CHAPTER 1

INTRODUCTION TO PURCHASING AND SUPPLY CHAIN MANAGEMENT

 Understand the differences between purchasing and supply management

 Understand the differences between supply chains and value chains
 Identify the activities that are part of supply chain management
 Appreciate the importance of supply chain enablers
 Identify the historical stages of purchasing’s evolution

Re-shoring involves bringing some sourcing back to the United States, while near-shoring involves
evaluating suppliers located closer to United States. Such suppliers may be located in Mexico and Central
and South America.

The supply base consists of all the suppliers that provide and organization with its materials and services. In
some organization’s this supply base extends to the network of downstream firms responsible for delivery
and aftermarket service of the product to the end customer. The realization that competitive advantage
could be achieved by managing both upstream (suppliers) and downstream (customers) flows led to a focus
on supply chains and supply chain management.

Several factors are driving an emphasis on supply chain management.

1. First, the low cost and increased availability of information resources among entities in the supply
chain allow easy linkages that eliminate time delays in the network.
2. Second, the level of competition in both domestic and international markets requires organizations
to be fast, agile, and flexible.
3. Third, customer expectations and requirements are becoming much more demanding.
4. Fourth, the ability of an organization’s supply chain to identify and mitigate risk minimizes
disruptions in both supply and downstream product or services to mitigate the impact on lost sales.

The supply base is an important part of the supply chain. Supplier capabilities can help differentiate a
producer’s final good or service, increasing their value to the final customer.

Savings come in different forms; the traditional approach is to bargain hard for price reductions. A newer
approach is to build relations with suppliers to jointly pull costs out of the product or service and expect
suppliers to contribute innovative ideas that continually add value to a firm’s products and services.

Poor quality is only one supply threat; others include natural disasters, financial instability, operational
problems, transportation delays, and so on. These risks are magnified by sourcing strategies that
emphasized global sourcing, single sourcing, and JIT inventory. Certainly there were benefits realized from
these strategies, however, often the increased vigilance necessary to mitigate and manage these additional
risks was not established.

Managing talent requires a constant focus on finding, developing, and promoting individuals who will
contribute to making the supply management department recognized as a strategic contributor to the
organization.

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PURCHASING AND SUPPLY MANAGEMENT

Purchasing is a functional group (i.e., a formal entity on the organizational chart) as well as a functional
activity (i.e., buying goods and services). The purchasing group performs many activities to ensure it
delivers maximum value to the organization. Examples include supplier identification and selection; buying,
negotiation, and contracting; supply market research; supplier measurement and improvement; and
purchasing systems development. Purchasing has been referred to as doing “the five rights”: getting the
right quality, in the right quantity, at the right time, for the right price, from the right source. In this text
we will interchange the terms “purchasing” and “procurement.”

Supply management is a strategic approach to planning for and acquiring the organization’s current and
future needs through effectively managing the supply base, utilizing a process orientation in conjunction
with cross-functional teams (CFTs) to achieve the organizational mission. Similar to our definition, the
Institute for Supply Management defines supply management as the identification, acquisition, access,
positioning, and management of resources and related capabilities an organization needs or potentially
needs in the attainment of its strategic objectives.

Supply management requires pursuing strategic responsibilities, which are those activities that have a
major impact on the long-term performance of the organization. These long-term responsibilities are not
pursued in isolation, but should be aligned with the overall mission and strategies of the organization.
These strategies exclude routine, simple, or day-to-day decisions that may be part of traditional purchasing
responsibilities. The routine ordering and follow-up of basic operational supplies is not a strategic
responsibility. The development of the systems that enable internal users to order routine supplies,
however, is considerably more important.

Supply management is a broader concept than purchasing. Supply management is a progressive approach
to managing the supply base that differs from a traditional arm’s-length or adversarial approach with

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sellers. It requires purchasing professionals to work directly with those suppliers that are capable of
providing world-class performance and advantages to the buyer.

Think of supply management as a strategic and supercharged version of basic purchasing. Supply
management often takes a process approach to obtaining required goods and services. We can describe
supply management as the process of identifying, evaluating, selecting, managing, and developing suppliers
to realize supply chain performance that is better than that of competitors. We will interchange the terms
“purchasing,” “supply management,” and “strategic sourcing” throughout this book.

Supply management is cross-functional, meaning it involves purchasing, engineering, supplier quality

assurance, the supplier, and other related functions working together as one team, early on, to further
mutual goals. Instead of adversarial relationships, which characterize traditional purchasing, supply
management features a long-term, win-win relationship between a buying company and specially selected
suppliers. Except for ownership, the supplier almost becomes an extension of the buying company. Supply
management also recognizes the mutual benefits to both parties, through shared information, provisions
for on-site resources, and frequent help to suppliers in exchange for dramatic and continuous performance
improvements, including steady price reductions. In short, supply management is a new way of operating,
involving internal operations and external suppliers to achieve advances in cost management, product
development, cycle times, and total quality control.

Organizationally, leading and coordinating strategic supply management activities have largely become the
responsibility of the functional group called purchasing. Practicing professionals often use the terms
“supply management” and “purchasing” interchangeably. Through the above discussion we have sought to
clarify some of the differences while recognizing that good purchasing and supply management practices
can have significant impact on the organization’s overall performance.

SUPPLY CHAINS AND VALUE CHAINS

These researchers break down the concept into three areas and separate supply chains from supply chain
orientation and from supply chain management

A supply chain is a set of three or more organizations linked directly by one or more of the upstream or
downstream flows of products, services, finances, and information from a source to a customer. It is
important to acknowledge that anytime business is conducted a supply chain will exist.

A supply chain orientation is a higher-level recognition of the strategic value of managing operational
activities and flows within and across a supply chain.

Supply chain management then, endorses a supply chain orientation and involves proactively managing the
two-way movement and coordination of goods, services, information, and funds (i.e., the various flows)
from raw material through end user. According to this definition, supply chain management requires the
coordination of activities and flows that extend across boundaries. Organizations that endorse a supply
chain orientation are likely to emphasize supply chain management.

Regardless of the definition or supply chain perspective used, we should recognize that supply chains are
composed of interrelated activities that are internal and external to a firm. These activities are diverse in
their scope; the participants who support them are often located across geographic boundaries and often
come from diverse cultures.

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Although many activities are part of supply chain management (which a later section discusses), an
improved perspective visualizes supply chains as composed of processes rather than discrete, often poorly
aligned activities and tasks. A process consists of a set of interrelated tasks or activities designed to achieve
a specific objective or outcome. New product development (NPD), customer-order fulfilment, supplier
evaluation and selection, and demand and supply planning are examples of critical organizational processes
that are part of supply chain management. Recent product recalls of consumer products such as
automobiles, toys, peanut butter, and dog food have placed increasing emphasis on a new supply chain
concept: the reverse supply chain; its goal is to rapidly identify and return these tainted products back
through the supply chain. Toyota’s much publicized quality breakdowns that created acceleration and
braking problems led to massive recalls and forced Toyota to temporarily suspend the sales of certain
models.

In this case the creation of a reverse supply chain was necessary to fix defective brakes and gas pedals was
necessary to fix these problems and restore confidence in the Toyota brand value chain is composed of
primary and support activities that can lead to competitive advantage when configured properly. The
accumulation of these activities results in the total value added by the firm.

One way to think about the difference between a value chain and a supply chain is to conceptualize the
supply chain as a subset of the value chain. All personnel within an organization are part of a value chain.
The same is not true about supply chains. The primary activities, or the horizontal flow across Exhibit 1.2,
represent the operational part of the value chain, or what some refer to as the supply chain. At an
organizational level, the value chain is broader than the supply chain, because it includes all activities in the
form of primary and support activities. Furthermore, the original value chain concept focused primarily on
internal participants, whereas a supply chain, by definition, is both internally and externally focused.

A good example of a simple supply chain involves cereal producers (see Exhibit 1.3). A cereal company
purchases the grain from a farmer and processes it into cereal.

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Within the downstream portion of the supply chain, logistics managers are responsible for the actual
movement of materials between locations. One major part of logistics is transportation management,
involving the selection and management of external carriers (trucking companies, airlines, railroads,
shipping companies) or the management of internal private fleets of carriers.

Distribution management involves the management of packaging, storing, and handling of materials at
receiving docks, warehouses, and retail outlets.

THE SUPPLY CHAIN UMBRELLA-MANAGEMENT ACTIVITIES

A large set of activities besides purchasing are part of supply chains. As previously discussed,
management’s ability to align, coordinate, integrate, and synchronize these activities and the physical,
information, and monetary flows is supply chain management.

What are the activities that are part of this concept called supply chain management? The management
activities that are covered by the supply chain umbrellas are illustrated in Exhibit 1.5 and briefly described
in the following paragraphs.

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Purchasing

Most organizations include purchasing as a major supply chain activity. Because purchasing is the central
focus of this book, there is no need to provide more detail here.

Inbound Transportation

Larger organizations usually have a specialized traffic and transportation function to manage the physical
and informational links between the supplier and the buyer. Transportation is a major cost for many
organizations; as a result there are usually opportunities to coordinate the purchase of transportation
services.

Quality Control

As previous examples have shown, quality control is vital to all organizations. Today’s focus on supplier
quality has shifted from detecting defects at the time of receipt or use to prevention early in the materials-
sourcing process. Progressive organizations work directly with suppliers to develop proper quality control
procedures and processes.

Demand and Supply Planning

Demand planning schedules the firm’s output. This includes forecasts of anticipated demand, inventory
adjustments, orders taken but not filled, and spare-part and aftermarket requirements. Supply planning is

6
the process of taking demand data and developing a supply, production, and logistics network capable of
satisfying demand requirements.

Receiving, Materials Handling, and Storage

All inbound material must be physically received as it moves from a supplier to a purchaser. In a non-just-
in-time environment, material must also be stored or staged. Receiving, materials handling, and storage are
responsible for the physical control over inventory. Receipts from users indicating that services have been
performed are also run through receiving to trigger invoice payment.

Materials or Inventory Control

The terms “materials control” and “inventory control” are sometimes used interchangeably. Within some
organizations, however, these terms have different meanings. The materials control group is often
responsible for determining the appropriate quantity to order based on projected demand and then
managing materials releases to suppliers. This includes generating the materials release, contacting a
supplier directly concerning changes, and monitoring the status of inbound shipments. The inventory
control group is often responsible for determining the inventory level of finished goods required to support
customer requirements, which emphasizes the physical distribution (i.e., outbound or downstream) side of
the supply chain.

Order Processing

Order processing helps ensure that customers receive material when and where they require it and
represents the key link between the producer and the external customer.

Problems with order processing have involved accepting orders before determining if adequate production
capacity is available, not coordinating order processing with order scheduling, and using internal
production dates rather than the customer’s preferred date to schedule the order.

Production Planning, Scheduling, and Control

These activities involve determining a time-phased schedule of production, developing short-term

production schedules, and controlling work-in-process production. The production plan often relies on
forecasts from marketing to estimate the volume of materials that are required over the near term.
Because operations is responsible for carrying out the production plan and meeting customer-order due
dates, order processing, production planning, and operations must work together closely.

Shipping/Warehousing/Distribution

The shipping activity involves physically getting a product ready for transportation to the customer.
Shipping activities include: (1) proper packaging to prevent damage, (2) attaching any special labeling
requirements, (3) completing all required shipping documents, and (4) arranging transportation with an
approved carrier. For obvious reasons, shipping and outbound transportation must work together closely.
Before a product is shipped to the customer, it may be stored for a period in a warehouse or distribution
center. This is particularly true for companies that produce according to a forecast in anticipation of future
sales. Increasingly, as companies attempt to make a product only after receiving a customer order and
information systems become more sophisticated, this part of the supply chain may become less important.

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Outbound Transportation

Many organizations have outsourced the transportation link to their customers. Fullservice transportation
providers called third party logistics providers (3PLs) are designing and managing entire distribution
networks for their clients. Firms operating in this space include familiar names such as UPS, DHL, CH
Robinson, and Ryder.

Customer Service

Customer service includes a wide set of activities that attempt to keep a customer satisfied with a product
or service. The three primary elements of customer service are pretransaction, transaction, and post-
transaction activities.

FOUR ENABLERS OF PURCHASING AND SUPPLY CHAIN MANAGEMENT

Capable Human Resources

The key to the success of any company is the quality of its employees. This is certainly true for purchasing.
Exhibit 1.6 identifies, from previous research, the various kinds of knowledge and skills demanded of
today’s supply chain professional. Previous research indicated that the top five knowledge areas for
purchasers should include:

(1) supplier relationship management,

(2) total cost analysis,
(3) purchasing strategies,
(4) supplier analysis, and
(5) competitive market analysis

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9
Proper Organizational Design

Organizational design refers to the process of assessing and selecting the structure and formal system of
communication, division of labor, coordination, control, authority, and responsibility required to achieve
organizational goals and objectives, including supply chain objectives.

Real-Time Collaborative Technology Capabilities

The development of information technology (IT) software and platforms that support an end-to-end supply
chain have grown rapidly in the twenty-first century. There are cloud-based storage systems, a new wave of
mobile devices that permit skyping for visual meetings, and shared software platforms that permit visibility
between all size supply chain partners. Further identification technologies such as radio frequency
identification (RFID) and voice recognition systems are getting better and better.

The adoption rates are highest in the areas of collaborative (1) sourcing and procurement, (2)demand
planning, (3) global trade management (GTM), and (4) transportation management systems (TMS) These
categories follow the two general software categories of planning and execution. Planning software seeks
to improve forecast accuracy, optimize production scheduling, reduce working capital costs, shorten cycle
times, cut transportation costs, and improve customer service. Execution software helps obtain materials
and manage physical flows from suppliers through downstream distribution to ensure that customers
receive the right products at the right location, time, and cost. It can be summed up as “lean logistics,”
“lean operations,” and “lean supply.”

Right Measures and Measurement Systems

The right measures and measurement systems represent the fourth pillar supporting purchasing and supply
chain excellence. Unfortunately, there are many roadblocks between measurement and improved
performance. Some of these include (1) too many metrics, (2) debate over the correct metrics, (3)
constantly changing metrics, and (4) old data. Overcoming these roadblocks requires that the organization
know what it wants to measure, has a process in place to measure it, and has accessibility to the right data.
The next step involves taking action on the measurement data.18 Finally, as with any planning system, the
targets are revised to reflect the realities of the marketplace, competition, and changing goals of the
organization.

Chapter 2

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The Purchasing Process

the purchasing process is used to

identify user requirements, evaluate the user needs effectively and efficiently, identify

suppliers

who can meet that need, develop agreements with those suppliers, develop

the ordering

mechanism, ensure payment occurs promptly, ascertain that the need was effectively met,

and drive continuous improvement. In every step of this process, managers

are challenged to

ensure that internal users are satisfied with both the process and the outcome.

Purchasing Objectives

Objective 1: Supply Assurance - Purchasing must perform a number of activities to satisfy the operational
requirements

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of internal customers, which is the traditional role of the purchasing function.

As a greater proportion of the responsibility for

managing

key business processes shifts to suppliers, purchasing must support this strategy

by providing an uninterrupted flow of high-quality goods and services that internal customers

require. Supporting this flow requires purchasing to do the following:

1. Source products and services at the right price.

2. Source them from the right source.

3. Source them at the right specification that meets users’ needs.

4. Source them in the right quantity.

5. Arrange for delivery/service performance at the right time to the right internal customer.

Supply managers must be responsive to the materials and support needs of their internal

users (sometimes also called internal customers). Failing to respond to the needs of internal

customers will diminish the confidence these users have in purchasing, and they may

try to negotiate contracts themselves (a practice known as maverick buying).

Objective 2: Manage the Sourcing Process Efficiently and Effectively

Purchasing must manage its internal operations efficiently and effectively, by performing

the following:

• Determining staffing levels

• Developing and adhering to administrative budgets

• Providing professional training and growth opportunities for employees

• Introducing improved buying channels within the procure-to-pay systems that lead

to improved spending visibility, efficient invoicing and payment, and user satisfaction

Objective 3: Supplier Performance Management

One of the most important objectives of the purchasing function is the selection,

development,

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and maintenance of suppliers, a process that is sometimes described as

supplier

performance management (SPM). Purchasing must keep abreast of current conditions

in supply markets to ensure that purchasing (1) selects suppliers that are competitive,

(2) identifies new suppliers that have the potential for excellent performance and develops

closer relationships with these suppliers, (3) improves existing suppliers, and (4) develops

new suppliers that are not competitive with current suppliers. In so doing, purchasing can

select and manage a supply base capable of providing performance advantages in product

cost, quality, technology, delivery, and new-product development.

QUIZLET.COM
Purchasing Management:

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The systematic process used to obtain goods and services in order to satisfy the needs of an enterprise.
Strategic Purchasing:
The process of planning, implementing, evaluating and controlling strategic and operating decisions.

Supply Management:

The identification, acquisition, access, positioning and management of resources needed to obtain strategic
objectives.

Supply-Chain Management:

Integrates supply and demand management within a company in procuring, producing and delivering a
final product to customers. (SMC) - Focused on Customer needs.

Logistics Management:

The planning, implementing and controlling the storage of goods. Raw materials, in-process inventory,
finished goods moving from the point of origin to the point of consumption. (part of SMC) -Includes
transportation.

Objective of Purchasing Management:

The basic objective is therefore to operate efficiently and effectively in order to obtain the highest possible
output with the lowest possible input, leading to maximum profitability.

Reasons for Increased Importance of Purchasing and Supply Management:

1. Globalization.
2. Internationally oriented Business Strategies
3. Increasingly stringent quality specifications and control.
4. Products are environmentally friendly and often recycled.
5. Constant and continuous rise in inventory costs.
6. Shortened Product Lifespan.
7. Increased Supply Risks.

Importance of Purchasing and Supply Management:

1. Profit-Leverage Effect - The small percentage saved in the purchase price may develop into a larger
percentage increase in the organisation's profit.
2. Total Cost Balance - The balancing of the income from turnovers (sales) with the cost of inputs that
are required to generate turnover.
3. Return On Investment. - 1. More efficient purchasing lowers overall purchasing costs thus
increasing the gross income the total income of the enterprise.
4. 2. More efficient purchasing decreases the amount of employed assets.
5. (ROI)

Influence of Supply Management on General Business Operations:

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 1. Operations Function - Efficient supply results in a quick and efficient production process. Any delays
are detrimental.
2. Marketing Function - Efficient purchasing and identification allows for exploiting marketing
opportunities.
3. Human Resource Function - Efficient purchasing results in the optimization in expenditure on
personnel not part of the permanent staff.
4. Financial Function - The purchasing function contributes to the decision making process and affects
financial planning.
5. Public Relations - How purchases are conducted could project either a specific favourable or
disadvantageous image.

Purchasing Cycle:

Determines the frequency that products are purchased.

Purchasing Cycle Steps:

1. Identification of the need.

2. Identify potential suppliers.
3. Bidding and Negotiation (tenders)
4. Placing Orders/ Awarding of Contract.
5. Following up and Expediting/ Contract Administration.
6. Receiving and inspection of incoming goods.
7. Analysing the invoice and closing the order.

Purchasing Portfolio:

All products, materials and services can be classified and by using the variances, the supply department can
develop different strategies to best manage all purchasing transactions.

Fundamental Principles of the Purchasing Portfolio:

1. Supply Risk - The risk that may be encountered in the availability of products and services.
(Influencing factors)
- Limited Supply
- Natural Disaster
- Scarcity
2. Profit Impact - The contribution to the profit of the firm that can be attributed to a specific
product.
(What affects the costs)
- Product Quality
- Possibly a Substantial Component needed
- Part could be essential to production.
3. Product Classification Matrix.
1. Strategic Items - These types of products are purchased from one supplier.
↑ High Profit Impact. ↑ High Supply Risk.
2. Leverage Items - These types of products can easily be purchased from different.
↑ High Profit Impact. ↓ Low Supply Risk.

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 3. Bottleneck Items - Over-ordering when an item is available due to unreliable supply.
↓ Low Profit Impact. ↑ High Supply Risk.
4. Non-Critical Items. - Standardized products, monitoring and optimizing inventory levels.
↓ Low Profit Impact ↓ Low Supply Risk

Important Processes of Supply Chain:

(processes required to create value)

1. Customer-Driven Supply Chain

2. Efficient Logistics
3. Demand-Driven Sales Planning
4. Lean Manufacturing
5. Information Processing
6. Sourcing

Key Principles of Supply Chain Management:

1. Value and Creation of Customer Value

2. Total Cost of Ownership
3. Integration of Processes
4. Reduction of Cycle Time

Purchasing Planning:

Determining what the supply objectives are and then deciding on how to achieve them.

Levels-of-Planning:

1. Strategic Planning (top management)

1. Long Term Planning
2. Top level Management
3. Plan for proactive purchasing
2. Functional/Tactical Planning (middle management)
1. Medium Term Planning
2. Middle-Management
3. Implementation of Strategic Plans.
3. Operational Planning (lower management)
1. Short term planning.
2. Lower Management.
3. Implementation of purchasing and supply policy and strategy.

Strategic Purchasing Objective:

1. Keep inventory investment as low as possible.

2. Develop new or existing suppliers.
3. Ensure availability of purchased requirements.

Tactical Supply Objectives:

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 1. Putting together a competent project team.
2. Contract reliable suppliers.
3. Alternative inventory control systems.

Operational Purchasing Objectives:

1. Maintain good supplier relations.

2. Provide technical support.
3. Inventory analysis.

Factors influencing Organisation of the Purchasing and Supply Function:

- extent of monetary value.

- possibility of increasing profit.
- the size of the enterprise.
- perceived contribution.
- variety and nature of materials to be purchased.

Centralized Purchasing and Supply:

All the departments of a company make purchases through a common purchasing department.

Centralized Advantages:

1. Standardized Products and Materials.

2. Increased negotiating power
3. Improved control
4. Reduced admin costs
5. Enhanced supplier relations

Centralized Disadvantages:

1. Slow response times.

2. Top heavy staff structure.
3. Less department integration.

Decentralized Purchasing and Supply:

Purchasing materials by all departments and branches independently to fulfill their needs.

Decentralized Advantages:

1. Good Service Delivery.

2. Faster reaction times.
3. Greater flexibility for profit centres.

Decentralized Disadvantages:

1. Possible Duplication.

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 2. Less control over function.
3. Possible supplier confusion.
4. Less focus on the big picture.

Internal Organisation:

Relates to certain activities that must be performed.

Cross-Functional Teams:

A group of people with different functional expertise working toward a common goal

Coordinating Purchasing and Supply Management:

An attempt to harmonize the tasks and activities of this function to ensure full cooperation.

Control:

A systematic attempt to ensure that objectives of the enterprise are achieved by measuring actual
performance and comparing it with set standards.

Performance Evaluation:

A systematic measurement and subjective judgement of critical dimensions of supply management to

provide value assessment of performance.

Performance Evaluation Steps:

1. Identify Objectives and determine the scope of the function.

2. Establish performance measures and indicators.
3. Measure actual performance.
4. Evaluate actual performance.
5. Report/ give feedback.

Purchasing Process:

1. Origin of the Need.

2. Specification.
3. Source Identification.
4. Selection of Suppliers.
5. Bidding or Negotiating.
6. Placing order.
7. Following up.
8. Inspection and Receiving.
9. Damages and Rejections.
10. Analyse the invoice.
11. Payment.
12. Maintaining files and records of transaction.

Strategic Sourcing:

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Strategic management process where commodities and suppliers are analysed and managed with
appropriate strategies to support the organisation's long term goals.

Process of Strategic Sourcing:

1. Build the team.

2. Conduct Market Research.
3. Develop a Strategy.
4. Negotiating a Contract.
5. Manage Supplier Relations.

Strategic Sourcing Matrix:

1. Bottleneck
2. Critical
3. Routine
4. Leverage

Outsourcing:

The process of purchasing goods, previously produced in-house, from an external supplier.

Outsourcing Advantages:

1. Cost Saving.
2. Better Competitive Position.
3. Increased Responsiveness.

Outsourcing Disadvantages

1. Loss of control and skills.

2. Loss of service provider focus.
3. Lack of clarity.
4. Lack of Cost Control.
5. Ineffective Management.
6. Loss of Confidentiality.

Outsourcing Decision Process

1. Assessing the cause of outsourcing

2. Defining Core activities.
3. Analyzing the strategic position.
4. Considering non cost factors.
5. Total Cost Analysis.
6. Analysis of the relationship.

Co-Sourcing:

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Partial outsourcing of activities or functions.

Subcontracting:

Employing external elements to produce products.

Rationalism:

Supply base optimization is the process of identifying how many and which suppliers will be maintained.

Reciprocity:

A practice where suppliers are also customers of the enterprise enjoy preferential treatment.

Captive Suppliers:

Suppliers who are too dependent upon one client for their continued survival.

Macro environmental Influences on Supplier Selection:

1. Legal and ethical environment.

2. Governmental Environment.
3. Economic environment.
4. Social environment.
5. Environmental issues.

Market Structure Influences on Supplier Selection:

1. Competitors.
2. Suppliers.
3. Customers.
4. Intermediaries.

Micro Environmental Influences on Supplier Selection:

1. Mission and Goals.

2. Functions.
3. Resources.

Supplier Assessment Criteria:

1. Cost.
2. Quality.
3. Delivery.
4. Environmental Issues.
5. Time.
6. Flexibility.
7. Geographical Location.

Supplier Selection Process:

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 1. Exploratory Stage.
1. Identification of Potential Suppliers.
2. Prescreening to reject unsuitable suppliers.
2. Selection Stage.
3. Conduct Research on Potentially Suitable Suppliers.
4. Choose the evaluation method and analyse the suppliers.
5. Select the supplier(s)
3. Supplier Management Stage.
6. Ongoing Measuring of Supplier Performance.
7. Supplier Accreditation.

Supplier Relationship Types:

1. Transactional.
2. Collaborative.
3. Alliance.

Supplier Relationship Management:

Strategically managing, all interactions with third party organizations that supply goods and services to an
organization in order to maximize the value of those interactions.

Corporate Social Responsibility:

A corporation's initiatives to assess and take responsibility for the company's effects on environmental and
social well being.

Purchasing and Supply Social Responsibility Definition:

A corporation meeting the discretionary responsibilities expected by the society.

Purchasing and Supply Social Responsibilities:

1. Community Support.
2. Diversity of Products and Services.
3. Environmental Awareness.
4. Ethics.
5. Financial Responsibility.
6. Human Rights.
7. Safety.

Business Ethics:

A set of moral principles that guide the behavior of leadership.

Fraud:

As dishonestly obtaining an advantage, avoiding an obligation or causing loss to another party.

Green Supply Chain Management:

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Integration of environmental policies into that of purchasing policies.

Risk Management Process:

1. Identifying the Risk.

2. Evaluating and categorizing the risk.
3. Deciding on alternative methods.
4. Implement strategy and monitor.

Quality Planning:

Management planning setting quality objectives and specifying necessary operational processes.

Quality Assurance:

Quality management focused on providing confidence that quality requirements 'WILL' be met.

Quality Control:

Quality Management focused on fulfilling quality requirements.

Quality Improvement:

Quality Management focused on increasing their ability to fulfil quality requirements.

Cost of Quality:

1. Prevention Costs.
2. Appraisal Costs.
3. Failure Costs. (internal and external)

Total Quality Management:

A system of management based on the principle that every member of staff must be committed to
maintaining high standards of work in every aspect of a company's operations.

Total Quality Management Characteristics

1. Commitment.
2. Coordination.
3. Personnel Management.
4. Supplier Management.
5. Quality Information.
6. Performance Evaluation.

Quality Management Systems:

1. Define improvement goals.

2. Measure, determine baseline.
3. Analyse determine reasons for deviations.

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 4. Improve
5. Control, introduce standardized procedures.

Standardization:

The process of developing and agreeing on uniform, technical product specifications.

Standardization Advantages:

1. Less stock needs to be kept.

2. Larger quantities may be ordered at one time.
3. Inspection and Quality Control are facilitated.
4. Possibility for mistakes nearly improbable.
5. Improved Competitive Postilion.
6. Items are readily available

Value

The difference between the benefits the customer perceives minus the total cost to acquire those benefits.
(purchase price)

Fair Price Criteria:

1. Price should cover manufacturing costs.

2. Price determined by active competition.
3. Price determined by supplier and buyer.

Cost Elements:

1. Direct Costs of Materials - Materials that are converted or consumed during the production
process.
2. Direct Labour Costs - All labour traceable to the final product determined by: 1. Labour Hours. 2.
Wage Rate.
3. Indirect Costs - All other costs of the product or service not directly linked to materials or labour.
4. Profit Mark Up - Profit Mark Up added to manufacturing costs to determine selling price.

Behaviour of Cost Related to Volume:

1. Total Fixed Cost. (cost remains the same, rent)

2. Total Variable Cost. (cost ↑ as production ↑)
3. Semi Variable Cost. (fixed and variable, electricity)

Price Analysis:

1. Collecting Information.
2. Understand supplier price models.
3. Set objectives for price determination.
4. formulate price policy and strategy.

23
The Learning Curve:

The number of units produced related to the number of labour hours required to produce.

Production Inventories:

Raw materials and components which the enterprise recquires for reprocessing.

Maintenance Inventories:

Materials that support the production process but are not necessarily incorporated into the final product.

Processing Inventories:

Semi-finished products stored between various production stages/

Final Production Inventories:

Final products ready for dispatch.

Materials Requirement Planning:

A system the controls the scheduling and ordering of materials in order to replenish inventories.

Manufacture Resource Planning:

MRP II - Try to minimize inventory investment through careful planning of the demand product.

Distribution Resource Planning:

Pull System dependent upon consumers. Determines customer demand at retail level.

Enterprise Resource Planning:

Management software that integrates internal and external business processes.

Just-In-Time System

An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only
as they are needed in the production process, thereby reducing inventory cost.

MNP 2601 Purchasing Management

Chapter 1
The purchasing and supply function works towards common goal of maximizing efficiency and
providing maximum value to the end customer over an organization.

24
Charles Dominik 2008: purchasing management has been elevated to a more significant
consideration of top level business executives. The top 10 include:

 Change 10 – Technology proliferated

 Change 9 – center led procurement arrived
 Change 8 – Purchasing grabbed more spend
 Change 7 – Social responsibility became a top priority
 Change 6 – Measurement was mandated
 Change 5 – Strategic sourcing went DIY
 Change 4 – Supply roles expand
 Change 3 – Global sourcing went mainstream
 Change 2 – The chief procurement officer position was adopted
 Change 1 – The supply chain was recognized

Purchasing for business enterprises is inherent to practically all forms of business and has been a
feature of all businesses for centuries.

Purchasing is not equally important for all types of business enterprise

Butter & Linse: over the past 25 years the vaule of industrial and commercial purchasing changed
from one of simply buying goods and services to overseeing seeing an integrated set of
management functions.

Gundlach 2006: the emphasizing coordination, the focus in purchasing moved away from
transaction management to relationship management – relationships internal and the enterprise as
well as externally with the many stakeholders that are involved in the narrow goods.

Unravelling the terminology confusion

The role of purchasing management function has changed from an admin activity, involving a
simple transferal of goods, to an independent managerial function known as supply management
which acknowledges the continuous interaction between variables to efficiently we realize the
firm’s mission and objectives.

The purchasing function is managed with an integrated management approach known as supply
chain management. All supply and buying organizations involved in the process of putting a
product on the market, for raw materials to final product are perceived as a unified entity.

In this journey of recognition there are myriad of purchasing and supply terms, and different
concepts that have been used incorrectly or interchangeably.

The traditional purchasing function developed into a broader concept known as supply
management. Supply management in turn was absorbed into a management philosophy known
as supply chain management.

Purchasing and strategic purchasing

Purchasing refers to the systematic process of deciding what, when and how much to purchase,
the act of purchasing it and the process of ensuring that what is required is received on time in the
quantity and quality specified.

Above definition clearly emphasizes the classical approach to the purchasing function.

Purchasing function: the objective is ensuring the continuous flow products and services at the most
advantageous conditions for the firm, including the lowest total cost of ownership.

25
Strategic purchasing: the process of planning, implementing, evaluating and controlling strategic
and operating decisions for directing or activities of the purchasing function toward opportunities
consistent with the firm’s capabilities to achieve its long-term goals

Strategic purchasing changes the focus of purchasing from a purely functional perspective to one
that takes the long-term goals of the firm as a whole into consideration in decisions thereby, in a
very real sense, contributing to the future direction that the firm will take.

Supply management
The identification, acquisition, access, positioning and management of resources and related
capabilities an organization needs or potentially needs in the attainment of its strategic objectives.

Additional characteristics of supply managements include:

 Supply management has a more strategic focus than purchasing

 Supply management is clearly focused on the attainment of the overall organizational
goals
 Supply management maintains a systems approach to the acquisition of materials and
services, thereby involving other functional areas as well.
 Supply management is a progressive approach to managing the supply base whereby
suppliers are regarded as extensions of the buying firm and where they are involved in the
strategic level in and long-term relationship closely resembling a partnership.

Purchasing is the foundation of supply management. Supply management is still a function of the
enterprise since it includes the typical activities of purchasing, but at the same time it has an
broader more long-term focus.

Supply chain management

SCM encompasses the planning and management of all activities involved in sourcing and
procurement, Conversion, and all logistics management activities.

That also includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third party service providers and customers. Supply chain management integrates
supply and demand management within and across companies.

SCM is not a particular function of an enterprise such a supply management and marketing. It is
cross function because it involves many functions.

The supply chain is strongly focused on the customer.

Logistics management
The part of SCM that plans, implements and controls the efficient, effective forward and reverse
flow in storage of goods services and related information between the point of origin and point of
consumption in order to meet customers’ requirements.

Important activities included in logistics management are:

 traffic and transportation

 inventory management
 Packaging and handling
 Warehousing
 The processing of returned goods.
 Customer service

26
Logistics is therefore strongly focused on the physical flow material goods and services, with a
strong emphasis integrating all these activities so that the total cost in the logistics system is
minimized.

Objectives of purchasing and supply management

The objectives of a business enterprise should always be focused on the profitable satisfaction of
customers’ needs.

If the purchasing and supply function is performed efficiently and effectively, it Serves the
fundamental objective of the firm – To ensure the highest possible return on the capital invested by
the firm.

The objectives of purchasing and supply management also evolved as the global business
environment changed and firms had to adjust to more competitive circumstances.

The following objectives are the core of most purchasing and supply functions:

 Supply the organization with the flow of materials and services that meet its current and
Future needs
 Manage the supply base so that adequate suppliers are available for the current and future
requirements
 Foster inter functional relationships by contributing to multi functional teams and providing
outstanding customer service
 Maintain an optimum balance of inventory to ensure the desired level of customer service
while minimizing costs associated with service levels
 Maintain and develop the quality of purchased products and services.
 Contributing to the development of overall business strategies by providing strategic supply
inputs
 Ensuring that a timely, cost effective and comprehensive information system is in place that
will form the basis of all internal decisions

The importance of the purchasing and supply function for business

Reasons for the increasing importance of the purchasing function

The role of the purchasing function in an organization is influenced by various factors:

 Globalization of world trade and its impact on competitive advantage

 The adjustment of organizational structures to become more internationally oriented
 Rapid developments in information technology – Supplies sources, Market trends &
availability of materials
 Increased supply risks – I.e. energy crisis, Local wars
 Increasingly stringent quality specifications and control
 Constant rises in inventory costs
 Recycling material and conserving environment

See activity 1.3 on page 10 of the study guide

27
The importance of the purchasing function was successful business operations
The importance of the purchasing function and effective purchasing and supply management of
successful business operations must necessarily be related to profits in return on investment (ROI).

It is necessary to focus on important influence that more efficient purchasing can have on the
following three key the business areas:

 The profit leverage effect

Represents the main part of an enterprises total expenditure. Explains how a small
percentage of saving in purchase price may develop into a relatively large percentage
increase in the organizations profit.

See the section in a textbook for a further explanation and formula

 The turnover/total cost balance

The impact the supply management has on the net income of the firm by balancing the
income from turnover with the cost of inputs the required to generate turnover

The two major elements responsible for a high and it income:

o Increase in turnover (sales)

o Lower total cost

Factors influencing increased sales:

o Improved customer lead time – reduce lead time to the customer by improving
supplier relations. Maintain high inventory levels or reduce cycle times from design
stage to finished product.

o Flexibility – increase sales if the firm can adapt quickly to changes in customer
demand.

o Improved quality – customer develops a preference for the firm’s product.

o Innovation

Factors contributing to lower total cost:

o Lower inventory cost can be achieved by maintaining lower average inventory

levels which in turn can result from reduced supply lead times and lower prices.

28
 Lower inventory may lengthen the lead time to customers thereby exerting a
negative influence on improved sales

o Entering into long term contracts or even partnerships with suppliers can substantially
reduce the price of products and services. May make the firm less flexible.

o Quality costs can be substantially reduced by working with suppliers on joint total
quality management programmes and zero defect programmes.

o Supply management is a major source of innovations for the firm – requires the best
IT available.

The influence of more efficient purchasing on the return on investment

ROI rests on two pillars:

 Profit margin
 Asset turnover – how efficiently the assets have been employed.

Return on investment = profit margin x turnover of assets = total income of the enterprise x turnover
Turnover of total assets employed

 More efficient purchases can lower purchasing cost as part of the cost of sales – gives a
higher profit margin
 Asset turnover - more efficient purchases can decrease the extent of the assets employed.
 The smaller the inventory, the fewer the total assets employed and the higher the turnover.

Too few firms regard the purchasing function as an opportunity to increase profits.

The influence of supply management and general business operations

The interaction between supply management and other business functions often determines the
level of success achieved by these operating units.

The operations/production function depends heavily on the timeous and correct supply of
materials to avoid production stoppages and products of poor quality.

The operations function also need to production means such as machinery and equipment and
the supporting spares and maintenance. Efficient and effective supply management will ensure a
more efficient production process, maximum utilization of production capacity and lower
manufacturing costs.

Sales or the marketing function depends on efficient purchasesing.

The human resource function also depends on the efficient purchases ie Equipment or other
tangible fringe benefits .

The administrative and finance functions require items such as office furniture, computers and
stationary

29
The activities of the purchasing department affect financial planning to large extent.

Purchasing also plays an important role in public relations.

Changes in the operating environment all contribute to the fact that the impact of supply
managements on the internal operations of the firm is in increasing. These include:

 E commerce
 Changes in the market – globalization of markets and changing customer preferences
 The shortened life cycle of products.
 Changes in management philosophy.

The purchasing cycle: basic steps in supply management.

The purchasing cycle consists of a series of consecutive steps or small purchasing activities, also
known as purchasing procedures.

These include:

 Identification and description of the need

 Source identification and supplier selection
 Bidding and negotiation
 Placing the order/concluding the contract
 Following up and expediting/contract administration.
 Receipt inspection of the incoming goods
 Analyzing the invoice and closing the order

See figure 1.2 of the textbook for a diagram

Step 1: product identification and specification

The need for a specific materials, parts and service originates with the users of the goods and
services Or in the stores carrying these requirements.

It is important the user functions identify the need in good time to avoid urgent orders.

The description of the requirements of user functions for materials, components and services is
communicated to the purchasing function by one of the following documents:

 Purchasing requisitions
 Materials lists – related to a particular production run or product group
 Kanbans – information cards forming part of the JIT system

Step 2: source identification and selection

Information technology has contributed much to the efficiency of the purchasing function in this
area.

The selection of suppliers requires extraordinary effort and supply management.

For non standard items or large quantities and high expenditure orderss, supply management and
should take the responsibility because of its experience and knowledge of the market and trends.

30
Step 3: bidding and negotiation
The process of asking for formal tenders is often not fully described in the purchasing policy and
procedures Manual.

Senior management is frequently involved in the final approval of the tender procedure.

The bidding process does not necessarily identify the actual supplier to whom the contract will be
awarded – sometimes frowned upon.

Step 4: placing the order/awarding the contract

Issuing an official order for the supply of goods and services is a legally binding step. It is essential
that the authority and responsibility for placing the orders is vested in only one function – the
purchasing function.

It should provide comprehensive information on quantities, prices, delivery dates, point of delivery,
quality and discounts.
The order should also indicate whether any specification list or other appropriate documents are
attached, forming part of the agreement between buyer and seller.

Once the contract is concluded, it is a crucial task to administer it efficiently to ensure the supplier
performs according to the contract.

Purchasing, technical, financial and legal experts can be part of the contract administration team.

Information technology has in many cases done away with the tedious method of committing
orders to paper and sending hard copy documents to suppliers.

Step 5: expediting and contract administration

This business group within the purchasing function is usually responsible for following up and
expediting orders, using a copy of the warder indicating the extent to delivery date.

With EDI buyers can immediately determine the progress of the order so that expediting in the
traditional sense is no longer required.

Follow up comes into operation when orders are not received on the delivery date.

The purpose is to ascertain the cause of the delay and to inform suppliers they have failed to
deliver. A second and third follow up is often necessary.

Expediting consists of the constant monitoring of the suppliers progress with the order – ensures the
supplier does not fall behind schedule

The task of expediting is of particular importance in international purchasing.

Step 6: receipt inspection

It is the receiving function to carry out a superficial inspection on delivery – compare quantities and
check for damage.

A receiving note, detailing order number, quantities and physical appearance of goods should be
completed.

Shortages or deficiencies should be recorded clearly

Copies of the receiving note should be forwarded to the requisitioner

The receiving function is also responsible for the orderly internal distribution of deliveries to user
functions

31
Are faulty consignment may be the result of poor or incorrect communication.

Step 7: closing the order

As a first step in closing the order, the suppliers’ invoices analysed by either the purchasing or
financial function.

When paying for the order all relevant documents are submitted to the financial function under
cover of a request for payment.

The classification of processing transactions into three main categories shows the advent of
eprocurement changes the cyclical nature of the steps.

 New task situation – new product or service is purchased for the first time from unknown
suppliers
 Straight rebuy – first four states of the cycle are bypassed
 Modified rebuy – purchasing a new product from a known supplier or a known product
from a new supplier.

The purchasing portfolio

All purchasing transactions are not of equal importance to the buying firm.

Kraljic: 1983 – portfolio of possible purchasing transactions. Based on two main characteristics of
supply situations:

 Supply risk – the risk that the firm encounter in the availability of products and services
(scarcity)
 Profit impact – contribution to profit of the firm that can be attributed to specific product.

See product classification matrix – figure 1.3 in the textbook

Strategic items have a high impact on profits and the higher supply risk. There are few suppliers for
this kind of product or service and the expenditure of the firm on these items is high.

Leverage items also have a higher profit impact but the risk of availability is low. The firm may have
high expenditure on these items and there are a large number of suppliers in the market – supply
function is in a strong position to use its purchasing power to obtain the best deal.

Not uncritical items are characterized by low supply risk and low profit impact – standard items and
firms expenditure is low.

Bottle neck items – hi supply risk and low profit impact. Only few suppliers and supply function has
very little leverage due to low expenditure.

32
Supply management and related developments - SCM
The term supply chain management is not yet universally accepted as descriptive of the exciting
new approach aimed at enhancing Customer service and providing a firm with the competitive
advantage Through the efficient management of the flow of materials and services.

SCM is a management philosophy aimed at integrating a network of upstream linkages, internal

linkages inside the organization and downstream linkages in performing specific processes and
activities.These will ultimately create value for the customer in the form of products and services.

C figure 1.4 in the textbook – the supply chain model

The above depicts the integration of all activities involved in the flow of materials and services, and
shows that the supply chain as a whole is focused on creating value for the customer.

It should be noted that the figure emphasizes process management as opposed to functional
management. The fully integrated supply chain, processes are managed across the functional and
organizational boundaries.

Important to understand that the supply chain philosophy focuses on the processes that are
required to create value in the supply chain and not on the typical business functions.

Some of the most important processes of a supply chain are:

 Customer driven supply chain – customer defined product or service and this information is
fed through the information system back to the supply chain. Focus of the supply chain
processes is the end of the supply chain

 Efficient logistics – ensure the least cost in the supply chain welcome performing to or
exceeding customer requirements.

 Demand driven sales planning – linked to the customer driven demand, the volume and
mix of demand are the trigger mechanisms for all other processes. The sales planning of
the ultimate supplier to the end customer would before by demand driven.

 Lean manufacturing – most effective operation of all manufacturing processes – should be

fully integrated with the rest of the supply chain

33
  Information processing

 Sourcing – a key process. Represents the upstream extension of the supply chain and may
include second and third tier suppliers of the primary firm.

Key concepts in SCM

Value and creation of customer value

Contribution of the supply chain in creating value can be found in:

 Quality of the inputs,

 the optimization of input costs
 timeliness of transformations
 customer satisfaction

Total cost of ownership

In supply chain provides a competitive advantage by ensuring that the total cost over the whole
supply chain is optimized and the advantage is passed on to the end customer.

Integration of processes
The endeavor to optimize value, delivery processes are managed as processes across functional
boundaries.

Reduction of cycle time

Being more responsive to ever changing customer demands, being able to anticipate customer
requirements, being able to reduce lead times for efficient logistic processes

Characteristics of supply chain management

 SCM is a management philosophy – sharing risks, benefits and rewards for long term
cooperation
 Supply chains consist of multiple layers of companies striving to optimize the supply chain
process
 Organisations may be involved in multiple supply chains of many other organisations
 All links and interfaces in the supply chain are not of equal importance
 Information sharing in SCM occurs across the breadth of the supply chain.
 Comparable corporate philosophies are essential in achieving the necessary levels of
planning and coordination
 SCM is based on a shared vision of what customer value is

Logistics management
Part and parcel of SCM. Refers to the inbound and outbound flow in storage of goods , services
and information within and between organisations.

See figure 1.5 in the textbook.

34
That in order for quench it

Chapter 2: The task of purchasing and supply

management
Supply management is the process of planning, implementing, evaluating and controlling strategic
and operational purchasing Decisions for directing all activities of the purchasing function toward
opportunities consistent With the firm’s long-term goals.

Purchasing and supply management as part of business management

Executed as an integrated part of the firm’s broader management.

Purchasing and supply planning his style of offence general planning, mainly because the
continuous flow of raw materials, materials, components and services is of strategic importance to
the enterprise.

The organizational structure of the purchasing and supply function should be aimed mainly at
linking into the firm’s overall structure in the most effective way.

The firms P&S function should be compatible with the firm’s organizational structure.

P&S coordination should be ended harmonizing and the lining the activities of the P & S function
with those of other business functions.

Control is that in element of management which ensures the activities are executed according to
plan.

35
Planning for purchasing and supply management

The nature of purchasing and supply planning

P & S planning is the first responsibility of P & S management. At the task can only be executed after
the planning task has been completed.

The following general factors headed to what is called the ‘resource crisis’ which has made P & S
planning increasingly more crucial over the past two decades:

 Energy crisis
 Scramble for commodities
 Shortages or semi finished products
 Inflation
 Fluctuating exchange rates
 Government control in producer countries

Levels of P & S planning and objectives

P & S management can be involved at three levels and the organization:

 Organizational planning – strategic planning

 Functional or tactical planning – middle management level
 Operational planning – lowest level

An important part of P & S planning is the formulation of objectives.

Overall objectives are part of a strategic or long-term objectives. Tactical and operational
objectives and should support strategic objectives.

Lower levels of objectives will transform the strategic or long term objectives into more specific
feasible ones.

See the table on page 24 of the study guide

Strategic purchasing and supply planning
Strategic purchasing and supply planning is planning for the long term and should take place at
top management level.

One of the aims of strategic purchasing and supply planning is to plan purchasing and supply pro-
actively and move away from reactive purchasing.

The following factors will determine whether the purchasing and supply function can play a
proactive or reactive role in the strategic planning process:

 Extent to which the enterprise depends on purchased products, raw materials and services
 Importance that top management attaches to the P & S function.
 Extent of the evolutionary development of the purchasing and supply function within the
enterprise
 Ability of the P & S manager to fit a shift in emphasis from tactical to strategic purchasing
 Importance of supplier relations and long term contracts
 Willingness of top management to invest in integrated systems.

Examples of areas for which supply management can develop strategies:

 Assurance of supply strategies

36
  Cost reduction strategies
 Supply chain support strategies
 Environmental change Strategies
 Competitive edge strategies
 Risk management strategies

See figure 2.1 in the textbook

See page 27 in the study guide.

Tactical purchasing and supply planning

Executed at functional or middle management level.

P & S management has a dual role to develop existing and supply strategies as part of the broad
strategy of the enterprise at top management level and to implement in the middle management
level.

Entails planning the resources required for achieving the objectives and planning the effective
application of resources.

For categories of P & S planning at mid-management level can be distinguished:

37
  Needs

 Purchasing and supply of programme planning – include planning of the Supply System, a
time schedule of deliveries, planning of transport, preparing materials budget for the
quantities required, and negotiating contracts with suppliers

 Planning the purchasing and Supply System – determining procedures for purchasing
activities, planning inventory investment the inventory control system. Important dates
include EDI and MRP II

 Extraordinary projects – Purchasing of Capital Equipment, changes to the organizational

structure , planning necessitated by large purchasing contracts running for periods of
between two and five years.

Operational purchasing and supply planning

These objectives represent the implementation of P & S policy and strategy by planning for specific
purchasing and supply activities over the short term.

Objectives and operational level was used for each of the above mentioned categories at middle
management level.

 Materials requirement planning - Entails planning marketing investigation and analyzing and
interpreting master production schedules

 Supply planning - entails planning negotiation, calculating the most economical order
quantities and using supplier sources.

 Planning of purchasing and Supply System – means that specific supply activities are
allocated to subgroups in the purchasing and supply function. A purchasing and supply
menu is compiled, setting out the procedures for P & S activities.

 Extraordinary projects – depends on the nature of the project.

Organizing P & S management

Due to the growing importance of the purchasing function, the P & S department must be
organized in such a way that it links up with the overall organizational structure.

The creation of an effective organizational structure of the P & S function is in threefold process:

 The decision is made about the position of the P & S function in the org structure of the
enterprise.
 The internal organizational structure of the P & S function is formulated.
 Management decides on the extent to which all activities relating to the supply of
materials should be integrated with other functions in the organization.

Position of the purchasing and supply function in the enterprises organizational structure

38
The position or level of the purchasing and supply function has significant implications for the
execution of the P & S function.

It has an influence on the extent to which the P & S function contributes to the overall
management of the enterprise.

It is affected by factors such as:

 The extent of the monetary value

 The perceived contribution of P & S to enterprises profits
 Of possibility of increasing their profits
 The variety and nature of materials to be purchased
 Tackle supplier market
 Time based competition
 The size of the enterprise
 Management’s commitment to integration

Centralized purchasing and supply organizational structure

When a firm vests the authority for the P & S function in one person or dedicated team.

Centralization has become more widely used because of:

 the availability and efficiency of transport and logistic networks
 new developments such a supply chain management , supply partnering , long term
contracts and integrated information systems.

Decentralized purchasing and supply organizational structure.

Defined as purchasing by different departments, branches or plants we each ensure he is a
measure of autonomy over decision making in respect of P & S.

See the table on page 29 of the study guide

See table 2.2 in the textbook – advantages and disadvantages of centralized and decentralized P
&S

39
Combined purchasing and supply organisational structure.
The combined or hybrid approach represents a combination of the centralize and decentralized
structure.

In this approach common requirement of different plants, ie equipment and categories of raw
materials, are purchased centrally by the head office.

Individual requirements of different plants are produced on a decentralized basis.

Internal organisational structure of purchasing and supply

The main advantages of organizing the function by means of internal subdivisions are:

 enables buyers in enterprises to specialize.

 everybody body knows what tasks are allocated to them and other colleagues

Cross functional teams

People at lower levels are empowered and included in decision-making.

Important purchasing decisions are also made BAB areas teams consisting of representatives from
the purchasing function, quality control, engineering, new product development, marketing, and
sometimes even suppliers.

Using cross functional teams has many advantages for a firm:

 different perspectives and expertise of team members

 Responsiveness to user needs
 Increased acceptance by users of the products
 Understanding by other functions of the range of tradeoffs considered in making a final
purchase
 Reduced time to solve problems or computer – task
 Increase innovation
 Joint agreements and ownership of decisions among the members
 Enhanced communication between functions and top management
 Teams exiting responsibility for problem correction.

See table 2.3 in the textbook.

Coordinating purchasing and supply management

The nature of purchasing and supply coordination

The P & S function is an auxiliary or support function providing a specific service to other functions in
the organization.

The P & S functions direct contact with the external environment also contributes to the
complexities of the P & S coordination.

Coordination between purchasing and supply and other functional areas.

40
Lateral purchasing and supply coordination has mutual advantages for both the purchasing
function and other functions in the organization.

Lateral coordination is important because the purchasing and supply function acts in an advisory
capacity on aspects relating to the supplier market and in a verifying capacity with quality control

The nature of the relationship between purchasing and supply function and functions of the
enterprise contains the potential for conflict.

Coordination between purchasing and supply and the Supplier System

Consists of two dimensions:

 Coordination has to be established with the whole Supply System

 Called nation with the activities of the individual suppliers is also important

To particular coordination task of purchasing and supply management is to coordinate the

objectives, abilities and activities of each component of the overall supplier system with those of
the enterprise and the purchasing and supply function.
The chief coordinating mechanisms available to P & S management are:

 Open communication
 Strategic alliances
 Integrated systems
 Conscious motivation of suppliers
 Standardisation of specifications
 Purchasing documents and purchasing procedures

Control: performance evaluation of the purchasing and supply function

The most important overall control mechanism P & S is the process of performance evaluation,
which is fundamentally aimed at improving overall performance.

An assessments should be made of the degree of success which supply activities are carried out,
after which manage uses this information to improve performance.

Performance evaluation of the material supply activities has both an:

 Objective quantitative dimension

 Subjective qualitative dimension

Objectives and basic principles of performance evaluation

Most important objectives for the performance evaluation of the purchasing and supply function of
the following:

 Improvement of purchasing and supply performance

 Provision of information to purchasing and supply management
 Motivation and enhancement personnel
 Placing the internal reorganization of purchasing and supply activities on a rational footing
 Establishing an objective basis for comparing the P & S performance between different
purchasing and supply divisions in the enterprises and also between different firms.

Within the context of the set objectives, the underlying principles of P & S performance help to
paint a clearer picture of the essence of the performance evaluation of the purchasing and supply
function. Principles comprise the following:

41
  Performance evaluation of the purchasing and supply function entails costs –and benefits
derived must be weighed up against these costs
 Performance evaluation must make provision for both quantitative and qualitative
measures
 Evaluating the performance of the P & S function requires a sound database containing
information that covers a wide spectrum of purchasing and supply activities.
 P & S evaluation must be updated continually.
 Performance in the P & S function must be evaluated using several measures.

Difficulties relating to the performance evaluation of the purchasing and supply function
Some of the more obvious difficulties of purchasing performance evaluation of the following:

 The P & S function is performed by means of a large number of diverse activities – it is

extremely difficult to build up an objectively based overall picture of P & S performance.
 Is difficult to express the performance of the various P & S activities in quantitative terms.
 Is difficult to set quantitative standards for the P & S performance.
 Traditional purchasing objectives are of little practical value in the performance evaluation
of the P & S function.
 Purchasing performance is directly influenced by factors external to the function i.e.
corporate strategy, market forces

States in the process of evaluating the purchasing and supply function

The following states are generally accepted:

 Determining the objectives of P & S

 Determining appraisal factors and criteria for success
 Performing internal audits, self-governance and self-assessment
 Exercising managerial control in response to results.
Step 1: identify objectives are determine the scope of the P & S function
Persisted in evaluating performance is that elimination of the scope of the purchasing function in a
specific firm and the identification of set objectives for it.

Measuring against objectives or standards is the essence of the any control procedure.

Top management’s view of the objectives and scope of the P & S function must be obtained.

Objectives for evaluation purposes should be approached with circumspection

Step 2: establishing performance measures and performance indicators for evaluation:

A decisive step in the successful implementation of performance evaluation.

Establishing performance measures and the contaminant metrics involves the designing of
yardstick of practical evaluation of purchasing and supply performance.

By performance measure represents a group of related purchasing activities that jointly provide a
picture of a specific aspect of purchasing and supply performance.

Purchasing performance indicators are a series of measurement techniques whereby quantitative

values can be determined for specific purchasing and supply activities

Greater emphasis is being placed on measures such as the following:

 Human relations
 Professionalism
 Negotiating ability

42
  Commodity knowledge
 Ability to cultivate qualified suppliers
 Team-building

They must be three evaluations of measures and norms:

 Level one: P & S management – evaluation of the performance of P & S management on a

subjective basis

 Level two: Supply proficiency – relates to performance levels of the function and also to the
achievement of P & S objectives. Means that performance evaluation of the supply
proficiency level determining the extent to which the purchasing and supply function has
achieved the overall objectives.

The most important measures that can be used for performance evaluation at this level are:

o Pricing proficiency – extent to which the P & S function has allowed purchasing to
take place at competitive prices. Matrix there can be vague and put this measure
on the following:

(see the textbook with the formula)

 Price variance ratio

 Invoice price variance

 Cash discounts negotiated

o Supplier performance – the selection and development of the Supply System are
taken to be the primary tasks of the purchasing and supply function. Examples of
performance indicators that could give an indication of supplier performance
include:

 Rejection ratio

 Supplier turnover

o Materials flow – gives an indication of the degree of proficiency of the purchasing

function in allowing a continuous accurate and prompt flow of materials between
supply and the firm.

Examples of matrix include:

 Promptness factor

 Outstanding orders

Some materials supplier performance measures include:

 inventory holding

 production planning and control

43
  material handling

 Quality – and performance to quality requirements is a key proficiency

measure. Examples of the most important norms include:

 Quality certification

 Quality delivered

 Level three: supply efficiency. Includes:

o Cost savings – Attempts to depict how efficiently the P & S function utilizes Financial
Resources.
Examples include:

 Cost avoidance ratio

 Inflation index

 Quantity discount ratio

 Workload – Concerned with the performance of the P & S personnel. Examples

include:

 Input ratio

 Expenditure ratio

 Administrative performance – related to the administrative budget for the P & S

function and is closely linked to the workload as a performance measure.

One of the best ways to measure administrative issues is through benchmarking

Permitted lay down for administrative performance also chiefly reflects the
relationship between the cost and some or other element of purchasing function
outputs:

 Purchasing cost ratio

 Cost per order

All three performance measures at this level are particularly sensitive to these influences and can
give rise to a distorted image of actual purchasing performance if both images and the
performance indicators are not carefully selected.

Step 3: measurement of the actual performance

The availability of information from an established information system considerably facilitates the
task of performance evaluation.

44
For those aspects of purchasing performance for which quantitative objectives can be readily set
the MS them into the actual performance consists of comparing actual performance with the set
quantitative objectives.

There is a difference in the measurements are the actual performance at three levels

At the purchasing and supply management level, evaluation is mainly subjective.

Of the levels of P & S proficiency and P & S efficiency more objectives and quantitative methods
are used

Step 4: evaluation of actual performance

Evaluation of actual performances is closely interlinked with the measurement of actual
performance.

Attention must be given to those measures and metrics for which actual performance does not
measure up to the planned or expected performance.

One can adopt four main approaches when evaluating the actual performance of the P & S
function:

 Historical approach – drawing a comparison between present P & S performance and

preceding periods
 Budget objectives
 Quantitative objectives
 Benchmarking – gives P & S management a picture of how the function is performing
compared to other companies.

Step 5: reporting

The final step in the evaluation process of the P & S function. Report aims are providing
information about those aspects of the P & S function which is unsatisfactory.

As performance evaluation is on-going feedback of results should be continuous.

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Chapter 3: Purchasing processes and procedures
Procedures in the purchasing process

No standard purchasing procedure is equally suitable for war businesses.

The following general steps are identified:

 Origin of the need

 Specification
 Source identification
 Selection of suppliers
 Bidding and negotiation
 Following up and expediting/contract administration
 Receipt, inspection and distribution
 Inspection of the incoming goods
 Handling faulty consignments and rejections
 Analyzing the invoice
 Closing the order – Payment
 Maintaining files and records
 Measuring supplier performance

Origin of the need

The need for specific materials originates with the users of the goods and services.

Need may arise for production, maintenance and cleaning materials, stationery, office or plant
equipment etc

It is important the user functions identify the need in good time to avoid urgent orders. It is essential
to create specific purchasing procedures.

Mr. Control system of the inventory function should be designed to anticipate the production
functions need for production materials and to maintain adequate levels of supplies.

Where a materials requirement planning (MRP) system is used, the system not only provides
information on the size and the specific description of the need, but also schedules the purchasing
in terms of the master production schedule (MPS).

Description or specifications
The materials, components and services needed by the user function is communicated to the
purchasing function by means of one of the following documents.

 Purchasing requisitions – Office Equipment, stationery and protective clothing etc

46
  Travelling requisitions - repeated purchasing of standard inventory requirements
 Materials list – material requirements related to a particular production run or product group
 Kanbans – information cards forming part of the JIT system. Provide a clear description and
specification of the firms specific needs.

It is the responsibility of both the buyer and the user to ensure that the description meet the
standards.

Is the buyers prerogative to question specifications on purchasing requisitions, travelling requisitions

and materials lists. It’s important that buyers do not alter obscure, superficial or incomplete
specifications without consulting the user.

Alterations to requisitions must be authorized.

Supply source identification

One of the activities of the purchasing process to which IT has contributed is the purchasing
function.

IT innovation e.g. eprocurement, electronic data interchange, electronic catalogues are of great
value in identifying potential suppliers.

Selection of suppliers
When standard products are to be purchased in relatively small quantities the usual procedure is to
use the supplier recommended on the requisition.

In the case of travelling requisitions, the names of three or four suppliers are usually required. An
open order contract will have often been negotiated with the suppliers. Depending on the terms of
the contract the buyer will likely select the supplier with the shortest lead time as prices will have
been fixed by the open order agreement.

Purchasing highly specialized equipment – written quotations must be submitted with requisitions

Bidding and negotiation

Business is reserve the right to negotiate after the bidding procedure has been completed.

The bidding process does not necessarily identify the actual supplier to whom the contract will be
awarded – a frowned upon activity.

Placing the order/concluding the contract

Issuing an official order for the supply of goods and services is a legally binding step.

Essential that the authority and responsibility for placing orders are vested in only the purchasing
function.

All orders are subject to the terms and conditions printed on the reverse side of an official order,
except in exceptional circumstances.

The order form is the source document for a whole series of activities to been performed after the
order has been placed. Several copies of the order are made and distributed to the following
actions or groups:

 Supply receives the original order.

 Financial function receives a copy for verifying the invoice for payment.

47
  Receiving function receives a copy notifying it to expect a delivery.
 The inspection function receives a copy with detailed information on the specifications,
enabling it to plan the inspection task
 Purchasing function keeps a copy for follow up and expediting as a control measure
 The last copy stays in the order book as a permanent record of the transaction.

Order form issued to confirm a telephone order should clearly state that it is a confirmation.

As purchasing and supply does not have technical knowledge to perform all tasks of contract
administration, purchasing, technical, financial and legal experts will be part of the administration
team.

IT has largely done away with the tedious method of committing orders to paper.

Following up and expediting/contract administration

A specialist group and is usually responsible for following up and expediting orders.

Suppliers often send acknowledgement of orders indicating a fixed delivery date.

Expediting consists of the constant monitoring of the suppliers progress with the order.

Expediting is particularly important in international purchasing.

Follow up comes into operation when orders are not received on the delivery date

Receipt inspection and distribution

The receiving function should receive all deliveries.

Only in exceptional cases should a supplier be allowed to deliver directly to the user function.

If the receiving function starts to:

 carry out a superficial inspection on delivery

 ensure packaging has not been damaged
 compare quantities with those on the official order

A receiving note with full details should be completed promptly. Any shortages or deficiencies
should be recorded clearly.

Copies of the receiving note should be forwarded to the requisitioner, the purchasing department
and the supplier.

The receiving function is responsible for the orderly internal distribution of deliveries to the user
functions.

Handling faulty consignments and rejections

The purchasing function should be responsible for all negotiations with the supplier over faulty
consignments for the following reasons:

 Communication with the supply base is the primary responsibility of the purchasing function.
 The purchasing function is responsible for long term supplier relations
 It is the purchasing functions responsibility to foster and maintain a TQM approach with
suppliers

48
Analyzing the invoice
The suppliers invoices analysed by either the purchasing or financial function.

Invoices are analysed and compared with the official order and delivery note. The most important
aspect of this task include:

 Comparing invoice prices with those on the order

 Dear fine calculations
 Checking discounts
 Comparing quantities received with those ordered.
 Confirming the details on the invoice are in full agreement with the terms and conditions of
the original order.

An important task in analyzing the invoice is to identify cash discounts i.e. 2.5% within 30 days

Closing the order

Relevant documents are submitted to the financial function under cover of a request for payment

Maintaining files and records

Finance step in the purchasing cycle is to keep a records system for copies of orders

Electronic records eliminate the need for vast paper files of transactions and increased accessibility
to information for purchasing personnel

Measures supplier performance

Supplier performance evaluation is a critical part of the purchasing cycle.

The management of the supply base is regarded as a strategic responsibility of purchasing.

Chapter 4: Purchasing and supply policies and

strategies
Strategic sourcing pertains to all issues of strategic importance in the supply of materials and
services to modern organizations

Can also be regarded as a strategic management process whereby commodities and suppliers
are analysed and relationships are formed and managed according to best practice and
appropriate strategies.

The process of strategic sourcing

Consists of a process containing the following steps:

49
  Building the team
 Conducting market research
 Developing a strategy
 Negotiating a contract
 Managing supplier relationships

See figure 4.1 on Page 60 of the text book

Build the team

The strategic sourcing process starts with the building of a multi-functional team who will act a
category teams for the sourcing of certain category items.

A team may consist of a purchasing manager, an operations manager and information systems
manager etc

Conduct market research

Conduct market research on the suppliers.

Make a spend analysis of the total expenditure for each commodity and supplier and the spending
on the commodity as a percentage of total spending.

Data should be connected and transformed into a comprehensible format to use strategy
development and decisions.

Develop a strategy
The information gathered must be structured into a format which makes it possible for the team to
develop a strategy for Similar commodities.

The portfolio analysis matrix or strategic sourcing matrix can be applied to bring structure. With this
matrix the total spending is divided into different categories according to the risks involved in the
supply of the commodity, The number of suppliers in the market and the amount spent on a
commodity.

The total spending can be divided into the categories:

 Routine
 Leverage
 Bottle neck
 Critical

See figure 4.2 on page 61 of the textbook

Routine items - in arms length relationship is applicable. Decisions are made on lower levels and
without much effort to search for suppliers.

Leverage items – or large amount is spent the supply risk is low.i.e. computer hardware

Bottle neck items – amount spent is no better risks are high because:

50
  substitution of products is difficult
 specific missions and manufacturing are complex
 The commodity has a big impact on the operations
 The market is monopolistic with high barriers for competition
 The situation is geographically and politically complex

Critical items – large amounts are spent and the risks of availability are high due to difficulty in
substitution.

Negotiate a contract
The contract is negotiated with the identified suppliers and the strategy is implemented in terms of
time lines, resources and accountability.

Manage supplier relationships

The basis for managing a relationship should be the performance evaluation of suppliers.

Outsourcing: to make or buy

Traditionally, large organizations tend to choose the make option. This lead to backward
integration, large organizations and ownership of a large group of manufacturing plants. Purchases
involved mainly raw materials that were processed in the enterprise.

Outsourcing is described as the process of purchasing goods and services on specification from an
external supplier.

It can involve the transfer of an entire business function to supplier or may lead to the transfer of
some activities associated with the function.

Co-sourcing consists of a partial outsourcing of functions and activities.

Outsourcing can involve the transfer of both people and physical assets to the supplier. A term
often used in the context of outsourcing and insourcing is vertical integration or Vertical
disintegration (Concerned with the decision on whether to perform an activity internally or source it
from outside)

In sourcing is vertical disintegration

Backward Disintegration refers to activities on the supply side and forward disintegration to the
distribution side of an organizations supply chain.

Major characteristics of outsourcing are:

 Activities that were initially performed in house being transferred to an external party
 Assets going over to that external party
 Existence of an extended relationship between the parties over a longer period
 Exposure of the buyer to both cost and risk profile transfer

Certain trends in the business world made outsourcing popular:

 Efforts to make enterprises leaner

 Narrowing the supply base to limited number of suppliers
 Pressure to be Internationally competitive
 Organization specializing in a limited number of products and technologies
 Emphasis on quality, delivery times and technology
 Pressure to get to technology developments
 And lack of skills, knowledge or capacity

51
  Pressure on organisations to deliver excellent customer service

Rationale for outsourcing

Tactical reasons are to:

 reduce operating and control costs

 three up internal resources
 Receive important cash infusion
 Improve performance

Strategic reasons include:

 Improve company focused

 Maintain access to world class capabilities
 Gain access to resources that are not available internally
 Accelerate reengineering benefits
 Improve customer satisfaction
 Increase flexibility and risks

Outsourcing may have considerable economic and strategic advantages for the enterprise.

It can bring about cost savings if the service provider can offer the product or service at a lower
cost of ownership.

Outsourcing contractors as can enlarge the production operating capacity of the enterprise,
helping to save large amounts of capital for additional production or operation facilities.

Outsourcing may also assist the organization to respond to changes in market demand quickly.

Disadvantages of outsourcing include:

 Outsourcing contractors or service providers become dependent on the enterprise –

captive supplier
 An enterprise can become over involved in the development of contractors or service
providers.
 Loss of control and skills
 Loss of service provider focus
 Lack of clarity – If the particulars of the responsibilities are not clearly prescribed.
 Lack of cost control
 Ineffective management – outsource service provider may not be efficient, effective all
capable of performing well
 Loss of confidentiality – service provided becomes an extension of the organization and has
access to information.
 Double outsourcing – where an outsourcing contractor outsources the service to another
provider.

The outsourcing decision process

The outsourcing decision requires a wide variety of knowledge and technical skills ranging from
strategic thinking to indepth cost analysis.

The Outsourcing decision process may consist of the following phases:

 Assessing the causes for outsourcing

 Defining core activities

52
  Analyzing the strategic position
 Considering non-cost factors and making a decision
 Conducting a total cost analysis of core activities
 Analyzing the relationship

See figure 4.3 on page 65 of the textbook

Phase one: Assess the causes for outsourcing

Often triggered by technology and demand trends including:

 New product development – be sure to consider the stability of the technology and its
lifecycle
 Strategy development – driven by the business strategy development process
 Poor internal or external performance and competencies – unsatisfactory performance or
incompetence
 Changing demand patterns – market changes may need a shift in production or service
provision
 Shifting technology life cycle – outsourcing effectively shifts the risk to competent, flexible
external sources that specialize in technology.

Phase two: define core activities and competencies

In this phase a connectivity importance analysis is competed. McIvor 2005 suggests use of the
critical success factor method (CFM)

The process of identifying core competencies and activities should be carried out by top
management with inputs from consultants and teams representing all functions.

Organisations prefer to keep core activities inside the organization and outsource all non-core
activities.

Phase three: strategic analysis

The major strength that give the organization a competitive advantage should be identified.

The competitive advantage maybe the way the organization leverages its costs or differentiates its
product.

Strategic analysis may be executed through a swot analysis, value chain analysis and capability
analysis

The benefits of carrying out this analysis are:

 the organization can focus resources on the activities where it can achieve preeminence
 Activities for which the company has no critical strategic need should be outsourced

Phase four: consider the non cost factors and make a decision
That outsourcing team may decide to perform an activity inside or may go with outsourcing.

Non cost factors should be highlighted:

53
  Control of production/service and quality – organization must ensure that the critical
product or service is available
 Design secrecy
 Unreliable suppliers
 Supplier specialized knowledge and research
 Volume of requirements
 Availability of facilities
 Workforce stability

Phase five: conduct of total cost analysis of core activities

And effort is made to measure all the costs involved in the interim a provision and external sourcing
of the activity.

Tenders can be requested from the top suppliers of the product or service. The second stage
concerns determining the cost of carrying out the activity internally. The availability of an activity
based costing (ABC) management system will use the formidable task of identifying cost in the
organization.

What costs should be included in and insourcing/outsourcing decision is open to debate.

Table 4.1 on page 67 of the textbook:

The main cost elements that should be included in the insourcing/outsourcing analysis:

If the organization is more competent in performing an activity than any other external source
management might decide to:

 Keep the activity in house maintaining any current advantage

 Outsource the activity to the most competent external source if there is no certainty that
your organization will be able to sustain its competency

If external sources are more competent at performing the activity than internal sources top
management may decide to:

 Invest in resources to enable the organization to improve the performance of the activity
internally
 Outsource core activity that does not give any competitive advantage

Phase six: relationship analysis

The relationship between the two parties to an outsourcing agreement may take many forms. The
relationship will depend on:

 The technical, management and financial capacity of the two parties

 The type of product or service
 Supplier market conditions
 Competitiveness of the country’s economy
 The motives of the organization

The support which the organization gives the service provider may vary from:

 No support

54
  Assistance with the establishment of a service provider
 Financial assistance
 Provision of skilled labour
 Technological assistance
 Training and management of workers
 Assistance with quality control
 Purchase of raw materials

Larger enterprises that outsource simple production or service tasks to unsophisticated businesses
will often have to offer greater support to the service provider in the form of training of workers,
creation of the infrastructure and management.

The more critical the product or service in terms of risks in the supplier market and technological
advancement, the longer term of the contract will be.

An SLA will usually form part of the contract with the supplier of the outsource product or service .

Supplier policies and strategies

Local, national or international suppliers

Various options have advantages and disadvantages:

Overseas suppliers may have advantages for SA enterprises:

 Advanced technical expertise

 Been quality
 Lower cost you to lower labour costs
 A larger production capacity in
 Large or product range

Disadvantages of the overseas suppliers may include:

 Higher transport costs

 Longer lead times
 More administration
 Exchange rate and political risks
 Cultural factors
 Possible inappropriate use of workers i.e. slave labour

Local or nearby sources of supply have advantages including :

 Lower transport costs

 Shorter lead times
 Small inventories
 Improve communication
 Express orders being easier to expedite
 More reliable service
 Better personal relationships with suppliers
 Support of local business

Advantages of larger national local suppliers:

 Lower prices due to mass production

 Technical support in the former intensive research and development

55
  Continuity of supply as big national suppliers are in a strong financial position and hold more
stock
 Improved service from local branches and depots.

Purchasing from a distributor or manufacturer

Include the following advantages:

 Distributors have specialized product knowledge

 Purchasing enterprise has a wider choice of style, quantity, colour, packaging and finish
 Shorter lead times and the after sales service due to better locality
 Better Marketing Services i.e. Transport, storage, reordering, financing
 System contracts can be entered into to reduce administration and stockholding

Supply base optimization: one supplier or more

The process of identifying how many and which suppliers will be maintained

Effective supplier management and development begins with determining the right number of
suppliers an organization should maintain.

The concentration of purchasers from one or limited number of suppliers may be beneficial to the
enterprise under certain circumstances:

 Were successful relationship exists

 With the supplier his patent rights or a unique process
 With the supplier offers outstanding quality
 We orders are too small to justify more than one supplier
 When bigger discounts or lower transport cost make it worthwhile
 Where the enterprise has a stockless or JIT system.
 When electronic data interchange is used
 When partnerships with suppliers are the obvious supply strategy
 When a supply management approach is followed in the firm.

Using more than one supplier for the same item or service may be to the enterprises advantages
when:

 The enterprises buying strategic or important projects

 When one supplier specializes in one product or service and another gives support only
 Using small enterprises to be involved in community development
 When one supplier does not have sufficient capacity to supply the enterprises current or
future needs

Size of suppliers
Smaller businesses often supplier to the local market only. They are characterized by flexibility,
speed and availability but usually at a higher price.

Larger enterprises are suitable for large volumes but usually of lower quality.

Supplier development
There are three main ways in which an enterprise may become involved in the development of
suppliers:

 Purchasing from disadvantaged suppliers – BEE

 Taking action when a product of services not available – produce product themselves
 Performance appraisal of suppliers

Reciprocity

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Meaning: buy from you because you buy from me

The decision to make or buy

A larger enterprises usually choose the make option. However the new management focus is on
the enterprises main mission or core business.

The following circumstances will favour buying requirements or outsourcing services:

 If the enterprise has a strong purchasing corps

 When there are inadequate facilities or better investment possibilities
 When the operational staff knowledge and skills are inadequate
 When the demand for product and services is a relatively small
 When it’s cheaper to buy than to make

The following circumstances are more favourable for making the product or insourcing the service:

 When it costs the enterprise less to produce a product or service

 When there are no or few reliable suppliers
 When there is capacity available for use
 When the enterprises quality requirements are very stringent
 For competitive, political or social and environmental reasons
 For emotional reasons

Captive suppliers
The supplier becomes dependent on the enterprise

Environmental protection
Purchasing should be made according to the following three main aspects concerning the
environment:

 Does the suppliers mission support policies and measures to protect the environment during
manufacturing of products
 Are the products environmentally friendly themselves
 Are the right products and quantities produced to prevent obsolescence and waste?

57
Chapter 5: Evaluation and selection of suppliers
Purchasing and supply is the fundamental link between an organization and its suppliers – The
purchasing and supply professional is responsible for the inputs into an organization.

But it is fairly managing suppliers, the P & S manager effectively protect the cost structure of the
organization.

Environmental forces influencing supplier selection

The selection of suppliers cannot be made in isolation. The environment, company policies,
strategies etc must be considered.

The business environment must also being considered. Factors include makro, market and micro
factors.

Environmental forces influencing decisions. See table 5.1 on page 77 in the textbook

Supplier assessment criteria

Cost, quality, delivery and environmental issues are regarded as the main key performance
indicators of supplier Assessment.

The key driver for the use of a supplier is competitiveness or cost.

Many successful organizations based the operational expertise and the key performance
objectives of quality, cost, speed, dependability, flexibility and service which form the basis for the
criteria for selection and evaluation of suppliers.

Purchasing needs to consider many additional criteria:

 Quality and quality accreditations

 Price, cost and cost structure
 Delivery
 Time

58
  Flexibility
 Service
 Financial status
 (OPC) – Operations planning and control
 The technology and process capability
 Supply chain management
 Environmental issues, and social responsibility
 BBB EE

Quality and quality accreditations

Quality products and services improve:

 the productivity of the organization due to fewer operational interruptions and better
working conditions,
 quality of the final output
 better customer service

Price, costs and cost structure

One of the primary roles of a purchasing professional is to defend the cost structure without
compromising quality.

The determination of the cost structure of a supplier can lengthy process.

Delivery
Importance of on time delivery cannot be overstressed. There is always pressure to reduce
inventories, and make smaller and more frequent deliveries.

Time
Time based competition is one of the current management buzz words which includes reducing
time in order to gain an advantage.

Reducing time means improvement in productivity. Individual organisations and supply chains are
looking for improvements in all aspects of time reduction.

Suppliers should be actively involved in analyzing and reducing cycle times using cross functional
teams and techniques such as process/time mapping.

Flexibility
The supplier can be flexible with regard to:

 volume – ability to change the number of products supplied

 Variety ability to offer a range of products
 Mix – ability to provide varying proportions
 New products – ability to adapt in order to develop new products

Service
Essentially a fusion of the above key criteria.

Suppliers should not just want to qualify to be considered a supplier, they need to win orders and
win them consistently.

Service would also include the supplier’s attitude to managing the customer’s inventory to
providing in consignment stock facilities.

Financial status

59
Is imperative to determine the Financial Health or condition of the supplier. It’s an wise to select a
supplier who is in difficult financial straits.

Systems: operations planning and control, E commerce

And assessment of the operations planning and control (OPC ) systems used by a supplier is
important.

Trend nowadays is away from traditional forecasting and information systems towards real time
demand planning systems based on current happenings.

The ability to communicate electronically between customer and supplier is rapidly becoming a
mandatory prerequisite for suppliers.

Technology and process capability

In considering a potential suppliers technology and process capability, the purchasing manager
needs to look at:

 If the suppliers equipment and processes will meet the requirements of more demanding
specifications
 If the supplier has the technological ability to meet future requirements
 The design capability of a supplier
 The ability to develop new products and services
 If the supplier has the available capacity to meet future demands

Supply chain management (SCM)

Considered as a separate criterion for supplier selection due to importance due to the following
reasons:

 Suppliers position, role and importance in the supply chain

 Suppliers appreciation and awareness of the concept of SCM
 The supplier sourcing policies and criteria
 Effectiveness of the suppliers transport and distribution
 The suppliers potential with regard to lean manufacturing
 The suppliers long-term relationship potential – Partnerships

Environmental issues, ethics and social responsibility

Important that suppliers become increasingly sensitive to the environment and environmental
issues. Include the following:

 Adoption of environmental management systems such as ISO 14001

 Environmentally friendly packaging
 RE use, recycling and RE Manufacturing
 Waste disposal

Also consider whether a supplier has a code of ethics, social awareness and social responsibility.

BBBEE
A core requirements of the SA business environment.

Capabilities, responsiveness and motivation : present and future

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These criteria consider several desirable supply traits:

 Supply management and staff capabilities

 Employer/employee relationships
 Staff morale
 Suppliers attitude to on-going education of staff and management
 Responsiveness of the supplier
 Motivation of suppliers to meet organizational requirements

Geographic location
Suppliers should be located near the purchasing organization.

The more geographically dispersed the supply base, the more complex the supply chain.

Different combinations of selection criteria will be required for different situations.

See the full diagram in figure 5.1 on page 80 of the textbook

See figure 5.2 on page 83 of the textbook the 7 steps involved in the supplier selection process.

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The supplier selection process
Entails the surgeon added occasion of possible suppliers, elimination of unsuitable ones and the
indepth study and ensuing evaluation of shortlisted suppliers against the key criteria.

Also to ascertain whether the supplier warrants preferred supplier or certified supplier status.

The supplier selection process has three stages. The first are carried out consecutively while the third
is performed after a suitable period of time.

Step one: identification of potential suppliers: sources of information for initial selection and
assessment
There are many sources available to identify suppliers:

 Internet search engines

 Chamber of commerce or business
 Embassies and consular general offices
 National associations
 Trade directories, trade journals and business directories
 Industrial trade fairs
 Credit bureaus

Step two: Prescreening to reject unsuitable suppliers

Done to eliminate any that may be unsuitable. There are many grounds for the elimination of
suppliers at the early stage:

 Suppliers that do not need the organisations quality requirements

 Suppliers in a poor financial situation
 Suppliers experiencing the labour issues and strikes
 Suppliers previously rejected
 Where there is a reasonable risk of interruption in supply

Step three: conduct research and potentially suitable suppliers

The depth of the investigation and the criteria used can vary widely depending on the product or
service being purchased. Information sources include:

 Supplier visits – time consuming and usely costly

 Suppliers surveys or questionnaires

Step four: choose the assessment method and analyse the suppliers
Ranges from informal to formal

Informal techniques include:

 Using the purchasing manager’s judgement for low value purchasing

 Executive roundtable as a semi formal method

Formal techniques include:

 Weighted point supplier performance rating – goods and criteria are weighted according
to the importance.

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Step five: select the supplier or suppliers

The supplier management (maintenance) stage or post assessment phase.

It is essential to maintain and develop suppliers after selection.

Step six: ongoing measurement of supplier performance

Supplier performance measurement can be done by using the weighted point evaluation method
– See figure 5.3 on page 85 of the textbook.

Step seven: supplier accreditation

Successfully proven suppliers can be classified in three groups:

 Approved suppliers – suppliers they have made the requirements

 Preferred suppliers – suppliers whose past performance consistently meets or exceeds the
organisations required levels of quality, cost, production and delivery of service
 Certified suppliers – the ultimate supplier accolade. Requires an in-depth assessment of the
supplier.

Supplier relationship management

Many organizations rely on their suppliers to reduce costs, enhance quality and develop new
products faster than their competitors suppliers.. As a result, organisations build networks of suppliers
that can help them learn, improve and grow.

What constitutes a buyer-supplier relationship?

The relationship can be defined as the connection or association.

Relationships can be low value , transaction based or high value strategic ones.

Types of buyer - supplier relationships:

Three principal classes of relationships

 Transactional relationships – straightforward between buyer and seller, no close

involvement. Simple exchange of goods or services for payment. Little sharing of
information.

 Collaborative relationships – adoption of a high level of corporation had to maintain a

trading relationship overtime

 Alliance relationships – enhancement of collaborative relationship. Existence of institutional

trust - Prudent trust

Chapter 6: Sustainable purchasing and supply

management
Corporate governance and purchasing and supply management

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The King report boats on the principle of King II by emphasizing sustainability, and providing a list of
best practice principles.

King III provides guidance to all corporate entities on serious governance related aspects including:

 Ethical leadership and corporate citizenship

 Boards and directors
 Audit committee’s
 The governance of risks
 The governance of information technology
 Compliance with laws, rules, codes and standards
 Internal audit
 Governing stakeholder relationship
 Integrated reporting and disclosure

Directors have an economic accountability to shareholders and an obligation to all stakeholders to

ensure that the company’s resources are utilized service to ensure the continuing viability of the
business.

This involves:

 environmental sustainability,
 social responsibility,
 respect for human rights
 Effective management of stakeholder relationships

King three – economic value of the company is not based on the balance sheet alone

In purchasing situations, P & S personnel must always:

 act professionally in the interests of the organization and stakeholders

 be free and honest and awarding of contracts
 Have an intimate knowledge of the product or service they purchase
 Having intimate knowledge of the supplier market and market conditions
 Keep up to date with the newest developments in the P & S field

For corporate governance and financial reporting, specific attention must be given to possible
problem areas such as long-term purchasing agreements, electronic communication with suppliers,
supply management, inventory control, write-offs and risk management.

Corporate social responsibilities of P & S management

P & S management has an economic responsibility to shareholders.

P & S is expected to comply with legal obligations and must also observe ethical responsibilities.

P & S responsibilities can be defined as meeting the discretion responsibilities expected by society.
These encompass activities relating to:

 Community – buying from local suppliers, donate into local development campaigns.
 Diversity – search for and purchase from previously disadvantaged groups
 Environment – using life cycle analysis to evaluate the environmental impact of its products
and packaging. Encouraging other suppliers to commit to waste reduction goals &
environmentally friendly practices
 Ethics – abiding by the organisations code of conduct

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  Financial responsibility – following applicable financial standards and requirements and
applying sound financial practices

 Human rights – respecting the constitution of South Africa and ensuring the fair treatment of
workers and workers conditions

 Safety – promoting a safe environment for each employee in the supply chain

Ethical aspects in purchasing and supply management

Business ethics
The set of moral principles or rules of conduct that guide our behavior in business.

The key requirements stipulated by the King III report are regarded as follows:

 The board should ensure that the company is a responsible corporate citizen
 Leadership should be effective and based on an ethical foundation
 The board should ensure that management cultivates ethical conduct and the creation of
an ethical risk profile and the establishment of a code of conduct.
 The assurance of the companies ethics performance supported by an assurance statement

Business ethics and ethical conduct starts with top management.

Purchasing and supply ethics and ethical conduct

Purchasing ethics are based on business ethical principles.

Business people, managers and individuals are not as concerned about ethical conduct in any
other area or function of the enterprise as much as in purchasing and supply for the following
reasons:

 Purchasers have power over large sums of money

 Purchasers may have the greatest say in terms of which supplier will receive an order
 A purchaser is exposed to more unethical temptations than any other employee
 Unethical action by purchasers influences relations with suppliers
 Temptations influence a purchasers objectivity and rational thinking

Sales representatives are frequently less mindful of ethical conduct.

Areas of unethical conduct among purchasers

Personal favours include gifts, money in the form of kickbacks and even bribes. There are more
subtle areas in which the purchaser can consciously or unconsciously act unethically:

 A purchaser may have interests in supplier, and may put their own interests before those of
an employer.
 Loyalty of purchasers or fear of retaliation from superiors may give rise to unethical
behavior.
 An enterprises purchasing power can also be misused if purchasers placed orders for
themselves and their friends
 Withholding important information from a supplier may be unethical if the suppliers position
is harmed in a competing transaction.
 Information on suppliers obtained from written quotations, tenders or sales representatives
should be treated confidentially.

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  The setting of specifications by the users or purchasers to suit one specific supplier to cut out
competition is unethical.
 Disclosure of confidential information on the purchasers own organization is unethical.

Ethical code of conduct

The first and most effective measure against unethical behavior.

The policy document on ethical behavior should contain information such as

 the policy on the acceptance of gifts

 meals are included trips
 Dealing with sales representatives
 Ending quotations and tenders
 Dealing with confidential information
 Disseminating information
 Behavior during negotiations
 Policy pertaining to a supplier in which the purchaser or members of management have an
interest
 Using an organizations equipment in time for personal work
 Direct purchases by other sections and managers

The ethical code of conduct should be made known to every purchaser, manager and member of
staff.

Training and education on ethical conduct should be given to management and personnel.

All suppliers should be supplied with a printed copy of the policy.

The benefits of the ethical codes are as follows:

 They provide a basis for working together, which requires that people treat each other with
respect
 Set boundaries for what constitutes ethical behavior
 They provide a safe environment because everybody knows what is expected of them.
 They provide a commonly held seat of guidelines which binds people together.

Fraud in purchasing and supply management

The basic distinction between fraud and error is that of the intention.

A person committing an error does not do so knowingly – periods of accidental.

Fraud is intentional.

Green supply chain management

From green purchasing two green supply chain management

Environmental or green purchasing is the integration of environmental considerations into
purchasing policies, programmes and actions.

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Objectives of green purchasing is to facilitate recycling, reuse and resource reduction.

Purchasing can contribute to environmental performance in a number of ways:

 Buying packaging materials that can be more easily recycled

 Participating in the design stage and suggesting alternative sources of supply
 Asking upstream members of the supply chain to commit to waste reduction goals
 Using early supplier design involvement
 Selecting suppliers based on environmental criteria
 Evaluation supplier environmental performance

Purchasing plays an important role in communicating green concept and efforts to other
organisations in the supply chain

Green supply chain management: integrating environmental thinking in to supply chain

management – encompasses a broader range of practices from green purchasing to integrated
supply chains.

Table 6.1 on page 96 of the textbook - greening opportunities throughout the supply chain.

Risks and risk management in purchasing and supply

Risk and uncertainty

In the business world, organizations are operating in an environment which constantly changes.

Uncertainty increases as planning stretches further into the future.

Uncertainty about the future manifests itself as the risk that the realized financial results would
deviate from that which was anticipated.

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The perceived level of uncertainty depends on information that an individual can use to evaluate
the likelihood of the outcomes and the individual’s ability to evaluate this information.

Uncertainty consists of the following:

 Uncertainty about whether an event will take place.

 If the event does occur what the outcome will be.

The degree of uncertainty surrounding the event determines the level of risk.

Risk in a corporate environment can be subdivided into four categories:

 Core business risk

 Incidental business risk
 Operational risk
 External downside risk

See figure 6.1 on page 97 of the textbook

The classification of risks inherent in purchasing and supply management

Purchasing and supply risks can be found in all of the risk groupings indicated.

Speculative purchasing and supply management risks

Those risks that offer a chance of gain or loss

Core business risks in P & S

Include all the activities, decisions and events which impact directly on the operating profit of an
organization. These risks are inherent to the main business of the organization.

The cause fluctuations in the operating profit of the company and eventually also in the earnings of
the ordinary shareholder.

Incidental business risks in P & S

Risks that arise naturally from the activities of the business. They do not form part of the main
business of the enterprise.

These risks are many financial and can generally be subdivided into the following categories:

 Interest rate risk – risk of having to pay more for debt due to changes in market interest rates
 Liquidity risk – risk of being unable to pay suppliers when required
 Currency risk – the possible impact which fluctuations in exchange rates may have.

Event risks in P & S management

Include only the possibility of loss was no chance of gain i.e Incoming goods damage during
transportation.

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These risks are usually referred to as insurable losses as the financial consequences of these losses
may be transferred to an insurance company.

Specific event risk categories include:

 External downside risks

 Operational risks

External downside risks

Refer to those external factors that could affect the enterprise negatively i.e. natural disasters,
robberies, hijackings etc.

Some examples include:

 External suppliers not delivering on delivery date

 Physical security risks
 Litigation risks
 Natural disaster risks
 Labour action risks
 Government regulations pertaining to purchasing

Operational risks impacting on purchasing and supply management

Operational risk is the exposure of an organization to losses resulting from the internal failures or
shortcomings of people, processes and systems.

People
People risks continue to be the major contributing factor in many dramatic failures. Some of these
risks include:

 Inexperienced, incompetent, unsuitable , negligent or maverick staff

 Human error
 A working culture that creates low morale, high staff turnover, poor concentration
 Unethical conduct and theft
 Unauthorised and/or ill informed decision making
 The inability to work in a group, and poor human relations

Processes
The risk of the P & S processes being insufficient and causing inefficiency and an unexpected losses

Systems
Risks resulting from system failures based upon the dependency of P & S on technology

New technologies often have implications of complexity and uncertainty. The newer the
technology, the greater the risk that it may not perform as expected.

The following are examples of system risks:

 Systems failures
 Security breaches
 Implementation failure
 Insufficient systems capacity
 Poor data integrity

Identification of P & S management risks

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Any unplanned events that may occur during the acquisition, delivery or use of the goods and
services which can negatively affect the organizations ability to serve its own customers can be
regarded as risks.

A radical example of the results of supply failure would be shutdown of production lines due to the
lack of incoming materials.

Purchasing practices such as supplier relationship management, so classification and quality

management programmes can manage supply risk by reducing the likelihood of detrimental
event.

The purchasing and supply process also includes inventory management and the internal
distribution of goods and services to operational sections.

Wrong or inadequate specification

May either result in the delay in obtaining the required goods or services or in the supply of the
wrong goods or services

The loss the purchasing organization suffers as a direct result from procuring unusable goods or
services is directly proportional to the monetary value of such goods or service.

Requisitions received late

Result in reactive procurement actions which may have a detrimental effect on supplier selection,
pricing and quality

Internal and/or external fraud

The occurrence of unethical conduct, corruption and fraud in the sourcing supplier selection,
invoicing and fulfillment function is real.

Lack of suppliers
Refers to situations where monopolies or oligopolys exist.

Monopolistic situations are important from two perspectives:

 Dealing with monopolistic suppliers carries the risk that the suppliers may integrate forward
and start competing directly
 Any Financial instability in the monopolistic supplier may be a risk to the purchasing
organization

Oligopoly situations normally hold the risk that no better quality or price can be negotiated by the
purchasing organization.

Study the table 6.2 on page 101 of the textbook

Pricing
Increase in pricing could render the product or service of the purchasing organization too high to
sell competitively.

Increases in input costs also have a negative effect on the cash flow positions of purchasing
organisations

Quality

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Quality failures can system from

 the failure of suppliers to maintain Capital Equipment,

 lack of supplier training in quality principles and techniques
 damage that occurs in transit

Continued availability
Supply risk becomes prevalent whe a buyer – supplier relationship is formed and the purchasing
organization has some form of reliance on the supplier.

Quantities and lead times

A supplier may not have extra equipment, available employees or the ability to obtain necessary
inputs to handle sudden increases in demand

Technological changes
Suppliers may not keep up with technological advances in the manufacturing processes.

If the inputs used by other suppliers in the manufacturing process are less sophisticated than those
of competitive suppliers it may impair the comparative functioning of the products.

Agreed procedures for inspections and returns to supplier

Every agreement with suppliers holds the risk of quality discrepancies.

It’s important that procedures for the inspection of products received from suppliers be established
when the agreement is intended to. Also applies for return criteria.

Internally errors
The most common risks are:

 wrong or incomplete documentation

 products not inspected or thoroughly checked on receipt
 following the wrong procedures

Information systems and processes

Inventory management requires well developed information systems and processes to facilitate:

 the timeous ordering of products from suppliers,

 to prevent or detect inventory losses
 monitor and control the movement of inventory to different parts of the supply chain in the
org.

Malfunctioning information systems can lead to inventory shortages and internal distribution
problems.

Disasters
Floods, fires etc can damage or even destroy the inventory of the purchasing organization.

Options in managing risks

Includes:

 risk avoidance – the best method of handling a risk is trying to avoid it entirely

 Risk assumption – the consequences of the loss will be borne by the party exposed to the
chance of loss. Typically applies to minor infrequent losses.

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  Risk elimination – introduces standards, procedures and actions necessary to eliminate risk

 Risk reduction – reducing the likelihood of occurrence of loss and its severity

 Risk transfer – risks are transferred to another party but not insurance. The risk itself is
transferred to a third party ie a lease agreement.

Pro-actively managing purchasing and supply risks

To specific techniques to manage supply Risk pro-actively:

 Behavior based management techniques

 Buffer oriented techniques

Behavior based management techniques

Addresses supplier processes rather than simple outcomes. Suppliers are evaluated on the
behaviors, which then have an effect on outcomes.

The following management techniques serve to align goals of suppliers with those of the
purchasing organization:

 supplier certification – suppliers who consistently meets predetermined quality, cost, delivery
, financial and volume objectives can be certified.

 Implementation of quality management programmes – implemented in the suppliers

facilities and improve the abilities and activities of the supplier to satisfy the quality needs
and expectations of the purchasing organization.

 Target costing –requires discussions and negotiations between suppliers and purchasing
organization

 Supplier development – purchasing organization must actively improve the capabilities and
performance of suppliers to ensure they meet the short and long term supplier needs.

Supplier development includes:

o Creating and maintaining a network of competent suppliers

o Reducing costs
o Upgrading suppliers technical, quality and delivery capabilities

The above can be achieved by:

 Provided feedback of supplier performance

 Raising performance expectations
 Educating and training supplier personnel
 Recognizing suppliers
 Placing engineering or other personnel from the purchasing organization on the
suppliers premises
 Directly investing in capital in a supplier

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Buffer oriented techniques
Buffers are outcomes based ways of dealing with risk. Purchasing organizations use buffers to
reduce the detrimental effects of supply risk events rather than reducing the likelihood of a
detrimental event . Inventory serves as a buffer for product and availability.

 Internal buffer inventory – supply risk can be reduced by holding additional inventory for
contingencies
 Supply inventory – uncertainty regarding delivery of materials from suppliers can be
eliminated by requiring suppliers to always hold sufficient safety inventory
 Multiple sourcing – using multiple sources of supply a reduces the risk of supply disruptions. It
also competitive

Contingency plans
Its important for purchasing organisations to establish contingency plans which could be activated
should an expected supplier and inventory risks occur.

A five step supply chain contingency plan can be easily developed.

 Step 1: define critical materials and services

 Step 2: identify critical materials and services and their suppliers
 Step 3: perform a risk assessment of the identified suppliers
 Step 4:
 Step 5:

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Chapter 7: The management of quality in
purchasing and supply
The application of QMS in the purchasing and supply context is increasingly being considered a
prerequisite for Comprehensiveness in the private sector any guarantee of good governance in
public sector institutions. A QMS is a comprehensive set of procedures and working methods of an
organization which ensure that its outputs satisfy the customer’s needs and which safeguard the
overall interests of the organization in line with its mandate, vision and mission

A QMS consists of:

 Quality planning – part of quality management focused on setting quality objectives and
specifying necessary operational processes.

 Quality assurance – part of quality management focused on providing confidence that

quality requirements are fulfilled.

 Quality control – part of quality management focused on fulfilling quality requirements.

 Quality improvement – focused on increasing the ability to fulfil quality requirements.

Demarcation of the responsibilities of P & S

Quality is equally important for the internal customer of the supply function since it contributes
towards efficiency and total cost within the firm.

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Quality is the total combination of features and characteristics through which a product or service
when used will meet or exceed expectations of the customer by being able to satisfy the specific
need.

Burt et al. (2010): four main responsibilities of supply management

 Creation of compete and appropriate specification for quality requirements

 Selection of suppliers that have technical and production capabilities
 Development of realistic understanding with suppliers of quality requirements and creation
of the innovation to perform accordingly
 The monitoring of suppliers quality/cost performance and the exercise of appropriate
control.

The task can be subdivided into management task which is clearly related to managing the supply
base and the technical side which has to do with standardization specifications and quality control
procedures.

The technical component can be subdivided into two perspectives of quality:

 Design quality – specific characteristics of the products that determine its value in the
marketplace
 Conformance quality – how well the product is made with respect to its design
specifications

Supply management and internal service quality

Ensuring quality for ultimate customers is seldom questioned

The quality level delivered to final customers is the result of the each link in the supply chain –
internal customers of supply management are equally important in the total drive for quality.

Internal service quality is of crucial importance for the following reasons:

 It impacts on an organizations ability to meet the demands of supply chain partners

 Supply management has customers internal to the organization are equally dependent on
good quality to perform effectively.
 Internal customers i.e. operations, design, logistics etc. contribute just like the firm’s external
suppliers to the satisfaction of the ultimate customer.
 The internal quality of the workplace is the biggest contributor to employee satisfaction.

To improve the quality of internal service delivery, much more emphasis on internal customer
relations and an improved understanding of the needs of internal customers is required.

Supply management and supplier quality management

Buyers will be looking at the following characteristics from a customer oriented supplier:

 A reliable quality assurance system

 Effective control operations aimed at maintaining quality
 Built in quality in day to day activities
 Continuous quality improvement
 Awareness of the quality policy within the company
 International quality certifications

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Cost of quality
Table 7.1 - Most of the tasks and activities aimed at preventing poor quality from reaching the firm
and its customers

The cost of prevention is lower than the cost of correction.

Handfield et al 2009: 289 Burt et all 2010: 155

Prevention costs
Costs related to actions aimed at preventing quality errors and the cost they will cause i.e.
Equipment adjustment and calibration, Process redesign and control

Appraisal costs
Costs incurred when products and services are inspected or evaluated in order to ensure that
inadequate quality products, Materials and services do not into the internal operational processes
of the firm

Included in appraisal costs:

 Cost of incoming inspections

 Testing of purchased materials
 Semi-finished and final product inspection
 Supply of audits
 Recording and processing of data related to quality.

Failure cost
Incurred when products and services that do not comply with the quality expectations of the
customer actually reach the customer. The two types of failure include:

 Internal failure costs – Incurred after production and before delivery ie. Cost of scrap,
disposal, rework
 External Failure costs – Customer returns and the replacement of faulty products, warranty
claims, legal etc

Firms are convinced that the cost of prevention is lower than the cost of appraisal and failure.

The cost of attracting new customers in a competitive environment is high compared to the
relatively low cost of retaining an existing customer.

Purchasing and supply: quality management systems

TQM
More than a system it’s a management philosophy. Stretches over the entire supply chain,
influencing all participants and also the ultimate customer.

One of the main elements of the philosophy of TQM is the attitude of the firm and that every
employee must be directed towards a continuous driving for improvement across all activities of
the company and the supply chain.

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All individuals and teams working towards Internal and external customer satisfaction should
endeavor to provide fault free products and services.

The basic elements of a TQM system include:

 Commitment
 Coordination
 Personnel management – empowerment, training, teamwork, performance evaluation etc
 Supply management
 Quality information – reliable information on customer satisfaction, supply and purchasing
performance
 Performance evaluation

TQM in supply management originates with the customer and is part of the internal departmental
philosophy and which is carried over to the supplier to the suppliers supplier.

The impact of TQM on purchasing and supply can be summarized in the following points:

 Customer focus
 Structured relationships – internal and external customers and suppliers
 Performance measurements – TQM demands continuous improvement & performance
measurement
 Employee involvement
 Involvement in teamwork

Six Sigma
Focuses on processes, and insists on a level of quality consistent with six standard deviations from
the mean.

Embedded in the six sigma philosophy is the concept of continuous improvement.

See figure 7.1 of the textbook

Quality management system of the international standards organization (ISO)

A quality management system (QMS) is defined as:

Pursuit of coordinated activities to direct and control an organization in order to continually

improve the effectiveness and efficiency of its performance.

A fully documented QMS will ensure that two important requirements are met:

 The customer’s requirements

 The organization requirements

The ISO developed a set of eight principles the enterprises may use as a guide to the
implementation of quality programmes:

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The principles of the QMS are:

 Principle 1: customer focus – understand current and future requirements

 Principle 2: leadership – commitment to quality philosophy at top management level
 Principle 3: involvement of people – promote a culture of quality awareness
 Principal 4: process approach – management of all activities and the resources required to
fuel the process
 Principal 5: systems approach – managing interrelated processes is a system
 Principal 6: continual improvement
 Principle 7: factual approach to decision-making – leads to the insistence that all data and
information are absolutely accurate, reliable and accessible.
 Principal 8: mutually beneficial supplier relations – suppliers should be treated as an
extension of the firm

Purchasing and supply: cyclical element of quality

The three main techniques which can assist supply management in achieving its goal to ensure
quality are:

 Standardization
 Value analysis
 Quality assurance

Standardization as an aid for quality decision.

The formal acceptance of standard items is derived mainly from three sources:

 International standards
 National or industrial standards
 Business standards

Standardization of commercial terminology influencing the global logistics system is increasingly

important

The SABS mark serves as a guarantee that the product satisfies a certain standard specification.

Standardization implies that the characteristics of items have to comply with a specific minimum
acceptable standard.

Advantages of standardization

 Less stock needs to be kept to be kept when a standard item is suited to many
applications.
 Larger quantities may be ordered at a time, creating the opportunity for negotiating larger
discounts
 Inspection and quality control of the incoming goods of the celebrated what you mean
eliminated when standard as products are part of the supply base
 The possibility of mistakes and doubts when orders are placed or eliminated
 The usually cheaper standard items may reduce the cost of final products which makes the
firms competitive position improve.
 Standard items are more readily available

Standardization and purchasing decisions

Standardization maybe using a variety of circumstances:

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  When a firm is experiencing severe price competition or inflation and it becomes
necessary to reduce costs to stay competitive
 When the demand for a product Is uncertain and the firm does not wish to invest
substantially in the manufacture and purchase of non-standard items
 When there is doubt about the suppliers ability to maintain constant quality
 Standardized items require less technical skill.
 Standardisation can also be used when a firm is experiencing a shortage of funds

International standards: ISO

ISO 9000 – 9004

Many South African organizations now demand ISO 9001 certification from a supplier

Venue analysis as an aid for decisions and quality

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Unit 1 – Purchasing Function in perspective

Distinguish between purchasing and supply management concepts

Purchasing Management (P,N,E,F)

 Process of buying, locating & selecting a supplier

 Negotiating price, quality, quantity
 Ensuring delivery
 Functional approach

Supply Management (M,S,R)

 Management of resources the organisation needs to attain objectives

 Strategic focus and systems approach
 Regards suppliers as extensions of the firm

Discuss objectives of purchasing management (S,M,M,M,D)

 Supply organisations with a flow of materials to meet needs

 Maintain effective supplier relationships
 Maintain and develop quality
 Maintain internal relationships
 Develop staff, policies and procedures

Discuss objectives of supply management (C,I,M,E,C)

 Contribute to overall business strategies

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 Integrate supply objectives with corporate objectives
 Manage supply base
 Ensure timely, cost effective information system in place
 Contribute to multi functional teams and provide outstanding customer service

Discuss importance of P & S function (G,I,I,S,I,F,I)

 Globalisation
 International orientation
 Information technology development
 Short product life span
 Increased supply risks
 Focus on quality and environment
 Increased costs

Discuss influence purchasing has on profit and return of investment

Profit leverage

Effect of saving on bottom line – small % of saving in purchase price contributes to large increase in profit

Return on investment

Profit margin – more efficient purchases lower purchasing cost – gross income and total income increase –
higher profit margin

Asset turnover – more efficient purchases decrease extent of assets employed (like inventory) – increase
turnover

Discuss elements of purchasing procedure (O,S,S,S,N,O,F,R,H,A,C,M)

Origin of need – From user (qty, time)

Specification

 Purchase requisitions for routine purchases

 Travelling requisitions for standard purchases
 Material lists for production material requirements
 Kanbans for information cards for JIT

Source identification

 Price lists, Catalogues, quotations

 EDI, e-procurement, electronic catalogues

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Selecting suppliers

 Standard products – recommended supplier on requisition

 Specialised – recommended by user (quotations)
 High value – comprehensive selection (Material lists)

Negotiating and bidding

 Formal tenders or negotiation with potential suppliers

Ordering and contracting

 Issue official order (legally binding) – ensure completion

 Several copies given to other departments involved in process

Follow up and expedite

 Follow up done by mail, letter or phone

 Constant monitoring of supplier progress

Receiving, inspecting and distributing

 Stores should receive and inspect

 Complete receiving note and note shortages/damages
 Distribute to end customer

Handling faulty consignments and rejections

 Responsibility of purchasing to negotiate faults with supplier – maintain good relationship

Analyzing invoice

 Compare with order and delivery note

Closing order

 Payment done by finance

 Must have all documents – order, invoice, receiving note, quotations

Measuring supplier performance

 Performance evaluation and feedback to supplier on performance

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Unit 2 – Task of P&S Management

Planning

Discuss levels of purchasing and supply planning

Strategic -Organisational planning at highest level – Top Management mission and long term objectives

Tactical – Implementation of strategic plans - Executed at middle management

Operational – Material requirements planning, P&S system planning – done at lowest level

Strategic Tactical Operational

Ensure availability of purchased
requirements at competitive
price
Develop suppliers
Keep inventory investment low
Enter long term contracts with
reliable suppliers
Put together a project team
responsible for developing
suppliers
Study alternative inventory
control systems or flow of
materials
Maintain sound relations with
suppliers – ethics, contract,
timely ordering
Study situation in supplier
market and provide technical
support
Conduct inventory analysis,
reduce a cat and improve
understanding with suppliers

P&S Strategy (L,C,I,H,A)

 Link with organisation

 Close relation with suppliers
 Integrate with other functions
 HR must emphasize efficiency

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 Atmosphere of department

Phases of design strategy

I – Enterprise objectives as basis

II – Analyse P&S environment

III – Analyse P&S opportunities and risks

IV – Set P&S objectives

V – Develop P&S strategy

VI – Evaluation

Organisation

Position in enterprise structure

Centralised – Authority for function in one person or team

Advantages

 Standardisation
 Increased buying power – bulk purchases
 Branches work together
 Staff expertise
 Control
 Reduced admin costs
 Central team
 Integration

Decentralised- different branches, departments, plants have autonomy over decision making

Advantages

 Closer relations between purchasing and consumer

 Needs better satisfied
 Nearby suppliers utilised effectively
 Faster action in emergencies

Organisation structure of P&S

Related to activities

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Specialist groups within function formed with regard to skills, supply system, methods, inter relationships
and integration

Cross-functional teams

Streamline and eliminate non-value adding activities – empowerment of lower levels

Advantages

 Different perspectives and expertise

 Increased innovation
 Enhanced communication between functions
 Teams accept responsibility
 Faster problem solving
 Joint responsibility

Coordinating

With other functions

 P&S activities support other business functions and activities

 P&S function acts as advisory capacity with supply market

Supply system

 Coordinate objectives, abilities and activities of each component of overall supplier system

Control

Systematic attempt to reach objectives – observe actual and compare with standard

Objectives of performance evaluation

 Improve P&S performance

 Provide information to P&S Management for decision making
 Motivate and enhance personnel
 Establish basis for comparing with other P&S divisions and benchmarking
 In principle, performance evaluation of P&S function must be a systematic scientific technique used by
P&S management as evaluation costs money and costs must be weighed against benefits

Problems evaluating P&S function (D,D,D,M,F)

 Diverse activities
 Difficult to express in quantitative terms
 Difficult to set quantitative measures
 Measurement narrowly focused – supplier base reduction not always included

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 Function influenced by internal and external factors (policy and supplier market)

Steps in evaluating process (D,E,M,E,F)

 Determine objectives
 Establish performance measures and norms – Management measures, Proficiency measures, Efficiency
Measures
 Measure actual performance
 Evaluate actual performance
 Feedback (report)

Unit 3 – New management approaches

Supply Chain Management

 Series of connected suppliers and customers

 Process Management opposed to Functional Management
 Focus on value add
 Covers flow of goods from all levels (Manufacturing to Distribution to Customer)
 Supports vertical coordination (identify core activities and outsource rest)
 Boundaries broken down between internal and other enterprises

Important processes in supply chain

 Customer driven
 Efficient logistics
 Demand driven by sales planning
 Lean manufacturing – eliminate waste
 Information flow up and downstream
 Sourcing

Core principles of supply chain management (V,T,I,R,S,T,S,H)

 Value and creation of customer value – lowest cost while satisfying need
 Total cost ownership – understand true cost
 Integration of processes – Delivery process managed across boundaries
 Reduction of cycle time – reduce lead times, design time, faster introduction of new products
 Strategic partnerships – Merge cross functional teams of various organisations
 Total quality management (TQM) – applied to whole organisation, ISO9000, benchmarking, JIT
 System integration – EDI or ERP

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 Human resource development – training, team development, cross functional, inter-organisational

Characteristics of supply chain management (P,C,O,I,L,I,S)

 Philosophy for conducting business

 Consist of multiple layers of companies as a team
 Organisations involved in multiple supply chains
 Integration of suppliers, firms and customers
 Links and interfaces are not all of equal importance
 Information sharing across the supply chain
 Shared vision of customer value

Guidelines for implementing a supply chain

 Develop supply chain strategy to support overall strategy

 Identify supply chain goals
 Develop system for gathering market intelligence
 Integrate and manage supplier base
 Develop performance measurement system

Logistics Management

 Planning, implementing, controlling efficient and effective flow and storage

 Point of origin to point of consumption
 Optimises flow in organisation
 Three main concepts: movement, satisfaction and reasonable cost

Time based competition

 Reduce lead time from conception to design to delivery

 Product cycle time – time it takes to market
 Merges 3 elements: Speed, quality and flexibility
 Influences P&S in strategic, sourcing, supporting business strategies, supply chain perspective

Benchmarking

Define concept and objectives of benchmarking

 Process allows a company to evaluate its work methods, processes, service levels and products against
meaningful standards
 Basic objective is to improve current performance in activities in benchmarking study

Identify three categories in benchmarking and how it can be used

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Internal benchmarking
 Measures performance of processes, divisions, business units or manufacturing units in the same firm
against each other

External benchmarking
 Comparison of performance in activities between firm and competitors in the same industry

Best-practice benchmarking
 Seeks world class practices and excellence irrespective of industry, business or type of product

What are the advantages of benchmarking?

 Improves customer satisfaction

 Identifies best practices
 Improves existing processes
 Identifies forms competitive position
 Transforms complacency
 Helps set attainable improvement
 Prioritises activities for improvement

Implementation process (P,A,I,A,M)

I – Planning – Determine target

II – Analysis – Determine why target better

III – Integration – Communicate findings

IV – Action – Develop schedule for reviewing

V – Maturity – Becomes accepted method

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Unit 4 – Strategic Sourcing

Process whereby commodities and suppliers are analyzed and relationships formed according to best
practices in support of long term organisational goals

Process of strategic sourcing

Analyse total spending by dividing into categories according to risk and amount to be spent

Bottleneck Routine

Amount spent low Amount spent low

Risk high Risk low

Substitution difficult Substitution easy

Critical Leverage

Amount spent large Amount spent large

Risk high Risk low

Substitution difficult Substitution easy

Define subcontracting and outsourcing

Tie in with make or buy decision – firms concentrate on core activities and externalise specialist jobs by
subcontracting or outsourcing

Outsourcing

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Does not form part of production process, involves provision of services (non-core activities) e.g. HR, credit
management, cleaning, transport, cafeteria

Subcontracting

Producer hires another firm to perform part of manufacturing process or furnish sub assemblies for end
products

Discuss the Advantages and Disadvantages

Advantages Disadvantages
 Cost savings  Dependency on enterprises – captive supplier
 Specialisation  Unsuccessful development of supplier
 Better competitive position  Over involvement in development of contractors
 Enlarged production capacity
 Limit inventory
 Increase response to market
Outsourcing decision process

I – Assess technology and demand trends

II – Define core activities

III – Analyse strategic position

IV – Conduct total analysis

V – Considering non-cost factors & making decision

VI – Analysing the relationship

Cost elements for insourcing vs outsourcing

Costs (insourcing) Costs (outsourcing)

Operating expenses Purchasing cost

Interest on capital Freight

Depreciation Inventory cost

Fixed overheads Admin cost

Engineering Design Relationship cost

Non – cost factors

 Control of production
 Design secrecy
 Unreliable suppliers
 Suppliers specialised knowledge

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 Volume of requirement
 Availability
 Workforce stability

Unit 5 – Selection and performance evaluation

List reasons for growing importance of supplier selection (I,G,I,A,G,I)

 Increasing costs
 Growing competitiveness
 Increased outsourcing
 Adopting JIT, TQM and SCM
 Growth of e-commerce
 Integrating organisations

Poor supplier selection consequences

 Out of stock situations
 Product recall
 Weakening competitive position

List 12 most important evaluation criteria

Quality Financial status

Cost Technology

Delivery Systems

Time SCM

Flexibility Environment/Ethics

Services Capabilities/motivation

Discuss the supplier selection process

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PHASE 1 – EXPLORATORY PRE-EVALUATION STAGE

 Identify possible suppliers – internet, chamber of commerce, websites

 Pre-screen to reject unsuitable suppliers – based on evaluation criteria

PHASE 2 – SELECTION EVALUATION PHASE

 Conduct research on suitable suppliers – visits, questionnaires

 Choose the evaluation method and analyse – weighted point system
 Select supplier

PHASE 3 – POST EVALUATION PHASE

 Measurement of supplier performance

 Supplier accreditation – approved, preferred, certified
Unit 6 – Supplier policies and strategies

Framework and guidelines used when making decisions about suppliers

Name the benefits of procuring from Local, National or International suppliers

International Suppliers

 Advanced technical expertise and quality

 Lower costs in labour
 Larger production facilities
 Larger product range

Local suppliers

 Low transport costs

 Shorter lead times
 Improved communication
 Express orders easier to expedite
 Reliable service
 Better personal relationship
 Implementation of JIT

National suppliers

 Lower prices due to mass production

 Technical and development support
 Continuity of supply – hold larger stocks
 Improved service locally

Advantages of buying from a distributor or manufacturer

 Specialised product knowledge
 Purchaser has wider choice

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 Dispersed locations – shorter lead times
 Can have blanket or open contracts

Supply Base optimisation

Identifying how many and which suppliers will be maintained

Advantages and risks of one or limited suppliers

Advantages Risks

Long term relationships Dependency on suppliers

Bigger discounts Absence of competition

EDI and JIT can be used Supply disruptions

Outstanding quality offered Monopolies

Advantages of using more than one supplier

 Important products purchased
 Long term relationship possible – different specialisations
 SME development
 One supplier can’t supply, use another one

Supplier development

Discuss 3 main ways in which an enterprise becomes involved in supplier development

 Purchases from disadvantaged suppliers – policy on AA purchases

 Product service not available – develop other suppliers ability to supply
 Performance appraisal of suppliers – point out supplier weaknesses

What is meant by “Reciprocity”?

Suppliers who are also customers of purchasing organisation enjoy preferential treatment

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Decision to make of buy

Circumstances favouring buying Circumstances favouring making

Strong purchasing corps able to buy efficiently Costs less to produce

Inadequate facilities No or few suppliers

Staff expertise inadequate Available capacity

Demand small Quality requirements stringent

Cheaper than to make Competitive, political, environ, emotional

reasons

Cost considerations Cost considerations

Purchase price of product Delivered cost of raw material

Receiving and inspection costs Labour & inspection cost

Transport costs Incremental manuf. Overheads

Incremental purchase costs Incremental management costs

Incremental purchasing costs

Incremental stock costs

Incremental financial costs

What is meant by “Captive Suppliers”?

Suppliers who are too dependent on one client for their survival

Policy should be made to limit buying from one supplier and buy from others

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Explain three main aspects concerning environmental consciousness purchasers to take into account

 Supplier mission, policy, measures to protect the environment during manufacturing – check process
on waste, air and safety
 Environmentally friendly product produced
 Correct quantities & product used to prevent obsolescence and waste

Buying auctions

Explain the differences between forward auctions and reverse auctions

Forward auctions (sellers auctions)

 Several buyers compete for scarce product

 Seller in strong position
 Risk of prices driven up by competitive bidding
 Purchasers should have a good knowledge of goods sold, profit margins and pricing strategies

Reverse auctions (electronic buyers)

 One buyer and a group of sellers

 Online, real time auction between buying organisation with one of two invited suppliers
 Three types of electronic auctions

o English – start highest selling price, reduced during bidding, lowest bidder wins

o Dutch – Low price set, increases until supplier bids, first supplier to bid wins

o Sealed bid – one chance to bid and lowest bidder accepted

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Unit 7 – Ethical aspects, Corporate governance, Social Responsibility

Corporate Governance

Explain the role of P&S management in corporate governance

 P&S personnel must act ethically and lawfully

 Ensure most beneficial value package obtained with every purchasing transaction

 Act professionally in the interest of the organisation

 Intimate knowledge of product/service they purchase, supply market and market conditions

Social Responsibility

P&S social responsibilities is defined as a meeting of discretionary responsibilities expected by society

Explain the five areas of social responsibility of P&S function (D,E,H,P,S)

Diversity

 Obligation to search for and purchase from previously disadvantaged groups

Environment

 Use life-cycle analysis to evaluate environment friendly products, waste reduction and recycling

Human Rights

 Visit suppliers to ensure no slave or child labour is used and workers treated fairly

Philanthropy & Community

 Buy from local suppliers, donate to non-profit organisations, and alleviate poverty

Safety

 Ensure supplier operations are conducted in a safe manner

Ethical aspects

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Set of moral principles or rules of conduct that guide behaviour – follow a code

List the reasons for increased concern about ethical conduct in purchasing and supply

 Purchasers have power over large sums of money

 Purchasers have greatest say over which supplier gets the order
 Purchaser could be exposed to unethical conduct
 Unethical actions by purchasers influences supplier relationships
 Temptations influences purchasers objectivity
Areas of unethical conduct
 Purchasers may have interests in supplier
 Loyalty to colleagues
 Misuse of purchasing power for personal gain
 Withholding information from a supplier
 Supplier information on documents is confidential
 Setting specifications on one supplier to cut out competition
 Disclosure of confidential information

Countering unethical conduct

Set up a code of conduct policy document on ethical behaviour which should contain the following
information:
 Acceptance of gifts, meals, pleasure trips
 Dealing with sales reps
 Handling quotations and tenders
 Dealing with confidential information
 Behaviour during negotiations
 Purchaser with supplier interest
 Using enterprise purchasing power
 Using enterprise equipment
 Direct purchases by other sections

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Unit 8 – Management of quality

Quality concept

Conformance to requirements or fitness for use

5 principles

Transcendent quality Condition of excellence

Product based quality Product attribute

User based quality Fitness for use

Manufacturing quality Conformance to requirements

Value-based quality Degree of excellence at acceptable price

From a technical perspective

 Quality of conformance – how well it is made to specification, no defects

 Quality of design – characteristics of product give customer satisfaction

From a business perspective

 Reflect the objectives of efficiency and effectiveness, optimising value and costs

Internal service quality

Identify why internal service quality is so crucial from a purchasing point of view
 Impacts organisation ability to meet external demands
 Pivotal role in delivering quality – internal and external
 Internal customers determines quality delivered to external customers
 Internal quality of workplace contributes to employee satisfaction

Name the elements of internal service quality

 Responsiveness to customer needs

 Quality of delivered products
 Meeting customer expectations

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 Flexibility in meeting customer changing needs
 Delivering information on time
 Delivering products on time
 Delivering reliable information
 Explaining delivery problems
 Communication level

Managing quality: TQM (systems approach)

Explain the characteristics of TQM

 Management philosophy that permeates the whole supply chain
 Continuous improvement is the cornerstone
 All employees and partners have quality project responsibilities
 Team problem solving cross-functional and inter-organisational – ensures quality goals shared
 Feedback on customer satisfaction important input

What is the impact of TQM on P&S?

 Customer focus
 Reliable suppliers ensuring quality, availability and quick response time for internal and external
customers
 Structured relationship
 Quality objectives attained and collaboration amongst all parties
 Performance Management
 Supplier evaluation, quality improvement, feedback
 Employee involvement
 Enhance problem solving capacity
 Involvement in teamwork
 Must be involved in quality teams

Managing quality: Planning (Analytical approach)

Name the steps used for quality planning (S,C,S,D,D,D)

 Study quality environment
 Collect necessary data
 Set quality objectives
 Develop policies and strategies
 Decide on quality
 Decide on implementation

Quality environment

What information should be collected for analysis?

 Availability of items

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 Existence of substitutes
 New suppliers
 Technology innovations
 Using standardised items
 Making own items
 Quality specifications of competitors
 Global changes
 Changing management philosophies
Quality objectives
 Improve customer satisfaction
 Use recyclable packaging
 Implement TQM

Quality decisions

Identify the aids for decision making on quality and give a short description of each

Standardisation
 Formally accepted, uniform, inherent characteristics of items in terms of specific measurements,
design, composition, performance, quality and use
 Derived from 3 sources: International (ISO9000, Inco terms), Industrial (ISO14000, SABS), Business
standards (Emerged within plants)
 Advantages:
o Less stock kept
o Larger quantities ordered
o TCO reduced
o Inspection & quality control easier
o Mistakes on orders reduced
o Improved competitive position
o Availability of product
o Better labour relations
o Global logistics costs reduced

Value analysis
 Eliminate unnecessary cost of product that constitutes an input to the supply chain
 Compare function with cost – lowest cost to produce with lowest cost of attribute
 Procedure of analysis
o Select product for examination
o Execute value analysis programme in 6 phases:
 Information phase – gathering
 Inquiry phase – investigation on product
 Speculation phase – speculate improvements
 Evaluation phase – test improvements
 Recommendation phase – best alternative

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  Implementation and follow up phase – implement and monitor
Quality assurance
 Purchaser places responsibility with the supplier to provide quality on a constant level per requirement
 Defects/problems continuously identified – cradle to grave
 Right quality built into product, not inspected into it
 Agree quality levels before the time
 Manufacturing facilities should be thoroughly examined
Description of quality

What are the different quality methods of description used and give explanation of each?
Market grades Deduced from size, shape, colour, moisture
Apply to agricultural products like wood, tobacco

Brand Names Identification to differentiate from similar

competitive products

Commercial standards When industry or government set certain standards

For example: bolts, nuts, window frames etc

Inherent specified characteristics Chemical, physical and performance of products

Materials and Manufacturing Purchaser specifies what materials should be used

characteristics and how it should be manufactured

Engineering drawings (blueprints) Used when purchasing spare parts for machines,
casting and construction

Samples Useful when a particular colour is required

Control of quality
Purchasing firm inspects deliveries on arrival to ascertain that stated quality requirements have been met

Discuss the quality control process

 Setting standards – Specs to determine sample to supplier then delivery

 Recording performance – Inspection size (Sample or Total)
 Explaining discrepancies – Report on attributes and variables
 Corrective action – Return everything, Return defective, Negotiate adjustment

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Unit 9 – Price Determination and Cost Analysis

Buyers adopt various approaches to determine the right price

 An element of value – customer benefits minus customer sacrifices
 A fair price
 A competitive price

Define the concepts of “a fair price” and “a competitive price”

A fair price
 Lowest price that ensure continuous supply of proper quality where and when needed. It covers
supplier cost and allows fair profit
A competitive price
 Price which relates to the strategic importance of purchased materials, components and services for
long term profitability and survival of the enterprise

Cost as an element of determining price

Name the elements of cost in determining price

Direct cost of materials
 All materials that can be directly identified in the final product
 Estimated with the aid of material cost of similar products and materials lists

Direct labour costs

 All labour that is physically traceable to the final product
 Important components: labour hours and wage rate

Indirect manufacturing cost

 All other costs of manufacturing, like factory overheads

Profit mark-up
Element of ultimate price the purchaser must understand – profit earned by the supplier

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Behaviour of cost under volume changes
Three cost categories
TOTAL FIXED COST Remain the same as a total over shorter term no
matter how many products produced
As cost per unit produced – decrease as output
grows
E.g. Rent, Salaries

TOTAL VARIABLE COST Increase as a total as production quantities

increase
Cost per product remain the same
E.g. direct labour and material cost

SEMI-VARIABLE COST Have fixed and variable elements

Vary according to number of units produced
E.g. Electricity consumption

Market forms and price determination

Market structure determined by number of purchasers and sellers – buyers market and sellers market
Type of market is linked to nature of competition

Identify and describe the characteristics of the three market forms in which most purchases are being
done

Market Buyers Sellers Product Behaviour

Pure Many Many Homogenous Impossible for individuals to influence

Competition price – no bargaining power for
purchaser

Oligopoly Many Few Homogenous Purchaser can exploit price differences

with substitutes

Monopoly Many One No substitute Difficult for purchaser to negotiate price

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Type of product and price determination

Identify six types of product categories and method of price determination for each
Product Category Method of price determination

Raw Materials Require specialised purchasers

Prices usually fixed in these markets

Special Items Custom ordered & manufactured

Usually non-repetitive purchases

Standard production items Majority of items purchased

Determined by quotes, catalogues, price lists
Stable over short term

Items of small value Value ceiling should be checked regularly

Price rise in short term – inflation
Expense to check price before purchase not
justified

Capital goods Complicated and usually performed by

management team

Services Specialised activity

For general activities – quotes & tenders
For complicated service - negotiations

Price analysis as a method of determining prices

Process of comparing supplier prices against external benchmarks without knowing supplier cost

Steps in the price analysis process

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 1. Collect information for determining purchase price – use price lists, catalogues, quotations, internet
2. Understand the pricing models (6)
Price volume model Supplier analyses market to find volume of sales
combined with specific price per unit

Market penetration model Suppliers new products to market prices very

low to increase sales and discourage
competition

Market skimming model Supplier intends “creaming off” profits early

Revenue pricing model Suppliers obtain sufficient revenue to cover

operating costs

Promotional pricing model Attractive prices for individual products, sell

below cost to ensure sales – long term contract
can be expensive with them

Market price level Use if keen competition and numerous similar

products in the market

3. Setting objective for price determination

o Budget objectives – set in form of standard prices and determined by marketing analyses
o Cost reduction strategies – reduce actual cost or TCO (long term contracts)
o Price indices – how market prices of specific commodities change compared with base period

4. Formulating price policy and strategy

Prevailing market prices Used for standard production articles and
certain raw materials – prices published
regularly

Competition in the market Used for specialised products – use tender

process

Negotiation Transactions with high monetary value and

where tender conditions not present

Cost analysis as a method of determining prices

Process of analysing each individual cost element that together adds up to the final price

Cost based pricing models

Cost mark-up Estimate cost and add mark-up % to represent profit

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Margin Based on history or feel of market – decide on profit %

Rate of return Bases profit on objective of specific desired rate of return on financial investment
rather than cost

Collaborative cost analysis

Managing total cost of supplier with benefit of effort shared jointly by supplier and purchaser

Main approaches:
Target pricing
Organisation develops specific goals for its cost to produce a product
Based upon desired profit margin & projected selling price
Difference between supplier price and target cost is where buyer and
seller collaborate

Cost saving sharing pricing Encourages suppliers to continuously endeavour to reduce cost and
improve performance to create basis for sharing savings

Techniques for assisting cost/price analysis

The learning curve
 Graphic representation indicating a constant reduction in average direct labour hours that occurs for
each unit produced every time number of units produced doubled
 Correlation between average labour hours per unit and number of units manufactured
 Based on the simple perception that labour becomes more skilled and efficient with the repeated
handling of equipment and materials

Breakeven analysis
 Presented graphically as a series of ratios between manufacturing cost and related quantities of a
product manufactured and sold by a supplier
 Consists of total cost curve and revenue cost curve – breakeven is where total costs intersects revenue
curve
 Revenue above total cost = profit ; Revenue below total cost = loss

Hedging prices
 Reducing risk of fluctuations in the prices of raw materials
 Simultaneous purchase and sale in two different markets (cash and futures) assumed to operate so that
a loss in the one will be offset by an equal gain in the other
Unit 10 – Inventory Management

Lean supply context

Drive to identify duplication and waste – no value add, but adds cost - gets eliminated

Impact of features
 Relationship as a quasi firm
o Firm and external firms work together to eliminate unnecessary cost

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 o JIT approach moves inventory burden to suppliers
 Cost transparency
o Customer willing to share data on internal processes with supplier
o Supplier shares cost structures with customers
 Research and Technology
o Exploitation of new technologies and collaborative roles
 Relationship assessment
o Jointly managed – eliminating supplier evaluation as a non value adding activity

Reasons for holding inventory

 Ensures production continuous and economic
 Low unit cost and constant availability
 Makes economical purchasing possible
 Protects against uncertain delivery, price increase and break in supply
 Reduces purchasing cost as fewer orders placed
 Allows autonomous decision making

Inventory concepts

Categories of inventory
Production inventory Raw materials, materials & components required in production
process
E.g. Timber. Textiles, ball bearings

Maintenance inventory Materials that support the manufacturing process but not
necessarily included in final product
E.g. Light bulbs, lubricants, cleaning materials

Processing inventory Semi-finished products which are stored between various

production stages
E.g. WIP

Finished product inventory Products ready for dispatch

Contract methods & procedures of purchasing inventory

Standing orders Agreement with supplier to deliver over a period of time at fixed price

Term Contracts Decentralised companies prefer centralised contracts – fewer suppliers for long
term agreement

Urgent orders Placed by phone – pressure on suppliers

Goes against procedure & control

Low value orders Cost of order between R300 – R400 – increase admin costs

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 Rather use petty cash or COD

Inventory costs
Inventory carrying costs (ICC) Financing – Interest paid or lost
Interest Storage – Maintenance, property tax
Space Handling – Equipment, remuneration
Risk Insurance
(ISR) Technical – depreciation, obsolescence
ICC = Inventory carrying cost per unit X qty

Ordering costs Preparation and issue of orders to suppliers:

Admin cost
Follow up cost
Quality control
Payment
TOC = Fixed cost per order X No. of orders

Cost of inventory shortages Difficult to quantify and calculate

E.g. cancelled orders and customer goodwill
Relate to higher transport cost
Increased overtime
Additional admin

ABC Classification
Inventory in the 4 categories must be classified
Achieved by doing the following:

 Compiling inventory catalogue

Inventory list containing information such as: stock number, inventory level, price
Record by writing all inventory received and sent out

 Applying ABC analysis

Information on the importance of different inventory items in terms of monetary value
Based on average inventory investment or annual rand consumption
Express rand demand and qty of items in a category as a percentage of total rand demand and total
number of items
A 10% of total items
70% of rand demand

B 40% of total items

20% of rand demand

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C 50% of total items
10% of rand demand

Inventory planning and control

Planning involves decisions on qty to purchase and when to purchase
Control monitors and evaluates inventory activities – actual vs performance

Demand planning - Independent demand items

Demand for a product not connected to demand for another product – finished goods

 Inventory timing
o Use periodic reorder system
o Inventory levels checked at fixed intervals
o Maximum inventory level calculated based on consumption over 2 to 3 months
o Inventory is issued and demand is depleted
o At a fixed time an order is placed – difference between existing qty and max level
o Ordering qty and review date will vary – depends on issue rate
o Inventory replenished to max stock

 Inventory qty
o Two aspects considered: ROP and EOQ
o Order a fixed qty (EOQ) when stocks need to be replenished
o Replenishment takes place when reorder point reached
o Reorder point calculation: ROP = D (LT) + SS
o Reorder point reached order is placed for EOQ
o EOQ calculated √2CoR/Cc
o Order replenished according to batch size – max stock level will vary
o Need to know inventory costs
o Total inventory cost = Inventory carrying cost + Inventory ordering cost
o EOQ is where total inventory carrying cost = inventory ordering cost
o Optimal number of orders to place is N = R/Q (R is annual consumption) and (Q is quantity)

 Response based techniques

Techniques used to react to market changes quickly
Quick Response (QR) Captures day to day demand at retail level and
deploys demand electronically in real time

Continuous replenishment Eliminates need for replenishing orders – no

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 orders generated by buyer

Automatic replenishment Supplier can anticipate future customer

requirements & automatically fill customer
inventory

Efficient consumer response (ECR) Used mainly in grocery industry – discourages

stockpiling and cut throat promotions

Demand planning – Dependent demand items

Demand for a time-based supply chain is dependent on demand for finished products

 Requirements planning (MRP, MRP II, DRP and ERP)

MRP
 Uses planned production to determine what and how much should be ordered, when and what date
delivery should take place
 Scheduled to coincide with time of need
 Demand depends on forecast demand for finished product
Characteristics
 Uses electronic data
 Inventory reduced to bare minimum by synchronising material flow and production scheduling
 Demand for materials calculated in MRP – more reliable than forecasting techniques

Main components

Forecasts Actual
demand

MPS

O/S

MRP Inventory Orders

BOM
System Status

Actual

Levels
Planned Management
schedules
Lead times
Production
Control
Purchasing

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Influences on P&S Management
Positive Negative

Closer links between supplier and user Qty purchased inflexible

Fewer outstanding orders Lead times must be short and reliable

Decrease in inventory Lower inventory levels – pressure on purchasing

Improvement on accuracy Availability & lead times must be reliable

More time available for value analysis Demand expertise required

Improved accuracy of purchasing planning

Eliminates expediting orders

MRP II
Next development to include financial terms – basis of Material Resource Planning

DRP (Distribution Resource Planning)

Applies MRP principles to service, retail and distribution operations

ERP (Enterprise Resource Planning)

 Management information system and business intelligence system integrating all business processes
 Integrates internal processes with external processes
 One database with different modules

JIT (Just-in-time)
 Product-orientated management system
 Eliminates all forms of waste
 Achieved through the use of Kanban
 Ensures product of correct specifications are available in correct quantities at the right time
 Eliminate inventory

Advantages
 Lower inventory levels
 Smaller buffer stocks
 Short lead times
 Quality improvement
 Cost savings

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Kanban – JIT information system
 All materials/products move through plant in containers to which Kanbans are attached
 Every container has 1 m-Kanban and 1 p-Kanban (movement and production)
 Every production station has storage area where full and empty containers are stored
 No activity takes place without authorisation of relevant Kanban

Symptoms of poor inventory management

 Increased number of outstanding orders
 Increase in rand investment in inventory
 Differences in inventory turnover or times
 Increase in out of stock during fixed time period
 No storage space – too much inventory
 Increase in inventory holding cost
 Increase in obsolescence inventory – slow or no moving stock

Unit 11 – Capital equipment

Nature or Acquisition
 Affects competitive advantage over long term
 Aspects overlooked:
o Intellectual property rights
o Speed of acquisition
o Installation
o Continuing supplier support
o Upgrades

Classification
Capital equipment used to produce goods e.g. Buildings, Plants, Machinery, Computers
Multipurpose Single purpose

Variety of uses in various industries Designed to do one or several similar operations

Longer technological life Quality of work better than multipurpose
E.g. forklifts, lathes Limited to single industry

Characteristics

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 Large expenditure – large capital outlays, investment long term, consider price and TOC
 Non-recurring expenditure – irregular purchases, used gradually
 Specialised and technical nature – various departments involved in purchasing process, longer lead
time

Size and scope of procurement team

 Several functions involved with different requirements
 Team to make decisions on acquiring capital
 Number of personnel depends on extent, situation, size of firm, organisation orientation

Explain the role of the P&S function in the purchasing of capital equipment

Role of P&S in procurement of capital equipment

 Does not play dominant role – more of a supportive role, with inputs into following areas:
o Provision of information – existing suppliers and industrial publications
o Evaluation & Selection of suppliers – contribute to investigation of potential suppliers using
selection criteria
o Negotiations & conditions – strategies, amendments, price, payment terms
o Coordination & administration – central point for placing order, drafting contract, following up
o Specific purchase – Low value orders can be done by P& S function entirely

Factors to consider when purchasing capital equipment

Qualitative considerations Quantitative considerations (financial)

Reliability of equipment – risk if breakdown Payback period method – period in years it

takes to recover capital outlay – shortest
payback most beneficial

Flexibility of equipment – single or multi
Net present value method (NPV) – future cash
flow discounted to present value and
compared to initial investment – if present
value of future cash flow > initial investment
then acceptable

Space requirements – adding equipment Internal rate of return method (IRR) – rate of
return that equates the future cash flow with
initial capital outlay – one that givers highest
rate of return is the choice

Effect of quality of end products – fewer rejections

Durability of equipment – life expectancy/robust

Departmental preference – everyone’s input

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Used capital equipment
 Reasons for used purchases
o Cost of new equipment higher than used – better ROI
o Readily available
o More adequate – financial sense to spend less
o Rebuilt and have longer lifespan
o Can be inspected while in use

 Precautions when buying used equipment

o History and age
o Maintenance record
o Available spares
o Price of new vs old
o Terms and Conditions
o Cost of relocating equipment

Leasing capital equipment

Use of fixed asset without obtaining ownership of it

Explain leasing under the following headings

 Types of leasing
 Benefits of leasing

Types of leasing
 Financial Leases
o Used to obtain financial leverage
o Lease over long term – just shorter than equipment life span
o Lessor purchases (owner) and Lessee pays rent to lessor, which covers capital cost with service
charge to cover interest
o Lessee responsible for insurance, servicing and maintenance

 Operating leases
o Facilitate business operation
o Undertaken as means of marketing products
o Lessor responsible for service and maintenance
o Lease mostly short term – organisation not interested in owning equipment

Benefits of leasing

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 Provides certainty
 Convenient
 Flexible – no long term capital investment
 Financial leverage – liquidity increases
 Investment responsibility lies with lessor
 Tax deductable
 Expert service, advice, maintenance available

Disadvantages
 May be more expensive than loans
 Lessor may insist on supervising
 Less freedom of use and action
 No residual value for lessee
 Difficult to make changes to equipment
 Equipment obsolete – contract ends

Unit 12 – Small Business

 Distinct business entity including co-operative enterprises and non-government organisations managed
by one owner or more which includes branches & subsidiaries
 Classified into: Medium, small, very small and micro
 Owner managed – 5 to 50 employees with turnover between 150000 to 40 million

Business related considerations

 Social adjustments & changing demographics
 Supply management paradigms
 Management attitudes

Management concepts
 Outsourcing and subcontracting activities
 Competitive advantage of SME’s
 Advances in technology

Problems with SME purchasing programmes

 Limited resources
 Communication
 Availability of information & suppliers
 Transaction costs

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 Conflicting policies influencing purchaser
 Objections and attitudes of purchasers with regard to:
o Lack of expertise
o Cost
o Location
o Welfare perception
o Risk
o Dependency
o Reverse discrimination
o Tracing and development
o Poor performance

Implementing small business purchasing programme

1. Goal and mission of organisation
2. Origin of idea & purpose of programme
3. Systematic approach in implementing programme
 Senior management commitment - Sincere
 Planning – understand BEE status and environment
 Orientation of staff – Train and educate staff on SME programme
 Orientation of suppliers – Communicate to other suppliers
 Organisation of SME purchasing programme – dedicated person handling SME
 Publicity – communicate new policy
 Supplier selection – Information, Assessment, Maintaining, Developing
4. Control of small suppliers

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Unit 13 – Purchasing of Services

Process consisting of a series of more or less intangible activities that normally take place in interaction
between customer and employees

Explain purchasing of services under the following headings:

 Reasons why the purchasing of services has become so important
o Industry is the fastest growing in the world
o Large portion of revenue spent is on services
o Deregulation of previous government controlled service industries
o Sourcing tools are easier
o Outsourcing of non-core activities

 The variables supply management should consider when buying services

o Value of service – total expenditure over time
o Degree of repetitiveness – develop expertise and structures
o Degree of tangibility – Some services tangible
o Production of services – Understand technology involved
o Nature of demand – continuous, periodic, discrete
o Nature of service delivery – Buyers premises or supplier facility
o Degree of standardisation – standard or customised
o Skills required – qualifications

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Characteristics of services
 Services are intangible – experienced, not delivered, perception is reality
 Services are heterogenous – quality varies, difficult to compare
 Service production – production and consumption simultaneous
 Perishability – cannot be stored for later
 Entry to the market – easy, large capital seldom required

Categorisation of services
 Traditional services – Temps, travel, food, transportation
 Hybrid – consultant and legal services
 Non-traditional – advertising and outsourcing

Process and structures

Supply – users – top management – external suppliers – relationships important

Process of purchasing has 3 phases

 Preparation phase – data collection, structures, process, SOW (specification)
 Procurement phase – supply base, negotiations, contract
 Implementation and follow up phase – monitoring, compliance, administration

Professional Services Hybrid and non traditional category

Supplier doesn’t submit ideas
Easy to monitor
Poorly supplied, don’t use again

Consultancy Services Legal, advertising, temp

Consultants require information, access to
process, staff members, active participation
Service delivery joint

Transport Services Variables that impact decision:

Total cost – trading off
Speed
Reliability
Capability
Accessibility
Trading off is a disadvantage in one activity is
accepted to gain greater advantage
Horizontal – between different modes
Vertical – sub one activity for another
Lateral – transport cost weighed against other

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CHAPTER 1 – THE PURCHASING FUNCTION IN PERSPECTIVE

DEFINE THE CONCEPT LOGISTICS (MAIN ELEMENTS)

The part of SCM that plans, implements and controls the efficient, effective forward and reverse flow in
storage of goods services and related information between the point of origin and point of consumption in
order to meet customers’ requirements.

Important activities included in logistics management are:

 Traffic and transportation  Warehousing
 Inventory management  The processing of returned goods.
 Packaging and handling  Customer service

Logistics is therefore strongly focused on the physical flow of material goods and services, with a strong
emphasis integrating all these activities so that the total cost in the logistics system is minimized.

DEFINE THE CONCEPT SUPPLY CHAIN MANAGEMENT (SCM) (6 ELEMENTS)

SCM is a management philosophy aimed at integrating a network of upstream linkages, internal linkages
inside the organization and downstream linkages in performing specific processes and activities.These will
ultimately create value for the customer in the form of products and services.

MAIN DIFFERENCES BETWEEN LOGISTICS AND SUPPLY CHAIN MANAGEMENT (10) P20

Logistics Supply chain management (SCM)

It is a framework for the managment of all
activities related to material and
information flows within an organisation.
The scope is the entire organisation
Can be regarded as a “functional silo” of a
particular organisation
Uses the logistic framework and extends the concept of
product, services and information flow beyon the
boundaries of the single orgnaisation to other firms and
entities through linkages, often of an informal nature
It si the integration philosophy which seeks to optimise
value added over the activities of many organisations and
specifically over ever-changing combinations of firms and

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It manages business activiteis in order to
optimise customer service and to minimise
cost for a particular organisation
The focus is on the management of the
flow of products, services and information
Logistic management focusses on
optimising wealth for a single firm
entities
It manages business processes across the functional and
organisational boundaries of a network of organisations,
and aims at optimising customer satisfaction and
eliminating activities and processes that add cost and not
value over the entire supply chain
The focus is on the management of relationships across
the entire supply chain
SCM is aimed at optimising benefits for all participants in
the entire supply chain

CHAPTER 2 – THE TASK OF PURCHASING AND SUPPLY MANAGEMENT

ADVANTAGES AND DISADVANTAGES OF CENTRALISED AND DECENTRALISED ORGANISATIONAL

STRUCTURES FOR PURCHASING AND SUPPLY MANAGEMENT

Type of Advantages Disadvantages

structure

1. Materials and products are standardised
2. Negotiating power is increased and
volume discounts are made possible
3. Staff are afforded the opportunity of
becoming experts
Centralised 4. Control is improved
5. Administrative costs are reduced
6. Supplier relations are enhanced
7. Information systems integration is
facilitated
8. Duplication of effort is eliminated
1. There is a slow response time to regional
plants
2. There is resentment from geographically
dispersed business unit management
3. There is a tendency to bypass the central
buying office
4. There is less integration with user
departments
5. Staff structure is top heavy
6. There is lack of insight into the
requirements of dispersed plant units

1. There are better relations between 1. There is loss of economies of scale

decentralised purchasing and other
functions
2. There is good service delivery to
regional plants
3. There is faster reaction time to user
Decentralised departments in emergencies
4. Support of local suppliers generates
goodwill
5. There is greater autonomy for profit
centres
6. Interdivisional competition can improve
2. Suppliers are confused by dealing with
many offices
3. There is duplication of staff and facilities
4. Control over the function is much more
difficult
5. There is a greater likelihood of
communications breakdown
6. There is focus on local units and under-
emphasis on strategic issues

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 purchasing performance

CHAPTER 4 – PURCHASING AND SUPPLY POLICIES AND STRATEGIES

STRATEGIC SOURCING MATRIX

High

Bottleneck Critical
Substitution difficult Substitution difficult
Risk and Monopolistic markets Strategic importance
complexity High barriers to entry High value in total purchasing spend
Geographical/political complexity
Routine Leverage
Substitution possible Substitution possible
Alternative suppliers and products Alternative suppliers and products
Low
available available
Standard product specifications Standard product specifications

Low Amount spent High

MAKE OR BUY:

The following circumstances will favor buying requirements or outsourcing services:

 If the enterprise has a strong purchasing corps

 When there are inadequate facilities or better investment possibilities
 When the operational staff knowledge and skills are inadequate

 When the demand for product and services is a relatively small

 When it’s cheaper to buy than to make

The following circumstances are more favorable for making the product or insourcing the service:

 When it costs the enterprise less to produce a product or service

 When there are no or few reliable suppliers

 When there is capacity available for use

 When the enterprises quality requirements are very stringent

 For competitive, political or social and environmental reasons
 For emotional reasons

RATIONALE FOR OUTSOURCING

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Tactical reasons are to: Strategic reasons include:

 Reduce operating and control costs  Improve company focused

 Three up internal resources  Maintain access to world class capabilities

 Receive important cash infusion  Gain access to resources that are not available
internally
 Improve performance
 Accelerate re-engineering benefits

 Improve customer satisfaction

 Increase flexibility and risks

DISADVANTAGES OF OUTSOURCING

 Outsourcing contractors or service providers become dependent on the enterprise – captive supplier
 An enterprise can become over involved in the development of contractors or service providers.
 Loss of control and skills – result of dependence on outside parties
 Loss of service provider focus – service provide may conclude contracts with other companies and
become less focused and interested in a particular client
 Lack of clarity – If the particulars of the responsibilities are not clearly prescribed. (SLA)
 Lack of cost control – costs of SP become a problem if not properly managed. SP my lose interest if
the agreement does not make provision for a fair cost increase
 Ineffective management – outsource service provider may not be efficient, effective or capable of
performing well
 Loss of confidentiality – service provider becomes an extension of the organization and has access to
sensitive information.
 Double outsourcing – where an outsourcing contractor outsources the service to another provider

CHAPTER 5 – ASSESSMENT AND SELECTION OF SUPPLIERS

SUPPLIER ASSESSMENT CRITERIA

Cost, quality, delivery and environmental issues are regarded as the main key performance indicators of
supplier Assessment.

The key driver for the use of a supplier is competitiveness or cost.

Many successful organizations based the operational expertise and the key performance objectives of
quality, cost, speed, dependability, flexibility and service which form the basis for the criteria for selection
and evaluation of suppliers.

 Quality and quality accreditations  Price, cost and cost structure

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  Delivery  The technology and process capability
 Time  Supply chain management

 Flexibility  Environmental issues, and social responsibility

 Service  BBB EE

 Financial status  Capabilities, responsiveness and motivation:

present and future
 (OPC) – Operations planning and control  Geographical Location

Price, costs and cost structure

One of the primary roles of a purchasing professional is to defend the cost structure without compromising
quality. The determination of the cost structure of a supplier can lengthy process.

Delivery

Importance of on time delivery cannot be overstressed. There is always pressure to reduce inventories, and
make smaller and more frequent deliveries.

Time

Time based competition is one of the current management buzz words which includes reducing time in order
to gain an advantage.

Reducing time means improvement in productivity. Individual organisations and supply chains are looking for
improvements in all aspects of time reduction.

Suppliers should be actively involved in analyzing and reducing cycle times using cross functional teams and
techniques such as process/time mapping.

Flexibility

The supplier can be flexible with regard to:

 volume – ability to change the number of products supplied

 Variety ability to offer a range of products

 Mix – ability to provide varying proportions

 New products – ability to adapt in order to develop new products

Service

Essentially a fusion of the above key criteria.

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Suppliers should not just want to qualify to be considered a supplier, they need to win orders and win them
consistently.

Service would also include the supplier’s attitude to managing the customer’s inventory to providing in
consignment stock facilities.

Financial status

Is imperative to determine the Financial Health or condition of the supplier. It’s an wise to select a supplier
who is in difficult financial straits.

Systems: operations planning and control, E commerce

And assessment of the operations planning and control (OPC) systems used by a supplier is important.

Trend nowadays is away from traditional forecasting and information systems towards real time demand
planning systems based on current happenings.

The ability to communicate electronically between customer and supplier is rapidly becoming a mandatory
prerequisite for suppliers.

Technology and process capability

In considering a potential suppliers technology and process capability, the purchasing manager needs to look
at:

 If the suppliers equipment and processes will meet the requirements of more demanding
specifications
 If the supplier has the technological ability to meet future requirements
 The design capability of a supplier

 The ability to develop new products and services

 If the supplier has the available capacity to meet future demands

Supply chain management (SCM)

Considered as a separate criterion for supplier selection due to importance due to the following reasons:

 Suppliers position, role and importance in the supply chain

 Suppliers appreciation and awareness of the concept of SCM

 The supplier sourcing policies and criteria

 Effectiveness of the suppliers transport and distribution

 The suppliers potential with regard to lean manufacturing

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  The suppliers long-term relationship potential – Partnerships

Environmental issues, ethics and social responsibility

Important that suppliers become increasingly sensitive to the environment and environmental issues. Include
the following:

 Adoption of environmental management systems such as ISO 14001

 Environmentally friendly packaging
 RE use, recycling and RE Manufacturing
 Waste disposal
Also consider whether a supplier has a code of ethics, social awareness and social responsibility.

BBBEE

A core requirements of the SA business environment.

Capabilities, responsiveness and motivation : present and future

These criteria consider several desirable supply traits:

 Supply management and staff capabilities

 Employer/employee relationships
 Staff morale

 Suppliers attitude to on-going education of staff and management

 Responsiveness of the supplier
 Motivation of suppliers to meet organizational requirements

Geographic location

Suppliers should be located near the purchasing organization. The more geographically dispersed the supply
base, the more complex the supply chain. Different combinations of selection criteria will be required for
different situations.

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 7 STEPS IN THE SUPPLIER SELECTION

1. Identify possible suppliers

2. Prescreen to reject unsuitable suppliers

Suppier selection process

3. Conduct research on suitable suppliers

4. Choose the assessment method and always analyse the

suppliers

5. Select supplier

6. Ongoing measurement of supplier performance

7. Supplier accreditation
PROCESS

Exploratory Pre-assessment
phase
Stage
CHAPTER 6 – SUSTAINABLE PURCHASING AND SUPPLY
MANAGEMENT

Selection Assessment
CORPORATE SOCIAL RESPONSIBILITIES OF PURCHASING AND SUPPLY MANAGEMENT phase
Stage
a) Community

Purchasing and supply management should as far as possible

Supplier
 buy from local suppliers, Post-
management
assessment
or  donate to local development campaigns and philanthropic
maintenance phase
organisations, and
stage  seek opportunities for poverty alleviation in local communities
Stage Purchasing and supply should also encourage members of the supply chain to add value in the
community.

b) Diversity

Purchasing and supply has an obligation to do everything in its power to search for and purchase
requirements from previously disadvantaged groups.

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c) Environment

Purchasing and supply should:

 use a life-cycle analysis to evaluate the environmental friendliness of products and packaging,
 participate in the design of products for disassembly,
 encourage suppliers to commit to waste-reduction goals and environmentally practices,
 participate in the design of products for recycling or re-use.

d) Ethics

Ethics form an important part of the King III report. According to this report senior managers should
take responsibility for the ethical (or unethical) conduct in their organisations. The key requirements
stipulated by the King III report:

 The company board should ensure that the company is and is seen to be a responsible
corporate citizen through the development and implementation of strategies and policies in
relation to economic, social and environmental impacts
 Leadership should be effective and based on an ethical foundation
 The board should ensure that management cultivates a culture of ethical conduct through the
creation of an ethical risk profile; and the establishment of a code of conduct through the
integration of ethics into all company practices, procedures, policies and conduct and through
the assessment, monitoring, reporting and disclosure of the company’s ethics performance.
 The assurance of the company’s ethics performance supported by and assurance statement in
the integrated report is recommended

e) Financial responsibility
 Purchase and supply should become knowledgeable of and follow applicable financial
standards and requirements.
 Apply sound financial practices and ensure transparency in financial dealings.
 It should actively promote and practise responsible financial behaviour throughout the supply
chain.

f) Human rights

The Constitution of South Africa guarantees human rights in the country. In terms of human rights,
people in purchasing and supply should treat people, including colleagues in the organisation,
superiors, subordinates suppliers or potential suppliers, with dignity and respect.

Purchasing and supply management must visit suppliers’ plants to make sure that they do not use
child or slave labour, that workers are treated fairly and that the working conditions are humane.

g) Safety

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 Purchasing and supply must promote a safe environment for each employee in the organisation and
the supply chain, and should also support the continuous development and diffusion of safety
practices throughout the organisation and supply chain.

Purchasing and supply must ensure that suppliers’ operations are conducted in a safe manner, and
that materials are packed, transported and moved in the safest possible manner to and in the
organisation.

CHAPTER 7 – THE MANAGEMENT OF QUALITY IN PURCHASING AND SUPPLY

COST OF QUALITY – 3 CATEGORIES

1. Prevention costs
Costs related to actions aimed at preventing quality errors
Eg:
 Equipment adjustments and calibration
 Process redesign and control
 Quality planning
 Supplier capacity surveys
 Quality training

2. Appraisal costs
Costs incurred when products and services are inspected or evaluated in order to ensure that inadequate
quality products, materials and services do not enter the internal operational processes of the firm.
Eg:
 Cost of incoming inspections as well as at the supplier
 Testing of purchased materials
 In-process, semi-finished and final product inspection
 Supplier audits
 Recording and processing of data related to quality

3. Failure costs
Costs incurred when products or services that do not comply with the quality expectations of the customer
actually reach the customer.
Eg Internal:
 Cost of scrap
 Disposal, rework and redoing inspections
 Production downtime
 Processing waste

Eg External:

 Customer returns and replacement of faulty products

 Warranty claims
 Cost of legal action

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  Costs associated with product recalls

COST OF QUALITY - FAILURE COSTS

a. Internal Failure Costs

Costs that are incurred after production and before delivery to the internal or external customer.

Ex: Cost of scrap, disposal, rework and redoing inspections, production down time and processing
waste

b. External Failure Costs

Ex: Customer returns and the replacement of faulty products, warranty claims, cost of legal action and
the costs associated with product recalls.

Often included in this category is the cost of lost customers, which is very difficult to determine
accurately

REASON FOR SHIFTING FROM “CORRECTING INADEQUATE QUALITY” TO “PREVENTING DEVIATONS FROM
QUALITY REQUIREMENTS”

The idea is that the cost of prevention is lower than the cost of correction.

DEFINE STANDARDISATION

Standardisation is the process of developing and agreeing on uniform, technical product and service
specifications related to appearance, performance, measurement criteria, methods, processes and practices.

CIRCUMSTANCES UNDER WHICH STANDARDISATION MAY BE CONSIDERED

1. Price competition or Inflation

When a firm is experiencing severe price competition or inflation and it becomes necessary to reduce
costs to stay competitive

2. Uncertain product demand

When the demand for a product is uncertain and the firm does not wish to invest substantially in the
manufacture and purchase of non-standard items

3. Supplier Quality
When there is doubt about the supplier’s ability to maintain constant quality

4. Less technical skill needed

Standardized items require less technical skill.

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 5. Shortage of funds
Standardization can also be used when a firm is experiencing a shortage of funds

VARIOUS WAYS IN WHICH COST SAVINGS IN PUCHASING THROUGH STANDARDISATION MAY BE EFFECTED
(ADVANTAGES)

 Less stock needs to be kept to when a standard item is suited to many applications.

 Larger quantities may be ordered at a time, creating the opportunity for negotiating larger discounts.

 Inspection and quality control of the incoming goods are facilitated or even eliminated when
standardized products and standardized quality assurance procedures are part of the supplier base
management philosophy of the purchasing organization.

 The possibility of mistakes and doubts when orders are placed or eliminated

 The usually cheaper standard items may reduce the cost of final products which makes the firms
competitive position to improve.

 Standard items are more readily available.

CHAPTER 8 – PURCHASING PRICE DETERMINATION AND COST ANALYSIS

PRICE DETERMINATION FOR DIFFERENT TYPES OF PRODUCTS

The type of purchase or the type of product being purchased determine the price. Pricing method should
therefore be adopted to the following product categories

1. RAW MATERIALS - such copper, wheat and crude oil which are bought on world commodity markets and
require special skills of commodity purchasers or commodity brokers. Usually prices are fixed in these markets

2. SPECIAL ITEMS - these items are specific to an organisation’s activities and are of non-repetitive nature. Eg.
Equipment

3. STANDARD PRODUCTION ITEMS – they constitute majority of items purchased by most purchasing divisions
and there is use of catalogues and published prices.

4. ITEMS OF SMALL VALUE – Items in this category have such small comparative value that the expenditure of
any particular effort to check the price prior to purchase is not justified.

5. CAPITAL GOODS – price determination for capital goods is a complicated process and is usually performed
by management team since it has major financial implications for the firm. Eg. Buildings, plant and machinery.

6. SERVICES if it is a general type of service such as catering or cleaning, quotations must be submitted and
tenders too.

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7. ITEMS FOR RESALE – Prices are largely influenced by what prices the market will be willing to buy. Unique
purchasing and pricing methods are used by shops like pick and pay. Eg. Groceries

UNDERSTANDING SUPPLIER PRICING MODELS

PRICE VOLUME MODEL- The volume is as important a variable as the price because an increased volume may
imply that the direct costs is spread over more units so that the costs per unit maybe reduced. The pricing
model is therefore the basis for quantity discounts offered to the purchaser.

MARKET PENETRATION MODEL – The aim behind this is to maximise profits by capturing a large share of the
market as soon as possible.

Reason:

 To maximise long-term profits by capturing a large share of the market as early as possible
MARKET SKIMMING MODEL – The supplier is intent on “creaming off” the profits as early as possible. Earn as
much as possible as quickly as possible. Here prices are set to achieve a high profit on each unit.

Reason:

 Used for innovative products aimed at recovering development costs before competition steps in.

This strategy invites competition since extraordinary profits are made.

REVENUE PRICING MODEL – This model is to obtain sufficient revenue through sales to cover costs rather than
to make profit.

Reasons:

 To retain skilled labour

 To improve capacity utilisation in times when there is a downturn in markets due to a decline in the
economic cycle

PROMOTIONAL PRICING MODEL – This model attracts sales even if it means selling at below costs incurred. An
example is selling cell phones below cost price to ensure an increase in sales of user contracts.

MARKET PRICE LEVEL – The suppliers use this strategy if there is keen competition and numerous similar
products that compete on the market therefore use of product differentiation is important to maintain a
competitive advantage.

Eg: Suppliers will differentiate their product by selling additional services such as free delivery or extend
payment terms.

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CHAPTER 9 – QUANTITY AND INVENTORY MANAGEMENT

REASONS FOR HOLDING INVENTORY:

1. Continuity in production and marketing – sufficient inventory ensures that production is continuous.
Low unit costs and constant availability of final products provide marketing opportunities such as
timeous availability and better service to customers which could result in a better competitive
position.
2. Cost savings and hedging against price uncertainties – The enterprise may make use of quantity
discounts and transport in bulk, which means cost savings. Hedging against price in important to
enterprise prone to currency volatility.
3. Protection against supply uncertainties – It serves as protection against breaks in supply caused by
unexpected events, such as strikes and natural disasters.
4. Purchasing costs – Larger less-frequent deliveries must be traded off against the increased cost of
inventory holding and decreased costs of transportation.

COSTS OF INVENTORY SHORTAGES (STOCK-OUT COSTS)

 Increased transport costs (eg air freight as opposed to sea freight)

 Increased adjustment or overtime (so-called back orders)
 Costs in the plant
 Additional administration costs, or costs caused by the disruption of a planned production schedule
 Costs resulting from cancelled orders

DIAGNOSE AND DESCRIBE THE SYMPTOMS OF POOR INVENTORY MANAGEMENT

1. Increase in number of outstanding orders. This is one indication of poor management

2. Increase in rand investment in inventory with no definite reason
3. Differences in inventory turnover rates or times at different plants or at different comparable depots
4. Increase in number of out-of-stock in a fixed time period. Indicates a drop in control by inventory
management.
5. No storage space from time to time. Indicates too much inventory.
6. Increase in inventory holding costs compared to previous figures
7. Increase obsolete inventory.

CHAPTER 15 – PURCHASING CAPITAL EQUIPMENT

DEFINE CAPITAL EQUIPMENT

Assets that are held for longer than a year acquired for long-term requirements and used in the production of
goods and services and/or the overall running of the enterprise.

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 Examples:

Lathes, milling machines, printing presses, automatic drills

Auxiliary equipment such as forklifts, trucks and power generators.

Even administrative auxiliary equipment such as office furniture, computers and fax machines.

QUALITATIVE FACTORS TO CONSIDER WHEN PURCHASING CAPITAL EQUIPMENT

 Reliability of the equipment

Relates to the risk of interruptions in production, maintenance and adjustment times and the
expertise of maintenance staff.

 Flexibility of the equipment

The versatility of application of the equipment to be used for purposes other than those for which it
was primarily acquired.

 Space requirements
The greater the floor space required for the equipment, the more capital is required for the
equipment, the more capital is required fin the form of buildings, factories and warehouses.

 Safety of the equipment

Unsafe equipment can lead to industrial accidents, production losses and even low worker morale.

 Effect on the quality of end products

Equipment that can consistently provide the required quality ensures fewer rejections and defective
end products which in turn eliminate production losses.

 Durability of the equipment

Capital equipment which has depreciated in full can still be used to manufacture a product, but it may
be so economically obsolete that it cannot compete with other, more modern equipment.

 Preferences of different departments

The preferences of other functions such as marketing, finance and personnel, should also be
considered as the need might differ.

The role of purchasing and supply management in the procurement of capital equipment:

Purchasing and supply function does not necessarily play a dominant role in the purchasing of capital
equipment – mainly provide support – give advice and promote supplier relations
Can provide input in the following areas:
(1) provision of information; provide info on availability of suppliers, new equipment, price of capital
equipment etc.
(2) evaluation and selection of suppliers; contribute by investigating potential suppliers including financial
position, management abilities, technical abilities, reputation, after-sales services etc. AND make
recommendations on local, national, international suppliers/ reciprocity AND help compile supplier
assessment
(3) negotiations with suppliers and contractual conditions: help prepare negotiating strategy and define
the contractual conditions of the purchase

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 (4) coordination and administration of the purchase: act as central point where specific purchases are
analysed and considered, assume admin of the purchase and execute the purchasing transaction
(5) specific purchases: purchasing can assume control of standard equipment with relatively low unit
value

TYPES OF LEASES

(1) Financial leases:

 Used to obtain financial leverage and related longer-term financial benefits
 Long term and covers a time period slightly shorter than te approximate life of the equipment leased.
 Lessor pays for the asset and owns it
 Lessee pays rental that covers the capital cost of the asset with a service charge
 Lessee is responsible for insurance, servicing and maintenance

(2) Operating leases:

 used to facilitate business operations
 the asset is not wholly amortised during the obligatory period of the lease
 lessor is responsible for servicing, maintenance and updating equipment
 short term and used when org has a temporary need for equipment but not interested in owning it

RELATIVE MERITS OF LEASING

Advantages:

- provides certainty
- convenient from operating and managerial point of view
- flexible (org not locked into long-term commitments due to capital investments)
- provides org with financial leverage and may increase liquidity
- investment responsibility lies with lessor
- small initial capital outlay required
- expert service, advice, maintenance available
- risk of obsolescence is reduced
- lessor may carry out prior testing before agreement
- lease payments are tax deductible
- allow org to assess equipment over predetermined amount of time
- can serve as buffer against price increases
- can enhance financial position of the org because it doesn’t appear as debt on balance sheet
Disadvantages:

- may be more expensive than other purchasing methods

- lessor may sometimes insist on supervising
- less freedom of use and action
- no residual value for lessee
- sometimes relatively more difficult to make changes/ improvements to the equipment under the
contract
- equipment may rapidly become obsolete and then lessee is bound for the period of the contract

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CHAPTER 16 – PURCHASING SERVICES

KEY VARIABLES IN TRANSPORT DECISION MAKING:

 Total Cost – All cost that can be associated with a particular transportation contract.
 Speed – Refers to the time required by the contractor to perform a specific task as describe in the
SOW
 Reliability – Ability to meet customers’ expectations continuously
 Capability - Ability in terms of capacity, staff, equipment and management to perform the services
contract in time
 Accessibility – The ease with which a service supplier can be accessible to the various user division or
plants which may be spread geographically

CHARACTERISTICS OF SERVICES WHICH DISTINGUISH SERVICES FROM BUYING GOODS:

1. THE INTANGIBILITY OF SERVICES – services are experienced by the customer and not delivered in the
sense that a tangible item is.

2. THE HETEROGENEITY OF SERVICES – The implication for purchasing is that services are unlikely to be
interchangeable.

3. SIMULTANEITY IN SERVICE PRODUCTION – there is no lead time in services delivery since service
production and services consumption are simultaneous.

4. THE PERISHABILITY OF SERVICES – Since the production and consumption of services are simultaneous,
services cannot be stored for later use.

5. ENTRY INTO THE MARKET - For most services entry into the market is relatively easy in the sense that
large amounts of capital are seldom requires to become a service provider.

COPIES OF ORDER FORM MUST BE DISTRIBUTED TO THE FOLLOWING FUNCTIONS

 Supplier receives the original order.

 Financial function receives a copy for verifying the invoice and for payment.

 Receiving function receives a copy notifying it to expect a delivery.

 Inspection function receives a copy with detailed information on the specifications, enabling it to plan
the inspection task.

 Purchasing function keeps a copy for follow up and expediting as a control measure
 The last copy stays in the order book as a permanent record of the transaction.
Reason for order form to be distributed to the functions above:

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 The order form is the source document for a whole series of activities to be performed after the order has
been placed.

CHAPTER 17 – PURCHASING FROM SMALL BUSINESSES

PROBLEMS WITH DISADVANTAGED SMALL BUSINESS PRUCHASING PROGRAMMES

1. Communication

If SME is owned by a previously disadvantaged individual there could be cultural and language divides.
Coupled with communication are the issues of prejudice and mistrust and expectations that can’t be
met.

Direct and immediate access to the suppliers might be difficult:

 Inaccessible location
 No landline
 Cell phone switched off

2. Availability of information and suppliers

There is an abundance of small suppliers in certain sectors (cleaning, catering, garden maintenance,
clothing and transport industries) but few in areas such as supply of manufactured goods and
technology.

3. Transaction costs

Costs are high on both ends SME and Organisation.

Organisation:
 Tracing, evaluating and developing small suppliers, are high in terms of time spent visiting and
making telephonic contact and handling complaints from originators in terms of poor quality
and on-time deliveries.

SME:

 Owner is in all likelihood the manager and need to spend time on completing complicated
tenders.
 Organisations charge collection fees on tenders
 Once a contract has been awarded the SME must familiarise itself with the client’s policies and
procedure and to develop the technical ability to meet the required quality standard.

4. Conflicting policies influencing the purchaser

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 Best practices suggest to organisations that supplier database should be decreased. In reality, when
buying from SME’s, one’s supplier database tends to increase.

SME’s have a lack of resources , poor pricing methods, lack of training, lack of market information and
most importantly quality problems.

5. Objections and attitudes of purchasers

 Financial instability
 Lack of experience
 Cost
 Location
 Welfare perception
 Risk
 Dependency
 Reverse discrimination
 Tracing and development
 Poor performance

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Possible questions

Chapter 1

1. Discuss the objectives of purchasing management – p8

2. Too supply organizations with a flow of materials and services to meet needs.
3. To maintain and develop the quality of purchased goods.
4. Maintain an optimum balance of inventory
5. Ensure continuity maintaining effective relationships with existing sources
6. Too buy efficiently, best value for every rand spent.
7. Discuss the objectives of supply management – p8
 Contribute to the development of overall business strategies
 Manage supply base
 To ensure that a timely, cost effective and comprehensive info system is in place.
 Contribute to multi functional teams and provide outstanding customer services
8. Discuss the elements of the purchasing procedure – p 15 – p23

i. Origin of the need

ii. Specification identifying the source
iii. Selecting suppliers
iv. Negotiating and bidding
v. Ordering and contracting
vi. Follow up and expediting
vii. Receiving inspecting and distributing
viii. Handling faulty consignments and rejections
ix. Analyzing the invoice
x. Closing order
xi. Measuring supplier performance.

Chapter 2

1. Discuss the levels of purchasing and supply planning and objectives –p27 -29

 Strategic purchasing and supply Planning. This is organizational planning at the

highest level. Top Management, mission and long term objectives.
 Tactical purchasing and supply planning. Executed at middle management, entails
the implementation of strategic plans.
 Operational purchasing and supply planning. This planning is at the lowest level,
materials requirements planning, planning the purchasing and supply system.
2. What is the advantages of a centralized structure –p33
 Standardization of materials and products is possible because purchases are made
at one point.
 Increased negotiating power.

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  Purchasing and supply staff are afforded the opportunity to become experts.
 Control over all the aspects of the purchasing and supply function is improved.
 Admin costs are reduced
3. What is the advantages of a decentralized structure –p 33 -34
 The needs of users can be better satisfied.
 Make more efficient use of local suppliers
 Different plants maintain there autonomy plant managers are often fully responsible for
the profitability of individual plants.
4. Discuss the advantages of cross-functional purchasing teams- p37
 Different perspectives and expertise of team members.
 Increased innovation because of informal organizational structures.
 Teams accepting responsibility for problem correction
 Enhanced communication between functions.
5. Name the steps that you will following the process of evaluating the purchasing and supply
function –p41 – 49

1) Determine the objectives and scope of purchasing and supply.

2) Establish performance measures and purchase and supply norms for evaluation.
3) Measurement of actual performance
4) Evaluation of actual performance.
5) Reporting(feedback)

Chapter 3

1. Name the core principles of supply chain management –p 58

 Value and the creation of customer value.

 Total cost of ownership
 Integration of processors.
 Reduction of cycle time.
2. Discuss the characteristics of supply chain according to Leenders and Hugo –p59

 Supply chain management is a philosophy for conducting business.

 Supply chains consist of multiple layers of companies striving as a team to optimize the
shared supply chain processes.
 Organizations may be involved in multiple supply chains
 Focus remains on customer value creation
 All links and interfaces in the supply chain are not of equal importance
 Data interchange and data capturing occur across all interfaces of the supply chain.
3. How would you implement a supply chain –p61

 Supply chain strategy is a sub strategy of overall business strategy, it should therefore be
developed to support overall corporate strategies.
 Identify supply chain goals and develop plans to ensure that every process is individually
capable of meeting them.
 Develop a system for gathering market intelligence.
 Integrate and manage the supplier base by creating long term contracts.

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  Develop a performance measurement system.
4. What is benchmarking? –p63

 Benchmarking is a process that allows a company to evaluate its work methods, processes,
service levels or products against meaningful standards.
6. What is the difference between internal and external benchmarking
 Internal benchmarking measures the performance of different processes, divisions, business
units or manufacturing units on the same firm against each other.
 External benchmarking is a comparison of performance in any number of business activities
between a firm and its competitors within the same industry.

Chapter 4

1. What do we mean by strategic sourcing? –p 71

 Is a strategic management process whereby commodities and suppliers are analyzed
and relationships are formed and managed according to the best practices and
appropriate strategies in support of long term organizational goals.
2. What is subcontracting? – p74
 Is a business practice which a producer hires another firm to perform part of the
manufacturing process or to furnish sub assemblies that will be incorporated into the end
product.
3. What is outsourcing? – p74
 Does not form part of the production process but involves the provision of support services,
such as credit management, HR, cafeteria services, cleaning services, transports etc.

4. Discuss the advantages and disadvantages of subcontracting and outsourcing

 Advantages- cost savings
 Specialization by smaller, more streamlined enterprises
 Better competitive position
 Enlarged production capacity
 Limit or eliminate inventory
 Increased responsiveness to changes in the market.
Disadvantages- subcontractors become dependant on the enterprise ‘captive suppliers”

- unsuccessful development of suppliers

5. Name the different phases in the outsourcing decision process – p76

1. assess technology and demand trends

2. define core activities
3. strategic analysis
4. consider non cost factors and make a decision
5. conduct a total cost analysis of core activities
6. Relationship Analysis

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Chapter 5

2 Name criteria that you would use to select a supplier –p83

 Quality
 Price cost structure
 Delivery
 Time
 Flexibility
 Service
 Financial status of supplier
 Systems: Operations planning and control
 Technology and process capability
 Supply chain management
 Environments, ethics and social responsibility of supplier.
 Capabilities, responsiveness and motivation.
2 Discuss the supplier selection process – p89 – 93
STEP 1: Identify possible suppliers

 Various sources to identify suppliers

 Internet search engines
 Company websites
 Chambers of commerce or business
 Embassies and consular general officers.

STEP 2: Prescreening to reject unsuitable suppliers

 Here we eliminate suppliers who are unsuitable

 Will eliminate suppliers in a poor financial situation
 Suppliers who experience labor problems
 Suppliers who don’t meet organizations quality requirements.

STEP 3: Conduct research on potentially suitable suppliers.

 Information in the public domain

 Supplier visits
 Supplier surveys or questionnaires

STEP 4: Choose evaluation method and analyze the suppliers

 Formal method is the weighted point supplier performance rating system. Where all
pertinent criteria are weighted according to there importance and each potential
supplier is scored against them.

STEP 5: Select Suppliers

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 STEP 6: Ongoing measure of supplier performance

 Supplier performance measurement can be done using the weighted point evaluation
method
 Many organizations base their ongoing measurements on quality, cost reduction, on
time technology and service.

STEP 7: Supplier accreditation

 Approved suppliers
 Preferred suppliers
 Certified suppliers

Chapter 6

1. Name the benefits of procuring from Local; National suppliers –p95

 Lower transport costs
 More reliable service
 Lower prices due to mass production
 Greater continuity suppliers are in a stronger financial position

2. Discuss the three main ways in which an enterprise may become involved in the
development of suppliers –p97
 Purchase of disadvantaged suppliers
 Taking action when a product or service is not available.
 Performance appraisal of suppliers

3. What do we mean by captive suppliers –p99

 Captive suppliers refer to suppliers that are too dependant on one client for their survival.

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Chapter 8

3 Why is an ethical conduct important for purchasing and supply? –p119

 Purchasing and supply managers have power over large sums of money; the largest
outflow of funds from an enterprise is from the purchasing department.
 Purchasers have the greatest say in which supplier will receive an order.
Due to the above the temptation to act unethically are greater.

 Unethical actions by purchasers influence relations with suppliers

 Temptation influences purchaser’s objectivity and rational thinking.
 The climate of interaction in the purchasing process creates an environment for
potential and unethical behavior due to the purchaser and supplier interaction.
Sale reps are often less mindful of ethical conduct and may try and influence the
purchaser through offers of personal gain for the purchaser.

Chapter 9

1. Explain quality from a technical perspective – p126

A technical explanation of quality should reflect the inherent characteristics of requirements:

 Design quality, specific characteristics of the product that determines its value in the
market place.
 Conformance quality, defines how well the product is made with respect to its
design specification.
2. Explain quality from a business perspective – p126
A business management explanation of quality should reflect:

 The objectives of efficiency and effectiveness

 Combined optimization of value and costs
Therefore concentrates how the technical aspects of quality should be managed internally as
well as external as part of the supplier management to achieve a competitive advantage in
customer service levels.

3. Why is internal service quality from a purchasing point of view important?-p127

 Impacts on an organizations ability to meet external customer needs
 Dual role (external/external) quality.

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  Internal customers to a large degree determine the quality of products and services
delivered to the external customer.
 The internal quality of the work place is the biggest contributor to employee
satisfaction.
4. Name the elements of internal service quality – p130
 Responsiveness needs
 Quality of delivered products or services.
 Meeting customers expectations
 Flexibility in meeting customers changing needs.
 Delivering information on time(internal/external)
 Explaining service delivery products
 Communication level.
5. Name the main characteristics of TQM. – p131
 Its is a management philosophy that flows through the whole organization including the
supply chain.
 Philosophy of continuous improvement.
 All employees of firm and partners in the supply chain have some quality project
responsibilities.
 Team problem solving insures that goals are shared and relationships are stabilized.
 Feedback of customer satisfaction with regards to quality value of products and services
6. Name the steps that you will use for quality planning. –p132
 Analyze the environment from suitable quality may be obtained
 Setting quality objectives
 Making decisions on quality.

7. Discuss the quality control process (9.8)

 Set standards
 Recording performance
 Report and explain deviations
 Corrective action
Chapter 10

1. What is a fair price? – p151

Is the lowest price that ensures a continuous supply of proper quality where and when
needed

2. What is a competitive price? – p151

Is a price which relates to the strategic importance of purchased materials, components and
services for long term profitability and survival of the enterprise.

3. Name the elements of cost in determining price. –p152 – 153

 Direct cost of materials
Estimated with a aid of materials cost of a similar product.

Basis of a materials list provided by the supplier

Direct material costs, all materials that can be directly identified in the final product, do
not include small items eg welding rods , cleaning materials.

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  Direct labour costs- all labour that is physically traceable to the final product
or services.
to componets are important labour hours and wage rate.

Purchases own production function may assist in estimating number of labour hours
needed

 Indirect manufacturing costs(overheads)

 Profit mark up
4. What do we mean by Total fixed costs? –p153
5. Name the different supplier pricing models. –p158 – 159
 Price volume model
 Market penetration model
 Market skimming model
 Revenue pricing model
 Promotion price model
6. What is hedging? –p166
 Is a method for reducing the risk of fluctuations in the prices of raw materials.
 It involves a simultaneous purchase and sale in two different markets which are
assumed to operate so that a loss in one will be offset by an equal gain in the other.

Topic 4

1. Classify capital equipment and provide examples of each category?

Capital equipment includes all equipment that is used directly in the manufacturing process
and or the overall running of the enterprise. I.e. drilling machines lathes, fax machines.

Multi purpose equipment- variety of uses various industries longer technological life and
may have considerable salvage values. Forklift.

Single purpose equipment- design to do one or several similar operations, quality of work is
much better. Limited to a single industry unlike multi purpose equipment.

2 Explain the role of purchasing and supply management in the procurement of capital
equipment?

Purchasing and supply management does not play a dominant role in the purchasing of capital
goods, but can give important input in some areas.

In the case of supporting capital goods, the role of the p+s department is mostly supportive and
gives advice and managers supplier relations.

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The department concentrates on cost savings(to reduce investments) which because of the
nature and magnitude of capital goods purchases are of vital importance.

1) Provision of information- availability of suppliers

new equipment

prices of capital equipmet

2 evaluation and selection of suppliers- subordinate role, p+s management should investigate
the financial positioning of its suppliers

3 Coordination administration of the purchase.- specific purposes are analysed and

considered. P+s also involved in placing the order.
3 Specific purchases- purchasing of standard equipment of relatively low unit value, is another
area where p+s management could play a role.

4. Discuss leasing as an option for acquiring capital equipment?

Leasin involves the use of a specific fixed asset

Asset involves the propert of the lessor, the lessee pays a fixed regular installment on it normally
in advance for a fixed term

Advantages of leasing:

 Leasing provides certainity

 Very convenient from an operational management point of view
 Flexible in the sense that the organizations are not locked into long term commitments
due to capital investments
 Provide organization finacial leverage,
 Investment responsibility lies with the lessor.
 A small initial capital outlay is required.
 Expert service
 Advice and maintenance are often available.
 Risk of obscelesence is reduced.

Disadvantages

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  May be more expensive than other purchasing methods such as loans
 The lessor may insist on supervising
 There is less freedom of use in action
 No residual value for the lesee
 Sometimes more difficult to make changes or improvement to the equipment under the
contract.

Give reasons why the purchasing of services has become so important.?

 The service sector is by far the fastest growing one in world trade
 Large portion of revenue spent on purchasing services.
 Deregulation of previously government controlled service industries.
 Reduced costs due to the fact it has received little attention in the past.
 Outsourcing of non core activities.

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MNP2601 May/ June 2013 – Purchasing and supply management

Question 1

1.1 Give three advantages and three disadvantages of a centralised organisational structure for purchasing
and supply management. (6) [TB PG 31]
Advantages Disadvantages
Materials and products are standardised. Staff structure is top heavy
Control is improved There is slow response times to regional plants
Supplier relations are enhanced There is a tendency to bypass the central buying
Duplication of effort is eliminated office
There is less integration with user departments

ADVANTAGES OF CENTRALISED STRUCTURE DISADVANTAGES OF CENTRALISED STRUCTURE

 Materials and products are standardised
 Supplier relations are enhanced
 Duplication of effort is eliminated
 Control is improved
 Administrative costs are reduced
 There is a slow response time to regional
plants
 Staff structure is top heavy
 There is a tendency to bypass the central
buying office
 There is less integration with user
departments
 There is lack of insight into the
requirements of dispersed plan units

1.2 Briefly explain the seven steps of the supplier selection process. (7) [TB PG 82 – 84]
Step 1: Identification of potential suppliers: sources of information for initial selection and assessment
Step 2: Pre-screening to reject unsuitable suppliers
Step 3: Conduct Research on potentially suitable suppliers
Step 4: Choose the assessment method and analyse the suppliers
Step 5: Select the supplier or suppliers
Step 6: On-going measurement of supplier performance
Step 7: Supplier accreditation

 STEP 1: IDENTIFICATION OF POTENTIAL SUPPLIERS: SOURCES OF INFORMATION FOR

INITIAL SELECTION AND ASSESSMENT
o There are a variety of sources available to identify suppliers eg.
 Internet search engines
 Chambers of commerce
 Embassies and consular general officers
 Credit bureaus
 Reputation
 STEP 2: PRE-SCREENING TO REJECT UNSUITABLE SUPPLIERS
o The actual process of supplier selection can be long and drawn out and thus a costly
exercise.
o There are many grounds for elimination eg.
 Suppliers that do not meet the organisation’s quality requirements
 Suppliers that are in a poor financial situation
 Suppliers that the organisation has previously rejected
 STEP 3: CONDUCT RESEARCH ON POTENTIALLY SUITABLE SUPPLIERS

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 o The depth of the investigation and the criteria used can vary widely depending on
the product or service being purchased.
o Information sources for supplier research includes:
 Supplier visits – time consuming and very costly
 Supplier surveys or questionnaires
 STEP 4: CHOOSE THE ASSESSMENT METHOD AND ANALYSE THE SUPPLIERS
o Assessment methods range from the informal to the formal
o Informal techniques would include the purchasing manager’s judgement for low-
value, non-critical purchases to panel consensus where a group would discuss the
relative merits of each supplier
o Formal method is the weighted –point supplier performance rating where all
pertinent criteria are weighted according to their importance and each potential
supplier is then scored against them
 STEP 5: SELECT THE SUPPLIER OR SUPPLIERS
o After studying the assessment in relation to the criteria, the purchasing manager or
the cross-functional team will be in a position to approve the supplier(s).
 STEP 6: ONGOING MEASUREMENT OF SUPPLIER PERFORMANCE
o Supplier performance measurement ca be done by using the weighted-point
evaluation method with a rating sheet
 STEP 7: SUPPLIER ACCREDITATION
o Suppliers which have gone through the assessment selection and evaluation process
successfully can be classified in three groups:
 Approved suppliers – they have met the requirements of the supplier
selection process
 Preferred suppliers – they have shown that their past performance
consistently meets and exceeds the organisation’s required levels for criteria
such as quality, cost reduction, delivery & service
 Certified suppliers – certification of suppliers is the ultimate supplier
accolade and many organisations hold functions to make such awards.

1.3 Define a “revenue pricing model” in your own words and identify two reasons for suppliers to make use of
this strategy (4). [TB PG 140]
The emphasis in this model is on obtaining sufficient client revenue to pay for operating costs rather than
on profit. The idea is to generate sufficient revenue through sales to keep the firm going. Suppliers use
this strategy to retain skilled labour and improve capacity utilisation in times when there is a downturn in
markets due to a decline in the economic cycle.

1.4 Discuss three characteristics of services which distinguish services from buying goods (3) [TB PG 272]
 Services are intangible – experienced, not delivered, perception is reality
 Services are heterogeneous – quality varies, difficult to compare
 Service production – production and consumption simultaneous
 Perishability – cannot be stored for later
 Entry to the market – easy, large capital seldom required

 INTANGIBILITY OF SERVICES
o Services are experienced by the customer, not delivered to the customer in the sense
that a tangible item is
 HETEROGENEITY OF SERVICES

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 oThe variety of services available makes it difficult for the purchasing function to compare
the different services to identify the most suitable supplier.
 PERISHIBAILITY OF SERVICES
o Since the production and consumption of services are simultaneous, services cannot be
stored for later consumption
Question 2

2.1 When an order has been placed in the purchasing process, the order from serves as a source document for
all activities to be performed. To which functions or groups should the order form, or copies thereof, be
distributed and for what reasons? (10)

 The supplier receives the original

 The financial function receives a copy, verification of invoice and for payment purposes.
 The receiving function, to expect the delivery
 The inspection function, with detailed information to plan the inspection efficiently
 The purchasing function for follow-up, expediting and control measures
 The last copy remains in the order book, as permanent receipt of transaction

PG52
 THE SUPPLIER
o Receives the original order, this is a legal binding step that product/services are to be
rendered
 THE FINANCIAL FUNCTION
o Receives a copy for verifying the invoice and for payment
 THE RECEIVING FUNCTION
o Receives a copy notifying it to expect a delivery. It is also used for the receiving and
inspection of the goods
 THE INSPECTION FUNCTION
o Receives a copy with detailed information on the specifications, enabling it to plan the
inspection task efficiently
 THE PURCHASING FUNCTION
o Keeps a copy for follow-up and expediting

2.2 Identify six disadvantages that the decision to outsource may hold for an organisation (6) [TB PG 63-64]

 loss of control and skills

 loss of service provider focus
 lack of clarity
 lack of cost control
 Ineffective Management
 Loss of confidentiality
 Double outsourcing

 Bring about cost savings if a service provider can offer the product at a lower cost
 Specialization by smaller, more streamlined enterprises
 Outsourcing contractors can enlarge production capacity, thereby saving large
amounts of capital for additional production facilities
 Limit or completely eliminate the inventory (stockpiling) of raw materials
 The organisation may benefit by reacting quickly to changes in market demand

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  Service providers specialise in manufacturing products or services
2.3 List four symptoms of poor inventory management (4) [TB PG 173]

 Increased number of outstanding orders

 Increase in rand investment in inventory
 Differences in inventory turnover or times
 Increase in out of stock during fixed time period
 No storage space – too much inventory
 Increase in inventory holding cost
 Increase in obsolescence inventory – slow or no moving stock

 An increase in the number of outstanding orders, which may be an indication that timing for
inventory replenishment is poor
 An increase in the rand investment in inventory without a definite reason
 No storage space from time to time, indicating too much inventory
 Increases in obsolete inventory

Question 3

3.1 What is the common role of the purchasing and supply management department in the purchasing of
capital goods? (5) [TB PG 256-258]

 Provision of information – existing suppliers and industrial publications

 Evaluation & Selection of suppliers – contribute to investigation of potential suppliers using selection
criteria
 Negotiations & conditions – strategies, amendments, price, payment terms
 Coordination & administration – central point for placing order, drafting contract, following up
 Specific purchase – Low value orders can be done by P& S function entirely

3.2 List and explain the problems that organisations face with small disadvantaged business purchasing
programmes. (10) [TB PG 290 – 293]

 Communication
 Availability of information & suppliers
 Transaction costs
 Conflicting policies influencing purchaser
 Objections and attitudes of purchasers with regard to:
o Financial instability
o Lack of expertise
o Cost
o Location
o Welfare perception
o Risk
o Dependency
o Reverse discrimination
o Tracing and development
o Poor performance

MNP2601 Oct/ Nov 2013 – Purchasing and supply management

Question 1

In some literature, supply chain management and logistics are sometimes wrongly referred to as being the
same concepts.

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1.1 Define the concept logistics. Underline the main elements/ phrases of the definition when providing the
definition (Your definition should include at least 4 underlined main elements/ phrases to receive 2 marks)
(2)

Logistics is therefore strongly focused on the physical flow of material goods and services, with a strong
emphasis integrating all these activities so that the total cost in the logistics system is minimized.
Logistics is the part of supply chain management that plans, implements and controls the efficient,
effective forward and reverse flow and storage of goods, services and related information between
the point of origin and the point of consumption in order to meet customer’s requirements

1.2 Define the concept supply chain management. Underline the main elements/ phrases of the definition
when providing the definition (Your definition should include at least 6 underlined man elements/ phrases
to receive 3 marks) (3) [TUT101/2016 PG46]

SCM is a management philosophy aimed at integrating a network of upstream linkages, internal linkages
inside the organization and downstream linkages in performing specific processes and activities.These will
ultimately create value for the customer in the form of products and services.

Supply chain management encompasses the planning and management of all activities involved in
sourcing and procurement, conversion, and all logistics management activities. Importantly it also
includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third-party service providers and customers

1.3 In a Table provide the main differences between logistics and supply chain management by comparing
these concepts on certain aspects. (Note use descriptive phrases or short sentences in the table that the
difference becomes clear. Using only cryptic words will be penalised Only answers provided in a table will
be marked) (10)

Logistics Supply chain management (SCM)

It is a framework for the managment of all
activities related to material and information
flows within an organisation.
The scope is the entire organisation
Can be regarded as a “functional silo” of a
particular organisation
It manages business activiteis in order to
optimise customer service and to minimise
cost for a particular organisation
The focus is on the management of the flow
of products, services and information
Logistic management focusses on optimising
wealth for a single firm
Uses the logistic framework and extends the concept of
product, services and information flow beyon the boundaries
of the single orgnaisation to other firms and entities through
linkages, often of an informal nature
It si the integration philosophy which seeks to optimise value
added over the activities of many organisations and
specifically over ever-changing combinations of firms and
entities
It manages business processes across the functional and
organisational boundaries of a network of organisations, and
aims at optimising customer satisfaction and eliminating
activities and processes that add cost and not value over the
entire supply chain
The focus is on the management of relationships across the
entire supply chain
SCM is aimed at optimising benefits for all participants in the
entire supply chain

Supply Chain Management Logistics

 Uses the logistics framework and
 Framework for management of all
extends the concept of products,
activities related to materials and
services and information flow beyond
information flows within the
the boundaries of the single

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 organisation as well as other organisation
organisations

 Seeks to optimise values added over  Regarded as a functional silo of a

the activities of many organisations particular organisation

 Manages business processes across

 To optimise customer service and
the functional and organisatonal
minimise cost for the particular
boundaries of a network of
organisation
organisations

 Management of relationships across  Management of the flow of products,

the entire supply chain services and information

 Optimising benefits for all participants  Optimisation of wealth for a single

in the entire supply chain organisation

Question 2

A management decision to centralise a purchasing and supply management function could have both
advantages and disadvantages. Describe ANY 5 advantages for centralising the purchasing and supply
function. Your discussion should include headings AND next to every heading a short explanation (or example)
of why/how this is an advantage for the business. (10)

Type of Advantages Disadvantages

structure

9. Materials and products are standardised
10. Negotiating power is increased and
volume discounts are made possible
11. Staff are afforded the opportunity of
becoming experts
Centralised 12. Control is improved
13. Administrative costs are reduced
14. Supplier relations are enhanced
15. Information systems integration is
facilitated
16. Duplication of effort is eliminated
7. There is a slow response time to regional
plants
8. There is resentment from geographically
dispersed business unit management
9. There is a tendency to bypass the central
buying office
10. There is less integration with user
departments
11. Staff structure is top heavy
12. There is lack of insight into the
requirements of dispersed plant units

 MATERIALS AND PRODUCTS ARE STANDARDISED

o It is an advantage so that all regional/district office have standardised products
and services which save time/cost when purchasing of products/services are
procured.
 SUPPLIER RELATIONS ARE ENHANCED
o Better communication between service providers and purchasing staff ensure on
specification products and services are received.
 DUPLICATION OF EFFORT IS ELIMINATED

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 o
When the purchasing function is decentralised duplication of activities are done
and more staff are employed to do similar tasks thus it when centralised
duplication of this activities is eliminated
 CONTROL IS IMPROVED
o Control is improved as all tasks are performed centrally and when errors are
made it is easy to intervene immediately
 ADMINISTRATIVE COSTS ARE REDUCED
o Less staff is employed to do similar tasks.

Question 3

Toyota SA car manufacturer needs to carefully select the suppliers of different components and parts used in
their vehicles. According to the textbook the main key performance indicators of supplier assessment are (a)
cost, (b) quality, (c) delivery and (d) environmental issues. Discuss how a purchaser at Toyota would assess
potential suppliers on the criteria (a) – (d)

(In your answer, you have to use the headings (a) – (d), give a short theoretical discussion and then APPLY to
Toyota) (10) [TB PG 78-81 & TUT101/2016 PG39]

 Cost
o If the supplier is productive, cost savings can lead to better prices for the purchaser. (1)
o Understanding suppliers’ cost structure – lengthy process – sometimes even just estimates. Need
to understand materials costs, direct and indirect labour costs, manufacturing costs and
overheads.(1)
o Toyota: Assessing suppliers’ cost structure would help the Toyota purchaser to determine if a fair
price is paid. If any defects are detected, the Toyota purchaser should realise that the price might
be higher than necessary – thus increasing the cost of the final vehicle. Toyota wants to minimise
input costs and should find the best price on parts without compromising quality. (1)
 Quality
o Quality products influence the productivity of the organisation due to fewer operational
interruptions and better working conditions. (1)
o This will increase the quality of the final product, leading to better customer service and
satisfaction and enhanced competitive advantage. (1)
o Toyota: Spare parts of poor quality can lead to poor performance of vehicles and fatalities (for
example the previous disaster with petrol cables). Poor quality can also result in a poor image
and decreased loyalty for Toyota (people will buy from competitors such as Nissan and Ford). (1)
 Delivery
o To reduce costs, lower inventories are needed. This might lead to suppliers making smaller, but
more frequent, deliveries. Late deliveries can result in production delays. The risk of being out of
stock should be managed. (1)
o Toyota: If parts are late, the whole production line could be stopped – resulting in increased
costs. Being late to deliver could lead to lost sales of cars. With the JIT system, non-delivery can
have a disastrous knock-on effect. (1)
 Environmental issues
o Be sensitive and sensible in terms of waste disposal; ISO 14001 compliant; re-use, recycle and
remanufacture. (1)
o Toyota: CO² emissions from cars should be managed, remanufacturing if mistakes made in
manufacturing, minimum waste and pollution from plant. (1)
Question 4

4.1 Delivering quality will incur costs. In literature three categories of quality cost are identified. Discuss the
three different categories using the type of cost as headings AND provide two relevant examples when
discussing every type of cost. (9) [TB PG 114 -115 & TUT101/2016 PG37-38]

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  Prevention costs (both a heading and description for 1 mark): These are costs relating to preventing
quality errors and the costs of changing the product design and production process to prevent the
errors. (1)
Any 2 examples for ½ mark each: equipment adjustments and calibration; process redesign and
control; quality planning; supplier capacity surveys; quality training of own and supplier's staff. (1)
 Appraisal costs (both a heading and description for 1 mark): These are costs incurred when products
and services are inspected to ensure that inadequate quality materials do not enter the internal
operational processes. (1)
Any 2 examples for ½ mark each: cost of incoming inspections as well as of the supplier; testing
purchased material; in-process, semi-finished and final product inspection; supplier audits; recording
and processing data related to quality. (1)
 Failure costs (both a heading and description for 1 mark): These are costs incurred when products
reach the customer that do not comply with the quality expectations of the customer. (1)
o Internal failure costs (both a heading and description for 1 mark): These are incurred after
production and before delivery to the internal/external customer. (1)
Examples of internal failure costs: cost of scrap; disposal; rework; redoing inspections;
production downtime; processing waste. (1)
o External failure costs (both a heading and description for 1 mark): These are incurred after
products have left the organisation, in the distribution channel or in the hand of the final
consumer. (1)
Examples of external failure costs: customer returns and replacing faulty products; warranty
claims; legal costs; costs due to product recalls; cost of lost customers.(1)

4.2 In the business world, a shift is made from correcting inadequate quality to preventing deviations from
quality requirements. Provide one reason for this shift. (1)

 The cost of prevention is lower than the cost of correction

Question 5

Leasing capital equipment can be an alternative to obtain the use of capital equipment. You have always been
of the opinion that leasing might be a more viable option. Explain any ten reasons you have for choosing
leasing in such a way that the advantage of leasing becomes clear with every reason discussed. Use headings in
your discussion. (10) [TB PG 266]

 Leasing provides certainty

 It is very convenient from an operating and managerial point of view
 It is very flexible in the sense that organisations are not locked into long-term commitments due to
capital investments.
 It provides an organisation with financial leverage because leasing typically replaces a large capital
outlay with smaller and regular payments. Leasing may increase liquidity and make capital available
for more profitable investments.
 The investment responsibility (initial capital outlay) lies with the lessor
 A small initial capital outlay is required.
 Expert service, advice and maintenance are often available.
 The risk of obsolescence is reduced.
 The lessor may carry out prior testing before any agreement is concluded.
 Lease payments are tax deductible
 Leasing allows an organisation to assess equipment against price increases.
 It may enhance the financial position of an enterprise because it does not appear as a debt on the
balance sheet, only as a note.

 Leasing provides certainty

 It is very convenient from an operating and managerial point of view

155
  It is very flexible in the sense that organisations are not locked into long-term commitments
due to capital investments
 It provides an organisation with financial leverage because leasing typically replaces a large
capital outlay with smaller and regular payments
 The investment responsibility lies with the lessor
 A small initial capital outlay is required
 Expert service, advice and maintenance are often available
 The risk of obsolescence is reduced
 Lease payments are tax deductible
 Leasing may serve as a buffer against price increases

MNP2601 May June 2014 – Purchasing and supply management

Question 1

Assume that Amazon.com decides to outsource all outbound transportation services for the delivery of parcels
to final consumers to approved courier services. Discuss the way in which Amazon.com’s purchasing and
supply management would consider the following five key variables in acquiring these outbound
transportation services. (Use the same headings, 1.1 to 1.5 below, in your discussion, followed by a short
theoretical explanation and then an application of the theory to Amazon.com. Make sure that you write your
answer in the prescribed, structure way.)

1.1 Total cost

 Includes all costs that can be associated with a particular transportation contract
 Optimising total cost by trading off cost elements is extremely important
1.2 Speed
 Speed refers to the time required by the contractor to perform a specific task as described in the
SOW
1.3 Reliability
 Reliability relates to the ability to meet customer expectation continuously and has therefore
the quality of the transport service as a core element
1.4 Capability
 Capability refers to the ability in terms of capacity, staff, equipment and management acumen
to perform the service contract in time, at the desired quality and within budget
1.5 Accessibility
 Accessibility relates to the ease with which a service supplier can be accessible to the various
user divisions or plants which may be spread out geographically, and also the ability of the
supplier to render a service where it is required
Question 2

(i) Define the concept of standardisation from a purchasing and supply point of view in terms of
quality decisions (2) [TB PG 119]
Standardisation is the process of developing and agreeing on uniform, technical product and
service specifications related to appearance, performance, measurement criteria, methods,
processes and practices.

 Standardisation is the process of developing and agreeing on uniform, technical product and
service specifications related to appearance, performance, measurement criteria, methods,
processes, and practices
 Standard items is derived from mainly three sources:

156
 o International standards
o National standards and
o Business standards
 Standardisation implies that the characteristics of items have to comply with a specific
minimum acceptable standard.

(ii) Discuss any Four circumstances under which standardisation may be considered during
purchasing decisions. (Use headings to structure your discussion.) (8) [TB PG 120]
 Standardisation may be employed fruitfully when the firm is experiencing severe price
competition or inflation and it becomes necessary to curtail costs in order to stay
competitive.
 Standardisation may be used when the demand for a product is uncertain or temporary
and a firm does not wish to invest substantially in the manufacture and purchase of non-
standard items.
 Standard items may be used when there is doubt about a suppliers ability to maintain
constant quality, or when rejections due to poor quality are relatively high on arrival or
during production.
 Standardised items are obviously require less technical skill which is helpful when a firms
employees in the production and purchasing functions are no technically highly skilled.
 Standardisation may also be used when a firm is experiencing a shortage of funds, which
sometimes happens in newly established business. Less stock needs to be carried,
reducing the need for storage space.

 SEVERE PRICE COMPETITION

o Standardisation may be employed fruitfully when the firm is experiencing severe
price competition or inflation and it becomes necessary to curtail costs in order to
say competitive
 UNCERTAINTY OF DEMAND
o Standardisation may be used when the demand for a product is uncertain or
temporary and a firm does not wish to invest substantially in the manufacture and
purchase of non-standard items
 QUALITY
o Standard items may be used when there is doubt about a supplier’s ability to
maintain constant quality, or rejections due to poor quality are high.
 TECHNICAL SKILL
o Standardised items require less technical skill which is helpful when a firm’s
employees in the production and purchasing functions are not technically high
skilled
 FUNDS
o Standardisation may also be used when a firm is experiencing a shortage of funds,
which sometimes happens in newly established businesses.

(iii) From a purchasing point of view, the cost-saving results of standardisation are significant. Briefly
discuss any five ways in which cost savings in purchasing may be affected through
standardisation. (make sure that you show the way in which cost savings are achieved Use Bullets
to structure your answer) (5)

 Less stock needs to be kept to when a standard item is suited to many applications.

 Larger quantities may be ordered at a time, creating the opportunity for negotiating larger discounts.

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  Inspection and quality control of the incoming goods are facilitated or even eliminated when
standardized products and standardized quality assurance procedures are part of the supplier base
management philosophy of the purchasing organization.

 The possibility of mistakes and doubts when orders are placed or eliminated

 The usually cheaper standard items may reduce the cost of final products which makes the firms
competitive position to improve.

 Standard items are more readily available.

 Less stock needs to be kept when a standard item is suited to many applications,
and this reduces inventory-carrying costs
 Larger quantities may be ordered at a time, creating the opportunity for
negotiating larger quantity discounts, with lower purchasing costs as a result.
 The possibility of mistakes and doubts when orders are placed is largely
eliminated, since the standard description can be used.
 The firm’s competitive position may improve, since the usually cheaper standard
items may reduce the cost of final products so that the firm can quote lower
prices
 Standard items are more readily available, thus less effort is taken in
administration costs.

2.2 A clear distinction can be made between the concepts of logistics management and supply chain
management. In a table, briefly describe the distinctions between logistic and supply chain management
(Please note that your answer will not be marked if it is not in the form of a table and the short relevant
descriptions required) (10)

Logistics Supply chain management (SCM)

It is a framework for the managment of all
activities related to material and information
flows within an organisation.
The scope is the entire organisation
Can be regarded as a “functional silo” of a
particular organisation
It manages business activiteis in order to
optimise customer service and to minimise
cost for a particular organisation
The focus is on the management of the flow
of products, services and information
Logistic management focusses on optimising
wealth for a single firm
Uses the logistic framework and extends the concept of
product, services and information flow beyon the boundaries
of the single orgnaisation to other firms and entities through
linkages, often of an informal nature
It si the integration philosophy which seeks to optimise value
added over the activities of many organisations and
specifically over ever-changing combinations of firms and
entities
It manages business processes across the functional and
organisational boundaries of a network of organisations, and
aims at optimising customer satisfaction and eliminating
activities and processes that add cost and not value over the
entire supply chain
The focus is on the management of relationships across the
entire supply chain
SCM is aimed at optimising benefits for all participants in the
entire supply chain

Supply Chain Management Logistics

 Uses the logistics framework and
 Framework for management of all
extends the concept of products,
activities related to materials and
services and information flow beyond
information flows within the
the boundaries of the single

158
 organisation as well as other organisation
organisations

 Seeks to optimise values added over  Regarded as a functional silo of a

the activities of many organisations particular organisation

 Manages business processes across

 To optimise customer service and
the functional and organisatonal
minimise cost for the particular
boundaries of a network of
organisation
organisations

 Management of relationships across  Management of the flow of products,

the entire supply chain services and information

 Optimising benefits for all participants  Optimisation of wealth for a single

in the entire supply chain organisation

Question 3

(i) Give a definition of capital equipment (2)

Capital equipment includes all equipment that is used directly in the manufacturing process and
or the overall running of the enterprise.
 Purchasing capital equipment involves buying assets that will be used by an organisation
for longer than one year

(ii) Give any two examples of capital equipment (you have to give two relevant examples to receive
one mark.) (1)
Drilling machines lathes, fax machines
 MULTIPURPOSE EQUIPMENT
o Eg. Forklifts, computer systems and furniture
 SINGLE PURPOSE EQUIPMENT
o Eg. Specialised machine tools and new manufacturing plants

(iii) When purchasing capital equipment, purchasing and supply should also take into account
qualitative considerations. Discuss any six Qualitative factors to consider when buying capital
equipment. (12)
Reliability of equipment – risk if breakdown
Flexibility of equipment – single or multi
Space requirements – adding equipment
Effect of quality of end products – fewer rejections
Durability of equipment – life expectancy/robust
Departmental preference – everyone’s input

 RELIABILITY OF THE EQUIPMENT

o Relates to the risk of interruptions in production, maintenance and adjustment times
o The expertise of maintenance staff

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 o Breakdowns means higher costs, loss of goodwill due to deliveries and unnecessarily
high investments in spares
 FLEXIBILITY OF THE EQUIPMENT
o The versatility of application of the equipment to be used for purposed other than
those for which it was primarily acquired
o Higher flexibility reduces the risk of obsolescence, in contrast with single-purpose
equipment that can be used for only one or few operations
 SPACE REQUIREMENTS
o Capital is required to provide space taken up by equipment.
o The greater the floor space required for the equipment, the more capital is required
in the form of buildings, factories and warehouses
o Technological innovation in photocopiers and computers have resulted in significant
space saving
 SAFETY OF THE EQUIPMENT
o To ensure that staff members are willing and able to operate equipment
o Unsafe equipment can lead to industrial accidents, production loses and even low
worker morale
 EFFECT OF QUALITY OF END PRODUCTS
o Quality conscious manufacturers who require very small tolerances can compare
alternative on the basis of the finished product
o Equipment that can consistently provide the required quality ensured fewer
rejections and defective end products which in turn eliminate production losses
 DURABILITY OF THE EQUIPMENT
o Technical and economic life expectancy of equipment is reflected in its durability or
the rate at which it depreciates in value
o Durability of equipment indicates if it is sufficiently robust for its intended use.

3.2 Management has to decide on either a centralised or a decentralised organisational structure for
purchasing and supply management. In a table briefly describe the following.

(i) Any 5 Advantages of a centralised structure, and

(II) Any 5 disadvantages of a decentralised structure

Type of Advantages Disadvantages

structure
 Materials and products are standardised
 Negotiating power is increased and
volume discounts are made possible
 Staff are afforded the opportunity of
becoming experts
 Control is improved
Centralised  Administrative costs are reduced
 Supplier relations are enhanced
 Information systems integration is
facilitated
 Duplication of effort is eliminated
 There are better relations between
decentralised purchasing and other
 There is a slow response time to regional
plants
 There is resentment from geographically
dispersed business unit management
 There is a tendency to bypass the central
buying office
 There is less integration with user
departments
 Staff structure is top heavy
 There is lack of insight into the
requirements of dispersed plant units
 There is loss of economies of scale
 Suppliers are confused by dealing with

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 functions many offices
 There is good service delivery to regional  There is duplication of staff and facilities
plants  Control over the function is much more
 There is faster reaction time to user difficult
departments in emergencies  There is a greater likelihood of
Decentralised  Support of local suppliers generates communications breakdown
goodwill  There is focus on local units and under-
 There is greater autonomy for profit emphasis on strategic issues
centres
 Interdivisional competition can improve
purchasing performance

ADVANTAGES OF CENTRALISED STRUCTURE DISADVANTAGES OF DECENTRALISED

STRUCTURE
 Materials and products are standardised  Loss of economics of scale
 Supplier relations are enhanced  Suppliers are confused by dealing with
many offices
 Duplication of effort is eliminated  There is duplication of staff and facilities
 Control is improved  Control over the function is much more
difficult
 Administrative costs are reduced  There is greater likelihood of
communications breakdown

(In order for your answer to be marked, you should answer in bullet form in a table and describe the
advantages and disadvantages clearly)

MNP2601 Oct Nov 2014 – Purchasing and supply management

Question 1

Green Harvest is a family company with 15 years of professional experience in the manufacture and sale of
rooibos tea. They are considering going into the coffee business. They have the options of wither importing the
coffee ingredients and making the coffee product or buying the finished coffee product. Green Harvest has
come to you for advice. Discuss the decision to make or buy coffee by highlighting the favourable
circumstances in the each option. (10) [TB PG 70 – 71 & TUT101/2016 PG40]

Circumstances that will favour buying the coffee or outsourcing the service:
 If Green Harvest has a strong purchasing corps that can buy the ingredients efficiently, they will buy.
 When there are inadequate facilities to make the coffee (or better investment possibilities instead of
investing in coffee-making facilities), they will rather buy or outsource the coffee making.
 When the operational staff’s knowledge and skills are inadequate in terms of producing coffee,
buying the finished coffee product or outsourcing to an experienced coffee manufacturer would be
better.
 When the demand for the product or service is relatively small and only temporary, it would be better
to buy or outsource instead of making long-term commitments in terms of coffee making.
 When it is cheaper to buy than to make, it makes sense economically to buy the coffee.

Circumstances that will favour making the coffee or insourcing the service:
 When it costs Green Harvest less to produce the coffee, they would consider making the coffee or
insourcing.
 When there are no or only a few reliable suppliers, they almost have no other option than to make
the coffee themselves.
 When there is available capacity, it could be used to make coffee instead of having idle machines.

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  When Green Harvest’s quality requirements are so stringent that suppliers cannot meet them, they
should rather manufacture themselves to prevent losses due to quality errors.
 For competitive, political, social and environmental reasons, they might prefer to make the coffee
themselves (for example when a competitor in the coffee business has acquired an interest in the
only supplier of coffee ingredients, or when Green Harvest is prevented from importing the coffee by
the authorities).

Question 2

2.1 In a table, shortly explain why a supply manager would consider a decentralised purchasing and supply
organisational structure by referring to the following.

(a) Any 5 advantages of a decentralised purchasing and supply organisational structure

- THERE ARE BETTER RELATIONS BETWEEN DECENTRALISED PURCHASING AND OTHER FUNCTIONS
- THERE IS GOOD SERVICE DELIVERY TO REGIONAL PLANTS
- THERE IS FASTER REACTION TIME TO USER DEPARTMENTS IN EMERGENCIES
- SUPPORT OF LOCAL SUPPLIERS GENERATES GOODWILL
- THERE IS GREATER AUTONOMY FOR PROFIT CENTRES

(b) Any 5 disadvantages of a decentralised purchasing and supply organisational structure.

- THERE IS LOSS OF ECONOMIES OF SCALE

- SUPPLIERS ARE CONFUSED BY DEALING WITH MANY OFFICES
- THERE IS DUPLICATION OF STAFF AND FACILITIES
- CONTROL OVER THE FUNCTION IS MUCH MORE DIFFICULT
- THERE IS A GREATER LIKELIHOOD OF COMMUNICATIONS BREAKDOWN

Type of Advantages Disadvantages

structure
 Materials and products are standardised
 Negotiating power is increased and
volume discounts are made possible
 Staff are afforded the opportunity of
becoming experts
 Control is improved
Centralised  Administrative costs are reduced
 Supplier relations are enhanced
 Information systems integration is
facilitated
 Duplication of effort is eliminated
 There are better relations between
decentralised purchasing and other
functions
 There is good service delivery to regional
plants
 There is faster reaction time to user
departments in emergencies
Decentralised  Support of local suppliers generates
goodwill
 There is greater autonomy for profit
centres
 There is a slow response time to regional
plants
 There is resentment from geographically
dispersed business unit management
 There is a tendency to bypass the central
buying office
 There is less integration with user
departments
 Staff structure is top heavy
 There is lack of insight into the
requirements of dispersed plant units
 There is loss of economies of scale
 Suppliers are confused by dealing with
many offices
 There is duplication of staff and facilities
 Control over the function is much more
difficult
 There is a greater likelihood of
communications breakdown
 There is focus on local units and under-
emphasis on strategic issues

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  Interdivisional competition can improve
purchasing performance

2.2 KFC has been baking their own bread in each of their franchises. Recently, they received the opportunity to
outsource the bread baking to an independent baker. This baker will bake all the bread and distribute it to the
different franchises. Discuss 4 advantages and 4 disadvantages the help KFC in their decision of whether they
should outsource or not. (Take note that the advantages and disadvantages should be relevant to KFC) [TB PG
63]

Advantages Disadvantages
 Cost savings  Dependency on enterprises – captive supplier
 Specialisation  Unsuccessful development of supplier
 Better competitive position  Over involvement in development of contractors
 Enlarged production capacity  Double outsourcing
 Limit inventory  Loss of confidentiality
 Increase response to market  Lack of cost control

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ADVANTAGES
Bring about cost savings if a service provider can offer
the product at a lower cost
Specialization by smaller, more streamlined
enterprises
Outsourcing contractors can enlarge production
capacity, thereby saving large amounts of capital for
additional production facilities
Limit or completely eliminate the inventory
(stockpiling) of raw materials
DISADVANTAGES
Contractors become dependent on the enterprise
with the accompanying dangers of a captive supplier
An enterprise becomes over-involved in the
development of contractors or service providers and
may never reach the point where it is able to
continue without intensive assistance from the
organisation
Loss of service provider focus
Lack of clarity

2.3 Although inventory costs should be kept to a minimum, organisations realise that keeping inventory
remains essential. Discuss the reasons for holding inventory.

5. Continuity in production and marketing – sufficient inventory ensures that production is continuous.
Low unit costs and constant availability of final products provide marketing opportunities such as
timeous availability and better service to customers which could result in a better competitive
position.
6. Cost savings and hedging against price uncertainties – The enterprise may make use of quantity
discounts and transport in bulk, which means cost savings. Hedging against price in important to
enterprise prone to currency volatility.
7. Protection against supply uncertainties – It serves as protection against breaks in supply caused by
unexpected events, such as strikes and natural disasters.
8. Purchasing costs – Larger less-frequent deliveries must be traded off against the increased cost of
inventory holding and decreased costs of transportation.

Question 3

3.1 Shoprite is in the process of opening a new store in Ghana; however, they are uncertain about owning a
warehouse or leasing it to assist Shoprite:

(a) List and discuss the types of leases options available to Shoprite (4)

Financial Leasing
o Used to obtain financial leverage

Operating Leasing
o Facilitate business operation

 Financial leases:
- used to obtain financial leverage and related longer-term financial benefits
- long term and covers a time period slightly shorter than the approximate life of the
warehouse leased.
- Lessor pays for the asset and owns it
- Lessee pays rental that covers the capital cost of the asset with a service charge
- Lessee is responsible for insurance, servicing and maintenance

 Operating leases:
- used to facilitate business operations

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 - the focus is on operating convenience
- the asset is not wholly amortised during the obligatory period of the lease
- lessor is responsible for servicing, maintenance and updating equipment
- short term and used when organisation has a temporary need for warehouse but not
interested in owning it

(b) Shortly discuss 6 merits of leasing of Shoprite (8)

 Leasing provides certainty

 It is very convenient from an operating and managerial point of view
 It is very flexible in the sense that organisations are not locked into long-term commitments
due to capital investments
 A small initial capital outlay is required
 The risk of obsolescence is reduced
 Lease payments are tax deductible

3.2 List and give a short description of the 8 most commonly used criteria for the assessment of suppliers.

 Internet search engines

o A powerful and rapid technique to identify potential suppliers and also provide
important information about them
 Chambers of commerce or business
o Can provide very valuable information about possible sources of supply – local,
regional & national
 Embassies and consular general officers
o Useful for obtaining information about international suppliers
 National associations
o Various associations representing industrial sectors can be contacted to obtain a list
of manufacturers or service providers
 Trade directories, trade journals and business directories
o Many industries publish directories and journals
 Industrial trade fairs
o These may provide the purchasing professional with an opportunity to compare
similar products from similar sources
 Credit bureaus
o Eg ITC can be approached for information when carrying out a financial assessment
of a potential supplier
 Reputation
o Reputation may be established by talking to colleagues and other purchasing
professionals

3.3 Price determination in the supply activity can be based on the type of product. Discuss the type of price
determination typically relevant when deciding on the price of the following type of product (also include one
example of the type of product in your discussion):

(a) raw materials

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RAW MATERIALS - such copper, wheat and crude oil which are bought on world commodity markets and
require special skills of commodity purchasers or commodity brokers. Usually prices are fixed in these markets

(b) Capital goods

CAPITAL GOODS – price determination for capital goods is a complicated process and is usually performed by
management team since it has major financial implications for the firm. Eg. Buildings, plant and machinery.

(c) items for resale

ITEMS FOR RESALE – Prices are largely influenced by what prices the market will be willing to buy. Unique
purchasing and pricing methods are used by shops like pick and pay. Eg. Groceries

MNP2601 May/ June 2015 – Purchasing and supply management

Question 1

In the case study, numerous examples are given of the manner in which The Coca-cola Company accepts their
purchasing and supply social responsibilities Discuss, with relevant examples, the manner in which The Coca-
Cola Company has met the discretionary responsibilities expected by the Ghanaian community structure your
answer by discussing two activities related to each of the following (if the case study does not have examples,
you may make relevant assumptions)[TB PG 92]

1.1 The environment

Purchasing and supply should:

 use a life-cycle analysis to evaluate the environmental friendliness of products and

packaging,
 participate in the design of products for disassembly,
 encourage suppliers to commit to waste-reduction goals and environmentally practices,
 participate in the design of products for recycling or re-use.

1.2 The Community

Purchasing and supply management should as far as possible

 buy from local suppliers,

 donate to local development campaigns and philanthropic organisations, and
 seek opportunities for poverty alleviation in local communities

Purchasing and supply should also encourage members of the supply chain to add value in the
community.

1.3 Ethics

Ethics form an important part of the King III report. According to this report senior managers should
take responsibility for the ethical (or unethical) conduct in their organisations. The key requirements
stipulated by the King III report:

 The company board should ensure that the company is and is seen to be a responsible
corporate citizen through the development and implementation of strategies and policies in
relation to economic, social and environmental impacts
 Leadership should be effective and based on an ethical foundation
 The board should ensure that management cultivates a culture of ethical conduct through
the creation of an ethical risk profile; and the establishment of a code of conduct through the
integration of ethics into all company practices, procedures, policies and conduct and
through the assessment, monitoring, reporting and disclosure of the company’s ethics
performance.

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  The assurance of the company’s ethics performance supported by and assurance statement
in the integrated report is recommended

Question 2

2.1 According to the case study, Project last Mile applies The Coca Cola Compnay’s supply chain expertise in
distributing critical medical supplier to remote communities in Ghana. The government agencies responsible
for managing and distributing the medical supplies purchased transportation services from the Coca-Cola
Company. Discuss the five key variables in transport decision making that the government agencies most
probably used.[TB PG 279]

 Total Cost – All cost that can be associated with a particular transportation contract.
 Speed – Refers to the time required by the contractor to perform a specific task as describe in the
SOW
 Reliability – Ability to meet customers’ expectations continuously
 Capability - Ability in terms of capacity, staff, equipment and management to perform the services
contract in time
 Accessibility – The ease with which a service supplier can be accessible to the various user division or
plants which may be spread geographically

2.2 Inventory shortages can cause serious disruptions in the organisation. Discuss the costs incurred when
inventory shortages are experienced (Note This Question is a theory question and not application to the case
study is required) [TB PG 157]

 Increased transport costs

 Increased adjustment or overtime
 Costs in the plant
 Additional Administration costs, or costs caused by the disruption of a planned production schedule
 Costs resulting from cancelled orders

2.3 Discuss the way in which organisations can benefit from buying from only one or a limited number of
suppliers (Note this question is a theory question and no application to the case study is required)

ANSWER HERE

Question 3

3.1 In the process of strategic sourcing, a matrix can be used to divide the spending on purchased products and
services into four categories. Provide a detailed diagram of the four quadrants of the strategic sourcing matrix
(note only diagrams will be marked. This question is theory question and no application to the case study is
required)

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3.2 The Coca-Cola Company may experience failure costs as part of quality costs while manufacturing
Schweppes Malt Considering this, define the different types of failure costs and give one relevant example per
category. (5)

Internal Failure Costs

Are costs that are incurred after production and before delivery to the internal or external customer.
Examples are cost of scrap disposal, rework and redoing inspections, production down time and processing
waste.

External Failure Costs

Examples are customer returns and replacement of faulty products, warranty claims, cost of legal action and
the costs associated with product recalls. Often included in this category is the cost of lost customers, which is
very difficult to determine accurately.

3.3 Due to the specialised task of sanitising the water used in manufacturing beverages at The Coca-Cola
Company, Management is uncertain whether to outsource this task to an independent company.

(a) Why would The Coca-Cola Company consider outsourcing the task of water sanitisation instead of
performing it in-house? (5)

 Cost savings
 Specialisation
 Better competitive position
 Enlarged production capacity
 Limit inventory
 Increase response to market

(b) Why would the Coca-Cola Company prefer insourcing the using an external service provider? (5)

 Dependency on enterprises – captive supplier

 Unsuccessful development of supplier
 Over involvement in development of contractors
 Double outsourcing
 Loss of confidentiality
 Lack of cost control

MNP2601 OCT/NOV 2015 – Purchasing and supply management

1.1 From the case study can be deduced that the approach followed when determining the price of maize is
based on prevailing market prices

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 Motivate this statement from the case study (3)

(If the case does not provide specific information to substantiate your answer you are allowed to make
relevant assumptions)

1.2 Standardisation is a helpful technique in managing quality in purchasing and supply

a) Define standardisation (2)[TB PG 119]
Standardisation is the process of developing and agreeing on uniform, technical product and
service specifications related to appearance, performance, measurement criteria, methods,
processes and practices.

(a) Discuss how silo owners can use standardisation in terms of the white maize received from the
farmers (2)
Standard items may be used when there is doubt about a suppliers ability to maintain constant
quality, or when rejections due to poor quality are relatively high on arrival or during production.
Standardised items are obviously require less technical skill which is helpful when a firms employees
in the production and purchasing functions are no technically highly skilled.
Standardisation may also be used when a firm is experiencing a shortage of funds, which sometimes
happens in newly established business. Less stock needs to be carried, reducing the need for storage
space.
(b) Discuss how standardisation implemented by silo owners would benefit the small-scale millers who
purchase from these silos (2)
Standardisation may be employed fruitfully when the firm is experiencing severe price competition or
inflation and it becomes necessary to curtail costs in order to stay competitive.
Standardisation may be used when the demand for a product is uncertain or temporary and a firm
does not wish to invest substantially in the manufacture and purchase of non-standard items.

(You may make relevant assumptions if the case does not provide relevant information to substantiate
your answer)

Question 2

2.1 Discuss any 9 supplier selection criteria when assessing suppliers. Your discussion should also include one
relevant example for criterium. (19)
 Quality and quality accreditations
 Price, cost and cost structure
 Delivery
 Time
 Flexibility
 Service
 Financial status
 (OPC) – Operations planning and control
 The technology and process capability
 Supply chain management
 Environmental issues, and social responsibility
 BBB EE
 Capabilities, responsiveness and motivation: present and future
 Geographical Location
(This question is a basic theory question and no application to the case study is required)

2.2 Based on the case study, the small-scale millers produce maize products at affordable prices. Categorise
ANY 3 types of inventory held at the small-scale milling plants by providing a short discussion of the inventory
categories and a relevant example. (6) [TB PG 154]

(You may make relevant assumptions if the case does not provide relevant information to substantiate your
answer.)

Production Inventories:

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Raw materials, materials and components required in production process – Corn

Maintenance Inventories:
Materials that support the manufacturing process but not necessarily included in final product – Light Bulbs

Finished Product Inventories:

Products ready for dispatch - Maize

Question 3

3.1 If suppliers are using price analysis to determine selling prices, discuss the six different pricing models to
assist them in determining prices (19) [TB PG 140]

(This question is a basic theory question and no application to the case study is required)

Price volume model Supplier analyses market to find volume of sales

combined with specific price per unit
Market penetration model Suppliers new products to market prices very low
to increase sales and discourage competition
Market skimming model Supplier intends “creaming off” profits early
Revenue pricing model Suppliers obtain sufficient revenue to cover
operating costs
Promotional pricing model Attractive prices for individual products, sell
below cost to ensure sales – long term contract
can be expensive with them
Market price level Use if keen competition and numerous similar
products in the market

3.2 From the case can be deduced that decisions should be made on appropriate milling machines as part of
small-scale millers capital equipment. Explain shortly what the decision about milling machines mean in terms
of the following qualitative considerations: [TB PG 258-259]

(a) Reliability

 Reliability of the equipment

Relates to the risk of interruptions in production, maintenance and adjustment times and the
expertise of maintenance staff.

(b) Flexibility

 Flexibility of the equipment

The versatility of application of the equipment to be used for purposes other than those for which it
was primarily acquired.

(c) space

 Space requirements
The greater the floor space required for the equipment, the more capital is required for the
equipment, the more capital is required fin the form of buildings, factories and warehouses.

(d) safety

 Safety of the equipment

Unsafe equipment can lead to industrial accidents, production losses and even low worker morale.

(e) effect on quality of end products

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  Effect on the quality of end products
Equipment that can consistently provide the required quality ensures fewer rejections and defective
end products which in turn eliminate production losses.

(f) durability

 Durability of the equipment

Capital equipment which has depreciated in full can still be used to manufacture a product, but it may
be so economically obsolete that it cannot compete with other, more modern equipment.

(If the case does not provide specific information to substantiate your answer you are allowed to make
relevant assumptions) (6)

Strategic sourcing

Is about managing the cost of purchase of goods and services. Can also be defined as the
strategic management process where by commodities and suppliers are analysed and
relationships are formed and managed according to the best practices and appropriate
strategies in support of long term organisational goal. Ref pg 60

Explain the strategic sourcing process

1)Build the team

Strategic sourcing process starts with the building of a multifunctional teal which may
consists of a purchasing manager, operation manager, information system manager,
financial or marketing manager, an engineer and legal advisor.

2)Conducting market research

Team should fully understand the relative importance of the item or service for reaching
business objectives. They should make a spend analysis of total expenditure for each
commodity and supplier and spending on the commodity as a percentage of total spending.

3) Developing a strategy

Information gathered must be structured by applying the portfolio analysis matrix or

strategic sourcing matrix where by total spending is divided into different catergories
according to the risks involved.

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Four catergories of the product are: routine, leverage, bottleneck, critical.

Routine items-supply risk are low, many suppliers, high availability, standard specification,
low amount to spend and easy substitution possibility. e.g Stationery like pens

Leverage items-supply risk are low,available alternative source of supply, standard product
specification, large amount is spend,substitution is possible. Tenders and quotes can be
used as the method of choosing a supplier. e.g computer hardware

Bottleneck items-risk are high, the market is monopolistic, specification and manufacturing
are complex, low amount spent,substitution is difficult.e. g fuel supply, often sorcing had 2
be done across country borders.

Critical items- risk are high, there is a limited or no competition, spend is high, difficult
substitution, design and quality are complex and critical.e.g sourcing components for mining
machines.

4)Negotiating the contract

The contract is negotiated with the identified supplier and the strategy is implemented in
terms of timelines, resources and accountability

5)Managing supplier relationships

An appropriate relationship should be formed and managed. The basis for managing a
relationship should be the performance evaluation of suppliers. Pg 61 and 62

Why organisation wish 2 outsource?

There are tactical and strategic reasons

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Tactical reasons-they are sourcing because they want to reduce operating and control costs,
to free up internal resources,to receive an important cash infusion, to improve performance
and to able to manage a function that is out of control.

Strategic reason- reason may be to improve company focus, to maintance access to world
class capabilities, to gain access to resources that are not available internally, to accelerate
re engineering benefits, to improve customer satisfaction and to increase flexibility and
share risks.

Outline the outsourcing decision process

There are 6 phase

Phase 1 assess the causes of outsourcing

Outsourcing considerations and decisions are often triggered by technology and demand
trends such as new product development, strategy development, poor internal and external
performance and competences, changing demand patterns and shifting technology life
cycle.

Phase 2 Define core activities

Core activities are primary activities to create and deliver product and services to the
customer. Organisations prefer to keep core activities and particularly core competences
inside the organisation and to outsouce all non core.

Phase 3 Strategic analysis

The strategic or competitive analysis provides a report on the organisations strategic

position relative to the market industry and competitors. It may inter alia be executed
through a SWOT analysis, value chain analysis and capability analysis.

Phase 4 Consider non cost factors and make decision

During this phase the outsourcing team may as a result of non cost factors either decide to
perform an activity inside or finally decide to go ahead with outsourcing. Non cost factors
are control of production service and quality, design secrecy, unreliable suppliers, suppliers

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specialized knowledge and research, volume of requirements, availability to facilities,
workforce stability.

Phase 5 Conduct a total cost analysis of core activities

In this phase an efoort is made to measure all the costs involved in the internal provision
and external sourcing of the activity.

Cost to be included in the insourcing analysis are,1) operating cost; direct labour, fringe
benefits, direct labour and indirect labour, 2) interest on capital of additional equipment, 3)
equipment depreciation,4) fixed overheads, 5) engineering /design research / learning.

Cost to be included in the outsourcing analysis, 1) purchasing cost,2) freight, 3)inventory

cost,4) administrative costs and 5)relationship cost

Phase 6 Relationship analysis

Depending on various factors, the relationship between two parties to an outsourcing

agreement may take different form. The relationship will depend for instance on the
technical, management and financial capacity and the size of the two parties, type of the
product/ service supply market conditions, the progressiveness of the country's economy
and the motive of the organisation

Supply policies and strategic

1)Local, national or international suppliers

A purchasing and supply policy document should make provision for the firms policy on the
use of international, national or local suppliers

Advantages of using overseas suppliers:

Advanced technical expertise, better quality, lower costs due to lower labour costs, large
production capacity or large product range.

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Disadvantages of using overseas supplier:

Higher transport cost, longer lead times due to long distance, more administration,
exchange rate and political risks and cultural factors.

Advantages of using local source:

Low transport cost, shorter lead times and consequently smaller inventories, improved
communication, express orders being easier to expedite, more reliable service, better
personal relatyionship with suppliers, the possibily to implement JIT system.

2)Purchasing from a distributor or manufacturer

Another issuer on which policy is required is by where purchases should be made directly
from manufacturer or from distribution

Advantages of purchasing from distribution:

-have specialised product knowledge

-has a wide choice of style, quality, colour, packaging and finish.

-dispersed location of warehouse of many distributors in the market make shorter lead
times and better after sale service possible

-marketing services such as transport, storage reordering, financing and assistance with
promotions and advertisement.

-system contracts can be entered into to reduce administration and stockholding.

3)Supply base optimisation: one supplier or more

Choosing to have one or more suppliers is a vital decision.

4) Size of supplier

The size of the suppliers that will be used for the provision of certain product or service
depends on the size of the enterprise.

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5) Suppliers development

There are main 3 ways inwhich an enterprise may become involved in development of
suppliers.

- purchase from disadvantage of supplier

- taking action when a product is not available

- performance appraisal of suppliers

6) Reciprocacy

Simply means buy from you because u buy from me. Whether or not to accept a policy on
reciprocity is an issue arousing much controversy and debate.

7)Decision to make or buy

The decision to manufacture oneself or to but from a supplier is also a contemporary one.
Cost implication had to be considered before decision taken.

8) Captive suppliers

Are suppliers who are too dependent on one client for their survival.

9) Environmental protection

Purchase should be made with a great caution and the following three main aspects
concerning the environment should be taken into account

-do the suppliers mission, supporting policy and measures protect the environment during
the manufacturing of products?

- how environmentally friendly is the product itself?

-are the right product and quantities purchased to prevent obsolecence and waste.

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