Chapter 2 – p.

37

Purchasing
Management

Do Thi Thu Ha, MSc.

 Do Thi Thu Ha, MSc.

Chapter objectives
After completing this chapter, you should be able to:
 Understand the role of supply management and its strategic impact on an
organization’s competitive advantage.
 Have a basic knowledge of the traditional purchasing process, e-procurement,
public procurement and green purchasing.
 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 sourcing versus multiple sourcing.
 Understand centralized, decentralized and hybrid purchasing organizations.
 Describe the opportunities and challenges of global sourcing and understand how
globalization impacts supply management.
 Understand and compute total cost of ownership.

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Lecture outline
In this chapter, you will learn about:
1. The Role of Supply Management in an Organization
2. The Purchasing Process
3. Sourcing Decisions: The Make-or-Buy Decision
4. Supplier Selection
5. How Many Suppliers to Use
6. Purchasing Organization
7. International Purchasing/Global Sourcing
8. Procurement for Government/Nonprofit Agencies
9. Ethical and Sustainable Sourcing Defined
10. Summary

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Purchasing in SCM Purchasing profession

The purchasing profession:
the act of obtaining merchandise;
capital equipment; raw materials; Merchants
services; or maintenance, repair Industrial
- Wholesalers
and operating (MRO) supplies in buyers
exchange for money or its - Retailers
equivalent.

whose primary
who primarily task is to
purchase for purchase raw
Primary focus of this chapter: resale materials for
purposes conversion
Industrial buyers purposes
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The Role of Supply Management in an Organization

Many successful businesses are treating purchasing as a key strategic process

07/21/2022 Source: U.S. Census Bureau, 2016 Annual Survey of Manufactures. 5
 Do Thi Thu Ha, MSc.

The Role of Supply Management in an Organization

 Purchasing can contribute to these
The primary goals of
purchasing:
to ensure uninterrupted flows of
raw materials at the lowest total
cost, to improve quality of the
finished goods produced and to
maximize customer satisfaction.
objectives by:
 actively seeking better materials and
reliable suppliers
 working closely with and exploiting the
expertise of strategic suppliers to
improve the quality of raw materials
 involving suppliers and purchasing
personnel in product design and
development efforts

07/21/2022 Source: U.S. Census Bureau, 2016 Annual Survey of Manufactures. 6

 Do Thi Thu Ha, MSc.

The Purchasing Process

Traditional Manual Purchasing System

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The Purchasing Process

Traditional Manual Purchasing System
1 day 2 hours 2 hours

Search Fill in Send to Buyer prints

goods requisition buyer order
1 day

2 hours 1 day 1 day

Payment Matching Accountant Delivery

invoice
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The Purchasing Process

Electronic Procurement Systems (e-Procurement)

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The Purchasing Process

Electronic Procurement Systems (e-Procurement)

1 hour 30 mins

Search goods Order on web Delivery

1 day

30 mins

Payment Generate invoice

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The Purchasing Process

Advantages of the e-Procurement System
1. Time savings
2. Cost savings
3. Accuracy
4. Real time
5. Mobility
6. Trackability
7. Management
8. Benefits to the suppliers

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e-Procurement System: Procurement Credit

Card/Corporate Purchasing Card
Place order Authorized
End-user
suppliers
organization
Receive goods/services
Provide Receive Submit
Make
data payment transaction
payment

How P-card works

Merchant acquirer
Card issuer
Process Request
Request Provide
payment authorization
authorization authorization
Process payment Process payment
Request Request
Processor authorization Network authorization Processor
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Vertical integration of supply chain

Supplier 1 Supplier 2 Supplier n

Manufacturer 1 Manufacturer 2 Manufacturer n

Vertical

Warehouse/DC Warehouse/DC Warehouse/DC

1 2 n

Retailer 1 Retailer 2 Retailer n

Customer 1 Customer 2 Customer n

Horizontal
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Vertical integration of supply chain

Advantages
1. No reliance on suppliers Disadvantages
2. Potential access to 1. Expensive
monopolizing suppliers
2. Reduces flexibility
3. Economies of scale
3. Loss of focus
4. Knocking off most popular
brand-name products 4. Not likely to have a
5. Lower costs culture that supports
both retail stores and
factories

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Sourcing Decisions: The Make-or-Buy Decision

Outsourcing Reasons for Making
refer to buying materials or
1. Protect proprietary technology
components from suppliers instead of
making them in-house. 2. No competent supplier
3. Better quality control
Reasons for Buying or
4. Use existing idle capacity
Outsourcing
5. Control of lead-time,
1. Cost advantage
transportation and
2. Insufficient capacity
warehousing cost
3. Lack of expertise
6. Lower cost
4. Quality

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Make-or-Buy Break-Even Analysis

Consider a hypothetical situation in which a firm has the option to make

or buy a part. Its annual requirement is 15,000 units.
A supplier is able to supply the part at $7 per unit. The firm estimates
that it costs $500 to prepare the contract with the supplier.
To make the part, the firm must invest $25,000 in equipment and the
firm estimates that it costs $5 per unit to make the part.
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Make-or-Buy Break-Even Analysis

Break-even Analysis

Break-even Point, Q
Total Cost to Make = Total Cost to Buy
 $25,000 + $5Q = $500 + $7Q
 Q = 12,250 units

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Break-even point Practise

 4/p.71

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Break-even point Practise

 5/p.71

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Break-even point Practise

 6/p.71

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Break-even point Practise

 7/p.71

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Supplier selection

1. Process and product technologies

2. Willingness to share technologies and information
3. Quality
4. Cost
5. Reliability
6. Order system and cycle time
7. Capacity
8. Communication capability
9. Location

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How Many Suppliers to Use

Sole sourcing:
refers to the situation when the supplier is the only available source
Single sourcing:
refers to the deliberate practice of concentrating purchases of an item with one source from
a pool of many potential suppliers.
Reasons Favoring a Single Supplier Reasons Favoring Multiple Suppliers
1. To establish a good relationship 1. Need capacity
2. Less quality variability 2. Spread the risk of supply interruption
3. Lower cost 3. Create competition
4. Transportation economies 4. Information
5. Proprietary product or process 5. Dealing with special kinds of
purchases businesses
6. Volume too small to split
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Purchasing Organization
Centralized purchasing:
is where a single purchasing department, usually located at the firm’s corporate office,
makes all the purchasing decisions, including order quantity, pricing policy, contracting,
negotiations and supplier selection and evaluation.
Decentralized purchasing:
is where individual, local purchasing departments, such as at the plant level, make their own
purchasing decisions
Advantages of Centralized Advantages of Decentralized
1. Concentrated volume 1. Closer knowledge of requirements
2. Avoid duplication 2. Local sourcing
3. Specialization 3. Less bureaucracy
4. Lower transportation costs
5. No competition within units
6. Common supply base
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International Purchasing/Global Sourcing

Quality of
Delivery
overseas
speed
products

Lower the
price of Countertrade
materials Why
global
sourcing?

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Procurement for Government/Nonprofit Agencies

Public procurement or public
purchasing: refers to the
management of the purchasing
and supply management
function of the government and
nonprofit sectors, such as
educational institutions,
hospitals and the federal, state
and local governments

• Principle 1 – Consider whether a material/product is needed before purchasing it or not.

• Principle 2 – Purchase a product considering the various environmental impacts over its
life cycle - from extraction of raw materials to disposal.
• Principle 3 – Select suppliers who make a conscious efforts to care for the environment.
• Principle 4 – Collect environmental information on products and suppliers.
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Ethical and Sustainable Sourcing Defined

Ethical sourcing policies should include:
 Determining where all purchased goods come from and how they are
made;
 Knowing if suppliers promote basic workplace principles (such as the right
to equal opportunity and to earn a decent wage, the prohibition of
bonded, prison or child labor, and the right to join a union);
 Use of ethical ratings for suppliers alongside the other standard
performance criteria;
 Use of independent verification of vendor compliance;
 Reporting of supplier compliance performance to shareholders;
 Providing detailed ethical sourcing expectations to vendors

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Summary
Over the last decade, the traditional purchasing function has evolved into an
integral part of supply chain management. Purchasing is an important
strategic contributor to overall business competitiveness. It is the largest
single function in most organizations, controlling activities and transactions
valued at more than 50 percent of sales. Every dollar saved due to better
purchasing impacts business operations and profits directly. Purchasing
personnel talk to customers, users, suppliers and internal design, finance,
marketing and operations personnel, in addition to top management. The
information they gain from all this exposure can be used to help the firm to
provide better, cheaper and more timely products and services to both
internal and external customers. Savvy executives are thus turning to
purchasing to improve business and supply chain performance.
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Remember, a real
decision is measured
by the fact that
you’ve taken new
action. If there’s no
action, you haven’t
truly decided.

– Anthony Robbins –

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