BBM 2102: INTRODUCTION TO PURCHASING AND SUPPLIES MANAGEMENT

TOPIC 1: INTRODUCTION

 Purchasing and Supplies Management is a management process of planning, organizing,

directing, coordination and control in obtaining and managing products, materials,
components or services required in a business operation.

 The major focus purchasing and supplies management includes;

 Safe and timely supply of materials, goods and services
 Low cost of products, services and materials
 Innovation
 Improving strategic position of the company in the market

Purchasing

 The term Purchasing is sometimes used interchangeably with procurement. It is the

process of acquiring products, services, materials and components from another firm.
 It describes the process of buying, learning need, locating and selecting suppliers,
negotiating prices and other pertinent terms and a follow up to ensure delivery.
 Purchasing has often been referred to as doing “the five rights” namely; getting the right
quality, in the right quantity, at the right time, for the right price and from the right
source
 Purchasing entails the following activities:
 Purchase needs identification through liaison with user departments.
 Identification of potential suppliers and negotiation.
 Selection of suppliers
 Market research for the necessary materials
 Analysis of proposals
 Issuance of purchase orders
 Administration of purchase contracts
 resolutions of purchasing related problems
 Maintenance of purchasing records

Supply management

 Supply management is the process of identifying, evaluating, selecting, managing and

developing suppliers to realize best possible supply performance over the competitors.
 It is a system management concept that is employed by companies to minimize materials
costs, improve quality and ensure efficient delivery of maximum value.
 The key elements of supply management comprise the actual materials/components,
budgets, information and employees.

 Supply management incorporates the activities of both the purchasing function and
procurement process which includes:
 Identification and selection Suppliers
 Negotiation of contracts and prices for materials, products and services with
suppliers
 Buying materials, products and services
 Supply market research
 Supplier measurement and improvement
 Purchasing systems development
 Identification, acquisition, access, positioning and management of resources
required to attain the firm’s strategic objectives
 Early Purchasing Involvement (EPI)
 Early Supplier Involvement (ESI) in product design
 Development of specification for crucial products
 Developing strategic purchase partnerships and alliances with supplies
 Continuous monitoring and improvement in the supply chain.
 Participation in strategic planning process
 Strengths Weaknesses Opportunities and Threats (SWOT) analysis.

Terms related to purchasing

i) Procurement

 Procurement is a broad concept encompassing a wider range of supply activities than those
included in the purchasing functions.
 It includes the traditional role of buying stores, movement, receiving, incoming inspection
and salvage with a focus on strategic matters and a more buyer participation that is related
material activities

Procurement includes but not limited to:

 Development of material and service requirements and other specifications
 Materials research and value analysis activities
 Extensive market research

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  Conduct of all purchasing functions
 Suppliers quality management
 Management of investments recovery activities (salvage of surplus and scrap)

ii) Supply Chain Management (SCM)

This is a system approach of managing suppliers, flow of information, raw materials, products,
services, factories, warehouses and customers who are the end users of the products.
Supply Chain Management involves:
 Flow of goods, data and finances related to a products or services from the procurement
of raw materials to delivery of the final product to the consumer (market).
 Managing the flow of goods and services to and from a business.
 Handling the entire production flow of a good or service starting from the raw material
components to the delivery final product to the consumer
 All steps involved in conversion of raw materials and components into final products
and delivery of the products to the ultimate customer.

iii) Materials Management

 From a managerial perspective, Materials Management is an organizational activity that
is designed to enhance coordination and control of various materials activities.
 The process integrates of all related materials functions to provide cost effective
delivery of material and services to an organization.
 Materials management includes the following activities:
 Purchasing and supply management activities.
 Inventory management
 Receiving activities
 Stores and warehousing
 In-plant material movement
 Production planning, scheduling and control
 Traffic and transportation
 Scrap and surplus disposal.

Objectives of purchasing

The main objectives of purchasing department in an organization are to:

1. Reduce/Lower costs
This objective is achieved by:
 Selecting a mix of suppliers who can provide the best prices and terms

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  Negotiating better prices with suppliers
 Implementing cost-saving measures such as bulk purchasing and vendor consolidation
 Taking advantage of warranties and discounts offered by the suppliers

2. Reduce risks and ensure the security of supply

 Purchasing department plays a significant role in mitigating risks associated with supply
of products and materials.

 It has a responsibility to understand the potential risks such as fraud, counterfeit

materials and intellectual property and develop innovative strategies to manage them.
 An effective risk mitigation strategy such as diversification helps to protect firms from
losses.
 Alternative suppliers should be made available in case of emergencies or unexpected
disruptions.

3. Manage relationships
 This objective is achieved by building and maintaining strong relationships with suppliers
in order to ensure timely deliveries, better pricing and better quality products.
 This can be achieved by effective communication with suppliers, providing feedback and
resolving disputes in a timely manner.
 Cordial relationships with internal stakeholders such as marketing, finance, logistics and
distribution should be aligned to realize maximum benefits.

4. Improve quality
 Improved quality can be achieved by establishing target performance levels for quality
and tracking performance against those targets.

 Some companies tend to work closely with their suppliers to develop their processes
and assist them in improving quality.

5. Pursue innovation
 Innovation can be achieved by sourcing supplies for products and services produced in
innovative firms.

 Purchasing department is always in contact with external businesses and therefore best
placed to source innovative goods and services that can provide a competitive
advantage to the company with regard to price, quality or convenience.

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6. Leverage technology
The purchasing department has responsibility to:
 Identify technology solutions that can address the company’s supply chain challenges.
 Select and implement the Enterprise Resource Planning (ERP) systems, inventory control
systems and other technology that can improve efficiency of the company’s supply chain
management.

7. Strategize sourcing
 Strategic sourcing is critical in building a reliable and efficient supply chain to meet
customer demands.

 It can be achieved by identifying and developing relationships with reliable suppliers

ensuring timely deliveries and reducing lead times.

8. Ensure sustainability
 Sustainability is a growing concern for many businesses and purchasing departments
can contribute to the organization's sustainability goals.

 Sustainability in purchasing can be achieved by sourcing from environmentally-friendly

suppliers and implementing environmentally-friendly packaging and transportation
methods.

 Companies can also work with suppliers to reduce waste and carbon emissions.

Principles of Purchasing

There are five principles of purchasing also referred also 5 R’s of procurement namely; Right
quality, Right quantity, Right price, Right source and Right time

i) The Right Quality

 The objective of procurement is to achieve right quality which fits the need of customer.
Establishing appropriate quality control and quality assurance system from buyer and
supplier’s side is critical in achieving the right quality.
 Procurement of goods or services should therefore be done in accordance to customer
requirements.
 The right quality of the product can be achieved by determining accurate specification of
requirements and quality standards.

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 Failure to achieve the right quality can lead to high costs, return or rejection and loss of
goodwill of the company.

ii) The Right Quantity

 Buying more quantities disregarding current needs is not a good procurement practice.
 The company should be able to estimate immediate needs and procure the right quantity to
match them
 Buying excess quantity can result in more fund blockage, increased holding cost, excess cost
of handling, inventory costs and risk of inventory getting damaged or pilferage/ theft.
 Accurate Demand forecasting helps in procurement of right quantity.

iii) The Right Price

 The quality of the product or service comes with a price and companies should be willing to
pay the right price for the right quality.
 The right price of a product can be obtained by doing price analysis & supplier cost analysis
and getting competitive price through negotiation.
 Paying higher cost than the value of product should be avoided.

iv) The Right time and place

 Procuring material too early or too late is detrimental to the success of the business.
 Getting the materials early can lead to extra cost for handling and storing the raw material.
 It also increases the risk of damage and theft of the material
 Similarly procuring the raw material later than required time will cause in delay in
manufacturing and supply of final product which will adversely affect the business.
 Procuring material at right place is equally important. Getting material from any can lead to
additional cost and time to bring the material to the right place.
 It also increases the risk of damage damaged during transportation.

v) The right source

 The source of procuring the material should be appropriate to suit the needs of the
company.
 Procuring a few products from a large manufacturer does not make any economic sense.

THE PURCHASING PROCESS

 The purchasing process is the steps a business goes through to complete a transaction.
 Typically, a business has to through a formal process when purchasing a product or service.
The purchasing process focuses on the actual act of buying products and services. It also

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 gives businesses a structured way to address their needs. It also allows for more informed
financial planning.
 An effective purchasing process can help prevent theft, fraud or irregular spending since it
requires documenting all business transactions.
 Below are steps to be followed to complete a purchasing process

1. Need Identification
 The purchasing process begins when the business recognizes that they have a need for a
product, tool or service that will enhance their operations.
 The purchasing process begins after need identification

2. Specifying the requirement

 Specification provides a detailed description of the goods or services a supplier will be
expected to supply with regard to description of product features, quality standards,
size, weight, count and testing methods used in order satisfy customer needs and
expectations.

3. Identifying and choosing a supplier

 A potential supplier who can provide the specific product or service to be purchased is
identified and selected from the list of supplies in the market. The selection should be
based on such factors as prices, reliability and delivery time.

4. Negotiation
 Negotiation is necessary for long-term contracts, discounts for bulk buying, deliver
terms and credit facilities.

5. Getting order approval

 Before initiating the transaction, the purchasing officer may need to get approval for the
order from the finance management to be sure there are enough funds available for the
purchase.

6. Placing an order
 Upon an agreement with the supplier on the transaction and specific details, such as
price, delivery times, fees and installations, the buyer formally places an order by filling the
necessary documents such as purchase orders.

7. Receipt and approval of the order

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  Upon receipt of the order, the buyer confirms if everything is in order before releasing
the payment. The supplier is required to address any issue arising from the delivery
before payment.

8. Making payment
 Once the order is confirmed and the buyer is satisfied with the delivery, he makes a
payment.

9. Review of supplier performance

 After working with the supplier for some time, it becomes necessary to review their
performance with regard to deliveries for quality and timeliness.
 This helps to track any issues that might arise later in the contract

Essential Elements of purchasing

Any decision make a purchase will be based on the following seven elements which
are common irrespective of the nature of the transaction or size.

i. Exposure
 Before making any purchase decision, one should have some knowledge about the
company that manufactures the product.
ii. Age
 Age relates to how well-established the product and business is in the market.
iii. Value
 This is a value judgment that a purchaser makes about potential benefits which are
related to monetary value.
 He strives to obtain the maximum value for money spent on the purchase of the
product
iv. Brand equity
 This is a conscious and subconscious assessment of the brand’s attributes or
characteristics.
v. Impulsivity
 There are many decisions that are made swiftly and without proper consideration
or consultation
vi. Innovation

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  This relates to how unique a purchase is perceived to be in respect to the
competition and how much those differences are aligned with the current and future
needs of the market.
 There is need for familiarity with the latest forms of technology, products or services
available in the marketplace and the ability to communicate this information to
stakeholders in order to assist them in the procurement process
vii. Loyalty
 Customers need to make a judgment about how often they’ll need to use the product
before making future the purchases.

The Evolution of Purchasing

 Purchasing has been in existence since 2800 BC but the concept was never documented
until 1832 when Charles Babbage wrote the first book “On the Economy, Machinery and
Manufacturing” which he devoted specifically to address purchasing. The book dealt with
Handling of Railway Supplies.
 In 1887, Marshall M. Kirkman published the second book “The Purchase and Disposition”
 Prior to World War I (1914-1918) most firms regarded the purchase function primarily as a
clerical activity but during the world war, it became necessary to obtain raw materials
supplies and services required to sustain the war.
 The factories and mines were to operate continuously to ensure organizational success
which called for attention on organization policies and procedures for purchase functions
which inevitably emerged as a recognized management activity.
 In 1933, Howard T. Lewis of Harvard University wrote the first college textbook on
purchasing. Since then, several books on purchase have been written by various authors
and cited in various articles in trade primarily in the engineering journals.
 Mangers are also increasingly becoming aware of the impact of purchasing on other
functions such as research and development, marketing, finance and operations.
 Historically, purchasing has evolved through the following four stages.

i) Passive stage
The stage has the following characteristics
 High proportion and individual communications due to purchasing low visibility
 Supplier selections based on price and availability

ii) Independent stage

The stage has the following characteristics:

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 Adoption of the latest purchasing techniques and processes which depends on the firms
competitive strategies
 Performance primarily based on cost reduction and efficiency measures.
 Established coordination links between purchasing and technical discipline.
 Recognition of the importance of professional development by top management
 Recognition of the opportunities in purchasing for contribution to profitability by top
management

iii) Supportive stage

The stage has the following characteristics:
 Adoption of purchasing techniques and products which strengthens the firm’s competitive
position
 Inclusion of purchase in sales proposal teams
 Recognition of suppliers as a resource with emphasis on experience, motivation and
attitude.
 Continuous monitoring and analysis of market product and suppliers

iv) Integrative stage

 Purchasing strategy is fully integrated into the firm’s competitive strategy
 Availability of cross-functional training of purchasing professionals
 Permanent lines of communication are established among all functional areas.
 Professional development focus on strategic elements of the competitive strategy
 Purchasing performance measured in terms of contribution to the firm’s success

The role of purchasing/functions of purchasing department

 The purchasing department, also known as the procurement department, is a critical
component of any organization.
 It is responsible for managing the entire process of acquiring goods and services needed
to support business operations.
 The needs of a company define its purchasing process and the functions of purchasing
department.
 The key functions of a purchasing department are to:
 Procure goods, raw materials & services for the organization at competitive
prices.
 Identify business requirements for goods, materials and services and find reliable
suppliers to meet these requirements
 Source reliable suppliers to meet the business requirements
 Negotiate prices, build quality and delivery terms

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  Set up the order quantities and making bid requests on supply contracts
 Coordinate delivery and storage operations
 Run quality control and product testing
 Manage budgets based on Return on Investment (ROIs) and payments
 Fulfill the following five Rs of procurements
 Support company operations with an uninterrupted flow of materials and
services.
 Keep inventory investment and losses at a minimum.
 Develop a long lasting invaluable relationship with active and potential suppliers.
 Achieve maximum integration with other departments of the company
 Handle the purchasing and supply management function proactively and in a
professional cost effective manner

The contribution of purchasing department to the overall firm’s performance

 Purchasing department contributes to the firm’s performance by:

1. Managing costs
The purchasing Department helps the business to manage costs by:
 Sourcing suppliers that offer competitive prices,
 Negotiating favourable terms of implementing cost effective procurement strategies
 Identifying opportunities for cost saving such as bulk buying, vendor/supplier
consolidation and cost and benefit analysis

2. Supply chain efficiency

Efficient procurement ensures a smooth and reliable chain by:
 Reducing the risk of disruption and delays in production
 Helping to meet customer demands on time which is essential for achieving sales and
revenue targets

3. Quality assurance
 Purchasing teams are responsible for evaluating supplier quality and performance.
 This ensures that products and services meet the required set standards
 Maintaining high quality standards contributes to customer satisfaction which also helps
to build brand name

4. Risk mitigation
 Procurement professionals help to assess and mitigate risks associated with suppliers and
product markets.

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  The work on contingency plans to address potential risks and disruptions
 The risk management approach also helps to protect organizations interests and
minimize the impact of unforeseen events

5. Supply Relationship Management (SRM)

 Purchasing department helps in building strong relationships with suppliers which is critical
for long term success of the business
 An effective SRM helps in obtaining preferential terms, reliable supply and access to
information.
 A collaborative success in supplies can lead to a joined product development and improved
overall performance.

6. Sustainability and Corporate Social Responsibility (CSR)

 Purchasing department plays a pivotal role in promoting sustainability by sourcing eco-
friendly and socially responsible products and services.
 Organizations that align procurement strategies with CSR organizational goals can enhance
their reputation and meet market demands of their customers.

7. Strategic alignment
 Purchasing department helps organizations to align their objectives with broader
organizational strategy.
 This ensures that purchasing decisions support the overall goals and objectives of the
organization.

8. Market influence
 Procurement teams of the organization helps to provide a valuable market intelligence by
monitoring market trends, price fluctuations and competitors activities
 This information helps the management in making strategic decisions

9. Financial performance
Effective procurement practices have a direct impact on the firm’s financial performance by:
 Optimizing costs
 Improving cash flow
 Enhancing profitability

10. Reduction of the Cost Of Goods Sold (CGS)

 Purchasing department helps to create efficient procurement practices which have a
direct impact on reducing CGS thereby increasing profitability.

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11. Helping other departments
Purchasing department also contributes to the firm’s performance by helping other
departments to:
 Identify their needs
 Manage their requisition process
 Source competitive prices for products, services and materials
 Adhere to their budgets
 Ensure quality of products and services
 Prevent unethical practices

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