Purchasing

Management
Supply Chain Management
Topics to Cover:
• Purchasing
• Importance of Purchasing Today
• Purchasing Processes
• Import Documentation
• Negotiation Skills
• Make – or – Buy Analysis
• Ethics in Buying
• Supplier Selection
 Purchasing
The acquisition of goods and services needed to support
the various activities of an organization, at the best
possible cost and from reliable suppliers.
Supply Chain Management
Purchasing professional's goal to a company
should be to provide:
i. The best pricing
ii. Communication
iii. Research in finding sources
iv. Supplier performance Evaluation
v. Service level agreements (SLA’s)
Supply Chain Management
Importance of purchasing:
•Competition
•Material cost
•Lead time
•Customer Demand
•Quality
Single Sourcing
Higher confidentiality.
Advantages
Potentially better quality Disadvantages
Strong relationships failure
More vulnerable to disruption if a
to supply occurs.
Greater dependency encourages more volume
Individual supplier more affected by
commitment and effort. fluctuations.
Better communication. on
Supplier
pricesmight exert upward
if no alternative pressure
supplier is
Easier to cooperate on new available.
product/service development.
More scale economies.
 Multi-sourcing
Advantages Disadvantages
 Purchaser can drive price down by  Difficult to encourage commitment
competitive tendering. by supplier.
 Can switch sources in case of supply  Less easy to develop effective SQA.
failure.  More effort needed to
 Wide sources of knowledge and communicate.
expertise to tap.  Suppliers less likely to invest in new
processes.
 More difficult to obtain scale
economies.
 Purchasing Process
•Recognize, describe and define the need
•Transmit the need (requisitions)
•Determine sources, investigate, and select supplier/analyze
bids
•Prepare and issue the PO
•Follow-up the order (including expediting and de-expediting) 
•Receive and inspect the material
•Clearance of the invoice and payment to supplier
 
 Supply Chain Management
S upplie rs Purchas ing Function The inte rnal ope ration

S upplie rs
pre pa re quota tions of Re que s ts P re pa re Re que s ts
 s pecifica tions re que s ts for for products
 price quota tions a nd s e rvice s
 de live ry etc.
The purchasing
function brings Quota tions
S e le ct Dis cus s with the
together the the prefe rre d
s upplie r
Ope ra tion

operation and its

suppliers
P roduce Orde r P re pa re Lia is e with the
goods /s e rvice s purcha s e orde r Ope ra tion

De live r Goods /S ervice s Re ce ive

goods /s e rvice s

(Slack, 2001, p417) Inform P urcha sing Input to the

Ope ra tion
Function
Supply Chain Management
Import Documents
•Bill of Lading
•Commercial Invoice
•Packing List
•Weight Memo
•Certificate of Inspection
•Certificate of Origin
•Insurance Policy
Supply Chain Management
Negotiation
 Supply Chain Management

 
Negotiation Definition and Comments:
The process whereby two or more parties decide what each will
give and take in an Exchange between them.” (Lysons &
Farrinton)

“Negotiation is the process by which we search for terms to

obtain what we want from somebody who wants something from
us.”
(Total Success Training)
 
“Negotiation is discussing or bargaining in order to reach
agreement.” (Owen)
Supply Chain Management
Types of negotiation

Adversarial Negotiation
Collaborative Negotiation
Supply Chain Management
Adversarial Negotiation (distributive or win-lose
negotiation)
Is an approach in which the focus is on ‘positions’
staked out by the participants and the assumption is
that every time one party wins, the other loses, so, as
a result the other party is regarded as an adversary
(opponent).
(Lysons & Farrington)
 Supply Chain Management
Collaborative Negotiation (integrative or win
-win negotiation)
Is an approach in which the assumption is that, by means
of creative problem solving, one or both parties can gain
without the other having to lose and, as other party is
regarded as a collaborator rather than an adversary, the
participants may be more willing to share concerns, ideas
and expectations than would otherwise be the case.
(Lysons & Farrington)
 The five steps of the negotiation process

1. Preparation and Planning.

2. Definition of Ground Rules.
3. Clarification and Justification.
4. Bargaining and Problem Solving.
5. Closure and Implementation.
The five steps of the negotiation
1. Preparation and Planning
Before the start of negations one must be aware of conflict, the history
leading to the negotiation the people involved and their perception of the
conflict expectations from the negotiations etc.
2.Definition of Ground Rules
Once the planning and strategy is developed, one has to begin defining
the ground rules and procedures with the other party over the negotiation
itself that will do the negotiation. Where will it take place?
What time constrains, if any will apply? To what issues will
negotiations be limited? Will there be a specific procedure to follow in
an impasse is reached? During this phase the parties will also exchange
their initial proposals or demands.
The five steps of the negotiation
3. Clarification and Justification
When initial positions have been exchanged both the parties will
explain amplify, clarify, bolster and justify their original demands. This
need not be confrontational.
Rather it is an opportunity for educating and informing each other on
the issues why they are important and how each arrived at their initial
demands.
This is the point where one party might want to provide the other party
with any documentation that helps support its position.
4. Bargaining and Problem Solving
The essence of the negotiation process is the actual give and take
in trying to hash out an agreement, a proper bargain. It is here
where concessions will undoubtedly need to be made by both
parties.
5. Closure and Implementation
The final step in the negotiation process is formalization the
agreement that has been worked out and developing and procedures
that are necessary for implementation and monitoring.
For major negotiations – this will require hammering out the
specifics in a formal contract.
Supply Chain Management

Make
OR
Buy
Supply Chain Management

Why would we buy something

(items, components, services)
when we could provide it ourselves?
Supply Chain Management
Reasons to buy:
The unit cost is cheaper,
We don't use it enough,
We don't have space,
We don't understand the technology,
We don't have the skill,
It's not our core business/expertise,
It's expensive to set up the process,
Supply Chain Management
Reasons to provide in-house:
The unit cost is cheaper,
It's critical to the business,
Retain specialist knowledge/skills,
We have control over the supply,
Quality issues are critical,
No suitable supplier,
It's part of our core business/expertise
Supply Chain Management
Ethics in Buying:

•Legal Requirements
•Child Labor
•Company’s Environment
•Green Supply Chain
•Fair Trade
Supply Chain Management
Supplier Selection
 Process and Product Knowledge
 Willingness to share technologies and information
 Consistent Quality
 Over all Cost
 Reliability
 Order System & Cycle Time
 Capacity
 Communication capability
 Location
 Service etc