something about SMART (or SMARTER) criteria, I recommend you to follow this link to Wikipedia.

Now, we need to see how to apply this to the purchasing targets.

Specific: Define short perimeters to act. No more that 5 by semester.
Examples :
- Reduce the Purchasing Costs
- Reduce the number of suppliers.

Changing Purchasing Targets

Francis SOLER R

So, the Item Purchasing Targets has been defined but sometimes you need to change it.

Let's see now several reasons:

a) In general you need to UPDATE your purchasing targets at least once by year but I recommend twice (in May for budget Semester 2 current year and in October for budget Semester 1 next year)

This updating have to follow the (rates of annual growth) cost of the life or at least the (rates of annual growth of) cost of the life in your industrial sector.

If your production plants are located in several countries I recommend to use the rate for every specific country.

In some cases you need to consider scenarios for specific raw materials or new technologies.

Hierarchy and Types of Targets

Francis SOLER R

You can define several types of targets for one single item. It depends of the amount of information you want to manage.

Purchasing Global Item Target: (by default Current)

It represents the highest level. It describes the maximum price accepted for one specific item to be delivered in one specific site.

You can split the Global Purchasing Item Target in two different targets.

Purchasing Budget Construction

Francis SOLER R

Maybe you think that fixing purchasing targets by item is a time-consuming task for nothing, I already wrote a post about the benefits, but now I would like discuss this point in relation with budget construction.

In my opinion, defining Purchasing Targets by Item is the best way to build your purchasing budget. This budget will be realistic and transparent, and will constitute a valuable tool.
Think about how your purchasing budget is built today. I am sure that you are using a 'top-down approach', considering last year’s expenses, the news from the market and expectations from your marketing and sales staff. With this kind of 'top-down approach, nobody knows what is behind the figures at the end of the day, or at me middle of the year.

I am proposing a bottom-up approach where the final result is the consolidation of all the needs and targets item by item.

Let's see how to build your budget with your purchasing targets.

Buyer Web Tool

Purchasing Targets - Transport

Elements for a Purchasing Item Target

Scope of Purchasing Targets

Who is defining the Purchasing Targets?

Purchasing Targets and Budget

Smart (ER) Purchasing Targets

Changing Purchasing Targets

Hierarchy and Types of Targets

Purchasing Budget Construction

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