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Procurement and
Vendor
Management
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Purchasing

▪ Obtaining the right material, in the right quantities, with the right
delivery (time and place), from the right source, and at the right price
are all purchasing functions.

▪ Choosing the right material requires input from the marketing,

engineering, manufacturing, and purchasing departments.
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Purchasing and Profit Leverage
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Purchasing Objectives

▪ Obtaining goods and services of the required quantity and quality.

▪ Obtaining goods and services at the lowest total cost.

▪ Ensuring the best possible service and prompt delivery by the supplier.
developing and maintaining good supplier relations and developing potential
suppliers.

▪ Selecting products and suppliers that minimize the impact on the

environment.
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▪ To satisfy these objectives, some basic functions must be

performed:

▪ determining purchasing specifications: right quality, right

quantity, and right delivery (time and place).

▪ Selecting supplier (right source). negotiating terms and

conditions of purchase (right price).

▪ Issuing and administration of purchase orders and agreements.

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Purchasing Cycle
The purchasing cycle consists of the following steps:

1. receiving and analyzing purchase requisitions.

2. Selecting suppliers, including researching and finding potential suppliers, issuing

requests for quotations, receiving and analyzing quotations, and selecting the right
supplier.

3. determining the right price.

4. Issuing purchase orders and agreements.

5. Following up to ensure delivery dates are met.

6. receiving and accepting goods.

7. Approving supplier’s invoice for payment.

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Selecting Suppliers

▪ Sourcing
▪ Sole sourcing
▪ Multiple sourcing
▪ Single sourcing
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Factors in Selecting Suppliers

▪ Technical ability

▪ Manufacturing capability

▪ Reliability

▪ After-sales service

▪ Supplier location

▪ Lean capabilities

▪ Price
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Identifying Suppliers

Some aids for identifying sources of supply include:

▪ Salespersons of the supplier company.
▪ Internet.
▪ Catalogues.
▪ Trade magazines.

▪ Trade directories.
▪ Information obtained by the salespeople of the buyer firm.
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Final Selection of Supplier

▪ Final Selection of Supplier

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Price Determination

Basis for Pricing

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▪ To make a particular component requires an overhead (fixed) cost of

$5000 and a variable unit cost of $6.50 per unit. What is the total cost
and the average cost of producing a lot of 1000? If the selling price is
$15 per unit, what is the break-even point?
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To make a particular component requires an overhead (fixed) cost of $5000 and a

variable unit cost of $6.50 per unit. What is the total cost and the average cost of
producing a lot of 1000? If the selling price is $15 per unit, what is the break-even
point?

Answer
Total cost = $5000 + 1$6.50 * $10002 = $11,500
Average cost = $11,500 , 1000 = $11.50 per unit
Break-even point: Let X = number of units sold
$15X = $5000 + $6.5X
$8.50X = $5000
Break-even occurs when 588.2 units are made and sold.
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Price Determination

▪ Competitive Bidding

▪ Price Negotiation
▪ Commodities

▪ Standard products

▪ Items of small value

▪ Made-to-order items
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Supplier Buyer Relation

▪ Contract buying

▪ Supplier responsiveness and reliability

▪ Close relationship with suppliers

▪ Electronic data interchange

▪ Vendor-managed inventory

▪ Internet
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Environmentally Responsible
Purchasing
Purchasing is responsible for managing waste products in most organizations
since they have:

▪ First-hand knowledge of price trends for waste products.

▪ Contact with salespeople who are an excellent source of information as to

possible uses of waste material.

▪ Familiarity with the company’s own needs, or uses for materials within the
organization.

▪ Knowledge of legislation involving the transportation and handling of

environmentally sensitive materials.
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Reduce, Reuse, and Recycle

▪ Reducing the use or generation of materials, whether hazardous or scrap,

is the most environmentally friendly of the 3 rs.

▪ The purchasing department, having direct contact with suppliers, is the

first to learn of new environmentally friendly materials.

▪ Lead-free solder and water-based solvents are just two examples

▪ Lean principles when applied to suppliers, involves reducing waste for all
stages of the supply chain.

▪ The use of returnable racks or packaging is widely used in many

industries, reducing both costs and environmental impact.
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Reduce, Reuse, and Recycle

▪ The next most effective step is to reuse materials wherever possible.

▪ Scrap from one process may be reused directly within the organization or
can be slightly processed for reuse in another process.

▪ Another category of reuse is by-products, which are saleable products

made from what was previously considered waste.
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Reduce, Reuse, and Recycle

▪ This is the most public and least effective of the 3 Rs, yet purchasing
can maximize the benefits of recycling through good management.

▪ Suppliers are often the best source of information on the disposal of

scrap materials and often will buy materials back for reprocessing.

▪ This does require good management to keep materials in their most

useful form.
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Expansion of Purchasing into Supply
Chain Management

The supply chain has four major components that are managed:

▪ The flow of physical materials from suppliers, downstream through the

company itself, and finally to distributors and/or customers.

▪ The flow of money upstream from customers back to the companies and
suppliers.

▪ The flow of information up and down through the stream.

▪ The flow of products back (upstream) from the customers, typically for
repairs or recycling. This is known as reverse logistics.
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Bullwhip Effect
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If suppliers were to be rated on the following basis, what would be the ranking
of the two suppliers listed?

Ranking of Rating of Rating of

Suppliers Suppliers Suppliers
Supplier A Supplier B
Factor Weight

Function 7 6 9
Cost 5 9 6
Technical
4 5 7
Assistance
Credit
1 7 4
Terms