PURCHASING MANAGEMENT

Outline

• 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

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 Introduction

Purchasing-
Obtaining merchandise, capital equipment; raw materials, services,
or maintenance, repair, and operating (MRO) supplies in exchange
for money or its equivalent.

Merchant Buyers-
wholesalers and retailers who purchase for resale.

Industrial Buyers-
purchase raw materials for conversion, services, capital equipment,
& MRO supplies.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 The Role of Purchasing in an
Organization
The primary goals of purchasing are:
1. Ensure uninterrupted flows of raw materials at the lowest total cost,
2. Improve quality of the finished goods produced, and
3. Optimize customer satisfaction.

Purchasing contributes to these objectives by:

– Actively seeking better materials and reliable suppliers,
– Work closely with strategic suppliers to improve quality materials, and
– Involving suppliers and purchasing personnel in new product design
and development efforts.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 The Purchasing Process

The Purchasing Process is:

1. Receive and analyse purchase requisitions

2. Select suppliers, issue quotations
3. Determine the right price (Negotiate)
4. Issue purchase orders
5. Follow-up to assure correct delivery on time
6. Receive and accept the goods after approval by QA.
7. Approve invoice for payment

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 The Purchasing Process- Cont.

Electronic Procurement (e-Procurement)

• For Example: Electronic Data Interchange (EDI) between P&G and

Wal-Mart

E-mail and internet has enabled e-procurement now

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 The Purchasing Process- Cont.

Advantages for the e-Procurement System

– Time savings
– Cost savings
– Communication anytime
– Flexible due to communication enhancement
– Trackability

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 Small Value Purchase Orders

Processing costs can be substantial. Small value

purchases should be minimized through:

According to a study, purchasing small value time to time increases the

organization’s cost.
•Procurement Credit Card/Corporate Purchasing Card
•Blank Check Purchase Orders
•Blanket or Open-End Purchase Orders
•Petty Cash

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 Sourcing Decisions: The Make-or-
Buy Decision
• Outsourcing -buying materials and components from suppliers
instead of making them in-house. The trend has moved toward
outsourcing.
• Backward integration refers to acquiring sources of supply
• Forward integration refers to acquiring customer’s operations.

The Make or Buy decision is a strategic decision.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 Sourcing Decisions: The Make-or-
Buy Decision- Cont.
Reasons for Buying or Outsourcing

• Cost advantage: Especially for components that are non-vital to the

organization’s operations.

• Insufficient capacity: A firm may have insufficient resources.

• Lack of expertise: Firm may not have the necessary technology

and expertise.

• Quality: Suppliers have better technology, process, skilled labor,

and the advantage of economy of scale.

• Focus on core-business
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 Sourcing Decisions: The Make-or-
Buy Decision- Cont.
Reasons for Making

• Protect proprietary technology

• No competent supplier
• Better quality control
• Use existing idle capacity
• Control of lead time
• Lower cost: through mass production which
decreases per unit cost

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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© 2005 Thomson Business and Professional Publishing
 Sourcing Decisions: The Make-or-
Buy Decision- Cont.
The Make-or-Buy Break-Even Analysis
MAKE OPTION BUY OPT ION
FC25000 500
Vc 5 7
ANNUAL REQUIREMENT = 15000 UNIT S
To tal cost to make = Total cost to buy
25000 + 5Q = 500 + 7Q
7Q – 5Q = 25000 – 500
2Q = 24500
Breakeven poin t Q = 12250 units

If the required un its are above than the breakeven point then it is better to make otherwise outso urce

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 Roles of Supply Base
Supply Base- suppliers that a firm uses to acquire its materials,
services, supplies, and equipment. Also known as Supply Pool.

Firms emphasize long-term strategic supplier alliances consolidating

volume into one or fewer suppliers, resulting in a smaller supply
base.

Preferred suppliers provide:

– Early supplier involvement- Information on the latest trends in materials,
processes, or designs
– Information on the supply market
– Capacity for meeting unexpected demand
– Cost efficiency due to economies of scale

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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© 2005 Thomson Business and Professional Publishing
 Supplier Selection

The process of selecting suppliers, is complex and should

be based on multiple criteria:

– Product and process – Order System and cycle

technologies time
– Willingness to share – Capacity
technologies and – Communication capability
information – Location
– Quality – Service
– Cost
– Reliability

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 How Many Suppliers to Use
Single-sourcing- a risky proposition. Although trends favor
fewer sources, avoid single source.

Reasons Favoring a Single Reasons Favoring More than

Supplier One Supplier

• To establish a good relationship • Need capacity

• Less quality variability • Spread risk of supply
• Lower cost interruption
• Transportation economies • Create competition
• Proprietary product or process • Information
• Volume too small to split

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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© 2005 Thomson Business and Professional Publishing
 Purchasing: Centralized vs.
Decentralized
Purchasing Organization dependent on
many factors, such as market conditions
& types of materials required.

– Centralized Purchasing- purchasing

department located at the firm’s corporate
office makes all the purchasing decisions.

– Decentralized Purchasing- individual,

local purchasing departments, such as
plant level, make their own purchasing
decisions.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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© 2005 Thomson Business and Professional Publishing
 Purchasing: Centralized vs.
Decentralized
Advantages- Centralization Advantages- Decentralization
– Concentrated volume- – Closer knowledge of
leveraging purchase volume requirements
– Specialization – Local sourcing
– Lower transportation costs – Less bureaucracy
– No competition within units
– Common supply base

A hybrid purchasing organization- both decentralized at

the corporate level and centralized at the business unit
level may be warranted.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 International Purchasing/Global
Sourcing
Global sourcing-
– Opportunity to improve quality, cost, and delivery performance.
– Requires additional skills and knowledge to deal with
international suppliers, logistics, communication, political
environment, and other issues.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 Questions to be asked

• Why are small value purchase orders problematic?

• Do you prefer manual or e-procurement? Discuss the
reasons
• Centralized VS Decentralized purchasing
• Select any organization/product and discuss how many
suppliers to use? Single supplier vs multiple supplier

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