Working With Purchasing Departments

Working With Purchasing Departments


BigVsSmall

In the last Big vs Small article, we discussed the challenges that smaller electronics firms encounter from having fewer people on staff. Today, we’ll discuss working at a large engineering institution that has a purchasing department. This provides a new set of challenges for engineers because of the interfacing required between departments.

While the overall trend is towards smaller engineering and product design firms, the overall distribution of company sizes approximates a power law distribution; some number of firms command a majority of the business, but there are not as many of them. For these few larger firms, they will have members on staff who focus solely on reducing component cost (and by extension, product cost). This may also be the case and mid size firms, as the cost of having someone on staff to reduce BOM costs can be paid for by the work they do. As a simple rule, the larger your company is, the more likely it is you will have a purchasing department to reduce material costs.

What does this mean for the engineer?

Communication

Communication between engineering departments and purchasing departments is crucial, and yet often strained. Why?

Look no further than the Bill Of Materials (BOM). What format should that take? Which format should be the “control copy” (the ultimate document that determines what goes on the board).

A smaller company can use the schematic as the control document; as an engineer decides whether or not to populate a particular resistor, he or she simply updates the schematic to represent this new reality. Looking at larger institutions, it quickly becomes untenable to use the schematic as the control document because of licensing costs (of the CAD tool) and usability issues (do you want your purchasing agent messing with your schematic?). Instead the BOM in spreadsheet format becomes the control document; it must be updated in lockstep with any changes to the design. It’s also possible to have multiple versions of a product being produced at once (imagine starting batch A, making a design change and then starting on batch B), further complicating the communication process.

What does this mean for the engineer? The engineering department must focus on a well documented process of how the BOM is changing and which parts are being used. Without purchasing understanding which parts to buy, a product will be more expensive than expected or may not be able to be built at all.

ERP systems

Purchasing departments are closely tied to accounting systems, as the purchasing of components quickly transition to the accounts payable departments. Buying parts requires paying for them shortly thereafter. Imagine: if you’re making 20,000 devices per month, each of which has 30 capacitors at $0.01 each, that quickly becomes a $6000 bill just for capacitors. That’s also assuming you’re only making one product. Now consider the rest of the components on the board and the cash flow issues quickly come to the forefront.

What does this mean for the engineer? The purchasing department will be working inside a system focused on accounting, likely by decree (perhaps the CFO of the company picked the ERP system). It is unlikely that software will consider the specifications and differences between components. Translation between an ERP system and an engineering document control system can be tumultuous. Even more of a hassle, every time you look to add a new component to your CAD package, you also need to clear it with your purchasing deparment. Ensuring data continuity across all of these systems is critical; imagine designing in a new component in CAD but later finding out in the ERP that the supplier is not allowed in your company because of past bad behavior (late delivery, etc). Engineers need to ensure the parts they’re specifying can actually be purchased later.

AVLs

On the subject of bad actors, purchasing departments will often keep an Approved Vendor List (AVL). This exists to ensure that the company is:

  • Maintaining good relationships between buyers (the purchasers) and sellers (the sales department at a chip manufacturer).
  • Set up with payment schedules (payment within 30 or 60 days, for example) or even a line of credit from the manufacturer or distributor.
  • Set up to receive  hopefully with preferential pricing (more on that below).
  • Maintaining a relationship with a distributor as the middleman (ie. a relationship with TI but an agreement to have Avnet handle the distribution).

What does this mean for the engineer? During the component discovery process, the manufacturer should be part of the decision (perhaps a filter on components you’re viewing on Parts.io). This is especially true for commodity components. The LM317 has over 300 vendors on Parts.io. While you could use the Risk Rank as a means for choosing which one you eventually buy from, engineers with purchasing departments from choose vendors listed on their AVL. Risk Rank serves a similar purpose as a purchasing department: reducing risk for large component purchases long into the future.

Large scale buys

One of the benefits of working at a larger company is the buying power that comes from purchasing thousands or hundreds of thousands of components at a time. This gets the attention of manufacturers and distributors, which also means they will lower prices in order to win your business. The more you buy, the less it costs per piece.

Purchasing departments are often judged on how much money they are saving the company. They will maximize their savings with two main tools: negotiating with outside vendors and bundling orders for better pricing.

Negotiating

One piece that can have significant impact in reducing costs and improving the relationship between engineering and purchasing is pulling the conversation about component cost to the beginning of the design cycle. As the engineer begins to evaluate components, he or she should also engage the manufacturer (with the assistance of their purchasing person) to ensure the pricing looks favorable should the component wind up in the final design. This creates competition between manufacturers and lowers prices into the future. Purchasing likes that the engineer is thinking about these things up front, because as mentioned above, the purchasing agents are often rewarded based on how much can be saved from the listed price of a component.

Bundling

Another significant impact to pricing is working with price breaks. These are visible on sites like Parts.io or FindChips.com (indexed from a large range of online distributors), but also exist on a negotiated basis between product company and manufacturer; sometimes there is also a distributor in between. These price breaks for large companies can be below the “catalog” pricing of online distribution. The actual price quoted depends on customer relationships, negotiations, total volume being bought from a manufacturer and a slew of other variables.

The constant in all of these things is volume; higher volume will command lower prices per part. As such, purchasing departments want to bundle as many components together as possible. If an engineer designs a new product with 10 separate 0.1uF 0805 capacitors on it, the purchasing agent wants that engineer to use the same capacitor that is on the other 8 products the company makes. Now instead of the formula:

Total capacitors bought from MFG  = # of capacitors in Product A x # of units of Product A

It is instead:

Total capacitors bought from MFG  = (# of capacitors in Product A x # of units of Product A) + (# of capacitors in Product B x # of units of Product B) + (# of capacitors in Product C x # of units of Product C) + …. ETC

This means larger numbers of components being ordered at the same time, which means lower costs overall.

What does this mean for the engineer? They need to understand which parts are already designed into previous products and make an attempt to use those components again. This process relates back to the “ERP Systems” above, because seeing which components are used across multiple products and using them again will provide the greatest amount of bundling. This requires more communication between purchasing and engineering (the first point above).

Conclusion

Having a purchasing department can significantly lower the cost of a product and reduce the burden of interfacing with manufacturers and distributors. This also introduces overhead in communication and paperwork to ensure components can actually be purchased. Understanding these constraints up front will allow engineers to better understand the flow of new products through various departments in an engineering organization and optimize for the shortest time between discovering a new component and getting it into a manufactured product.

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