Amity Business School

PURCHASING MANAGEMENT

Amity Business School

Learning Objectives
You should be able to:
– Describe the role of purchasing and understand its
impact on an organization’s competitive advantage.
– Have a basic knowledge of manual purchasing and
e-procurement.
– Understand and know how to handle small value
purchase orders.
– Understand sourcing decisions and the factors
impacting supplier selection.
– Understand the pros and cons of single versus
multiple sourcing.
2

– Describe centralized. and hybrid purchasing organizations and their advantages.Cont. purchasing. and describe and understand the opportunities and challenges of global sourcing.Amity Business School Learning Objectives. – Understand total cost of ownership and be able to select suppliers using more than unit price alone. 3 . decentralized. – Describe and understand how globalization impacts.

Amity Business School • The Role of Purchasing in an Organization • The Purchasing Process • Sourcing Decisions: The Make-or-Buy Decision • Roles of Supply Base • Supplier Selection • How Many Suppliers to Use • Purchasing Organization: Centralized versus Decentralized Purchasing • International Purchasing/Global Sourcing 4 .

Amity Business School Introduction PurchasingObtaining merchandise. 5 . & MRO supplies. services. capital equipment. repair. and operating (MRO) supplies in exchange for money or its equivalent. capital equipment. Industrial Buyerspurchase raw materials for conversion. Merchant Buyerswholesalers and retailers who purchase for resale. raw materials. or maintenance. services.

2. Improve quality of the finished goods produced. Work closely with strategic suppliers to improve quality materials. and Involving suppliers and purchasing personnel in new product design and development efforts. and 3. Optimize customer satisfaction. Purchasing contributes to these objectives by: – – – Actively seeking better materials and reliable suppliers. Ensure uninterrupted flows of raw materials at the lowest total cost. 6 .Amity Business School The Role of Purchasing in an Organization The primary goals of purchasing are: 1.

Step 3. Step 2.Buyer identifies suppliers & issues a request for quotation (RFQ).stating product.Amity Business School The Purchasing Process Manual Purchasing-Older system. quantity. 7 . prone to duplication of effort and error Step 1-Material Requisition/Purchase Requisition.The Purchase Order (PO).The Request for Quotation (RFQ). and delivery due date are clearly.The purchase order is the buyer’s offer & becomes a binding contract when accepted by supplier.

Cont. 8 .Amity Business School The Purchasing Process.

relevant information such as quantity and date needed. Electronic Procurement (e-Procurement) Step 1.Amity Business School The Purchasing Process.Buyer assigns qualified suppliers to bid. Step 3. Step 4.Material user inputs a materials requisition.Product description.Buyer reviews closed bids & selects a supplier 9 .Cont.at purchasing department (hardcopy or electronically). Step 2. & conditions are given.Materials requisition submitted to buyer. closing date.

Advantages for the e-Procurement System – Time savings – Cost savings – Accuracy – Real time – Mobility – Trackability – Management – Benefits to the suppliers 10 .Cont.Amity Business School The Purchasing Process.

Amity Business School Small Value Purchase Orders Processing costs can be substantial. Small value purchases should be minimized through: •Procurement Credit Card/Corporate Purchasing Card •Blank Check Purchase Orders •Blanket or Open-End Purchase Orders •Stockless Buying or System Contracting •Petty Cash •Standardization & Simplification of Materials & Components •Accumulating Small Orders to Create a Large Order •Using a Fixed Order Interval 11 .

The Make or Buy decision is a strategic decision. The trend has moved toward outsourcing. 12 .Amity Business School Sourcing Decisions: The Makeor-Buy Decision • Outsourcing -buying materials and components from suppliers instead of making them in-house. • Backward integration refers to acquiring sources of supply • Forward integration refers to acquiring customer’s operations.

13 . and the advantage of economy of scale. process. • Quality: Suppliers have better technology. • Lack of expertise: Firm may not have the necessary technology and expertise.Cont. Reasons for Buying or Outsourcing • Cost advantage: Especially for components that are non-vital to the organization’s operations.Amity Business School Sourcing Decisions: The Makeor-Buy Decision. • Insufficient capacity: A firm may be at or near capacity. skilled labor.

lead-time transportation.Cont.Amity Business School Sourcing Decisions: The Makeor-Buy Decision. and warehousing cost • Lower cost 14 . Reasons for Making • • • • • Protect proprietary technology No competent supplier Better quality control Use existing idle capacity Control of logistics.

Amity Business School Sourcing Decisions: The Makeor-Buy Decision.Cont. The Make-or-Buy Break-Even Analysis 15 .

processes.Information on the latest trends in materials.suppliers that a firm uses to acquire its materials. services. supplies. Preferred suppliers provide: – Early supplier involvement. or designs – Information on the supply market – Capacity for meeting unexpected demand – Cost efficiency due to economies of scale 16 . Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers. and equipment.Amity Business School Roles of Supply Base Supply Base. resulting in a smaller supply base.

is complex and should be based on multiple criteria: – Product and process technologies – Willingness to share technologies and information – Quality – Cost – Reliability – Order System and cycle time – Capacity – Communication capability – Location – Service 17 .Amity Business School Supplier Selection The process of selecting suppliers.

Reasons Favoring a Single Supplier Reasons Favoring More than One Supplier • • • • • • • • To establish a good relationship Less quality variability Lower cost Transportation economies Proprietary product or process Volume too small to split • • • Need capacity Spread risk of supply interruption Create competition Information Dealing with special kinds of business 18 . avoid single source.Amity Business School How Many Suppliers to Use Single-sourcing.a risky proposition. Although trends favor fewer sources.

Amity Business School Purchasing: Centralized vs. – Decentralized Purchasing. local purchasing departments. – Centralized Purchasing. Decentralized Purchasing Organization dependent on many factors. such as market conditions & types of materials required. make their own purchasing decisions.individual. such as plant level. 19 .purchasing department located at the firm’s corporate office makes all the purchasing decisions.

both decentralized at the corporate level and centralized at the business unit level may be warranted.Decentralization – Closer knowledge of requirements – Local sourcing – Less bureaucracy A hybrid purchasing organization. 20 .Centralization – Concentrated volumeleveraging purchase volume – Avoid duplication – Specialization – Lower transportation costs – No competition within units – Common supply base Advantages.Amity Business School Purchasing: Centralized vs. Decentralized Advantages.

logistics.Amity Business School International Purchasing/Global Sourcing Global sourcing– Opportunity to improve quality.performs service for a fee. • Trading company. cost. political environment. 21 . • Import broker or sales agent. – Requires additional skills and knowledge to deal with international suppliers.imports & carries wide variety of goods. and other issues. and delivery performance.buys and takes title to the goods. • Import merchant. communication.