Purchasing - general

Information

Chapter - 15

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Introduction to Purchasing

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Purchasing is extremely important part of the supply chain. It is
the stage at which you get the right materials or goods for your
business, hopefully at the right time and price

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In this section you will learn 3 things

Typical problems in
Goal of Purchasing Purchasing value drivers Purchasing

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Goals of Purchasing

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The primary goals of Purchasing is to buy what is needed at lowest
possible cost and keeping low inventory at the same time

▪ On time delivery
▪ Delivery according to the
order

On-time and free

of error

Minimize the
total cost of
usage / Low Inventory
ownership

▪ Take into account not only cost of purchasing but also all ▪ WIP
related costs (i.e. waste, efficiency changes in production ▪ Finished Goods
▪ Take into account cost of warehousing and frozen capital ▪ Raw Materials

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Purchasing value drivers

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 Several drivers related to purchasing have impacts on value generation

Driver Impact on

▪ Cost of goods sold (COGS)

Reviewing specification of
purchased materials ▪Waste
▪Inventor

▪Inventory
Consolidation of suppliers ▪ Better prices

Purchasing
▪Better prices and terms of payment
Renegotiation of Contracts ▪Cash Flow
▪Shorter lead times and Lower inventory

▪COGS
Purchasing planning ▪Waste

▪Better prices and terms of payment

Centralization of purchasing

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Typical problems in Purchasing

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 There are a few typical problem usually occur in Purchasing (1/2)
Potential Problem
▪ Purchasing planning process not linked to
production / sale planning process
Purchasing
planning
process ▪ Not optimal stock level (too small – setups, too
much – risk of outdating, frozen capital, wrong
exploitation of depot)
▪Fragmented or too monopolized supplier base
▪Non-market prices for materials, raw materials
Suppliers and services (purchasing power used to a small
extent)
▪ Specification or / and quality of materials, raw
materials and services not matched to needs
Materials
Analysis needed
▪Analysis of purchasing planning process (process mapping)
▪ Analysis of materials and raw materials stock level vs. average usage
▪Analysis of stock aging and identification of lingering stocks
▪ Analysis of materials and raw materials stock level
▪Analysis of production downtime reasons
▪ Analysis of materials / raw materials availability
▪ Analysis of suppliers for specific purchase items number
▪ „Value stream” analysis
▪Benchmarking between production plants / companies / direct and
indirect competition / other customers you have worked for
▪Competitive offers analysis (sending offers to alternative suppliers)
▪Analysis of optimal orders scale
▪ Analysis of prices in time / Analysis of reason of changes
▪ Analysis of specifications, present level vs. required level, analysis of
competition specifications, analysis of specification change possibility
(f.e. by usage of optimizing units)
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 There are a few typical problem usually occur in Purchasing (2/2)
Potential Problem Analysis needed

▪Insufficient control system / Inadequate tools: ▪ Analysis of tools used to control

✓Insufficient control of deliveries quality
✓Insufficient control of delivered raw materials’
quantity
✓Insufficient control of raw materials’ prices on the
world’s markets
✓Inadequate tools for control of purchasing budget
and expenses realization
✓Lack of clear purchasing procedures
✓Quality of deliveries
✓Quantity of delivered resources
✓Raw material prices on the world’s market
✓Purchasing budget and expenses
▪ Analysis of purchasing procedure (process mapping)
▪ Databases of suppliers / purchasing items / specifications etc.

▪ Low competences of procurement department ▪ Analysis of employees’ competences:

employees ✓ Experience / knowledge of the suppliers market and industry
✓Negotiation, analytical and organizational skills
Competencies
▪ ‘Excess’ of purchasing procedures ▪ Analysis of traders work time division
and Procedures ▪ Not optimal organization and location of purchasing ▪ Analysis of purchasing department organization
department
✓Too centralized / decentralized
✓Weak purchasing position in comparison with
other departments (position in the organizational
structure)
✓Function situated „far from Board of Directors”
✓Wrong competences division inside department
✓Lack of motivating system for traders

▪ Products introduction / change of products does not ▪ Stock rotation vs. changes in products portfolio
take into raw materials stock level / materials stock

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