CHAPTER 2- PURCHASING

MANAGEMENT

Chapter Two Outline

The Role of Purchasing in an Organization

The Purchasing Process
Sourcing Decisions: The Make-or-Buy Decision
Roles of Supply Base
Supplier Selection
How Many Suppliers to Use
Purchasing Organization: Centralized versus
Decentralized Purchasing
International Purchasing/Global Sourcing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

Introduction
PurchasingObtaining merchandise, capital equipment; raw materials, services,
or maintenance, repair, and operating (MRO) supplies in exchange
for money or its equivalent.

Merchant Buyerswholesalers and retailers who purchase for resale.

Industrial Buyerspurchase raw materials for conversion, services, capital equipment,

& MRO supplies.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

The Role of Purchasing in an

Organization
The primary goals of purchasing are:
1. Ensure uninterrupted flows of raw materials at the lowest total cost,
2. Improve quality of the finished goods produced, and
3. Optimize customer satisfaction.

Purchasing contributes to these objectives by:

Actively seeking better materials and reliable suppliers,

Work closely with strategic suppliers to improve quality materials, and
Involving suppliers and purchasing personnel in new product design
and development efforts.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

The Purchasing Process

The Purchasing Process is:
1. Receive and analyse purchase requisitions
2. Select suppliers, issue quotations
3. Determine the right price (Negotiate)
4. Issue purchase orders
5. Follow-up to assure correct delivery on time
6. Receive and accept the goods after approval by QA.
7. Approve invoice for payment

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

The Purchasing Process- Cont.

Electronic Procurement (e-Procurement)
For Example: Electronic Data Interchange (EDI) between P&G and
Wal-Mart
E-mail and internet has enabled e-procurement now

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

The Purchasing Process- Cont.

Advantages for the e-Procurement System

Time savings
Cost savings
Communication anytime
Flexible due to communication enhancement
Trackability

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

Small Value Purchase Orders

Processing costs can be substantial. Small value
purchases should be minimized through:
According to a study, purchasing small value time to time increases the
organizations cost.

Procurement Credit Card/Corporate Purchasing Card

Blank Check Purchase Orders
Blanket or Open-End Purchase Orders
Petty Cash

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

Sourcing Decisions: The Make-orBuy Decision

Outsourcing -buying materials and components from suppliers
instead of making them in-house. The trend has moved toward
outsourcing.

Backward integration refers to acquiring sources of supply

Forward integration refers to acquiring customers operations.
The Make or Buy decision is a strategic decision.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

Sourcing Decisions: The Make-orBuy Decision- Cont.

Reasons for Buying or Outsourcing

Cost advantage: Especially for components that are non-vital to the

organizations operations.

Insufficient capacity: A firm may have insufficient resources.

Lack of expertise: Firm may not have the necessary technology

and expertise.

Quality: Suppliers have better technology, process, skilled labor,

and the advantage of economy of scale.

Focus on core-business
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

10

Sourcing Decisions: The Make-orBuy Decision- Cont.

Reasons for Making

Protect proprietary technology

No competent supplier
Better quality control
Use existing idle capacity
Control of lead time
Lower cost: through mass production which
decreases per unit cost

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

11

Sourcing Decisions: The Make-orBuy Decision- Cont.

Th e Make-or-Buy Break-Even Analysis
MAKE OPTION
BUY OPTION
FC25000
500
Vc 5
7
ANNUAL REQUIREMENT = 15000 UNITS
To tal cost to make = Total cost to buy
25000 + 5Q = 500 + 7Q
7Q 5Q = 25000 500
2Q = 24500
Breakeven poin t Q = 12250 units
If the required un its are above than the breakeven point then it is better to make otherwise outso urce

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

12

Roles of Supply Base

Supply Base- suppliers that a firm uses to acquire its materials,
services, supplies, and equipment. Also known as Supply Pool.
Firms emphasize long-term strategic supplier alliances consolidating
volume into one or fewer suppliers, resulting in a smaller supply
base.
Preferred suppliers provide:
Early supplier involvement- Information on the latest trends in materials,
processes, or designs
Information on the supply market
Capacity for meeting unexpected demand
Cost efficiency due to economies of scale

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

13

Supplier Selection
The process of selecting suppliers, is complex and should
be based on multiple criteria:
Product and process
technologies
Willingness to share
technologies and
information
Quality
Cost
Reliability

Order System and cycle

time
Capacity
Communication capability
Location
Service

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

14

How Many Suppliers to Use

Single-sourcing- a risky proposition. Although trends favor
fewer sources, avoid single source.
Reasons Favoring a Single
Supplier

Reasons Favoring More than

One Supplier

To establish a good relationship

Less quality variability
Lower cost
Transportation economies
Proprietary product or process
Volume too small to split

Need capacity
Spread risk of supply
interruption
Create competition
Information

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

15

Purchasing: Centralized vs.

Decentralized
Purchasing Organization dependent on
many factors, such as market conditions
& types of materials required.
Centralized Purchasing- purchasing
department located at the firms corporate
office makes all the purchasing decisions.
Decentralized Purchasing- individual,
local purchasing departments, such as
plant level, make their own purchasing
decisions.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

16

Purchasing: Centralized vs.

Decentralized
Advantages- Centralization
Concentrated volumeleveraging purchase volume
Specialization
Lower transportation costs
No competition within units
Common supply base

Advantages- Decentralization
Closer knowledge of
requirements
Local sourcing
Less bureaucracy

A hybrid purchasing organization- both decentralized at

the corporate level and centralized at the business unit
level may be warranted.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

17

International Purchasing/Global
Sourcing
Global sourcing Opportunity to improve quality, cost, and delivery performance.
Requires additional skills and knowledge to deal with
international suppliers, logistics, communication, political
environment, and other issues.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

18

Questions to be asked
Why are small value purchase orders problematic?
Do you prefer manual or e-procurement? Discuss the
reasons
Centralized VS Decentralized purchasing
Select any organization/product and discuss how many
suppliers to use? Single supplier vs multiple supplier

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing

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