Purchasing and

Vendor Management
What Is Purchasing?
 Purchasing is a functional group and a functional activity.
 Objectives of Purchasing may be defined as: to buy
materials of the right quality, in the right quantity from the
right source delivered to the right place at the right time at
the right price.
 Purchasing is proactive.
 Purchasing is transactional as well as relational
 Purchasing is strategic.
Perspectives on Purchasing
 Purchasing as a function: people use specialized
knowledge skills and resources to perform specialized
tasks.
 Purchasing as a process
 Purchasing as a link in the supply or value chain.
 Purchasing as a relationship
 Purchasing as problem solving
 Purchasing as a discipline.
 Purchasing as a profession.
Definition of Purchasing:

The process undertaken by the organizational unit that,

either as a function or as part of integrated supply
chain, is responsible for procuring or assisting users to
procure, in the most efficient manner, required
supplies at the right time, quality, quantity and price
and management of suppliers, thereby contributing to
the competitive advantage of the enterprise and the
achievement of its corporate strategy.
Purchasing and Change
 Globalization

 Information Technology

 Changing production and management

philosophies.
Changing Aspects of Purchasing
 Structure: Horizontal, flatter, involving self-managed
teams and cross-functional relationships. It is an
integrated part of Supply Chain Management.
 Procedures: Based on IT applications; rapid, low cost.
Increased emphasis on center-led user procurement.
 Purchase Considerations: Subcontract or outsource non-
core business.
 Sourcing: reducing supplier base, global, increased use of
purchasing consortia.
Changing Aspects of Purchasing
 Supplier Relationships: long-term partnerships and
collaborations; win-win negotiations, sharing of
information.
 Quality and Specifications: supplier specifications of
design and quality.
 Inventory and Lead times: Low due to JIT requirements,
thus obviating waste.
 Purchasing Performance: Assessed mainly on its value-
added activities as part of supply chain.
 Purchasing Process Cycle
1. Identify user need for product or service.
2. Evaluate potential suppliers.
3. Bidding negotiation, & supplier selection.
4. Purchase approval.
5. Release & receive purchase requirements.
6. Measure supplier performance.
 Improving the Purchasing Process
 Online-requisitioning systems from users to purchasing
 Procurement cards
 Electronic purchasing commerce
 Long-term purchase agreements
 Online ordering systems to suppliers
 Electronic Data Interchange
 Online ordering through electronic catalogs
 Allowing users to contact suppliers directly
 Purchasing Integration

Purchasing in 1940s– VA & VE.

Purchasing in 1950s– System Contracting
Purchasing in 1960s– Material Management
Purchasing in 1970s– MRP
Purchasing in 1980s– JIT
Purchasing in 1990s– SCM
 Purchasing Integration

Integration can occur in many forms:

1. Sourcing
2. New-product development teams
3. Cross-location teams
4. Cross-organizational teams.
Characteristics of External Integration
 One or more number of suppliers for each
purchased item or family of items.
 A win-win approach
 Joint efforts to improve supplier performance.
 Joint efforts to resolve conflicts.
 Open exchange of information
 A credible commitment to work together.
 A commitment to quality & defect-free products.
 Evolving from Adversarial to
Collaborative relationships

Phase I: Traditional school of management

Phase II: Arms-length relationship

Phase III: Closer-buyer seller relationships

Phase IV: Total trust

Stages of Supplier Integration

 One-night stand [competitive leverage]

 Regular date [preferred supplier]
 Going steady [performance partnerships]
 Living together [strategic alliances]
 Marriage [co-business integration]
Types of Purchasing Strategies:

 Long term Supplier Relationship

 Early supplier design involvement

 Supplier Development

 E-Reverse Auctions [e-RAs]

Early-Supplier Involvement [ESI]

Advantages:
1. Reduced concept-to-customer development time.
2. Improved product specifications.
3. Enhanced quality
4. Access to new technology
5. Lower development costs.
6. Interchange of knowledge.
7. Improved manufacturing.
Steps in Supplier Development

Step 1: Identify critical products for development.

Step 2: Identify critical suppliers.
Step 3: Appraise Supplier performance.
Step 4: Determine the gap between present and
desired supplier performance.
Steps in Supplier Development

Step 5: Form cross-functional supplier

development.
Step 6: Meet with suppliers’ top management team.
Step 7: Agree how the perceived gaps can be
abridged.
Step 8: Set deadlines for achievement.
Step 9: Monitor improvements
Supplier Performance
Measurement

Supplier Performance measurement includes the

methods and systems to collect and provide
information to measure, rate, or rank supplier
performance on a continuous basis.
The measurement system is a critical part of the
sourcing process– essentially serving as ‘supplier’s
report card’.
Supplier Measurement Decisions
Objective [Quantitative Measures]:
1. Delivery Performance: A buyer can assess how
well a supplier satisfies the quantity and due-
date commitment.
2. Quality Performance: A buyer can compare a
supplier’s quality against some previously
specified performance objective.
3. Cost Reductions: Comparing supplier’s cost
against other suppliers within the same industry.
Supplier Measurement Decisions
Subjective [Qualitative Measures]:
1. Problem resolution ability.
2. Technical ability
3. Ongoing progress report
4. Corrective action response
5. Supplier cost reduction ideas.
6. Supplier New-Product support.
7. Buyer/Seller Compatibility.
Measurement Areas:
 Operational Purchasing
 Coordination with other functions
 Purchasing Organization and system
 Budget Performance
 Creative Performance
 Policy Development
 Planning & forecasting
 Measurement Areas:
Area Measure
Quality Percentage of rejects in goods received;
percentage of parts rejected in production & raw
materials rejected.
Quantity Percentage of stock which has not moved over a
specified period; number of production stock-outs;
number of emergency orders; comparison of stock
with target stock.

Timing Supplier’s actual delivery performance against

promised; time taken to process requisitions; time
taken for action.
Price Prices against standard; prices paid for key items
compared with market indexes; price at the time
of purchase against price at the time of use.
Operational Cost of processing an order; progressing costs as
Cost percentage of total; communication costs.
Types of Supplier Measurement
Techniques

 Categorical System

 Weighted-Point System

 Cost Based System

 Supply-Base Optimization
Advantages:
a) Buying from World-class suppliers
b) Use of full-service suppliers
c) Reduction of supply base risk
d) Lower supply base maintenance costs
e) Lower total product cost
f) Ability to pursue complex purchasing strategies.
Risks in Maintaining Fewer
Suppliers
1. Supplier Dependency

2. Absence of competition

3. Supply disruptions

4. Over aggressive supply reductions

Approaches to Supply Base
reduction

Twenty-Eighty Rule

“Improve or Else” Approach

Triage Approach

Competency Staircase Approach

Purchasing Structure

Centralized Purchasing:
 Economies of Scale:
1. Forecasting benefits
2. Negotiation on quantities
3. Compete for preferred supplier status
4. Reduction in prices by spreading overheads.
5. Professional can be employed.
 Centralized Purchasing

 Coordination of Activities:
1. Strategic focus possible
2. Uniform policies can be adopted such as ‘single
sourcing’
3. Competitive buying is eliminated.
 Centralized Purchasing

 Control of Activity:
1. Separate profit centre
2. Budgetary control
3. Uniformity of prices.
4. Inventories can be controlled.
5. Performance can be monitored
 Decentralized Purchasing

 Closer to users and better understanding of local

needs.
 Response time to divisional or plant needs maybe
rapid and of high quality.
 Possibly closer relationship with suppliers.
 Selecting local suppliers leads to lower transportation
costs.
 Geographical, cultural, political aspects maybe
considered.
Centralized Purchasing Activities

 Determination of major purchasing strategies and

policies such as vertical integration, outsourcing,
single and partnership sourcing.
 Purchase of leverage, bottleneck, strategic products.
 Purchase of capital equipment and systems.
 Negotiating for bulk purchases.
Centralized Purchasing Activities

 Purchasing research into market conditions,

vulnerability and similar matters.
 Rationalization of share of orders to be received by
specific suppliers.
 Control of group inventory.
 Staff training and development.
Decentralized Purchasing Activities

 Small-value orders and maintenance, repair and

operating (MRO) items.
 Items used only for that plant.
 Emergency purchases.
 Local buying to save transport costs.
 Staff purchases.