Unit 3: Purchasing Management

Introduction
• Purchasing is the “process of buying.”
• Many assume purchasing is solely the responsibility of the
purchasing department.
• However, the function is much broader and, if it is carried out
effectively, all departments in the company is involved.
• The purchasing department has the major responsibility for locating
suitable sources of supply and for negotiating prices. Input from
other departments is required.
• Purchasing, in its broad
Materials sense,
Management: Unit is everyone’s
3 || Fentahun business.
G. || Capital CBHS 1
Objectives of the Unit: After attending this unit, you will be
able to:-
• Explain the objectives of good purchasing management.
• Identify & express the policies & procedures of purchasing
management.
• Describe the benefit of computer based purchasing system.
• Understand & classify outsourcing, selection & value analysis.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 2

 Objectives of Good Purchasing
• The general objective of purchasing is understood as buying
materials of the right quality, in the right quantity, at the right time,
at the right price, and from the right source.
• The specific objectives of purchasing are:
– To pay reasonably low prices for the best values obtainable,
negotiating and executing all company commitments.
– To keep inventories as low as is consistent with maintaining
production.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 3

 Cont..
– To develop satisfactory sources of supply and maintain good
relations with them.
– To secure good vendor performance including prompt
deliveries and acceptable quality.
– To locate new materials or products as required.
– To develop good procedures, together with adequate controls
and purchasing policy.
– To implement such programmers as value analysis, cost
analysis, and make-or-buy to reduce cost of purchases.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 4

 Cont..
– To secure high caliber personnel and allow each to develop to
his maximum ability.
– To maintain as economical a department as is possible,
commensurate with good performance.
– To keep top management informed of material development
which could affect company profit or performance.
– To achieve a high degree of co-operation and co-ordination
with other departments in the organization.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 5

 Sourcing
• Sourcing is defined as the identification of appropriate suppliers
and the comparison of their products, plus other commercial
considerations, to achieve the optimum value for money.

– Where we can get information about the suppliers?

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 6

• There are two methods of sourcing: Quotation and Tender

Quotation
• A quotation may be defined as an offer, whether verbal or written.
• Care should be taken in drawing up the request for quotation
document with respect to:
– Specification and general requirements
– Quality standards
– Terms and Conditions
– Special delivery requirements
• Advice may be sought at all times
Materials Management: Unit 3 || Fentahun G. || Capital CBHS 7
 Tender
• A tender may be defined as a written offer completed by suppliers
in accordance with the standard invitation to tender document.

Single Sourcing
• Single sourcing occurs where there is only one supplier which is
capable of supplying against a particular requirement.
• This is a situation which is to be avoided if at all possible.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 8

 Cont..
• Where use of a single source is inevitable, care should be taken to
ensure the best value for money is being achieved by checking the
supplier's price list and terms and conditions.
• Special negotiations should be conducted with the supplier.
 Offer Evaluation
• The evaluation of offers should as a minimum take into account:
– Price
– Quality
– Delivery
– all relevant costs relating to installation, operation, service,
performance, disposal
– compliance with specification and adherence to terms and
conditions supplied.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 10

 Computer Based Purchasing System
• Most businesses have a manual, labor-intensive purchasing and
receiving process within their organizations.
• This manual process:
– drains productivity for employees and the purchasing
organization
– Results in over-spending
• Computer based purchasing is key to solve these problems, and
also delivers quick return-on investment (ROI).

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 11

 Cont..
• A manual purchasing process creates serious challenges for the
employee and the company:
– It takes way too long to order the good or service needed by the
employee. Key projects are often delayed as a result.
– An unreasonable amount of employees’ time is wasted in
tracking and managing the manual approval process.
– If the employee, an approver, or finance needs to modify the
request or has a question, the entire process is delayed or
repeated, causing even more problems.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 12

 Cont..
• A web-based purchasing system can help finance and the rest of the
organization overcome the challenges with manual procurement.
• Such a system typically offers the following capabilities:
– Employees use a shopping cart-based web interface to type in requests or
select items from electronic catalogs or online forms.

– Once the employee “checks out” their shopping cart, a

requisition is automatically created, which is sent through a
company-defined workflow for electronic approvals.
– Once the requisition is approved by all parties, an offer can be
created automatically from the requisition and issued to
suppliers viaMaterials
email or another electronic method.
Management: Unit 3 || Fentahun G. || Capital CBHS 13
 Cont..
– Inventory can be managed centrally or from multiple locations
and re-order points can be set.
– Employees can also create re-order alerts to ensure they never
run out of stock for critical supplies.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 14

 Selection and Motivation of Suppliers
• The process to find the ideal supplier is often not easy and requires
discipline and hard work.
• Identifying a Supplier:-Before selecting your supplier, it is
important to gather the opinions of stakeholders and define the
criteria for the selection process.
• During this time, it is important to identify a few suppliers to assess
their capabilities and compare pricing.
• Keep in mind that the ultimate goal is a win-win situation for the
supplier and manufacturer; therefore, open and transparent
communication is extremely important.
Materials Management: Unit 3 || Fentahun G. || Capital CBHS 15
 Cont..
• A key criterion in selecting the right supplier is value.
• Cost should not be the lone driver; you should instead look at
the total cost of ownership, which looks at the supplier’s:
– Customer service
– Delivery commitments
– Reliability and responsiveness
– Resource savings (hard and soft)
 Cont..
• Measuring Supply Performance: Another important step of the
supplier management process is developing an audit and
assessment program.
• You should always conduct an audit before the contract is signed:
– to confirm that the supplier does not have any significant compliance or
quality system failures that could affect your ability to produce top-quality
products.

• Another reason to conduct the audit beforehand is to understand the

supplier’s strengths and weaknesses before the relationship
becomes official.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 17

 Cont..
• Gaining Supplier Feedback:-Another tool you can utilize with
suppliers is a self-assessment questionnaire.
• The supplier self-assessment can be used to:
– identify performance gaps
– discover how the supplier understands their own operation.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 18

 Cont..
• Achieving Certification:-As your supplier relationship grows
stronger, and both parties feel they are receiving positive
performances, the supplier may be able to achieve a certified status.
• Developing Partnerships: - ultimately, the manufacturer/supplier
relationship is at its best when a strategic partnership is formed.
• With a stronger business partnership, a supplier is more likely to:
– Anticipate what is needed from the manufacturer
– Notify the manufacturer if problems occur that limit production availability.
– Communicate production delays when downtime or maintenance is required.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 19

 Cont..
• When selecting the right supplier, manufacturers should remember
to:
– Include all key internal stakeholders in the process to agree on
important criteria that the supplier should meet.
– Require strong communication between the manufacturer and
the supplier.
• Good communication might not necessarily confirm a
successful relationship, but poor communication can almost
guarantee a failed relationship.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 20

 Cont..

• Perform audits for the selected supplier, and work with them to
address any deficiencies.
– If the deficiencies are too great, move on to another supplier.
– Implement adequate monitoring to drive improvement in
supplier performance.
• Assess performance through useful metrics and provide the
necessary feedback to the supplier.
• Establish an effective certification program and utilize it when the
supplier has met its standards.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 21

 Cont..

• Motivate your suppliers to develop strategic partnerships to ensure

the greatest opportunity for success for both parties.
• Invest sufficient time, effort and energy early in the relationship to
set up for success.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 22

 Purchase Parameters – Eight Rs of Purchasing

• Right quality • Right procedure

• Right quantity • Right contract
• Right price
• Right time
• Right source
• Right place of delivery/
transportation

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 23

 Purchasing Policy and Procedure
• A policy is a general guideline for decision-making.
• A purchasing policy is a collection of rules that control the
requisition process.
• Purchasing policies help purchasing administrators implement their
purchasing strategy.
• A purchasing policy consists of a set of policy rules.
• The first step in creating a purchasing policy is to carry out a
clear, detailed analysis of the purchasing process, the supply chain
and the company’s needs.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 24

 Cont..
• Through purchasing policy, company managers know
the company’s needs in terms of goods, raw materials or services.
• The aim of a purchasing policy is to secure the supply
chain and guarantee delivery of a range of products or services to
customers.
• Purchasing policy guarantees their proper execution and
performance.
• An objective is the end; policy is the means to that end.
• An objective involves a target; a policy involves the procedure to
be followed to reach the target.
Materials Management: Unit 3 || Fentahun G. || Capital CBHS 25
 Cont..

• A policy is essentially a statement relating to those principles or

procedure by which a company seeks to realize its objectives.
• Procedure is a series of step-by-step actions needed for the
implementa­tion of a policy decision.
• There is hardly any standard purchasing policy and procedure
which can be applied to all industries.
– These policies may vary from company to company depending
on the size and type of business, products and services produced
and various other factors.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 26

 Cont..
Typical purchasing procedure
 Cont..
• The most important aspects of purchasing policy are:

i. Centralization or decentralization.
ii. Method of purchase of materials:
iii. The delegation of power relating to purchase
– whether the purchase department alone should undertake the responsibilities
for all types of purchases or some purchases can be also done by the user
department or not.

(iv) Communication — all communication with suppliers should

necessarily be done by the purchasing department.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 28

 Cont..
• (v) Authorization of the purchase department to seek clarification
about re­quirement, specification, delivery schedule, brand-name,
trademark etc. in the best interest of the organization.
• (vi) Responsibilities and accountability of purchase personnel.
• (vii) Purchase ethics — code of conduct.
• (viii) Public relations.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 29

 Make or Buy Decision
• This is the important planning activity of every undertaking.
• When a company grows fast, its sales increases at rapid rate then it
becomes an important matter to decide whether the company
should buy the parts or increase and establish its facilities to cope
up with the increased demand and sales.
• This will be greatly concern to materials management department.
• It will help in selecting the suppliers to buy the items at reduced
cost.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 30

 Cont..

• The material evaluation, its availability, alternative materials

selection, procurement and inventory control are the functions
influence the make and buy decisions.
• The make and buy decisions are largely based on cost economics
and cost benefit analysis made by the organization using the
existing production capacity of labor, skill and machines available
with the factory and how best they can be utilized.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 31

 Value Analysis
• Value engineering or value analysis had its birth during the World
War II.
• Lawrence D. Miles develop the technique and name it.
• Value analysis is defined as “an organized creative approach which
has its objective, the efficient identification of unnecessary cost-
cost which provides neither quality nor use nor life nor appearance
nor customer features.”
• Value analysis is concerned with the costs added due to inefficient
or unnecessary specifications and features.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 32

 Cont..
Value Analysis Framework
• The basic framework for value analysis approach is formed by
the following questions, as given by Lawrence D. Miles:
– What is the item?

– What does it do?

– What does it cost?

– What else would do the job?

– What would the alternative cost be?

• Value analysis requires these questions to be answered for the

successful implementation of the technique.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS

 Cont..
The man made blocks in implementing value analysis are:
– Lack of motivation
– Resistive to change
– Inertia
– Lack of knowledge and patience
– Attitude of ‘It will not work in Ethiopia
– we are very small or very big
– This has been tried earlier and failed

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 34

 Cont..

– ‘Let competitors try before we try’

– Difficulty of teams meeting or team meeting for getting
consensus.
• These limitations are man-made and can be over-come.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS

 Global Sourcing
• Global sourcing is the practice of sourcing from the global market
for goods and services across geopolitical boundaries.
• Global sourcing often aims to exploit global efficiencies in the
delivery of a product or service.
• These efficiencies include low cost skilled labor, low cost raw
material and other economic factors like tax breaks and low trade
tariffs.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 36

 Cont..

• The global sourcing of goods and services has advantages and

disadvantages that can go beyond low cost.
• Some advantages of global sourcing, beyond low cost, include:
– learning how to do business in a potential market
– tapping into skills or resources unavailable domestically
– developing alternate supplier/vendor sources to stimulate
competition, and
– increasing total supply capacity.

Materials Management: Unit 3 || Fentahun G. || Capital CBHS 37

 Cont..

• Some key disadvantages of global sourcing can include:

– hidden costs associated with different cultures and time zones
– exposure to financial and political risks in countries with (often)
emerging economies
– increased risk of the loss of intellectual property, and
– increased monitoring costs relative to domestic supply.
– For manufactured goods, some key disadvantages include long
lead times, the risk of port shutdowns interrupting supply, and
the difficulty of monitoring product quality.
Materials Management: Unit 3 || Fentahun G. || Capital CBHS 38