CHAPTER 2- PURCHASING
MANAGEMENT
Principles of Supply Chain Management:
A Balanced Approach
Prepared by Daniel A. Glaser-Segura, PhD
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.
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Introduction
Purchasing-
Obtaining merchandise, capital equipment; raw materials, services, or
maintenance, repair, and operating (MRO) supplies in exchange for money or
its equivalent. Also called Supply Management
Merchant Buyers-
wholesalers and retailers who purchase for resale.
Industrial Buyers-
purchase raw materials for conversion, services, capital equipment, & MRO
supplies.
Contracting-
Acquisition of services.
[Link]
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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.
4. Ensure sustainability in your purchasing practices
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.
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A major item that affects a firm’s likelihood of endorsing strategic supply
management is the percent of revenue that passes through directly to suppliers
Cost of Revenue as a
Percentage of total Sales
5 Admin.
12 Services
18 Capex
3 Spares
60-85 60-80 50-70 60-80 12 Trade-
items
Produ
25-50 10-40 50 ction
parts
Retailers Computers Consumer Automotive Pharma Service Typical
electronics industry structure
adapted from Kluge, 1996
DuPont analysis: Sales
105 mio
Capital Total assets
turn-over / 145 mio
ratio 2.1 x Net assets -
50 mio Interest free
liabilities
95 mio
RONA
9.9 % × Sales
105 mio
Income
before tax -
Other costs
5 mio 40 mio
Margin / Total costs +
4.7 % 100 mio
Purchased
Sales mat. &
105 mio serv. 60 mio
Amounts in Euro mio
DuPont analysis: Sales
105 mio
Capital Total assets
turn-over / 145 mio
ratio 2.1 x Net assets -
50 mio Interest free
liabilities
95 mio
RONA
12.4 ----
9.9 % × Sales
105 mio
+ 25 % !! Income
before tax -
6.2 --5 mio Other costs
40 mio
Margin / Total costs +
5.9 ---
4.7 % 98.8 ----
100 mio
Purchased
Sales mat.& serv.
105 mio 58.8 ---
60 mio
Amounts in Euro mio -2%
The Purchasing Process
Manual Purchasing-Older system, prone to duplication of effort
and error
Step 1-Material Requisition/Purchase Requisition- stating product,
quantity, and delivery due date are clearly.
Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers
& issues a request for quotation (RFQ).
Step 3- The Purchase Order (PO)- The purchase order is the buyer’s
offer & becomes a binding contract when accepted by supplier.
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The Traditional Purchasing Process
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The Purchasing Process
Electronic Procurement (e-Procurement)
Step 1- Material user inputs a materials requisition- relevant
information such as quantity and date needed.
Step 2- Materials requisition submitted to buyer- at purchasing
department (hardcopy or electronically).
Step 3- Buyer assigns qualified suppliers to bid- Product
description, closing date, & conditions are given.
Step 4- Buyer reviews closed bids & selects a supplier
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Internet Based Electronic System
Process
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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Procure to Pay Process Map
Need
Identification
GRN
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Elements of a Purchase Requisition
Internal document
Description of required material or service
Quantity required
Estimated unit cost (include it ???)
Operating account to be charged
Date of requisition
Date required
Authorized signature
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Traveling Purchase Requisition
Printed card or barcode
Description of item
List of approved suppliers
Prices paid to suppliers
Reorder point
Record of usage
Conserves time for handling routine
materials and supplies
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The Purchase Order
Quantity Method of
Material delivery
specification Ship-to address
Quality P.O. number
requirements Order due date
Price
Delivery date
It’s a legal document
which goes to suppliers
P.O. Form
The Purchasing Process- Cont.
Advantages for the e-Procurement System
– Time savings
– Cost savings
– Accuracy
– Real time
– Mobility
– Trackability
– Management
– Benefits to the suppliers
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Small Value Purchase Orders
Processing costs can be substantial. Small value
purchases should be minimized through:
•Procurement Credit Card/Corporate Purchasing Card
•Blank Check Purchase Orders
•Blanket or Open-End Purchase Orders
•Stockless Buying or System Contracting
•Petty Cash
•Standardization & Simplification of Matls & Components
•Accumulating Small Orders to Create a Large Order
•Using a Fixed Order Interval
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Sourcing Decisions: The Make-or-
Buy 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 customer’s operations.
The Make or Buy decision is a strategic decision.
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Sourcing Decisions: The Make-or-
Buy Decision- Cont.
Reasons for Buying or Outsourcing
• Cost advantage: Especially for components that are non-vital to the
organization’s operations.
• Insufficient capacity: A firm may be at or near capacity.
• 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.
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Sourcing Decisions: The Make-or-
Buy Decision- Cont.
Reasons for Making
• Protect proprietary technology
• No competent supplier
• Better quality control
• Use existing idle capacity
• Control of logistics- lead-time transportation,
and warehousing cost
• Lower cost
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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Sourcing Decisions: The Make-or-
Buy Decision- Cont.
The Make-or-Buy Break-Even Analysis (page 87)
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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Roles of Supply Base
Supply Base- suppliers that a firm uses to acquire its materials,
services, supplies, and equipment.
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
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Supplier Selection
The process of selecting suppliers, is complex and should
be based on multiple criteria:
– Product and process – Order System and cycle
technologies time
– Willingness to share – Capacity
technologies and – Communication capability
information – Location
– Quality – Service
– Cost
– Reliability
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How Many Suppliers to Use
Single-sourcing- a risky proposition. Although trends favor
fewer sources, avoid single source.
Reasons Favoring a Single Reasons Favoring More than
Supplier One Supplier
• To establish a good relationship • Need capacity
• Less quality variability • Spread risk of supply
• Lower cost interruption
• Transportation economies • Create competition
• Proprietary product or process • Information
• Volume too small to split • Dealing with special kinds of
business
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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 firm’s 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.
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Purchasing: Centralized vs.
Decentralized
Advantages- Centralization Advantages- Decentralization
– Concentrated volume- – Closer knowledge of
leveraging purchase volume requirements
– Avoid duplication – Local sourcing
– Specialization – Less bureaucracy
– Lower transportation costs
– No competition within units
– Common supply base
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.
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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.
• Import broker or sales agent- performs service for a fee.
• Import merchant- buys and takes title to the goods.
• Trading company- imports & carries wide variety of goods.
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Total Cost of Ownership (TCO)
Model
33
Total Cost of Ownership (TCO)
Model
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Facilitating E-Reverse Auctions
• Buyers and suppliers able to communicate in real-time,
worldwide, via the Internet
• Development of robust, user-friendly, third-party auction
systems
• Significant improvements in goods and service quality and
cycle time reduction
• [Link]
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Chapter 2 Purchasing Management
????? Any Questions ?????
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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