Agriculture Reference
In-Depth Information
Under an
assemble-to-order
strategy, a fi rm assembles available components when an order
is placed. Farm tractors and machinery would be a good example of this strategy. When
employing a make-to-stock strategy, the fi rm actually builds to order. A good example here
would be fi rms in the dairy equipment business who build sophisticated milking systems
precisely to a producer's specifi cations. Clearly, each of these strategies would employ the
master production schedule idea in different ways.
Purchasing
With a realistic master production schedule completed,
purchasing
begins its tasks of pro-
curing the inputs necessary to meet the requirements of the production schedule. Purchasing
is a common function for every organization. Although it varies by industry, the typical fi rm
spends about 40 to 60 percent of its total sales on purchased materials and services. As a
result, even a small percentage reduction in such a huge portion of the overall costs for an
agribusiness fi rm can have a signifi cant effect on the fi rm's bottom line. For example, if net
profi ts in the agribusiness are 5 percent of sales, then a 1 percent reduction in purchasing
costs will fall through to the bottom line, thus increasing profi ts by 20 percent over their
previous level. This example illustrates the relationship between costs of production (pur-
chasing) and the fi rm's profi ts.
Some agribusinesses have centralized buying where materials are purchased in large
quantities, often at substantial discounts. Other fi rms have decentralized purchasing where
each location purchases just the goods that are needed, when they are needed. Both have
their advantages and most agribusinesses use a combination of both. An agribusiness typi-
cally purchases four kinds of products.
•
Products used for further processing
•
Products that are resold
•
Products used directly in the fi rm's fi nal products
•
Products used to make the product but not used in the product itself
The purchasing function performs many activities, which include the following:
•
Receive a purchase requisition
: purchasing examines these documents to determine if a
less costly item can be substituted or eliminated entirely.
•
Select a qualifi ed supplier
: purchasing selects suppliers based primarily on four
factors—price, quality, timeliness, and customer service.
•
Place the order
: ordering procedures range from routine computer-based systems to
very time-consuming manual systems, depending on the nature of the purchase and the
buyer-supplier relationship.
•
Track the order
: purchasing monitors deliveries and production schedules and expedites
orders as necessary; follow-up is particularly important when a delay could disrupt pro-
duction, cause a loss of customer goodwill, and/or a potential loss of future sales.
•
Receive the order and approve payment
: purchasing works with receiving and account-
ing at this point to ensure all goods are received satisfactorily before authorizing
payment.
The purchasing activity of selecting suppliers is critical because of the impact of input prices
on the agribusiness's bottom line. As mentioned earlier, the four primary factors used in
