Purchasing and Vendor Management

What Is Purchasing?
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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
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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
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Globalization Information Technology Changing production and management philosophies.

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Changing Aspects of Purchasing
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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
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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. 2. 3. 4. 5. 6.

Identify user need for product or service. Evaluate potential suppliers. Bidding negotiation, & supplier selection. Purchase approval. Release & receive purchase requirements. Measure supplier performance.

Improving the Purchasing Process
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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 1940s² VA & VE. Purchasing in 1950s² System Contracting Purchasing in 1960s² Material Management Purchasing in 1970s² MRP Purchasing in 1980s² JIT Purchasing in 1990s² 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
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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:
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Long term Supplier Relationship Early supplier design involvement Supplier Development E-Reverse Auctions [e-RAs]

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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 process² 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 Quality Measure
Percentage of rejects in goods received; percentage of parts rejected in production & raw materials rejected. 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. Supplier¶s actual delivery performance against promised; time taken to process requisitions; time taken for action. 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. Cost of processing an order; progressing costs as percentage of total; communication costs.

Quantity

Timing

Price

Operational Cost

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
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Supplier Dependency Absence of competition Supply disruptions Over aggressive supply reductions

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Approaches to Supply Base reduction 
Twenty-Eighty ´Improve

Rule

or Elseµ Approach 

Triage Approach Competency

Staircase Approach

Purchasing Structure
Centralized Purchasing: ` Economies of Scale:
1. 2. 3. 4. 5.

Forecasting benefits Negotiation on quantities Compete for preferred supplier status Reduction in prices by spreading overheads. Professional can be employed.

Centralized Purchasing
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Coordination of Activities: Strategic focus possible Uniform policies can be adopted such as ¶single sourcing· Competitive buying is eliminated.

Centralized Purchasing
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1. 2. 3. 4. 5.

Control of Activity:
Separate profit centre Budgetary control Uniformity of prices. Inventories can be controlled. Performance can be monitored

Decentralized Purchasing
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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
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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
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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
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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.

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