LESSON TWO

PURCHASING MANAGEMENT
2.0 Introduction
The procurement management process involves managing the ordering, receipt, review and
approval of items from suppliers. Purchasing management involves The procurement
management process involves managing quality in the procurement of goods and services;
making sound sourcing decisions; applying appropriate buying techniques and skills in specific
buying situation; managing supplier relationships and ensuring ethical purchasing behaviour.
In essence, the procurement process helps the organization get value for money

2.1 Importance of Procurement Management

Purchasing management is a significant component for any business. Companies recognize the
significant cost savings that can arise from effective purchasing decisions and likewise how
poor purchasing strategies may result in disaster: Cost control is a critical factor in purchasing
management. The managers analyze which suppliers are selling the necessary inputs for
production and at what cost. From this information, they review a host of other factors, which
include on-time shipments, warranties, industry reputation and length of time in business.
Because switching vendors is costly, finding a reliable vendor is important to controlling costs.
Another important role of purchasing management is achieving price stability. When the cost
of production fluctuates wildly, other departments experience obstacles. For instance, the
marketing team does not know what price to charge customers; finance experts cannot estimate
profits and accountants cannot determine the company’s cash flow. Purchasing managers keep
the cost of production stable in a number of ways, one of which is negotiating with vendors to
achieve the lowest price and to lock in the value for a lengthy contract. For inputs with volatile
prices such as commodities, purchasing managers work with banks to hedge these items in the
form of a forward contract. These contracts also shield multinational corporations from the risk
of currency fluctuations, which can also affect the cost of production.
Securing the supply chain is another critical role of purchasing managers. Buyers are
responsible for ensuring that all of the necessary materials appear on time, intact and of
expected quality. If any of these shipments are delayed or of subpar, the effects reverberate
throughout the production chain. A shipment of faulty screws, for instance, may cause the
 finished product to fall apart. In turn, the entire order is jeopardized because of the
management’s purchasing decision. Further, Purchasing managers play a fundamental role in
ensuring customer satisfaction. Managers have this obligation in two ways: quality of product
and on-time deliveries. When buyers select high-quality ingredients at lower costs, these cost
savings can be issued to the customer. Likewise, poor quality deters customers from returning
to the business. Delayed and defective products are other ways customers are affected by the
decisions of purchasing managers. Thus, these employees play a critical role in shaping the
customer’s experience with the organization.

2.2 Organization of Purchasing Function

The purchasing manager organizes the purchasing function by creating an organization
structure representing the distribution of authority and responsibilities within the department.
The organization structure plays a critical role in the management of the purchasing function in
that it:
 Helps to properly group together similar /related activities for efficient operation
 Helps to guide in the allocation of tasks and responsibilities for the purchasing staff
 Helps to rationalize and balance workload among the staff
 Helps to show the relationship between tasks /units thereby fostering inter-functional
relationship among different units by indicating both horizontal and vertical integration
 Helps to indicate levels of authority thereby creating order and harmony in the
department/organization
 Indicate the flow of information in the department/organization

2.3 Factors That Determine the Level at Which Purchasing Unit Is Placed In the
Organizational Hierarchy
 Total expenditure on purchases- total value of goods and services purchased in an
organization
 Number of transaction- how busy or frequency of purchases in the organization
 Nature of purchased materials- criticality and sensitivity of materials to firms operations
  Contribution to firm’s profitability- its importance to competitive advantage and survival
in the market
 Size of the organization- will determine the levels created
 Industry changes- response to industry changes or practices
 Organization policy- guidelines relating to creation of organization structure

2.4 Reasons for placing supplies unit at top management level

 Supplies unit may be taking up a large proportion of the organizations finance/spending
 Activities of the supplies unit may be the core business of the organization/ high volume
in a particular year
 Supplies unit may be dealing with materials that are sensitive/critical hence the need for
management to closely monitor such materials
 Supplies unit may be handling materials of technical nature and management may wish to
get expert views in order to formulate policies on such materials
 The management may wish to get cooperation of the supplies team in policy
implementation by involving them in decision making/ Adoption of proactive approaches
 The Supplies function may be a Source of competitive advantage and market survival
hence the need to control it to deal with competition/strategic reasons

2.5 Disadvantages of Placing Procurement Unit At Low Level In The Organization

Hierarchy
 It would be restricted to handling clerical operations only
 It would be submerged in other functional departments hence difficult to determine its

contribution to organizational performance

 Inability to articulate procurement issues and procedures

 Low status hence lack of recognition and support

 Inability to contribute to organization image/ reputation

 Reduced staff morale/ productivity

2.6 Factors to Consider When Developing an Internal Purchasing Structure

  The size of the organization
 The nature of items the firm is dealing in
 The status of the purchasing function in the organization
 Organization policy on the designing of the structure
 The cost implication of the structure
 The communication channels to be established
 The distribution of authority- the hierarchy levels to be created

2.7 Criteria/factors that can be used to organize the purchasing/ SC function

 End product- staff to be responsible for buying materials of a particular end product
 Material requirements- each or related families of materials
 Values of items- senior buyers are responsible for high value purchases while junior
officers are responsible for low value purchases
 Profit/Cost centers- responsibilities are allocated according to operating costs that
constitute the material costs
 Material source- staffs are responsible for issues relating to particular suppliers e.g. local
& foreign purchase

2.8 TYPES OF ORGANIZATION STRUCTURES

2.8.1 Horizontal Purchasing Structure
Features of Horizontal Purchasing Structure:
 Performance objectives are based on customer needs and satisfaction
 It is a process based structure rather than task based
 Delayering and reduction in the size and scope of functional departs makes it flat
 Multifunctional teams are responsible for the whole process
 Combination of managerial and managerial activities whenever possible due to
reduced levels of authority
 Maximum supplier and customer contacts with organization members due to reduced
layers and bureaucracy
 Based on teamwork and rewards are focused on teams rather than individual
performance
 Advantages of functional organization structure
 Provides for proper allocation of duties, roles and responsibility
 Facilitates proper division of labour based on specialization
 Provides for better control of operations/ activities
 A basis for proper monitoring of project activities
 Provides for proper definition of project systems
 Clear chain of command and hierarchy of management
 Gives status to major functional areas
 Easier communication and decision making within functions
 Simplifies training of functional specialists
 Preserves strategic control at the top management level

2.8.2 Vertical/ Mechanistic Structure

Features of mechanistic structure include:
 Roles are rigidly defined
 Communication is vertical and mainly downwards
 Centralization of authority and decision making
 Loyalty to authority
 No delegation
 Lack of employee involvement/consultation

2.8.3 Organic Purchasing Structure

Features of organic purchasing structure include:
 Flexibility/ adaptability in organizing activities
 Roles and tasks are broadly designed
 Cross functional team approach in handling tasks
 Focus in performance of the tasks and results and not loyalty to the managers
 Free flow of information in both directions
 Participatory leadership

2.8.4 Centralized Purchasing Structure

 Features of centralized purchasing structure include:
 Purchasing decisions are made from a centralized position/ headquarters
 Centralized inventory control
 Centralized warehousing/ central stores
 Automated/computerised systems
 formulation of standardized Policies

Advantages of Centralized Purchasing

 Economies of scale- bulk purchasing resulting in huge quantity discounts thus lower
prices
 Facilitates specialization which enhances efficiency /eliminates duplication of
activities in the purchasing function
 Enhances the bargaining/negotiating power /position resulting in better terms and
value for money spent on purchases
 Better coordination of purchasing activities facilitating smooth flow of supplies
 Simplification and adoption of uniform purchasing procedures
 Better planning, control and monitoring of purchasing expenditure thus reducing
wastage
 Improved inventory management resulting in less investment in stocks
 Facilitates automation/computerization resulting in reduced labour and administrative
costs
 Creates a central contact point for suppliers and other stakeholders to obtain
purchasing information
 Facilitates training and engagement of specialists

2.8.5 Decentralized/Devolved Structure

Circumstances that favour adoption of decentralized purchasing
 When purchasing small value orders
 When purchasing maintenance, repair and operating items (MRO)
 When there is need for emergency purchases
 When purchasing is being carried out as part of corporate social responsibility
(CSR)
 When purchasing for staff needs e.g. beverages gifts etc. or from the staff
  When the organization wants to save on transport by purchasing locally
 When the items purchased are to be used only by a particular plant, branch or
department
 When operating in a wide geographical area and braches or units are widely
dispersed

Advantages of decentralized/devolved structure

 Improved customer service
 Allows staff participation in decision making- taps ideas and skills from
operational staff
 Adaptive to local environment and market conditions
 Increased speed in decision making
 Improved ability to respond to emergencies
 Improved quality of materials/services purchased /produced
 Allows management to focus on strategic issues
 Increased staff motivation

Weaknesses of decentralized purchasing

 Create unhealthy inter-functional competition among departments/ units
 Problems in monitoring and controlling the implementation of purchasing and
supply policies
 Lack of uniformity in purchasing procedures
 Diseconomies of scale/firm does not enjoy quantity discounts
 Weakens the status of the purchasing function and its contribution to profitability
 Inhibit specialization and promotes duplication of activities
 Leads to overstocking and increased stock holding costs
2.8.6 Combined Purchasing System

Features of a combined purchasing system

 Setting of policies and standards is done at the headquarters while branches are
authorized to purchase their requirements as per the set policies and standards
 Prices of commonly used items are negotiated at headquarters the while branches
are authorized to purchase at the negotiated prices
  Capital purchases are determined at the headquarters including their budgets and
the delivered directly to branches
 Suppliers for major items are determined at the headquarters and branches
purchase directly from the chosen Suppliers
 Legal matters erg issues on hiring leasing patents franchising legal matters are
dealt with at the headquarters and branches informed about the outcomes
 Hiring of the staff is done at the headquarters and posted to work at the branches

Activities that would be centralized in a combined (hybrid) structure

 Formulation of major purchasing policies
 Preparation of standard specifications for the whole organization
 Negotiation of bulk contracts for similar items used by a number of departments
 Purchase of common user items e.g. stationery
 Control of group inventory
 Staff training and development

Benefits of a Combined (Hybrid) Structure

 Special need for materials at branches can be addressed
 Regional branches are able to meet emergency requirements for materials
 Control of materials is maintained at the central department/ headquarter hence
easier supervision of procurement activities
 Top management can delegate activities at the Regional branches and focus on
policy formulation and complex issues
 It is possible to develop staff at Regional branches to take up management
positions
 It facilitates better customer service at both central and regional branches
 The firm can enjoy economies of scale at the same time buying from the
immediate market

2.8.7 Purchasing Consortia/ Group Purchasing

Factors that inhibit formation of purchasing consortia
 Different objectives /policies that firms seek to achieve
 Distance / spread of firms making the arrangement unfeasible
 Failure by members to contribute promptly to the common fund
 Conflicts in the appointment of the lead buyer and staffing issues
 The changing needs and operations of the members which may become unique
 Lack of management support to the policy