Supply Chain
Management
Purchasing Management (CH 2)
Introduction
Purchasing
In the context of supply chain management (SCM), 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
Industrial buyers.
Introduction
Merchants
The first category, merchants, includes the wholesalers and retailers, who
primarily purchase for resale purposes.
Generally, merchants purchase their merchandise in volume to take
advantage of quantity discounts and other incentives such as transportation
economy and storage efficiency.
They create value by consolidating merchandise, breaking bulk and
providing the essential logistical services..
Introduction
Industrial Buyers
The second category is the 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.
The typical industrial buyers are the manufacturers, although some service
firms such as restaurants, landscape gardeners and florists also purchase raw
materials for conversion purposes
The Role of Supply Chain 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.
The Financial Significance of Supply
Management
Purchasing has become more global and gained strategic corporate focus
over the last two decades.
The increasing use of outsourcing non-core activities has further elevated
the role of purchasing in a firm.
In addition to affecting the competitiveness of a firm, purchasing also
directly affects profitability.
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
The Financial Significance of Supply
Management
Profit-Leverage Effect
Purchase spend is the money a firm spends on goods and services
Dollar decrease in purchase spend directly increases profits before taxes by the same
amount.
Return on Assets Effect
Return on assets (ROA) is a financial ratio of a firm’s net income in relation to its total
assets.
A high ROA suggests that the management is capable of generating large profits with
little investment.
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
The Financial Significance of Supply
Management
Inventory Turnover Effect
Inventory turnover shows how many times a firm’s inventory is utilized and replaced
over an accounting period, such as a year.
Widely used formula is the ratio of the cost of goods sold over average inventory at
cost.
low inventory turnover indicates poor sales, overstocking and/or obsolescence
Hyper Link
Numerical [Link]
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
The Purchasing Process
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
E-Procurement
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
Advantages for the e-Procurement System
Time savings
Cost savings
Accuracy
Real time
Mobility
Track ability
Management
Benefits to the suppliers
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
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 .
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
Reasons for Buying or Outsourcing
Cost Advantage
(Economies of Scale, Quantity, Less Cost burden)
Insufficient capacity
(Capacity, Uncertain Demand)
Lack of expertise
(Technology, Environmental & Safety Standard, Core Competence)
Quality
(Skilled Labor, Process Technology, High Technology Industry)
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
Reasons for Making
Protect Proprietary Technology
(Competitive Advantage, Scare to Reveal Technology)
No Competent Supplier
(Capabilities, Supplier Development Strategy)
Better Quality Control
(Design, Manufacturing Process)
Use Existing Idle Capacity
(Short Term Solution, Produce Seasonal Products)
Control of Lead time, Transportation and Warehouse Cost
Lower cost
(Capital Investment, Lower Per Unit Cost)
Make or Buy Break Even Analysis
SEVERAL ASSUMPTION UNDERLINE THE ANALYSIS
1. All cost involved can be classified under either Fixed Cost or Variable Cost.
2. Fixed cost remains the same within the range of analysis.
3. A linear variable cost relationship exists.
4. Fixed cost of the make option is higher because of initial capital investment in
equipment
5. Variable cost of the buy option is higher because of supplier profits.
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
Make or Buy Break Even Analysis -Example
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.
Reference: Principle of Supply Chain Management 5th Edition by Wisner, Tan &
SELF TEST
Reference: Operations management 12th Edition by Jay Heizer, Barry Render & Chuck
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