McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3

The Purchasing
Function
 THE PURCHASING DEPARTMENT’S
FUNCTION IS TO:

1. PROVIDE APPROPRIATE LEVELS OF

SUPPLY

2. AT THE APPROPRIATE LEVEL OF

QUALITY

3. FOR THE LOWEST TOTAL COST

3-3
 PURCHASE PRICE Vs. TOTAL COST

• PURCHASE PRICE = THE DOLLAR VALUE

PAID

• TOTAL COST = PURCHASE PRICE +

DELIVERY + STORAGE + SERVICE

3-4
METHODS TO EXAMINE AND COMPARE COSTS

1. TOTAL COST OF OWNERSHIP

2. ECONOMIC ORDER QUANTITY (EOQ)

Forwards buying: is buying larger quantities than
are currently needed because the discount is greater
than the carrying cost
3. VALUE ANALYSIS
To : reduce the cost or improve design

Complexity management: is the process of

identifying links among components that raise
costs if any changes are made

3-5
TOTAL COST OF OWNERSHIP OF A TANGIBLE
PRODUCT

• TOTAL COST OF
OWNERSHIP = PRODUCT PRICE
+ DELIVERY
+ INSTALLATION
+ MAINTENANCE / REPAIR
+ POWER COSTS
+ SUPPLY COSTS
+ OPERATING COSTS
+ FINANCING

3-6
ECONOMIC ORDER QUANTITY

THE QUANTITY THAT MINIMIZES

ORDERING COSTS

AND

STORING COSTS

3-7
 USING VALUE ANALYSIS
THE OBJECTIVES OF VALUE ANALYSIS:
• REDUCE COSTS AND/OR
• IMPROVE DESIGN
COMPARE
What is BENEFITS RECEIVED New
Currently FUNCTIONS OF Alternatives
PRODUCT
Being Done Being
COST OF MATERIALS
Considered
WORK PROCESS
INVOLVED

OUTCOME: GREATER VALUE FOR LESS COST

3-8
 Purchasing Philosophy
• Adversarial purchasing philosophy

• Partnership purchasing / preferred supplier systems

• High purchase-volume material, components, or products of
strategic important;
• Specialized products requiring information and training for
effective use;
• Service that required specialized knowledge for cost
reductions or performance
• Material that no other supplier can provide.

• Single sourcing

3-9
 Buy-Grid Model

Buy-Grid model has two parts:

1. Buy-phase model: suggest that people go through a series of

steps (or phases) when making a decision.

2. Buy-class: refers to the type of buying decision based on the

experience of the buyer with a purchase of a

particular products or service.

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STEPS IN THE BUYING PROCESS
Step 8
Evaluation of product performance
Step 7
Selection of an order procedure
Step 6
Evaluation of proposals and
selection of a supplier
Step 5
Acquisition and analysis of proposals
Step 4
Search for qualified suppliers
Step 3
Development of detailed specifications
Step 2
Definition of the product-type needed
Step 1
Recognition of a need
EXHIBIT 3-3
3-11
 BUY-PHASES

1. NEW TASK
COMPLETE BUYING PROCESS REQUIRED EMPHASIZES
PRODUCT DEFINITION AND SPECIFICAIONS

2. MODIFIED REBUY
EMPHASIZES SUPPLIER SEARCH AND EVALUATION

3. STRAIGHT REBUY
EMPHASIZES NEED RECOGNITION AND PURCHASE

3-12
 MODIFIED REBUY
Value analysis

1. Out-supplier: those suppliers whose products are

not considered in straight rebuy

2. In-supplier: those supplier whose product are

ordered automatically in straight rebuy

3-13
 VENDOR ANALYSIS RATINGS
Multiattribute Model
Is based on the idea that people compare products across
attributes, or features, weighted by importance.
A RATING FORM SHOULD LIST
 The most important product attributes
 The most important service support attributes
 Pricing variables
 Delivery variables
 Quality variables
 Supplier capabilities

3-14
PURCHASING PARTNERSHIPS ARE MADE
WITH VENDORS WHO PROVIDE:

• High-purchase-volume Materials, Components or Strategic

Products

• Information and Training for Effective Product Use

• Services Requiring Specialized Knowledge for Cost

Reductions and/or Performance

• Materials Unavailable Elsewhere

3-15
 IMPROVE PERFORMANCE:
STAYING AHEAD OF PURCHASING TRENDS

1. REDUCE PURCHASING COSTS

• CUTBACK ON EMPLOYEES

• REDUCE NUMBER OF VENDORS/

TRANSACTIONS

• BUILD RELATIONSHIPS

• CENTRALIZE PURCHASING ACTIVITIES

• USE THE INTERNET

3-16
 IMPROVE PERFORMANCE:
STAYING AHEAD OF PURCHASING TRENDS
(continued)

2. OUTSOURCE IN-HOUSE ACTIVITIES

• TRAINING

• MANUFACTURING

• PROCESSING ACTIVITIES

• INVOLVE SUPPLIERS (ESI)

3-17
 IMPROVE PERFORMANCE:
STAYING AHEAD OF PURCHASING TRENDS
(continued)

3. CROSS-FUNCTIONAL TEAMS – MADE UP OF

COMPANY DEPARTMENTS, SUPPLIERS,
CUSTOMERS

4. INCREASE PROFESSIONALISM THROUGH

CERTIFICATION PROGRAMS AND
ESTABLISH A CODE OF ETHICS

3-18
 SALES SURVIVAL QUESTIONS:

CAN YOUR SALESPEOPLE ANSWER

THE FOLLOWING QUESTIONS?
1. WHAT IS A CROSS-FUNCTIONAL TEAM?
2. CAN YOU RECOGNIZE ONE AT YOUR CLIENT’S
ORGANIZATION?
3. DO YOU KNOW HOW TO GET YOUR COMPANY
INCLUDED IN YOUR CLIENT’S CROSS-
FUNCTIONAL TEAM?
4. WILL YOUR COMPANY GIVE YOU THE PEOPLE
RESOURCES TO SUPPORT YOUR CLIENT’S
NEEDS?
3-19
 SUCCESSFUL CROSS-FUNCTIONAL
PURCHASING TEAMS DEPEND ON:
• APPROPRIATE LEADERSHIP

• FACE-TO-FACE COMMUNICATION

• CONTINUITY– IN IT FOR THE LONG TERM

• TOP-LEVEL COMMITMENT to provide for key

individuals’ full participation

• EMBRACING DIVERSITY of experience, backgrounds,

outlooks, and corporate philosophy
EXHIBIT 3-9

3-20
 Changing company focus: MAKE-OR-BUY?
Purchasing Determines Who Provides Best Value for Lowest Cost

Best-Value Provider
Action In-House Partner
•Training
•Transaction Processing
•Paper Processing
•Product Design
•Product Manufacturing
•Component Part Manufacturing
•R&D
•Marketing
•Sales
•Advertising
•Research
•Support
•Human Resources Administration
3-21
 MAKE-OR-BUY DECISION ANALYSIS
RISK ASSESSMENT
FINANCIAL RISKS MARKETING RISKS
Resource Allocation Customer Impact
Investment of Resources Supplier Impact
Accurate Cost Analysis
Legal Issues
MANUFACTURING RISKS POLITICAL RISKS
Reliability Management commitment/
Expertise willingness to partner
Equipment Turf Battles
Patent Protection Internal Strife

ACCEPTABLE RISK UNACCEPTABLE RISK

Buy the Products, Retain Production and
Components or Services Provide Services

3-22
 ETHICAL ISSUES FOR BUYERS
KEY REQUIREMENT: EVERY COMPETITOR
HAS AN EQUAL OPPORTUNITY TO SELL TO
THE BUYER AND HAS EQUAL ACCESS TO
INFORMATION

AS A BUYER, YOU MUST

 PROVIDE EQUAL ACCESS TO THE
BUYING OPPORTUNITY
 BE TOTALLY RESPONSIBLE TO
YOUR EMPLOYER
3-23