1/3/2015

Purchasing Management
Faculty: Mr Ashok Sharma
BTech (IITD), MBA(FMS), FIMA

A few Questions ??

1. What is Buying / Purchasing/

Procurement ?
2. Evolution of Purchasing
3. What is Right Purchasing ?
4. What is the Mission of Purchasing ?
5. What are its Goals/ Role/s ?
6. What is P-Cycle ?

1. What is Purchasing ?

“ Acquisition of
goods and services
in any form…”

Buying: B2C,
Purchasing/Procurement: B2B

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 Buying: Newspaper, no formal contract, but

laws apply
 Purchasing: B2B: Focus is Price not Cost
 Partnership Sourcing
 Strategic Procurement: Long termin-ism,
Best in class worldwide,

2. Evolution of Procurement
 Prior 1900: recognised as an independent function by
many railroad organisations
 Prior to WW 1: regarded as primarily clerical
 During WW 1 & 2: seen as an important function because
of need to obtain raw materials and supplies needed to
keep the factories and mines operating

 1950s & 1960s: More managerial and procurement

became a well-recognised science

 1970s – 1980s: more emphasis placed on procurement as

prices of goods increased and the need to get more
realistic prices

Evolution of Procurement
 1983 – Sept 1983, Peter Kraljic’s article published in
Harvard Business Review. Widely cites today as the
beginning of the transformation of the function from
“purchasing” (viewed as highly tactical) to “procurement
or supply management” (viewed) as very
strategic.business)

 1990s – Procurement more integrated into the overall

corporate strategy, fueled strongly by the development of
supply management software solutions (automate
source-to-settle process).

 2000s – The leader of the procurement function with

many companies is established with a C-level title – the
Chief Procurement Officer. The global recession of 2008-
2009 places procurement at the centre of business
strategy

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3. What is Right Purchasing ?

“ Purchasing is the body of integrated
activities that focus on the acquisition of
materials, supplies and services of Right
Quality, in Right Quantity, at the Right Time/
Place, from the Right Source, at the Right
Price, in the Right Packaging, by the right
transportation, to achieve Right feasible
inventories..….”

BUYERS 7 RIGHTS
1. The right material ]
2. At the right Time ] to satisfy the company’s
3. In the right quantity] manufacturing needs
4. At the right place ]
5. At the right price ] to satisfy the cost
competitive environment
6. Of the right quality ] to avoid production
problems and eliminate
after sales warranty
problems.
7. At the lowest feasible ] To avoid tying up cash
inventory level unnecessarily in stock.

Functions of Purchasers:
Heard of KYC in Marketing ?
In Purchasing there are KYS
1. KYS Know Your Specifications/
Materials (key materials)
(Sales persons are better trained)
2. KYS Know Your Systems/Policies
3. KYS Know Your Supply Markets
4 KYS Know Your Suppliers
& Even Suppliers’ Suppliers 9

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Skills

Technical
Commercial
Legal
Human: Team work/ Leadership

Segmented Purchasing Strategy

 Provides a framework to redirect purchasing resources in a
strategic way so as to maximizes economic gains while
minimizing risk.

High Bottleneck items Critical items

 Places heavy emphasis on Develop strategic partnership
negotiating longer term with suppliers for these high
contracts ( 2 / 3 year risk – high impact items
horizon)

(Lock in security through

contracts for
these Important,
low-volume materials.)

Nuisance items Commodities

 Automate purchasing  Emphasis on bidding

 Minimize required attention Drive for sharp bargain
(Minimize attention through (Leverage volumes for
Low mechanization or outsourcing maximum cost advantage for
for these - office supplies and these High availability & low
other low cost items.) risk items.)
Low
Economic Opportunity High

Mission of PMM

“To contribute towards Building a

Sustained Competitive Advantage”
Where/ How does PMM Contribute to
building CA ?
Add Value + Prevent Waste

You must create a Business Plan

for Procurement

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5. Main Goals of Purchasing

 Broader supplier choice/ Stronger Supplier
Relationships: Managing Supply Risks

 Leaner procurement processes/ Cycle Time

Reduction/ Reduce paper-work: LTA/ LTC

 Timely Supplies/ Stronger Inter-department

Relationships

 Lower purchase prices/ Lower total cost of

purchasing (TCP)/ TCA/ TCO

Purchase Cycle: Process of Buying

PR to Payment Cycle: P2P, P2P2P,
S2S, S2S2S2S2 cycle: Specify-Source-
Supply-Settle, End-to-End Cycle
1. Determining the need/ specs (Indent/ Requisition/BOM)
2. Request For Quotations (RFQ): Short-listing vendors
3. Selecting the supplier: arriving at the appropriate price,
terms, and conditions: Comparison, Negotiations, Cost
Price Analysis (CPA) or Internal Cost Estimate (ICE)
4. Issuing the contract or order (PO/ Annual Contract…)
5. Following up to ensure delivery (Expediting)
6. Receipt/ Inspection/ Acceptance of materials (MRAN)/ QA
7. Payment to Suppliers in Time
8. Purchase Records/ Data Management

Role/ Functions of Purchasing

1. Operational: Transactional/ Procurement :
P2P2P +++
2. Strategic: Spend Analysis/
Annual Purchase Plan (APP)
Purchase Budget/
PMR/ Commodity Information
Sourcing: Vendor Management/Development
/Rating : Supplier Score-Carding , Performance
Dashboards- Vendors Performance Mgt: against
Company’s metrics
Data Analytics: Make better, timely and informed
decisions

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 Transactional
 Process centered
 Relational Purchasing
 Full outsourcing

 Value Adding
 Strategic: Develop Supply Base
 Shorter Life Cycles
 Cost Centric: Save 15 times salary
 High Technology Parts

Role of Purchaser Today

Purchasing managers must deal effectively with
 Quality,

 Cost,

 Delivery,
 Product and Process design,

 Environment

 Plant efficiency

 Product changes

 Ethics & corporate responsibility

 Social and economic impacts of their decisions

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Role of Purchasers today-contd.

 Corporate governance
 Knowledge transfer
 Ramp up/ Ramp down planning
 Short term problems
 Long term strategies
 Evolving client needs
 LESS MONEY IN THEIR ANNUAL SPEND
BUDGETS

Sourcing

 Sole Source
 Single Source
 Dual Source
 Multi-source

Sourcing

 Big or

 Small Suppliers

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Strategic Purchasing/ Sourcing:

The future state of procurement will involve
strategic sourcing.
 Strategic sourcing is a process for
reducing total cost of purchased
materials, goods and services, while
maintaining and/or improving levels of
operating efficiency, quality, technical
innovation, customer service and system
safety.
 To achieve this level of commitment,
organizations will truly need to work
together. 22

Total Acquisition Cost (TCA)

Total Cost of Ownership (TCO)
Purchasing: Real Profit Engine

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PURCHASING
- The Last Goldmine to Profits

- Purchasing-A Profit Centre

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Functions of Purchasers:
Heard of KYC in Marketing ?
In Purchasing there are KYS
1. KYS Know Your Specifications/
Materials (key materials)
(Sales persons are better trained)
2. KYS Know Your Systems/Policies
3. KYS Know Your Supply Markets
4 KYS Know Your Suppliers
& Even Suppliers’ Suppliers 25

Right Quality:
Is Best Quality the Right Quality ?
How to define Quality ?
 Specifications

 Blue Prints/ Drawings

 Samples

 Standards

 Brand Names

 Performance Specifications

RIGHT PRICE
 Lowest Price is not the best price.
 Lowest Responsible Price or
 Lowest Ultimate Cost of Purchase, usage &
storage.
 Higher the price - better the quality: not true
Price is an opinion, and cost is the fact
Price - Cost = Profit
How to Determine Price ?
 Cost Plus Pricing
 Determined by market considerations-
Demand/ Supply situation
 Determined by authorities/administered prices

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Right Price

 MRP
 MLO
 MLO+ IPR

 MLO+ IPR + Green Costs

 Commodity Pricing

 Tendering/ Competitive Quotations

 Reverse Auctions

 Monopoly: Is there another vendor ?

: Is there another buyer you know ?

Co-buying, Consortium buying, Aggregate Buying

Five Global Best Practices In Supply Management

What is Should Cost Analysis?

A cost modeling technique in which price is
projected by estimating the dollar value of each
cost component based on objective cost data.
The estimate is the analyst's view of what the
item "should cost" versus what the supplier
may ask the customer to pay once the product
or service has been defined. This analysis
provides a comparison point for bids or
proposals and encourages the buyer and seller
to identify, discuss and remove avoidable cost,
and to eliminate waste.
(ISM Dictionary)

What is Target Costing?

Used in supply management to identify the allowable price
for a supplier's product or service which starts with the
selling price of the buyer's end product or service for its
end product or service in the marketplace and subtracting
out the required profit. The amount remaining is the total
that it can cost the organization to make that product or to
perform that service, including materials.

This cost is allocated among purchases and internals

costs, with the result being the target cost for each item.
Purchasing then works with suppliers to ensure that their
prices come in at or below the target cost. Further analysis
and negotiation then seeks to remove costs from both the
buyer's and the seller's operations to reduce the price to
the acceptable target level. (ISM Dictionary)

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