Old Supply Wisdom

“Ifyou choose the right suppliers, all of your supply

problems will be solved”

“A well trained procurement organization can add major

dollars to the organization through cost savings”
The Prologue

• Purchasing & Supply management has become increasing visible in

world where Supply is a major determinant of Corporate Survival &
Success

• Supply Chain Performance influences not only financial and

operational risks but also affects reputational risk

• Every organization needs suppliers and customers, as critical to an

organizational success, competitive advantage and customer
satisfaction
 WHAT IS PROCUREMENT?
• Procurement is the sum total of effort that goes into
discovering and acquiring the supplies an organization
requires to function effectively

• This includes sourcing for supplies, sealing

contracts, managing suppliers, and settling supplier
invoices as and when due

• Procurement is viewed as a strategic function working to

improve the organization's profitability

• Procurement is seen as helping to streamline processes,

reduce raw material prices and costs, and identifying
better sources of supply. In essence, helping to reduce
the “bottom line”

• Procurement is an umbrella term under which Purchasing is

just a component.
WHAT IS SOURCING?

• Sourcing, as the name implies, is a finding a source

from where the goods and services can be
procured.

• It is a subsection of the procurement, where,

procurement is concerned with acquiring of goods
and services, sourcing is finding a least expensive
supplier for those goods
• Since the business profits heavily rely on finding the
best source of suppliers it is considered to be the
first step taken by the business before its first sale.
WHAT IS PURCHASING?
• Purchasing refers to the portion of the
procurement cycle that is actively engaged in
buying a product or service from a supplier
• Purchasing is only restricted to receiving and
making payments
• Purchasing can be best known as the
transaction-oriented function of
Procurement
• If procurement is the subject, then purchasing is
the verb
PURCHASING MANAGEMENT

• The purchasing profession can be defined as

“the act of obtaining merchandise; capital equipment; raw materials;
services; or maintenance, repair and operating (MRO) supplies in
exchange for money or its equivalent"
• The purchasing profession can be broadly classified into two categories: merchants
and industrial buyers.

• Merchants, includes the wholesalers and retailers, who primarily

purchase for resale purposes

• Industrial buyers, whose primary task is to purchase raw materials for

conversion purposes. Industrial buyers also purchase services; capital
equipment; and maintenance, repair and operating supplies
PURCHASING MANAGEMENT
• The Institute of Supply Management (ISM) defines supply management as the

“identification, acquisition,access, positioning and management of

resources an organization needs or potentially needs in the
attainment of its strategic objectives.”

• Key activities of supply management have expanded beyond the basic

purchasing function to include

“negotiations, logistics, contract development and

administration,
inventory control and management, supplier management and other
activities."
Importance of Purchasing
• According to Dave Nelson, former vice president of purchasing at
Honda of America, “One of the reasons that Honda recognizes
the importance of the purchasing function is that 80 percent of
the cost of a car is purchased cost. So how goes purchasing is
how goes Honda.”
• When an automobile producer sells a new car to a dealer for
$18,000, it already has spent more than $10,800 (about 60
percent) to buy the steel, tires, glass, paint, fabric, aluminum,
copper, and electronic components necessary to build that car.
• The increasing use of outsourcing over the last decade has
increased the percentage of spend significantly.
• While in service organizations that are highly labor intensive this
percentage might be close to 30 percent, the average for
manufacturing firms is close to 65 percent.
• The financial impact of the corporate spend is often illustrated by
the profit-leverage effect and the return-on-assets effect
Purchase Spend
• Purchase spend, also known as procurement spend or spend management, refers
to “the total amount of money an organization spends on goods, services, and
other resources from external suppliers to support its business operations.”

• It includes all the costs associated with purchasing raw materials, finished goods,
equipment, services, and other assets necessary for the organization's day-to-day
operations and production processes

• Purchase spend is a critical aspect of an organization's financial management, as it

directly impacts its profitability, cash flow, and overall performance.

• By analyzing and managing purchase spend effectively, businesses can identify cost-
saving opportunities, streamline procurement activities, reduce supply chain risks,
and enhance their competitive advantage in the market.
Profit Leverage Effect
• The profit-leverage effect of purchasing measures the impact of a change in purchase
spend on a firm’s profit before taxes, assuming gross sales and other expenses remain
unchanged

• The profit-leverage effect of supply savings is measured by the increase in profit

obtained by a decrease in purchase spend.
The Size of An Organization’s Spend & Financial
Significance
• The amount of money organizations spend with
suppliers is staggering

• Profit-Leverage effect is measured by the increase in

profit by decrease in purchase spend

• The prime responsibility of supply is to manage the

supply process with the lowest reasonable levels of
inventory

• To increase long-term share holder value, the company

must increase revenue, decrease cost or both

• Supply should not be focused on cost, but be

concerned with revenue enhancement
Return on Assets Factors

Labor Sales
$700,000 $5,000,000 Net income What if we
$400,000
decrease
Operating cost elements

Minus Profit
Materials
Cost of ($515,000)
margin materials cost
Goods Sold Divided by
$2,300,000
$3,800,000
8%
by 5%?
Sales (10.3%)
($2,185,000)
($3,685,000) $5,000,000 (or $115,000)
Plus
Overhead
$800,000 Other costs
$800,000
Return on
Investments
Multiply
10.0%
(13.0%)
Inventories
$500,000 Sales
$5,000,000
($475,000) Current assets Asset turnover
Assets

Account $1,100,000 Divided by rate

receivable 1.25
$300,000 Total assets
($1,075,000) (1.26)
Plus $4,000,000

Cash Fixed assets ($3,975,000)

$300,000 $2,900,000
The Role of Supply Management in an Organization

• The primary goals of purchasing are:

• Ensure uninterrupted flows of raw materials at the lowest total cost,
• Improve quality of the finished goods produced, and
• Optimize customer satisfaction
• Keep Inventory Investment And Loss At Minimum

• Purchasing contributes to these objectives by:

• Actively seeking better materials and reliable suppliers

• Work closely with and exploiting the expertise of strategic suppliers to improve quality
and materials
• Involving suppliers and purchasing personnel in new product design and development
efforts.
3P’s of Procurement
Every procurement management process consists of 3 Ps’,
namely Process, People, and Paperwork

1. Process: The list of rules that must to be followed while

reviewing, ordering, obtaining, and paying for
goods/services. Checkpoints/steps increase with the
complexity of the purchase

2. People: are stakeholders and their specific responsibility

in the procurement cycle. They take care of initiating or
authorizing every stage of the process. The number of
stakeholders involved is directly proportional to the risk
and value of the purchase

3. Paper: refers to the paperwork and documentation

involved in every stage of the procurement process flow,
all of which are collected and stored for reference and
auditing reasons
Procurement Strategy for Functional and
Innovative Products
Functional Products Innovative Products
(Routine Buying)
(Non- Routine Buying)
• Functional products are maintenance, repair,
• Innovative products might be new types
and operating (MRO) materials and other
of control mechanisms, new software
commonly purchased items and supplies
applications, or a new robotics system

• Characterized by low profit margins, • Innovative products are characterized by

relatively stable demands, and high levels of short product life cycles, volatile demand,
competition high profit margins, and relatively less
competition
• Thus, companies purchasing functional
products most likely concentrate on finding a • The sourcing criteria for these products
dependable supplier selling at a low price may be more closely aligned with a
• Focus should be on minimizing total landed supplier’s quality reputation, delivery
cost speed and flexibility, and communication
capabilities
Direct vs Indirect Procurement
• Direct procurement involves acquiring the • Indirect procurement involves purchasing
raw materials, parts, or components that goods and services, supplies, and materials
that are required to keep the day-to-day
are used to create a product.
business running
• These are the materials that often end up in • One way of classifying indirect procurement
the final product for customers. is that it doesn’t add to a business’s bottom
line.
• These purchases are generally made in large
quantities, acquired from a pool of suppliers • Indirect procurement may include purchases
at the best possible cost, quality and such as repairing equipment, buying office
supplies, maintenance, travel, or other
reliability.
services.
• If direct procurement stops functioning or
encounters problems, companies are no • Without indirect procurement functions,
businesses wouldn’t be able to operate
longer able to manufacture their product
effectively.
and create [Link] HONDA, Suzuki
Shutdown in Karachi • Typically, indirect procurement includes
• Direct procurement is often related to somewhere from 15-27% of a company’s
total revenue.
manufacturing operations where raw
materials are turned into physical products.
Purchasing Process
1. Recognition of Needs
2. Description of Need (ESI Early Supplier
Involvement)
3. Identification and analysis of possible
sources of supply, issue quotations
4. Supplier selection and determination
of terms
5. Issue purchase orders(PO)
6. Follow-up to assure correct delivery
7. Receive and accept the goods(GRN-
Goods Received Note)
8. Approve invoice for payment
9. Maintaining record (Post purchase
feedback)
Steps In The Purchasing Process
[Link] of Need 2. Description of Need
• It is essential to have accurate
• Any purchase originates with the
recognition of a definite need by description of need requested by
individual / system Internal Customer

• The person responsible for a • In many organization, supply process

particular activity should know the is split into mini-processes owned by
requirements of unit (How much & individual function like Internal
When) Customer, Buyers

• The supply department is • Factors to consider is either a best

responsible for helping to buying (Buyer’s intelligence) or
anticipate the needs of using
department specific brand selection (established
by internal user)
Steps In The Purchasing Process
[Link] of Potential
Source (Issuing RFX) Issuing RFX Reason

When items are not covered by Request for • RFQ is used in situations where the
Quotation buyer can clearly define the need
contract, the buyer has three options • Quotations are received from
for requesting business from potential multiple suppliers
suppliers
 Request for Quotation (RFQ) Request for • More complex needs at the buyer’s
 Request for Proposal (RFP) Proposal end
• Need expertise in developing and
 Invitation for Bid (RFB) proposing a solution
• When price is highly negotiable
Request for Bid • Similar to RFP in terms of the bid
specification
• Buyer is willing to use competitive
bid process
Steps In The Purchasing Process
[Link] Selection & [Link] & Placement Of The
Determination of Terms Purchase Order

• Placing an order usually involves

• Analysis of the quotes, bids or preparation of a purchase order
proposal
• Need for legal compliances and proper
• Selection of the suppliers lead to transaction record
order placement
• Format and Routing vary great so must
• Steps involve from a simple bid have serial number, date of issue, the
analysis form to complex name and address of the supplier,
negotiations quantity description

• It must contain provisions to protect the

buyer from damage suits caused by
patent infringement
Steps In The Purchasing Process
[Link]-Up & Expediting [Link] & Inspection of
Goods(GRN)
• At the time of order is issued, an
appropriate follow-up date is The primary purposes of receiving are
indicated
• Check the physical order arrived
• It is a routine tracking to ensure
• Check for the condition
supplier meets the deadlines
• Match the quantity ordered

[Link] Clearing & Payment [Link] of Record &

Relationship

• This involves alignment of Supply • Focus on record maintenances for future

and Accounts payable
• For organization record keeping is crucial
• To check the discrepancies in the for fulfilling statutory and compliance
invoice and time for correction requirements
• Organizations have to keep all records in
such a manner that they can be retrieved
whenever required.
Procurement emphasizes on input;
Supply Chain Management focuses on output and delivery
REFERENCES
Chapter 2 - Purchasing Management
Principles of Supply Chain Management by Wisner, Leong & Tan

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a6c34671e4c1/inditex_code_of_conduct_for_manufacturers_and_suppliers.pdf?t=1655306501225

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