Purchasing administration

The act of buying is one of the oldest in humanity, when in the stone age it occurred to them to exchange one thing with another (or better known as barter), which is why purchases and sales are born.

In 1961, in the United States of America began to speak of the administration of materials, until after 20 years the administration and control of purchases matured.

In Mexico, said administration was incipient and lacerating in terms of its management, since 90% of the companies that operated were simply departments of placing orders, the requisitions came with suppliers already chosen in the technical areas, negotiations already prepared by other people, missing only the administrative paperwork carried out by the so-called purchasing department.

Logically, the people in charge of these departments were practical, they had no training in managing the area in which they were located; the functions they performed were completely detached from the purchasing function and, in general, the organization of the function itself was misplaced and completely out of place and out of control.

Today, many entrepreneurs have realized the above situation, so they decide to change their administrations, make their staff better prepared and involve them more in other related functions.

However, when the employers wanted to make their staff better prepared and involve them more in the area, it turned out to be a real disaster: the North American models of functions, flowchart, and hierarchy misapplied, they unraveled in departments of supply, provisioning, supplying, supplies, and even acquisitions in Mexico. All of them make up the shopping activity itself.

But what is buying? It is acquiring a thing in exchange for a certain amount of money. This description leads us to the administrative process; The purchasing department plays a very important role in operations management, so it is necessary to introduce ourselves in this matter.

1.1.1 Definition of purchases, importance.

The definition of purchasing as a profession within the industrial and commercial life of a business conglomerate is as follows: trading is the act of obtaining the product or service of the correct quality, at the correct price, at the correct time and in the correct place; up to this point, it is the definition used by specialized books, and the word "correct" can be replaced by "adequate", "fair" and / or "precise".

However, nowadays purchasing as such has evolved considerably and has become part of other concepts in many companies, such as acquisitions, supplies or materials, activities that include acquisitions and many others such as inventory and warehouse control.

Therefore, when giving a personalized definition of purchases in terms of business administration, it can be affirmed that buying involves the process of locating and selecting suppliers, purchasing products (raw materials, components or finished articles), after negotiations. on the price and payment conditions, as well as the accompaniment of said process to guarantee its compliance with the agreed conditions; and, in terms of marketing, buying is acquiring for a money price some good, right or merchandise.

Due to the aforementioned, perhaps the definition previously used in business administration may correspond rather to the concept of supply, procurement, supplies, materials, and the different activities that emanate from the same definition, may through the division of labor give rise to various departments, including purchases, all grouped under a more generic and / or complete name.

The word “maybe” is mentioned, since business administration is dynamic and concepts vary from one company to another.

Definitely, no function is autonomous and all are related to each other and to those of other departments, but the more sophisticated a function becomes, the more sub-functions appear and the more difficult it is to define each of them. Therefore, valid definitions of yesterday are no longer valid today.

There are several reasons why purchases are particularly important in all industrial, commercial and service activities, these being: the participation of the purchasing department in obtaining profits, setting the purchase price, setting the sale price, the efficient operation of the investment, and, the costs and replacement of materials.

We will analyze each one of them in particular points, except the fixing of the sale price.

1.1.2 Participation of the purchasing department in obtaining profits.

Obtaining profits is the primary objective of any company, therefore trade is one of the acts that help generate profits as long as a good purchase is made.

The costs will directly affect the sale price of the final product, if these are low, a competitive market price may be offered and, as a consequence, a higher profit margin will be obtained.

1.1.3 Setting the purchase price.

Some suppliers maintain the price only for a certain time, since the raw materials that intervene in the product may be imported, so there must be an immediate adjustment in prices according to the sliding of the peso against the dollar, which is why the Buyer must be informed of the exchange situation at the moment, in order to guarantee that the quoted price is respected.

It is necessary to know that in proportion a slippage or an abrupt adjustment of the weight-dollar relationship affects the product purchased, since the sale price of the material to be purchased will increase in proportion to the amount of imported materials that it carries. said product; for example, if it is made up of 30% imported material, the buyer would not accept an 80% increase; on the other hand, in the negotiation the exchange rate that has been created by the government as aid or for commercial transactions must be considered.

Many suppliers make month-to-month adjustments to their prices on their materials, even when import products do not intervene in the manufacture of these, this ensures that the profit margin is always the same for them.

1.1.4 The efficient operation of the investment.

The purchasing department has to ensure the receipt of the appropriate materials and in the required quantity, in order to transform itself and be able to deliver the finished product on time to customers; at the same time, you must take care to keep only the relevant inventory to cover the needs and maintain a reasonable safety factor and not fall into storage costs that are constituted by the interest on investment, obsolescence and space costs.

1.1.5 Costs and substitution of materials.

Purchases represent a line in costs that can be controlled by the purchasing department, because they can be increased or decreased, depending on the ability of the buyer.

For example, psychological consideration in negotiations, through the experience of purchasing personnel, such as projecting supply and demand, so that a decrease in the purchase price can be forced, or volume discounts can be achieved, for cash payments and commercial discounts.

Being in constant contact in the market in general, the purchasing department is in a position to introduce new materials to replace others, which can have a lower cost of the final product, without having to sacrifice its quality.

It is necessary to keep in mind that we live in a world of multiple technological changes, that what is new today, will soon be obsolete, because there will be something better; for this reason, it is important to keep up to date to look for new alternatives, and above all, to be the link, allowing suppliers that offer new materials suitable to the process, to be approved, thus evaluating the advisability of making that change based on a saving in the price, a decrease in the quantity to use of the process, being a line product with the supplier and not a specialty.

1.2 Purchase administration, process.

A company that decides to purchase materials rather than manufacture or vertically integrate them must manage a purchasing function.

Taking into account the definition of the administrative process of Terry and Franklyn: “the application of planning, organization, execution and control by means of which a manager is administered”, the purchasing administration process is structured.

Personally, you could define purchasing management as the department's task that is focused on the cost of inventory and transportation, the availability of supplies and the quality of suppliers.

Therefore, it also contains planning, organization, direction and control.

Said purchasing administration process has some modifications, which will be seen below.

1.2.1 Planning

When speaking of planning within the purchasing administration, we must necessarily understand that we must set goals that guide us and direct us to achieve the objectives of a purchasing department and, logically, of the company itself.

1.2.1.1 Sales forecast.

"Forecasting is the art and science of predicting future events".

Forecasting is a technique used in sales planning based on experiences from previous years, which serves as the basis for preparing plans and programs in all areas of companies; Likewise, it indicates the number of articles or products to be manufactured or produced in a given time under favorable conditions and with the specified quality to satisfy the needs of the market.

To prepare a sales forecast, the following factors must be taken into account:

Type of fruit. Sales statistics from previous years. Type of market to which the product is directed. Direct or indirect competition. Quality of the article. Price. Inflation.

Once the sales forecast has been prepared and provided to the engineering and inventory control department, who in turn program the quantities of materials or items to buy, As well as the time in which they must be supplied to warehouses, the general objectives of a purchasing department are therefore set.

1.2.1.2 General and specific objectives of a purchasing department.

The general objectives of a purchasing department are:

Establish norms and policies, in accordance with the conditions and needs of the company. Search and acquire at the right price, in the necessary quantity, with the best quality, the controlled product, within the shortest possible time, with guaranteed purchasing capacity and availability, and with honest compliance. Develop and manage purchases. Establish well-evaluated suppliers. Be informed of technological changes that may arise in the use of new materials, in order to translate them into cost savings, improvement of quality of materials or articles, improvement of acquisition and distribution services.

The specific objectives of a purchasing department are:

Keep inventories as low as possible, but enough to satisfactorily feed production needs. Find and develop sources of supply. Locate new materials and products. Ensure good service from suppliers, including fast delivery and adequate quality of items. Implement purchasing policies that benefit the company. Develop optimal procedures and controls. Maintain an economic operating cost in the purchasing department, which will be balanced with the good results obtained. Inform company managers about changes in products or materials. that could affect the organization. Gather information and assess current and potential suppliers. Maintain dynamic and constant communication with company executives,that directly or indirectly, determine what the production programs will be to know them and take the steps to supply their needs in a timely manner. Cooperate with other company departments (sales, human resources, production, accounting, etc.) that request their services. up-to-date on existing advances in purchasing methods and techniques. Obtain quality control approval on new items or items that require a new supplier. For this purpose, samples should be obtained from potential suppliers. Monitor that the personnel of the area comply efficiently with the established procedures. Point out standards of moral conduct. Obtain profits for the company.Determine what the production programs will be to get to know them and take the steps to supply their needs in a timely manner. Cooperate with other company departments (sales, human resources, production, accounting, etc.) that request their services. Existing purchasing methods and techniques.Get quality control approval on new items or items requiring a new supplier. For this purpose, samples should be obtained from potential suppliers. Monitor that the personnel of the area comply efficiently with the established procedures. Point out standards of moral conduct. Obtain profits for the company.Determine what the production programs will be to get to know them and take the steps to supply their needs in a timely manner. Cooperate with other company departments (sales, human resources, production, accounting, etc.) that request their services. Existing purchasing methods and techniques.Get quality control approval on new items or items requiring a new supplier. For this purpose, samples should be obtained from potential suppliers. Monitor that the personnel of the area comply efficiently with the established procedures. Point out standards of moral conduct. Obtain profits for the company.Keep up to date with the advances in purchasing methods and techniques. Obtain quality control approval for new items or items that require a new supplier. For this purpose, samples should be obtained from potential suppliers. Monitor that the personnel of the area comply efficiently with the established procedures. Point out standards of moral conduct. Obtain profits for the company.Keep up to date with the advances in purchasing methods and techniques. Obtain quality control approval for new items or items that require a new supplier. For this purpose, samples should be obtained from potential suppliers. Monitor that the personnel of the area comply efficiently with the established procedures. Point out standards of moral conduct. Obtain profits for the company.

1.2.1.3 Programs.

It is an administrative tool in which it indicates the quantities of articles to be purchased, as well as the time in which it must be supplied to the warehouse for the production of which the company is engaged.

In the case of industrial companies, a program tells us how many pieces of each part must be purchased for the predicted manufacture of their final product.

It is worth mentioning that it is essential to classify items in terms of cost, representing 80% of the total to buy at the highest cost, 15% at the medium cost and the remaining 5% at the lowest cost.

This classification is called "ABC".

1.2.1.4 Budgets.

A budget is said to be the numerical monetary expression of a plan. A plan is the selection of a path to achieve a goal in a given period.

Achieving a goal involves pooling available resources, and this pooling of resources presupposes an organization.

The ingredients to make a budget are:

Have full organization. Maintain a strict knowledge of resources. Have perfectly determined objectives. Have a long experience in the operation. Establish a defined period of time. Be predictable. Achieve imagination. Have good ability.

1.2.2 Organization.

Organizing is the hierarchical timing for achieving a goal. The organization is the basic need to know perfectly the objectives of the company, for the achievement of the objectives set out in the planning.

Then, the division of labor appears, but perfectly synchronized to achieve the set goal. It is the means by which we can define the most appropriate structure for achieving the ends of any social organism..

1.2.3 Address.

If we know that leading is the art of closely bonding men with each other, is indicating to us that in a purchasing department there must be that dynamic and evolutionary link, thanks to which, managers constantly communicate what they want in the way that they hope will motivate subordinates to support company plans and objectives.

1.2.3.1 Management by Objectives.

Targeting is not something really new, although some authors have presented it. It is more than a system, it is a philosophy, a way of thinking and being based on business.

Within the administrative sphere, management by objectives (DPO), is a management method that emphasizes more on results than on operations, indicates the goals that must be achieved at all levels of the organization and uses the results in comparison with goals set, as a method of evaluating the contribution of each member and as a guide for managing the unit.

The DPO requires establishing a planning system that does not have to be seen what we will do tomorrow, but what we will do today, so that tomorrow is as we want it to be; it means working to achieve the future.

The point is, as an individual knows what he wants to achieve, his chances of success increase.

Unfortunately, effectiveness is confused with efficiency, which often leads the individual, department or company to efficiently carry out what they have never been able to do, and which, because it is well done, has distanced them from what could be considered their (s)) objectives).

That is why the DPO should set short-term goals, for their convenience, in which these should be reviewed at least every eight days.

1.2.3.2 Exception Management.

It is common to find a series of situations that occur repeatedly within the work of the management of the purchasing department. When they do occur, they require the attention of the executive to take the same direction over and over again.

Exception management (DPE) is an identification and communication system that emits a signal when the caregiver's attention is required, and remains silent when it is not required.

The DPE is based precisely on the identification of exceptions, understanding by exception that signal that warns the purchasing manager that he can take an action.

The action to be carried out can be, depending on the type of exception in question: corrective or creative.

The first refers to the one by means of which it is intended to reestablish a balance similar to that previously sustained and that we can divide into reinstallation actions focused on re-establishing control.

The second is aimed at taking advantage of opportunities that have arisen and although it also aims to establish a balance, one no longer seeks a similar one to the previous one, but of a superior type.

For example, if the materials reception department detects that there are defects in certain products of a supplier.

The corrective action is to inform the supplier of said defect and to correctly deliver the product to us; Also, if we replace that supplier with another with the same conditions of the good, then it would be a corrective action.

Creative action is when we take advantage not of a change of supplier, but to get another that sells us the same item but with better conditions, dividing the purchases.

1.2.3.3 Communication and motivation.

Communication is the action and the effect of making another participate in what one has: discovering, manifesting, or making one know some things, consulting; confer with others a matter by taking their opinion.

On this basis, we find ourselves in the urgent need that communication in a purchasing department must be strict, precise and concise, since that department has permanent contact with other important areas.

It is said that a purchasing department has a 50% relationship with suppliers and another 50% with the company itself.

That is why communication plays an important role in the purchasing department.

Although "man works for pay" is but a gross and exaggerated simplification, remuneration in money is a vital source of satisfaction. But the salary means more than what can be acquired thanks to the tranquility.

These aspects, unrelated to the economic question of wages, have a stronger impact on the behavior of men in their jobs than on their purchasing power.

The voice of the experience replies "money is not everything". Competent people change jobs if another job is more attractive, even if the salary is lower.

Those who remain in unpleasant positions will probably develop negative attitudes towards their work and therefore, to the company; they have little initiative and even restrict their productivity.

On the contrary, if the salary is lower than that of another company, but the work of the work itself leaves him with great satisfaction, the employee will still feel uncomfortable, because although he likes the position, he also wants others to think well of him. and your work.

1.2.4 Control.

Remember that control is the measurement of current and past results in relation to those expected, in order to correct, improve and formulate new plans. It is necessary to distinguish the control function, which is administrative in nature, from the control operations, which are technical in nature.

Thus, the quality control department (reception inspection), obtains statistics on materials, which is the control operation; whereas when it is sent to the purchasing department, where actions are interpreted and taken, it is already the control function itself.

Control is not possible if there are no pre-determined standards or norms; the more precise and quantitative such standardizations are, the more effective they will be.

Also, it is a means and not an end in itself. A control system should only be established if work and expense are justified in the face of the benefits expected of it.

Administrative control is much better when in the cases in which the planned was not achieved, rather than in the results that were obtained according to plan.

It is essential that in any purchasing department there is a manual that allows us to carry out the buying process to fulfill the control functions.

The purchasing manual is defined as the official guide of the department, through which the clear definition of the objectives, their structure, procedures, functions, responsibilities, and the delegated authority for the fulfillment of the entrusted tasks is provided.

A purchasing manual will have as basic objective the observance of the general policies of the company.

Company policy is defined as the orientation of administrative action in a certain sense, in play of certain general and particular objectives that are desired to be achieved.

This orientation may be given by written norms, which constitute the lines of conduct, behavior and advance decisions on certain aspects.

The statements or norms constitute a general action plan that guides the management of the company, they are the framework of the dynamics of the decisions, they express forms of behavior, the purpose of which is to guide the action in a coherent way and take a priori resolved certain problems.

The purchasing policy is the essential aspect of the general policy of the company, and is identified with the financial policy, and the purchasing policy of the latter must in reality be adapted in a double sense.

In general, rules aimed at guiding the action of specific sectors of the company are of greater practical importance: it may be financial policy, provisioning, production, marketing, personnel, etc. The set of these standards builds the manual for each sector of the company.

1.2.4.1 Evaluation

To determine the value that each individual represents for the department, it is advisable to make evaluations of the personnel at least every 6 months. There are predetermined values in each company where the evaluation criteria can be made.

Certainly, evaluations are based on results obtained in numbers (number of purchases made, percentage of, points obtained by supplier bonuses, etc.), however, the general qualifying factors can be listed: quality and quantity of work done, initiative and creativity, reliability and integrity, job knowledge and ability to learn, cooperation, judgment, punctuality and assistance, value of the department, etc.

1.3 Procedure, flowchart of purchases

The operation of purchases must be governed by precise organizational and functional rules that ensure that the planned operations are always carried out in the same way.

Therefore, it is necessary to establish standardized procedures, the purpose of which is to specify for each operation or group of operations the participation of sectors of the company and the interested foreign country.

One procedure is the succession of consecutive steps to carry out an activity. We have the common steps that are developed around the purchasing department:

Requisition. It is the request that is made to the supplier about a certain need to satisfy a certain purchase demand.

In most cases, it occurs verbally, resulting in a dialogue between buyer and supplier for the future purchase-sale of the good or service.

Quote. It is the establishment of the amount to pay, form and payment term for the acquisition of the good or service in question. It opens the way to negotiations between the offeror and the plaintiff.

When talking about quotation, you are talking about the valuation that the suppliers give to your item that they offer, represented in money. In the public sector, quotations are made under the Procurement Law, which determines the winning supplier through contests or tenders; In the private sector, quotes are requested according to the policies of the requesting companies, which are generally 3 quotes requested.

Orders or purchase orders. It is the physical document, in writing, which stipulates the quantity and quality required to be delivered by the supplier to the applicant, indicating the appropriate time and place for it, so it would be laughable not to stipulate the conditions of purchase of goods or services.

The order may change in terms of its shape, size, printing, but its objective will never change: to request a good or service.

The content of the order must bear at least these elements: reference number, date, assigned supplier, required date, place of delivery, payment terms, quantity, unit, description, price, total amount, authorization, and clauses.

Expedition. It is only an order confirmation. The first thing an expediter must do is make sure that the supplier is perfectly aware that there is an order in his favor and that he is in agreement with all the data, quantities, prices, dates, etc., that appear in the order of purchase.

Receipt of materials. To be precise in this description, the section, area or department of receipt (often called control table), must verify that the delivery of the supplier is being carried out precisely what is stipulated in the order or order of buy with the correct quantity.

After the material remittance activity, a receipt report is made, specifying the date, supplier name, order number, partial or total delivery, quantity received, description, observations and corresponding authorizations.

Quality control. The quality of the products will always be an important factor. All the delivered goods will be reviewed, as well as the valuation of the service offered by the provider, if applicable; If they contain defects, damaged or incomplete characteristics in the articles, they will be separated, counted and registered for their subsequent return to the manufacturer or distributor (supplier) who made the delivery.

It is here, in quality control, where engineers and administrators act to achieve their main objective: to ensure products with the best quality required. What was of interest to a small group of quality control technicians is now a primary concern among an increasing number of managers, engineers, and statisticians.

Quality control is an auxiliary, not a substitute for design work, good manufacturing methods, or the diligent activity of inspection, always required in the production of high-quality articles.

In more precise terms, quality is an expression of the measured properties, conditions or characteristics of a product or process, generally established in terms of grades, classes, specifications determined by the application of the product..

Therefore, quality control is a set of effective efforts of the different groups of an organization for the integration of the development, maintenance and supervision of the quality of a product, in order to make possible the manufacture and the service, to the complete satisfaction of the consumer and at the most economical level.

Rejections and / or returns. It is the physical return of the merchandise that does not comply with the characteristics imposed by the quality control area that are always accompanied by a physical document that describes the causes for which said action is submitted.

This action will affect both the supplier's payment and the refilling of the next order. A report must be made to the responsible buyer.

Payments. Payment is the economic remuneration for obtaining the good and / or service from the supplier to the buyer, whether in the form of cash, electronic transfer or any other means that is indirectly the collection of a certain amount of cash, against exhibition of the corresponding invoice.

There has been much discussion about whether the purchasing department should intervene in the payment of invoices, arguing many reasons in favor and other contradictory ones.

In a personal judgment, I think that the purchasing department should intervene only to track payments to suppliers, but not to perform such a function, since the main objective of the purchasing department is the acquisition of goods and / or services; However, purchases must initiate and close the contract of sale with the supplier, since it provides guidelines for the buyer to run out of tools for future negotiations with suppliers.

Complementary controls. Some companies operate solely with the concept of supplemental control at the disposal of employing a person or section to coordinate the inherent control activities of suppliers.

In my opinion, a purchasing department must have an in-depth analysis regarding the handling of profit margins, internal and competitive sales prices, inventory rotation, Paretto analysis of suppliers, etc., in order to locate the Responsible buyer with the reality of the market and the company.

The more knowledge that can be managed in the negotiation, the better opportunities the buyer will have to obtain his objectives with the supplier.

1.4 Inventories.

1.4.1 Definition and relationship with inventory management purchases.

Inventory management is a matter of interest to any business; without it, no operation could be performed.

The fact that there is an inventory does not add value to the product, but it does add utility in use; inventories add to the same utility of time, place and quantity, since the item that is not found in a certain place, in the time required and in the quantity requested, has little possibility of consumption.

A company's operations are basically measured by its ability to generate cash and by how attractive the return on investment is.

Inventory management consists of establishing, putting into effect and maintaining the most advantageous quantities of raw materials, materials in process and products, using for that purpose the techniques, procedures and programs most convenient to the needs of a company..

The term inventory has different acceptances, depending on the application that is given. For an industrial company it implies that its inventory is made up of raw materials, products in process and finished articles; whereas for a commercial company it implies existing merchandise.

Another definition that could be assigned to the inventory: "the inventory is used to refer to the aggregate of those tangible personal property, which are held for sale in the ordinary course of business, are in the production process for sale, or are to be consumed regularly in the production of goods or services that will be available for sale ”.

Inventories are a bridge between production and sales. They are generally the largest asset item; the acquisition, distribution and retention of inventories is understood exclusively as the list of goods purchased to be re-sold, goods that are part of the current assets line.

One of the main objectives of inventory accounting is to properly determine profit through the process of facing appropriate costs for income.

In inventory management, inventory investment levels absorb the largest percentage of current assets.

The process of confrontation lies in specifying how much of the total cost of the items that make up the initial inventory, plus net purchases of a certain period, must be subtracted from the sales made, in this period, in order to determine the final inventory that must face the next period sales.

Seen now from the purchasing department, the person in charge is concerned about the policy that affects raw materials in terms of their amount, quality, number of existing units, etc., which are related to production volume.

Inventory control means good planning of production operations in the long, medium and short term, as well as good production scheduling and control methods. A comprehensive and integrated control system that includes planning, scheduling, and production control must be closely related to other activities in the administrative process, such as cash flow, financial budgeting, and sales forecasting.

No inventory control system will eliminate inventory shortages. The techniques only help to get as close as possible to a simulation of the reality of the world; What contributes most to effective inventory management is the purchasing function.

1.4.2 Inventory classification.

The inventory classification is based on the type of material they store, so we have the following classifications:

Supplies. Indirect cost items consumed in factory operations. Raw Materials. Raw material in a relative term, as it is the main content that will be used in the future in product manufactured by the company. They are the goods that no factor or component has been added to them in the factory where they are located. Products in process. Those who are in periods of transformation, before becoming finished products, and their cost is increasing so it takes labor and indirect costs. Production materials. Parts or components that can be obtained from sources outside the company, or can be produced at the factory and stored for future use. Job material. They are those used in the operation of the plant or in the production of the company,but they do not become an integral part of the same products. Finished products. They are the finished goods that are stored for sale and delivery to customers. Goods in transit. Refers to the goods purchased by the company, which are part of its assets, even when they are not physically located in its warehouses. Goods on consignment. They are those that have been sent in order to find a market and are owned by the company, as long as they are not sold. Warehouse goods. They are those that have been delivered for custody in a deposit warehouse and are covered with the respective deposit certificate. They are sometimes found as collateral for a loan obtained, which is why they are also called pledged merchandise. Obsolete items. They are pieces, tools,old materials, in repair used from production and rebuilt machines. They are objects to be sold at any low price, count on recovering a bit of past investment.

As business grows and it becomes increasingly scientific to manage, managers find their problems more complex and larger, as well as increased pressure on decision-making.

Decisions by intuition no longer compete with those made now by modern managers, which are based on examining real facts through timely data, the state of their businesses and through the technical and mathematical analysis of their operations.

1.4.3 Valuation of inventories.

There are four inventory valuation methods: Identified or Historical, PEPS (First Entries First Exits), Averages, and UEPS (Last Entries First Exits).

Identified or historical.

Through this method, inventories are valued at the cost or origin of acquisition or manufacturing, indicating in each one, the one that corresponds to it. For this purpose, a key that is related to a word is usually used.

We will use the word "bat".

Key: bat

Interpretation: 0 1 2 3 4 5 6 7 8 9

According to this key, an article marked with the key "LEMAR.CO", means that its acquisition cost is $ 65,072.39. This method of inventory valuation is frequent in stores, in addition to knowing the cost of merchandise in the warehouse and sales, it serves to determine the amount of the discount that can be granted to a customer without lowering the price too much. Thus, if we find the following form marked on a label:

$ 9,950.00

IOAEM.MM

It actually indicates that its cost is $ 4,975.00

PEPS

The First Inputs First Outputs method works like its name, that is, the first thing that comes in is the first thing that comes out, but not in units, but in values. To carry out such a method in values, it is the costs that are applied in accordance with the order in which the merchandise was purchased.

The unit cost at which the first purchase was made is the cost that must be applied to the first sale until the lot is exhausted. Once the sale is finished, the corresponding cost of the next purchase will be applied as the unit cost of the merchandise sold.

Let's take as an example that the purchase of item X on January 1st cost $ 50 each and the amount purchased was 10 pieces. On February 1, 5 pieces were purchased at $ 60 each. On February 15, 12 pieces were sold for $ 150 each. It can be seen that a cost of $ 50 each will be applied to 10 pieces and the remaining two will be applied to $ 60.

10 × 50 = 500

2X60 = 120

Sum: 620

12 × 150 = 1,800

Income: 1,800

Cost: 620

Gross profit 1,180

Averages.

The average cost is simply to obtain an average sum in the unit costs of purchase. Continuing with the previous example, the average cost is as follows:

10 pieces purchased at $ 50 each: $ 500

5 pieces purchased at $ 60 each: $ 300

Total: 15 pieces: $ 800

800/15 = 53.33 12 items sold at 53.33 cost: $ 639.96

Income:

1,800.00 Cost: 639.96

Gross profit: 1,160.04

UEPS

It is a method of inventory valuation exactly the reverse of the PEPS, because although in this the exits from the warehouse are valued taking as the oldest cost, in the UEPS they are valued starting from the last one until they run out the inventories in units of each purchase lot.

For the example given, the cost of 12 items sold is as follows:

5 items cost $ 60 ea: $ 300

7 items cost $ 50 ea: $ 350

Total: $ 650

Income: 1,800

Cost: 650

Gross profit: 1,150

There is no rule that defines which method to follow, it all depends on the company's approach to purchasing its items. A good starting point would be the characteristics of the item and its cost of keeping it in inventory.

1.4.4 Inventory rotation.

By inventory turnover we mean the number of times that various items of assets, such as raw materials, merchandise for sale, accounts receivable, etc., are replaced during a specific period, usually one year.

Inventory turnover largely depends on the volume handled at the inputs as well as the outputs. Low turnover can be generated by the fact that there has always been enough merchandise at any time, or because the merchandise is out of date or in low demand.

In a high turnover, it must be considered, in the case of production, that certain articles necessary for production could be sold out on the market and this production was paralyzed; On the other hand, when talking about finished articles, the constant rotation means that sometimes the company has not filled orders on the dates that its customers request it.

Therefore, the number of times that a commodity is replaced will depend largely on the ratio of the number of inputs to outputs of the rotation in question.

There are three ways to calculate inventory turnover: general application, retail method, and applied to industries.

Of general application.

The cost of sales is divided by the average of the inventories. It is recommended that the average be monthly or weekly, since an annual average is not a representative index that can be used for an effective decision. Example:

Cost of sale: $ 18,000.00

Average monthly inventory: $ 3,500.00

18,000 / 3,500 = 5.14, which is the coefficient of rotation.

Retailers method.

The general application procedure changes for warehouses of clothing stores, household items, hardware stores, etc., and is replaced by this method, which is used for the practice of physical inventory. Rotation is considered as a ratio between sales made at sale price and inventories that are marked at the same sale price.

Sales made: $ 7'000,000.00

Merchandise in stock: 500,000.00

7,000,000 / 500,000 = 14, which is the coefficient of rotation.

Rotation applied to industries.

Both in-process and finished items include raw materials, labor, manufacturing costs, etc.

These elements must be taken into account so that, in calculating the rotation of raw materials, it is necessary to separate the cost of the materials found in the cost of sales to divide the result by the average inventory cost.

Cost of sales: $ 12'000,000.00

Average raw material

inventory: 1,200,000.00 Materials included: 7,200,000.00

12'000,000-7'200,000 = 4'800,000

4'800,000 / 1'200,000 = 4, which is the coefficient of rotation.

Of course, the turnover coefficient is a fact that the company administrator takes advantage of, as one of many measures, in order to prevent sales from stagnating or decreasing, but this coefficient must be taken in some cases, with certain reservations.

It is necessary to consider that the rotation undergoes some variations depending on the nature of the trade or industry, the class of articles and the time of the year.

This shows that when making rotation comparisons between the different departments, the fact that one of them has low rotation does not mean that it is operating poorly.

Notes:

Executive Specialization Institute, AC, Legajos, 1976.

Mercado, S., Purchasing Principles and Applications, LIMUSA, 1991, p. fifteen.

Benaque rojas, josé luis, Analysis of the Information of the Items Acquired by the Purchasing Directorate to Control the Entrances and Exits of the Products, UNITEC thesis, Mexico 2000, p. 28.

Leenders & fearon, Purchasing & Supply Management, Ed. Mc. Graw Hill, USA, 1997, p. 308.

Zenz, G., Purchases and Administration of Materials, Ed. Limusa Noriega, Mexico 1992, p. 386.

Terry, G., Principles of Administration, CECSA, Mexico 1975, p 22.

Render, B. & HEIZER, Jay, Operations Administration, Ed. Prentice Hall, México 1995 p. 47.

Menache, P., Purchasing Manual, Mexico 1990, p. 29.

Institute of specialization for executives, AC, Legacies, 1996.

García MFM, Administration and Management Development, COPARMEX, México 1988, p 197.

Idem., P. 202.

Flores D. and Orozco G., Towards a Comprehensive Administrative Communication, Ed. Trillas, Mexico 1990, p. twenty-one.

Reyes PA, Business Administration, Ed. Limusa Noriega Editores, Mexico 1994, p. 378.

Zens, Gary J., Materials Management, Ed. Gpo. Noriega, Mexico 1992, p. 205.

V. Feigenbau, Purchases and Total Quality Control, Engineering and Administration, Ed. CECSA, México 1991, p. 13.