Acquisition Method

Efficient Supply Systems: Acquisition Methods
Introduction
The acquisition process involves a series of activities

for obtaining necessary materials and services for an
organization. A key step in the acquisition process is
selecting the type of acquisition method or the way in
which the actual purchase will be made. Each type
has a particular use and advantage.
When the buying organization selects the

appropriate type of acquisition method, it minimizes
costs and maximizes buying power. This
combination enables the organization to retain its
competitive edge. Failure to choose the appropriate
method may increase both internal costs and outside spend, causing the organization to increase
prices to its customers and become less competitive.
The type of acquisition method chosen establishes the basis for interactions between the buying
organization and its supplier. It defines not only what the supplier is required to furnish and the
price to be paid, but also:
• How ordering will occur

• How and when delivery is to be made
• The length of time the agreement between the buying organization and supplier will last
If the buyer selects an incorrect type of acquisition method, more work or costs or both are
incurred. For example, if a buying organization has requirements for monthly deliveries of
materials or services, the buyer could reduce both workload and costs by establishing a longer
term agreement with a supplier ― rather than issuing monthly orders. A longer term agreement
would establish pricing and delivery up front. Pricing would be based on total volume rather than
monthly quantities, which would probably result in lower unit costs. The buyer would be relieved
of the burden of determining prices and placing orders every month. This would allow the buyer
time to focus on other purchasing activities that add more value.
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Making the Right Decision
To truly add value to the organization, buyers and

supply managers must select the appropriate type of
acquisition method in each situation. In making this
decision, supply managers should consider:
• How to reduce administrative burden

• Whether or not they can leverage their
buying power
For example, a plumbing company makes repetitive, frequent purchases of hardware. Several
times a week, it issues individual purchase orders for hardware. Because the individual orders
are relatively small, the plumbing company has no leverage with suppliers to reduce pricing,
improve quality, or get better delivery times. The plumbing company also uses internal resources
each time it processes a purchase order. Over time, issuing this many purchase orders
significantly increases administrative burden and cost.
The more appropriate type of acquisition method for this purchase would be a long-term contract.
Establishing an agreement with a supplier to deliver hardware for the next year or two would give
the plumbing company sufficient volume to negotiate better pricing, quality, and/or deliveries. It
also would eliminate the need for processing individual purchase orders, thus reducing
administrative costs.
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Module Objectives
There are many types of acquisition methods an organization can use to purchase goods and
services. This module focuses on distinguishing one type of acquisition method from another. It
emphasizes building the skills and knowledge in how to apply the most appropriate buying
method to any situation. Only with complete information can the buyer make the best decisions
regarding the types of acquisition methods to use.
Applying the most appropriate buying method requires the buyer to:
• Work with the internal customer to fully identify all factors concerning the pending
acquisition in order to fulfill the organization’s requirements for the materials or services
• Research current and projected market conditions to ascertain ways to benefit from
conditions
• Be fully apprised of and contribute to overall goals and strategies of the organization
Upon completion of this module, you should be able to:
• Describe various types of acquisition methods

• Identify a variety of different types of purchases
• Discuss the advantages and uses of different acquisition strategies
• Assess an intended purchase and determine the most appropriate buying method
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Method Selection Process
Overview
When an organization has a need that cannot be met with internal resources, it turns to outside
suppliers to meet its requirement. Thus, the suppliers are an integral part of an organization’s
processes and key to its success or failure. Acquisition methods are the ways in which an
organization has to make its actual purchases from suppliers. Types of acquisition methods
include:
Blanket Order
A blanket order is a term commitment to a supplier for a total quantity of certain goods or
services. It is an obligation over a predetermined time at predetermined prices.
Consignment Buying
In consignment buying, a supplier agrees to place its inventory in the buying organization’s
warehouse. The buying organization pays the supplier as it uses inventory items.
Contract
Contracts are agreements between a buyer and seller that define goods or services to be
delivered. Contracts are generally used when the issues involved are more complex or the
arrangement covers a longer period of time.
Procurement Card
Procurement cards are credit cards that provide a payment method for authorized internal
customers when dealing directly with suppliers to meet low-dollar, occasional needs.
Purchase Order
A purchase order is a written contractual document prepared by the buying organization.
Typically, it is a standard, preprinted form in which the buying organization inserts specific
information detailing requirements for either single or multiple items.
Systems Contract
A systems contract commits a supplier to keep adequate inventories of selected items on
hand and deliver them on demand.
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Acquisition Method Selection Process
The type of acquisition method used for a particular purchase helps ensure the buying
organization’s need will be fully satisfied in an effective manner. It also minimizes risk and
maximizes buying power. Choosing the type of acquisition method is a three phase process.
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Eight Common Attributes Across the Three Phases
The three phases of the acquisition method selection process are accomplished by comparing
the identified key factors of the purchase and characteristics of the selected buying strategy to the
elements of the various types of acquisition methods. Key factors of the purchase, characteristics
of buying strategies, and elements of the types of acquisition methods have the following eight
attributes in common which can be compared across the three phases.
Use
Definition Discussion
Each purchase, buying strategy and Uses of specific purchases range from
acquisition method has a specific defined meeting short-term, immediate need to
use. creating long-term agreements.
• Uses of purchases may support Buying strategies are used to match

required timing for delivery and/or a requirements to market conditions in order to
specific objective of the buying maximize buying power.
organization.
• Uses of buying strategies are tied to The variety of acquisition methods are used
market conditions. to reach the most advantageous type of
• Uses of acquisition methods are tied agreement with a supplier.
to the buying organization’s
operational strategies.
Term of Agreement
The term of the agreement defines how long Organizations use short-term agreements for
it will last. Agreements vary from short-term one-time or immediate needs.
(immediate fulfillment or delivery as soon as
possible) to long-term or multi-year. They use one year or longer term
agreements when their needs are continuous
or when a complex project is anticipated to
be long lasting.
Need
Organizations’ needs for goods and services Most organizations remodel their offices only
vary and may be one-time or continuous rarely, and would do so as a one-time
supply. Some needs occur only once or purchase.
rarely, in which case an organization would
make a one-time purchase. Other needs are On the other hand, most organizations have
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continuous and the organization must have continuous needs for office supplies and
an on-going source of supply. purchase these on an on-going basis.
Dollar Value
The dollar value is how much money is If an organization has a total outside spend
being spent by the buying organization. annually of $3 billion and its average
Many organizations categorize the dollar acquisition is $1.5 million, it might define the
value of their purchases as low, medium and following dollar value categories:
high. The categories are defined by the Low – less than $10,000
organization relative to total outside spend Medium – $10,000-$5 million
and to one another. High – greater than $5 million
Requirements: Description
The description, or specifications, for the Organizations may be able to clearly and
goods or services being purchased may or precisely define their requirements for the
may not be precisely and clearly defined at purchase of new vehicles for their fleet.
the time of agreement. Unknown needs
and/or rapid technological change may lead However, they may have only vague
to vague descriptions. descriptions of their requirements in an
agreement for legal services.
Requirements: Quantity
Quantity defines how many or how much a An organization would be able to define
buying organization needs of a product or quantity for an immediate, one-time
service. At the time of agreement, precise purchase.
quantities may or may not be known.
It may be able only to estimate requirements
for on-going, continuous needs.
Requirements: Delivery
Delivery defines the time or schedule when When organizations make a one-time
the supplier is required to provide the goods purchase, they usually can define the
or services. This may or may not be defined delivery time quite easily.
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at the beginning of an agreement.
When organizations have longer term
agreements, often the exact delivery
schedule is not known at the outset.
Price
Price is how much the buying organization When organizations make a one-time
will pay the supplier to deliver the goods or purchase for goods or services to be
services. Often, an agreement states either delivered in specified quantities at a specified
the price to be paid or a method for time, price can be determined at the time of
determining price later. Sometimes, a vague agreement.
definition of requirements or rapid
technological change makes predetermining However, when requirements are generally,
prices impossible. rather than specifically, defined (i.e., office
supplies vs. pens and pencils), price cannot
be predetermined.
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The Acquisition Method Selection Matrix
Since key factors of the purchase, characteristics of buying strategies, and elements of the types
of acquisition methods have eight attributes in common, we can define and summarize these for
a specific purchase in a matrix. Using a matrix facilitates the comparison of these three items in
order to ultimately choose the type of acquisition method for a purchase. Further, the use of a
matrix can provide a quick overview both of the characteristics of the various buying strategies
and of the elements of the types of acquisition methods.
Acquisition Method Selection Matrix
Requirements
Term of Dollar
Use Agreement Need Value Description Quantity Delivery Price
Key Factors of
Purchase
Characteristics
of Buying
Strategy
Elements of
Acquisition
Method
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How to Use the Acquisition Method Selection Matrix
In each phase of the acquisition method selection process for a purchase, the buyer fills in the
appropriate line in the matrix.
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Exceptions to Acquisition Method Selection
Selecting the most appropriate type of acquisition method is not an exact science. While the
three phase acquisition method selection process provides a viable tool, the buyer must relate
its use both to the objectives of the particular purchase as well as the buying
organization’s environment and culture.
One point to consider is the key factors and characteristics may not always be an exact match.
For example, the use of a particular strategy may match projected market conditions, but the term
of agreement for key factors and the buying strategy may differ. The buyer would have to
determine if it would be beneficial to change the term of agreement. Depending upon this
decision, the buyer could then match the key factors and the buying strategy to elements of the
types of acquisition methods to decide which is most appropriate.
Another point to consider is a buying organization may have policies, practices or goals that
affect the buyer’s choice of buying strategy and/or acquisition method. For example:
• An organization may have a policy against futures contracts, in which case the buyer
would never consider hedging as a buying strategy.
• An organization may not have a procurement card program, in which case the buyer
would not consider procurement card as one of the types of acquisition methods.
• An organization may be trying to build a closer, long-term relationship with a supplier, in
which case the buyer might select a contract rather than a purchase order as the type of
acquisition method to use in a declining market.
These types of exceptions must be taken into consideration throughout the acquisition method
selection process.
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Topic Summary
Acquisition methods are the ways in which an organization has to make its actual purchases.
Selecting the most appropriate type of acquisition method in a specific purchase minimizes the
buying organization’s risks and maximizes it buying power. Choosing the type of acquisition
method is a three phase process:
Matching the key factors of the purchase and the characteristics of the buying strategy to
elements of the types of acquisition methods enables the buyer to select the acquisition method
that is most appropriate for the buy. This matching is facilitated by defining eight attributes which
are common across the three phase process and capturing this information in an acquisition
method selection matrix.
Requirements
Term of Dollar
Key Factors of
Purchase
Characteristics
of Buying
Strategy
Elements of
Acquisition
Method
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Topic Summary (continued)
Requirements
Term of Dollar
Key Factors of
Purchase
Characteristics
of Buying
Strategy
Elements of
Acquisition
Method
• In phase one, the buyer fills in the Key Factors of Purchase line. The buyer defines
each of the eight common attributes based on the needs and requirements of a specific
purchase.
• In phase two, the buyer fills in the Characteristics of Buying Strategy line. The buyer
identifies the most appropriate buying strategy by matching the key factors to
characteristics of various buying strategies, and then selecting the buying strategy that
best matches.
• In phase three, the buyer fills in the Elements of Acquisition Method line. The buyer
identifies the most appropriate type of acquisition method by matching the key factors
and buying strategy to elements of various types of acquisition methods, and then
selecting the acquisition method that best matches.
Selecting the most appropriate acquisition method is not an exact science. While the three
phase process provides a viable tool, the buyer must relate its use both to the objectives of the
particular purchase as well as the buying organization’s environment and culture.
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Identify Key Factors
Overview
Organizations have a variety of needs that must be fulfilled by outside inputs. Each acquisition
has its own unique requirements. The first phase in meeting requirements in a buying situation is
to identify key factors of the purchase.
To identify key factors of a purchase, the buyer should answer the following questions.
• What is the term of this agreement (i.e., how long will it last)?
• Is this need on-going or a one-time purchase?
• What is the dollar value relative to other purchases (i.e., high, medium or low)?
• Can the requirements (description, quantity, delivery) be fully defined?
• Can the price to be paid be predetermined (i.e., established at the outset of the
agreement)?
After the buyer has identified the key factors, the buyer then determines whether to go to phase
two or skip directly to phase three of the process.
• If the requirements description is defined, the buyer should go to phase two and use the
key factors to determine buying strategy.
• If the requirements description is not defined, the buyer should move to phase three and
use the key factors to select the type of acquisition method.
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Types of Purchases
Organizations have a variety of needs that are met through different types of purchases. These
run the gamut of satisfying an immediate need for a consumable supply to ensuring a continuous
source for repeatedly used supplies or services to establishing a long-term relationship.
Short-term, Immediate Need
Definition Example
A short-term, immediate need is a requirement A new CEO has just been appointed and has
for goods/services that is unanticipated. selected new office furniture. The buyer
Organizations usually want delivery of these identifies the supplier, determines the pricing,
goods/services as soon as possible. and issues a purchase order for this one-time
acquisition.
Continuous Supply
Definition Example
Organizations frequently have on-going needs An organization has determined that it will need
for consumable supplies or materials. In these 1,000 cases of catsup in the next 12 months. It
circumstances, they are seeking a way to have wants monthly deliveries, but monthly demand
a continuous supply to meet these needs. varies. It places a blanket order with a supplier
to buy 1,000 cases of catsup at $20/case, and
issues monthly release orders specifying
quantity against the blanket order.
Long-term Agreement
Definition Example
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Organizations establish long-term agreements A supplier makes google eyes for dolls. Its
to fulfill continuous need or to handle primary customer, a doll manufacturer, wants
complex projects or relationships. the supplier’s inventory placed in its warehouse.
The supplier agrees. The doll manufacturer
establishes a long-term agreement with the
supplier for an on-site inventory.
Undefined Needs or Technology
Definition Example
Sometimes organizations look to outside A university is replacing all of its information

suppliers to assist them in defining and technology systems. It not only wants to handle
meeting future needs, even though at the its internal administrative work, but also have
outset of the agreement these are not defined. interactive capabilities with students, parents
and the general public. It foresees an evolving
system and hires a supplier to assist in both
defining and meeting the system requirements.
Low Usage
Definition Example
Low usage items are those for which an An organization’s fleet maintenance department
organization has very low demand or a one- has an occasional need for a part not covered
time need. by a contract. The department supervisor is
authorized to use a procurement card to
purchase these parts, provided no single
purchase exceeds $1,200.
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Use
The first step in identifying key factors of a purchase is to identify the type of purchase. The type
of purchase is input into the Use column of the Acquisition Method Selection Matrix.
Requirements
Term of Dollar
Key Factors of Type of
Purchase Purchase
Characteristics
of Buying
Strategy
Elements of
Acquisition
Method
Let’s take a look at some types of purchases and how other key factors would be input in the
matrix.
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Purchase for Short-Term, Immediate Need
A short-term, immediate need is a requirement for goods or services that is unanticipated. More
often than not, they occur due to unforeseen circumstances or lack of planning. Organizations
usually want delivery as soon as possible. The dollar value varies, but the price can typically be
predetermined. Requirements are generally well defined.
Key Factors of Short-Term, Immediate Need Purchase
Requirements
Term of Dollar Value
Use Agreement Need Description Quantity Delivery Price
Short-term, Immediate One-time Varies Defined Defined Defined Predetermined
Immediate fulfillment purchase
need
Example
A robotics manufacturer has just accepted an order from a global company that increases its
demand for circuit boards by 1,800 per week for the next month. The manufacturer’s current
circuit board supplier cannot meet this demand. The manufacturer must fulfill this short-term,
immediate need. The Production Line Supervisor has given the buyer complete, detailed
specifications including quantities and a delivery schedule. Based upon the prices on the current
circuit board contract and the quantities required, the buyer determines that the dollar value is
high. Because the requirements are well defined, the buyer knows that prices can be
predetermined before placing an order.
How should the buyer define the key factors of this purchase? To review the buyer’s acquisition
method selection matrix, click the button below.
Acquisition Method Selection

Matrix
Based on the information, the buyer enters the following key factors in the matrix. While the dollar
value for short-term purchases varies, the buyer knows this purchase has a high dollar value and
inputs this in the matrix.
Requirements
Term of Dollar
Key Factors of Short-term, Immediate One-time High Defined Defined Defined Predetermined
Purchase Immediate fulfillment purchase
need
Buying Strategy
Acquisition
Method
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The buyer identified the requirements description as defined, and can proceed to phase two of
the process.
Purchase for Continuous Supply

Organizations frequently have on-going needs for consumable supplies or materials where the
requirements may or may not be well defined. This demand can be met through frequent
purchases as needs occur or by establishing a continuous source of supply. If the continuing
requirements can be consolidated and covered by one agreement, the buyer can leverage its
buying power to establish better unit pricing. Consolidating requirements under one agreement
also removes the need to issue individual orders as needs occur, which reduces administrative
costs.
Key Factors of Continuous Supply Purchase
Requirements
Continuous One year or On-going Varies or May or may May or May or May or may
Supply more high not be may not may not not be
defined be defined be defined predetermined
Example
An international consulting firm has on-going needs for office supplies. In examining past usage,
the buyer discovers that all locations buy many of the same items repetitively and frequently.
Occasionally, one location buys an item that others do not use, but these are common office
supplies. Knowing this, the buyer can clearly define most of the requirements. The total spend is
high due to volume, and both quantity and delivery schedules vary. Since none of the
requirements are unique, the buyer can get unit prices for the defined requirements and establish
a way to determine prices for undefined requirements. The buyer wants to establish a long-term
agreement with a supplier in which the supplier is required to carry inventory and deliver on
demand.

Matrix
Based on the information, the buyer enters the following key factors in the matrix.
Requirements
Term of Dollar
Key Factors of Continuous Long-term On-going High due to Somewhat Unknown Unknown Defined
Purchase supply volume defined requirements
predetermined
and can
determine
undefined
way.
later
Buying Strategy
Acquisition
Method
Since the buyer has identified the requirements description as only somewhat defined, the buyer
would skip phase two and go directly to phase three of the process.
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Purchase for Long-Term Agreement
Organizations establish long-term agreements to fulfill continuous need or to handle complex
projects or relationships. Long-term agreements usually are one year or more. In some long-term
agreements, requirements can be well defined. It is not unusual, however, to see long-term
agreements with vaguely defined descriptions and/or unknown quantities or delivery schedules.
Many long-term agreements include a method to adjust pricing over the term of the contract to
reflect current market conditions.
Key Factors of Long-Term Agreement Purchase
Requirements
Long-term One year or On-going or Usually high May or may May or May or May or may
Agreement more one-time not be may not may not not be
purchase or defined be defined be defined predetermined
project
Example
A motorcycle manufacturer has just completed a study that shows it would be more cost effective
and beneficial to outsource its inventory storage facility. In examining the requirements, the buyer
determines that a long-term agreement (minimum of 5 years) would be needed to make it
attractive to suppliers and to meet the on-going needs of the organization. Due to the anticipated
length of the agreement and the requirements, the dollar value is high. Ordering and distribution
are well defined, so the buyer can completely describe the requirements to suppliers. Because
requirements are well defined, the buyer knows that the price can be determined up front.

Matrix
Requirements
Term of Dollar
Key Factors of Long-term Long-term On-going High Defined Defined Defined Predetermined
Purchase Agreement
Buying Strategy
Acquisition
Method
Having determined that the requirements description is defined, the buyer is now ready for phase
two of the process.
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Purchase for Undefined Needs or Technology
Sometimes organizations look to outside suppliers to assist them in defining and meeting future
needs, even though these are not defined at the time of contract. Economic uncertainty, rapid
technological change, and global competition all serve to obscure future needs. To stay viable,
organizations may use intermediate to long-term agreements where requirements are defined as
they become known. In these situations, dollar values are typically high and prices may be
unknown initially with a way to determine pricing later.
Key Factors of Undefined Needs or Technology Purchase
Requirements
Undefined One year or On-going or High Unknown May or May or Unknown
Needs or more one-time may not may not but can
Technology purchase be defined be defined determine
pricing later
Example
A scientific testing laboratory wants a supplier who will assist in re-engineering processes and
also replace equipment as necessary to support the changes. Technological change is rapid in
this industry. The buyer determines this is a one-time project that will be completed in the
intermediate to long-term range. The dollar value is high, since these types of suppliers are
expensive and equipment replacement costs may be significant. Because the buying organization
is seeking a supplier to help identify the needs, none of the requirements are defined at the
outset. However, the buyer anticipates being able to identify ways to determine pricing during the
term of the agreement. These may include a fixed daily rate for supplier personnel and tying to
manufacturers’ wholesale price lists for equipment.

Matrix
Requirements
Term of Dollar
Key Factors of Undefined Intermediate One-time High Unknown Unknown Unknown Unknown but
Purchase needs or to long-term project can determine
technology later
Buying Strategy
Acquisition
Method
Since the requirements description is unknown at this time, the buyer would skip phase two and
go directly to phase three of the process.
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Purchase for Low Usage
Low usage items are products or services for which an organization has very low demand or a
one-time need. It is relatively common for buying organizations to authorize certain internal
customers to make purchases of this nature up to a specified dollar limit directly from suppliers
without involving Purchasing. This is not to say that all low usage items are also low dollar items
as the dollar value varies. While some low usage items are significant expenditures (i.e.,
construction of a new branch location), the price can typically be predetermined.
Key Factors of Low Usage Purchase
Requirements
Low usage Usually Usually one- Varies or low Defined Defined Defined Predetermined
immediate time
fulfillment purchase,
but varies
Example
To assist a client in announcing a new product, an advertising agency needs flags from Asian,
African and European countries. The manager of this project tells the buyer that these flags are
needed in 30 days and gives the buyer complete specifications including quantities. The buyer
identifies the need as a low dollar value, one-time purchase for immediate fulfillment. Because
the requirements are well defined, the buyer knows that prices can be predetermined before
placing an order.

Matrix
Requirements
Term of Dollar
Key Factors of Low usage Immediate One-time Low Defined Defined Defined Predetermined
Purchase fulfillment purchase
Buying Strategy
Acquisition
Method
Since the requirements description is defined, the buyer can go to phase two of the process.
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Topic Summary
In phase one of the acquisition method selection process, the buyer identifies key factors of the
purchase. The reason for identifying the key factors is so they can be used for determining the
buying strategy and selecting the most appropriate type of acquisition method.
Types of Purchases
There are various types of purchases buyers frequently use to meet the needs of their
organizations.
Types of Purchases Definition

Short-term, Immediate Need A short-term, immediate need is a requirement for goods/services that is unanticipated.
Continuous Supply When organizations have on-going needs for consumable supplies or materials, they seek a
way to have a continuous supply.
Long-term Agreement Organizations establish long-term agreements to fulfill continuous need or to handle complex
projects or relationships.
Undefined Needs or Sometimes organizations look to outside suppliers to assist them in defining and meeting future
Technology needs, even though at the outset of the agreement these are not defined.
Low Usage Low usage items are those for which an organization has very low demand or a one-time need.
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The key factors of a purchase vary depending on the type of purchase. A summary of these key
factors are as follows.
Key Factors by Type of Purchase
Requirements
Short-term, Immediate One-time Varies Defined Defined Defined Predetermined
Immediate fulfillment purchase
need
Continuous One year or On-going Varies or May or may May or May or May or may
supply more high not be may not may not not be
defined be defined be defined predetermined
Long-term One year or On-going or Usually high May or may May or May or May or may
agreement more one-time not be may not may not not be
purchase or defined be defined be defined predetermined
project
Undefined One year or On-going or High Unknown May or May or Unknown but
needs or more one-time may not may not can determine
technology purchase be defined be defined pricing later
Low usage Usually Usually one- Varies or low Defined Defined Defined Predetermined
immediate time
fulfillment purchase,
but varies
During phase one, the key factors about the specific purchase are identified and placed in the
acquisition method selection matrix. Once key factors are identified, the buyer knows whether or
not the requirements description is well defined. The buyer can then determine whether to go to
phase two or skip directly to phase three of the acquisition method selection process.
• If the requirements description is defined, the buyer should go to phase two and use the
key factors to determine buying strategy.
• If the requirements description is not well defined (i.e., unknown or somewhat defined),
the buyer should move to phase three and use the key factors to select the type of
acquisition method.
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Determine Buying Strategy
Overview
An organization’s mission, immediate and long-term goals, and financial condition set the stage
for its buying strategies or the frequency and timing of its purchases. The current and projected
supply market conditions, the speed of technological change, and the availability of funds
influence these strategies. In turn, the strategy used must match the purchase being made and
affects the type of acquisition method to be selected.
Once the key factors of a purchase are identified and if the requirements description was defined,
phase two is to determine the buying strategy. Remember that if the requirements description is
not well defined in phase one, you skip phase two of the process.
By comparing key factors of the purchase with characteristics of various buying strategies, the
buyer determines the strategy to be used based on the best match. The key factors and
characteristics may not always be an exact match. In these instances, the buyer will have to
determine the appropriate course of action.
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Types of Buying Strategies
Among the buying strategies available to supply managers are:
Hand-to-Mouth Buying
Definition Example
Hand-to-mouth buying is a short-term strategy Strapped for cash, a struggling organization

using frequent purchases in small quantities puts a freeze on all purchases except goods or
to meet immediate short-term requirements. services immediately required. To satisfy these
short-term needs, it makes small purchases
frequently.
Hedging
Definition Example
Hedging typically involves the sale of a futures Knowing that it will need 1,000 pounds of silver
contract to offset the purchase of a cash in six months and that the precious metals
commodity. A futures contract is a contract for market is on the rise, an organization buys
the purchase or sale and delivery of 1,000 pounds of silver for delivery in six
commodities at a specified future date. months. At the end of this period, it sells this
contract for a profit and offsets the price it has
to pay for the silver it needs.
Integrated Supply
Definition Example
way.
Integrated supply is a special type of partnering After determining that inventory management is
arrangement wherein a supplier operates an not part of its core business, an organization
organization’s supply or inventory storage contracts with an outside supplier to operate its
facility. storage facility.
Leveraged Buying
Definition Example
Leveraged buying typically involves joining two Located in a rural area, two small cities
or more organizations together for the individually have a low demand for office
purpose of preparing specifications, collectively equipment maintenance. They combine their
receiving bids, and making award to the lowest requirements to leverage their buying power
qualified bidder. and to make a contract more attractive to
prospective suppliers.
Speculative Buying
Definition Example
Speculative buying refers to purchases made A hosiery manufacturer is discontinuing one of

not for internal consumption, but with the intent its lines and has reduced its prices to get rid of
to resell at a later date for a profit. its inventory. A large drugstore chain buys in
excess of its needs with the intent of reselling in
the future for a larger profit than normal.
Spot Buying
way.
Definition Example
Spot buying is the practice of buying on the A new CEO has just been appointed and has
open market for immediate delivery. selected new office furniture. The buyer
identifies the supplier, determines the pricing,
and issues a purchase order for this one-time
acquisition.
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Matching the Factors to the Strategy
By comparing key factors of the purchase with the characteristics of various buying strategies, the
buyer determines the strategy to be used for a particular purchase based on the best match.
The buyer then adds the characteristics of the buying strategy selected to the second line of the
acquisition method selection matrix, which would already have the key factors of the purchase
from the previous phase.
Requirements
Term of Dollar
Key Factors of
Purchase
Characteristics
of Buying
Strategy
Elements of
Acquisition
Method
The key factors and characteristics may not always be an exact match. For example, the use of
a particular strategy may match projected market conditions, but the term of agreement for key
factors of the purchase and key characteristics of the buying strategy may differ. In such a case,
the buyer would have to determine if it would be beneficial to change the term of agreement.
Let’s take a look at some types of buying strategies and how key factors of a purchase can be
matched to a buying strategy.
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Buying Strategy — Hand-to-Mouth Buying
Hand-to-mouth buying is a short-term strategy using frequent purchases in small quantities

to meet immediate short-term requirements. It is used in falling markets to take advantage of
decreasing prices with each successive purchase. Cash flow constraints, or goods that are
perishable or subject to rapid technological change, are other factors that might make this
approach appropriate. While the dollar value can vary, the requirements and price are generally
defined.
Characteristics of Hand-to-Mouth Buying Strategy
Requirements
Falling Short-term On-going Varies Defined Defined Defined Predetermined
markets,
rapid
technology
change, cash
constraints
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Hand-to-Mouth Buying — Example
An organization has a high-demand, on-going need for mobile phones. The needs are long-term
and the dollar value is high due to volume. Based on historical usage, requirements can be
defined. Subsequently, the price can be determined up front. In examining the requirements, the
buyer identifies the following key factors of the mobile phones purchase.
Key Factors of Purchase
Requirements
Term of Dollar
Key Factors of Continuous Long-term On-going High Defined Defined Defined Predetermined
Purchase supply
The technology for mobile phones is changing rapidly and prices are decreasing. Although the
needs are long-term, the buyer wants to take advantage of falling prices and stay current with
technological advances. Within these considerations and recognizing the key factors, the buyer
determines that the best buying strategy would be hand-to-mouth buying.
To review the buyer’s acquisition method selection matrix, click the button below.

Matrix
Requirements
Term of Dollar
Purchase supply
Hand-to-Mouth Falling Short-term On-going Varies Defined Defined Defined Predetermined
Buying Strategy markets,
rapid
technology
change,
cash
constraints
Acquisition
Method
In comparing the key factors to characteristics of hand-to-mouth buying, the buyer sees that the
buying strategy alters the term of agreement. The buyer determines it would be beneficial to
use short-term agreements, even though the need is on-going. In the current market, this allows
the buyer to take advantage of falling prices and stay current with technological advances.
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Buying Strategy — Hedging
A futures contract is a contract for the purchase or sale and delivery of commodities at a specified
future date. It is used as a protection against future market price fluctuations or unforeseen
supply shortages. Hedging typically involves the sale of a futures contract to offset the
purchase of a cash commodity. It may be used to safeguard profit margins when a sales
contract with fixed prices and extended delivery is negotiated with a customer, but the purchase
of raw materials for the sales contract is postponed.
If material prices rise between the time of the contract and the actual purchase of raw material,
profitability could be jeopardized. Hedging also is used to protect inventory values in declining
markets. If declining prices cause finished product prices to fall, the organization will lose money
due to the relatively higher cost of raw materials.
Characteristics of Hedging Buying Strategy
Requirements
Protection Intermediate On-going or High Defined Defined Defined Subject to
against future one-time increase
price purchase
increase
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Hedging — Example
An organization knows that it will need 25,000 pounds of copper in six months. Current price is
$1.04 per pound, but is projected to rise. In examining the requirements, the buyer identifies the
following key factors of the copper purchase.
Requirements
Term of Dollar
Key Factors of Long-term Intermediate One-time High Defined Defined Defined Subject to
Purchase agreement purchase increase
The buyer wants to guard against future price increases. Considering the need to guard against
future price increases and the key factors, the buyer determines that hedging would protect
against future price increases.

Matrix
Requirements
Term of Dollar
Key Factors of Long-term Intermediate One-time High Defined Defined Defined Subject to
Purchase agreement purchase increase
Hedging Buying Protection Intermediate On-going or High Defined Defined Defined Subject to
Strategy against one-time increase
future price purchase
increase
Acquisition
Method
With hedging, the buyer would buy a futures contract for 25,000 pounds of copper at $1.10 per
pound for delivery in six months. Typically, the futures contract price rises by a similar amount to
the spot price. If the spot price for copper rises from $1.04 to $1.10 per pound in six months, the
futures contract price rises to $1.16 per pound. The futures contract can be sold for a profit of
$.06 per pound to offset the price the buying organization will have to pay at the time it needs the
copper.
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Buying Strategy — Integrated Supply
Integrated supply is a special type of partnering arrangement, usually developed between a buyer
and a distributor on an intermediate to long-term basis. The objective of an integrated supply
relationship is to optimize, for both the buying organization and the supplier, the labor and
expense involved in the acquisition and possession of maintenance, repair, operating
(MRO) products. These items are repetitive, generic, high-transaction and have a low unit cost.
All integrated supply agreements shift some of the responsibilities normally performed by the
buying organization to the supplier.
Characteristics of Integrated Supply Buying Strategy
Requirements
Optimize Intermediate On-going High Defined Defined Defined Predetermined
inventory and to long-term
labor
expense
Products and services that are non-value added or have low strategic value are candidates for
integrated supply relationships. Many manufacturing organizations establish integrated supply
agreements for maintenance parts, equipment repair, safety equipment and equipment rental.
Public sector organizations often establish integrated supply agreements for janitorial services
and temporary personnel.
When business volume is sufficiently large, suppliers may operate an organization’s supply or
inventory storage facility using supplier personnel, under contract with the buying organization.
Depending on the agreement, a supplier may either acquire on-site inventories or just manage
them.
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Integrated Supply — Example
A motorcycle manufacturer had just completed a study that showed it would be more cost
effective and beneficial to outsource its inventory storage facility. It wants to reduce its inventory
and labor costs, and is looking for someone else to manage and operate the storage facility. In
examining the requirements, the buyer identifies the following key factors of the facility outsource
purchase.
Requirements
Term of Dollar
Purchase agreement
The buyer compares these key factors to characteristics of buying strategies and finds an exact
match with integrated supply.

Matrix
Requirements
Term of Dollar
Purchase agreement
Integrated Optimize Intermediate On-going High Defined Defined Defined Predetermined
Supply Buying inventory to long-term
Strategy and labor
expense
Acquisition
Method
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Buying Strategy — Leveraged Buying
Leveraged buying, or cooperative or consortium buying, typically is used to increase purchasing

effectiveness. It involves joining two or more organizations together for the purpose of
preparing specifications, collectively receiving bids, and making award to the lowest
qualified bidder. Each organization then issues its own contract and is responsible for its own
contract administration, including making its own payments. This type of buying arrangement
enables smaller users to secure the price and other advantages of large-volume purchasing.
Characteristics of Leveraged Buying Strategy
Requirements
Increase One year or On-going High Defined May be May be Predetermined
volume for more defined defined
purchasing
effectiveness
way.
Leveraged Buying — Example
A local restaurant chain has on-going needs for canned goods and pre-packaged products. There
are a number of restaurants in the area, some of which are part of international restaurant chains
and others that are locally owned and operated. Because its volume requirements are low
compared to international restaurant chains, the local chain cannot negotiate good pricing with
suppliers. The higher prices it pays are reflected in its menu prices, and it is losing customers to
the international chain restaurants. It wants a way to reduce expenses. In examining the
requirements, the buyer identifies the following key factors of the products purchase.
Requirements
Term of Dollar
Purchase supply
Comparing these key factors to characteristics of buying strategies and keeping in mind the
desire to reduce expenses, the buyer determines that the best strategy would be leveraged
buying.

Matrix
Requirements
Term of Dollar
Purchase supply
Leveraged Increase Intermediate On-going High Defined Defined Defined Predetermined
Buying volume for to long-term
Strategy purchasing
effectiveness
Acquisition
Method
By joining with other local restaurants in the community, the local restaurant chain can increase
its volume to negotiate better prices. This will enable it to lower menu prices and more effectively
compete with the larger chain restaurants. The buyer now knows that a cooperative or consortium
of local community restaurants will have to be established.
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Buying Strategy — Speculative Buying
Speculative buying refers to purchases made not for internal consumption, but with the intent to
resell at a later date for a profit. These speculative goods may be the same as those purchased
for consumption, but quantities purchased will be in excess of current or future needs. The intent
is to take advantage of expected increases in price to profit from the resale of goods.
Characteristics of Speculative Buying Strategy
Requirements
Profit from Varies On-going or High Defined May be May be Predetermined
price one-time defined defined
increase and purchase
resale
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Speculative Buying — Example
A large photography studio anticipates a significant price increase in the cost of 35mm film. It has
a contract with the film manufacturer under which the studio orders as needs occur. The studio’s
owner has asked the buyer to explore how to make a profit based upon the knowledge of future
price increases. The studio’s financial condition would allow it to buy in excess of its needs if it
could make a future profit. The buyer explores doubling its next order of film to take advantage of
current pricing. In examining the requirements, the buyer identifies the following key factors of the
film purchase.
Requirements
Term of Dollar
Key Factors of Short-term, Short-term One-time High Defined Defined Defined Predetermined
Purchase immediate purchase
need
The buyer knows that some of the smaller studios lack the financial resources to make such a
large buy at this point in time, and also knows that these studios have bought products from the
buyer’s organization in the past. In looking at the use and characteristics of speculative buying,
the buyer determines speculative buying to be a strategy that would satisfy the owner’s request. It
would allow buying film at current prices to resell to other studios in the future when prices
increase.

Matrix
Requirements
Term of Dollar
Key Factors of Short-term, Short-term One-time High Defined Defined Defined Predetermined
Purchase immediate purchase
need
Speculative Profit from Varies On-going or High Defined May be May be Predetermined
Buying Strategy price one-time defined defined
increase purchase
and resale
Acquisition
Method
way.
Buying Strategy — Spot Buying
Spot buying is the practice of buying on the open market for immediate delivery of needed
goods or services. It is often used to fulfill an immediate need for a one-time purchase. While the
dollar value varies, the price can usually be predetermined. The requirements for the purchase
can be defined.
Characteristics of Spot Buying Strategy
Requirements
Fulfill Short-term One-time Varies Defined Defined Defined Predetermined
immediate purchase
need
way.
Spot Buying — Example
A robotics manufacturer had just accepted an order from a multi-national company that increased
its demand for circuit boards by 1,800 per week for the next month. The manufacturer’s current
circuit board supplier cannot meet this demand and the manufacturer must fulfill this short-term,
immediate need. In examining the requirements, the buyer identifies the following key factors of
the circuit board purchase.
Requirements
Term of Dollar
Purchase immediate fulfillment purchase
need
Comparing the characteristics of various buying strategies to the key factors of this purchase, the
buyer determines that spot buying is an exact match.

Matrix
Requirements
Term of Dollar
Purchase immediate fulfillment purchase
need
Spot Buying Fulfill Short-term One-time Varies Defined Defined Defined Predetermined
Strategy immediate purchase
need
Acquisition
Method
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Topic Summary
Once the key factors of a purchase are identified and if the requirements were defined, the
second phase is to determine the buying strategy. An organization’s mission, immediate and
long-term goals, and financial condition set the stage for its buying strategies. The current and
projected supply market conditions, the speed of technological change, and the availability of
funds influence these strategies. In turn, the strategy used must match the purchase being made.
Buying Strategies
Various buying strategies are available to supply managers:
Buying Strategy Definition
Hand-to-Mouth buying A short-term strategy using frequent purchases in small quantities to meet immediate short-
term requirements.
Hedging Involves the sale of a futures contract to offset the purchase of a cash commodity. A futures
contract is a contract for the purchase or sale and delivery of commodities at a specified future
date.
Integrated supply A special type of partnering arrangement wherein a supplier operates an organization’s supply
or inventory storage facility.
Leveraged buying Typically involves joining two or more organizations together for the purpose of preparing
specifications, collectively receiving bids, and making award to the lowest qualified bidder.
Speculative buying Purchases made not for internal consumption, but with the intent to resell at a later date for a
profit.
Spot buying The practice of buying on the open market for immediate delivery.
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By comparing key factors of the purchase with the characteristics of various buying strategies, the
buyer determines the strategy to be used for a particular purchase based on the best match. A
summary of characteristics of various buying strategies are as follows.
Characteristics of Buying Strategies
Requirements
Term of Dollar
Hand-to- Falling Short-term On-going Varies Defined Defined Defined Predetermined
Mouth markets,
rapid
technology
change, cash
constraints
Hedging Protection Intermediate On-going or High Defined Defined Defined Subject to
against one-time increase
future price purchase
increases
Integrated Optimize Intermediate On-going High Defined Defined Defined Predetermined
Supply inventory to long-term
and labor
expense
Leveraged Increase One year or On-going High Defined May be May be Predetermined
Buying volume for more defined defined
purchasing
effectiveness
Speculative Profit from Varies On-going or High Defined May be May be Predetermined
Buying price one-time defined defined
increase and purchase
resale
Spot Buying Fulfill Short-term One-time Varies Defined Defined Defined Predetermined
immediate purchase
need
The key factors and characteristics may not always be an exact match, and the buyer must
determine the appropriate course of action for that particular purchase. The buyer must consider
such things as organization goals and market conditions.
Once the buying strategy is identified, then the buyer moves to phase three of the acquisition
method selection process.
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Select Acquisition Method
Overview
The third phase in the acquisition method selection process is to select the type of acquisition
method for the purchase. This involves matching the key factors of the purchase and
characteristics of the selected buying strategy to elements of the types of acquisition methods to
determine the most appropriate acquisition method.
Fundamental to selecting the most appropriate type of acquisition method is an understanding of

key elements of each type. Every option has its own distinct uses. Each also has clear
advantages over the other alternatives ― if it is the best choice.
In deciding which type of acquisition method is the best alternative in a particular situation, the
buyer needs to consider such things as:
• Is this a one-time purchase or a continuous need?

• Are the requirements defined?
• What costs should be considered?
• How much money is being spent?
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Types of Acquisition Methods
Let’s take a closer look at the types of acquisition methods you can use to make a purchase.
Blanket Order
Definition Example
A blanket order is a term commitment to a An organization has determined that it will need
supplier for a total quantity of certain goods 1,000 cases of catsup in the next 12 months. It
or services. It is an obligation over a wants monthly deliveries, but monthly demand
predetermined time at predetermined prices. varies.
It places a blanket order with a supplier to buy

1,000 cases of catsup at $20/case and issues
monthly release orders specifying quantity
against the blanket order.
Consignment Buying
Definition Example
In consignment buying, a supplier agrees to A supplier makes google eyes for dolls. Its
place its inventory in the buying primary customer, a doll manufacturer, wants
organization’s warehouse. The buying the supplier’s inventory placed in its warehouse.
organization pays the supplier as it uses The supplier agrees.
inventory items.
The doll manufacturer draws down from the
supplier’s on-site inventory and pays for google
eyes as it uses them.
Contract
Definition Example
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Contracts are agreements between a buyer A local government needs diesel fuel for its fire
and seller that define goods or services to trucks. It contracts with the community
be delivered. Contracts are generally used petroleum dealer for one year.
when the issues involved are more complex or
the arrangement covers a longer period of time. As needs occur, the government orders the fuel
and specifies quantity and delivered price. Price
is based upon the harbor price index plus a
differential specified in the contract.
Procurement Card
Definition Example
Procurement cards are credit cards that An organization’s fleet maintenance department
provide a payment method for authorized has an occasional need for a part not covered
internal customers when dealing directly with by a contract.
suppliers to meet low-dollar, occasional needs.
The department supervisor is authorized to use
a procurement card to purchase these parts,
provided no single purchase exceeds $1,200.
Purchase Order
Definition Example
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A purchase order is a written contractual A new CEO has just been appointed and has
document prepared by the buying selected new office furniture.
organization. Typically, it is a standard,
preprinted form in which the buying organization The buyer identifies the supplier, determines
inserts specific information detailing the pricing, and issues a purchase order for this
requirements for either single or multiple items. one-time acquisition. The purchase order
contains a detailed description of the furniture,
price, and delivery information.
Systems Contract
Definition Example
A systems contract commits a supplier to A printing company does lots of small jobs for
keep adequate inventories of selected items local businesses. Its demand for fine paper is
on hand and deliver them on demand. varied and continuous. It has no space to store
the many different types of paper it uses.
It establishes a systems contract with a supplier

that requires the supplier to deliver specified
paper within four hours after receipt of order.
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Uses of Acquisition Methods
The most widely used types of acquisition methods

are purchase orders and contracts.
• Purchase orders are typically pre-

established forms formatted for inserting
information (such as supplier and delivery
information and brief descriptions of what is
being purchased), and containing the buying
organization’s standard terms and
conditions. They are used for one-time purchases, often as the acceptance for bids or
offers received.
• Contracts are not pre-established and must be developed for each acquisition for
which they are used. Long-term, more complex purchases lend themselves to the use
of contracts as the type of acquisition method. Once developed, the contract contains
supplier and delivery information, including ordering information, complete specifications,
and all applicable terms and conditions. All parties to the contract must sign the
document to indicate acceptance.
Usually, purchase orders are easier to issue than contracts.
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Acquisition Method — Blanket Order
A blanket order is a term commitment (usually one year or more) to a supplier for a total
quantity of certain goods or services. It is a commitment over a predetermined time at
predetermined prices, or at prices to be determined on market or other conditions. This type of
acquisition method is used to reduce the number of small orders issued which reduces
administration costs.
Elements of Blanket Order Acquisition Method
Requirements
Reduce One year or On-going Varies Defined Defined, Unknown Predetermined
number of more except
small orders standing
order
The buying organization places a blanket order with a supplier that identifies the:
• Product or service to be purchased

• Price of the product or service in the appropriate unit of measure
• Applicable terms and conditions
When the product or service is needed, the buying organization issues release orders against the
blanket order. These releases specify quantity and delivery time. Releases are generally
repetitive in nature and define requirements on a regular interval (i.e., weekly or monthly).
A standing, or open-ended, order is similar to a blanket order and generally specifies all terms
except quantity. Shipments are made against release orders per the contract.
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Blanket Order — Example
A manufacturer uses blanket orders to adjust delivery schedule to production schedule when the
production schedule is not known at the time the blanket order is placed. The manufacturer
knows it will need 500,000 pounds of widgets to be delivered over the next year to assemble its
products. Although it wants deliveries in lots of 3,000, it does not know the exact schedule for
each delivery. It has been placing orders whenever needs occur and wants to reduce the number
of orders issued, but still have a continuous supply of widgets.
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Acquisition Method — Consignment Buying
At times, suppliers may be willing to place their inventories in the customer’s warehouse.
Typically the inventory consigned by the supplier to the buying organization is paid for by the
buying organization at the time of use. These consignment inventory systems provide a means
for the buying organization and the supplier to share inventory costs and carrying costs.
Elements of Consignment Buying Acquisition Method
Requirements
Share Multi-year On-going High Defined Unknown Unknown Subject to
inventory change
costs
The supplier provides the money invested in the goods, while the purchasing organization
provides the storage space and incurs certain other costs associated with carrying inventories.
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Consignment Buying — Example
An automobile manufacturer contracts with a supplier for all of its door moldings. It is the
supplier’s primary customer. The manufacturer wants the supplier to place its inventory of door
moldings in the manufacturer’s warehouse, so it has better control of the items it needs. Since the
supplier has devoted most of its space to the actual production of door moldings and has little
space to store inventory, the supplier agrees.
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Types of Contracts
Contracts are legally enforceable agreements that define goods to be delivered or services to
be performed. Generally, they are used when the issues involved are more complex or the
agreement covers a longer period of time. Contracts must result from the mutual agreement of
the parties to the contract. They may be formed orally or in writing as long as it can be shown that
an agreement was made. However, only in rare circumstances would the prudent buyer issue an
oral contract.
Fixed Price
Definition Example
Fixed price contracts are based on a price that will not A local government needs diesel fuel
differ from that agreed upon or understood to apply at for its fire trucks. It contracts with a
the time the contract is established. Because the petroleum dealer for one year.
supplier assumes the financial risk, fixed price contracts
are often more desirable to the buyer. As terms lengthen As needs occur, the government
or complexity increases, supplier risk rises. orders the fuel ― specifying quantity
and delivered price. Price is based
Fixed price contracts are used when the buying upon the harbor price index plus a
organization can clearly define requirements and when differential specified in the contract.
there is adequate competition. The contracts that are
long-term or are for items in an erratic market may include
a method to adjust pricing to reflect changing market
conditions. The adjustment method may be tied to a
specific market index or indicator.
Cost Reimbursement
Definition Example
Cost reimbursement contracts guarantee the supplier a An organization hires a management
price sufficient to cover allowable costs plus an consultant to 1) perform a gap
agreed upon additional amount for overhead and analysis between what the buying
profit. Suppliers are guaranteed reimbursement for costs organization does and industry
to the extent they are prescribed or permitted by the benchmarks and 2) recommend and
contract up to a predetermined figure. The supplier may implement changes subject to
not exceed the established ceiling without the approval of modifications by the buying
the buying organization. Because financial risk falls on the organization.
buyer, the buyer must carefully monitor these contracts.
Because clear definitions of the work
Cost reimbursement contracts are used for acquisitions in cannot be established at the outset of
which the buying organization is unable to clearly define the contract, the buying organization
its requirements and/or in markets where pricing data is would use a cost reimbursement
not available or not accurate. contract.
Time and Materials
Definition Example
Time and materials contracts generally provide payment An organization has a large fleet of
for labor and overhead at a predetermined rate per vehicles and wants to contract out its
hour plus the cost ― including handling costs of parts, fleet repair. The categories of labor
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supplies and materials ― required to perform the work. necessary for fleet repair can be
The labor required is defined and priced at an hourly rate. defined and priced.
The number of hours is not defined. Since the
requirements are defined only vaguely, parts, supplies Since neither the repairs that will be
and materials needed to perform the work are unknown at necessary nor the frequency of repairs
the outset of the contract. The amount of work (quantity) can be known in advance, nothing
and the schedule for the work (delivery) also are else can be defined and/or priced. The
unknown. buying organization would use a time
and materials contract.
Time and materials contracts are used for acquisitions in
which the buying organization anticipates the need to fulfill
a requirement that it can define only in vague terms at the
onset of the agreement.
Labor Hour
Definition Example
Labor hour contracts provide for the payment of defined An organization has a hiring freeze at
types of labor at a predetermined rate. The various a time when a number of employees
categories of labor that will be required during the term of have retired. Since it cannot hire due
the contract are defined and can be priced at an hourly or to the freeze, it establishes a
daily rate. The number of hours or days per category that temporary personnel contract.
will be needed during the contract term is not defined.
During the contract, the buying organization orders the Although the organization can define
categories of labor it requires as needs occur. It pays the the types of labor it will need, it is
supplier the established rate for the time it uses. unable to specify either how much of
each category or exactly when each
Labor hour contracts are used for acquisitions in which category will be needed. The buying
the buying organization anticipates that it will have future organization would use a labor hour
need for different labor categories, but is unable to define contract.
specific requirements at the beginning of the contract.
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Acquisition Method — Contracts
The contract form used in a specific case depends upon such factors as the ability of the buying
organization to define its requirements, market conditions, availability and accuracy of pricing
data, and relative risks as perceived by the buyer and the supplier.
Elements by Type of Contract
Requirements
Term of Dollar
Fixed Price Handle One year or On-going or High Defined May or may May or may Unit prices
complex more, but one-time not be not be predetermined,
issues or may be on purchase defined defined but total
long-term project contract value
agreements basis may change
when due to pricing
requirements adjustments
are fully
defined
Cost Handle One year or On-going or High Unknown Unknown Unknown Total contract
Reimbursement complex more, but one-time value unknown
issues or may be on purchase
long-term project
agreements basis
when
requirements
not defined
and/or
pricing data
not available
Time and Handle long- One year or On-going High Vaguely Unknown Unknown Unit prices
Materials term more, but defined predetermined
agreements may be on for labor but
for labor and project material costs
materials basis unknown.
when Total contract
requirements value unknown
can be only
vaguely
defined
Labor Hour Handle long- One year or On-going High Vaguely Unknown Unknown Unit prices
term more, but defined predetermined,
agreements may be on but total
when project contract value
requirements basis may be
can be only unknown
vaguely
defined
way.
Contracts — Example
A motorcycle manufacturer had just completed a study that showed it would be more cost
effective and beneficial to outsource its inventory storage facility. It wants to reduce its inventory
and labor costs, and is looking for someone else to manage and operate the storage facility.
way.
Acquisition Method — Procurement Card
The use of procurement cards, or credit cards, provides a payment method whereby authorized
internal customers are empowered to deal directly with suppliers for low-dollar purchases ―
typically MRO type transactions.
Elements of Procurement Card Acquisition Method
Requirements
Term of Dollar
Meet immediate Immediate One-time Low Defined Defined Defined Predetermined
need. Eliminate fulfillment purchase
petty cash.
Reduce small
number of
orders.
Procurement cards reduce:
• Number of small orders issued

• Involvement of supply management in low dollar transactions
• Administrative costs
• Acquisition cycle time
Typically, supply management establishes guidelines for the use of procurement cards including
setting dollar thresholds and blocking some suppliers and/or some goods or services purchases.
The agreement with the financial institution providing the credit card also contains usage
parameters. Most organizations have replaced their old petty cash systems with procurement
cards.
way.
Procurement Card — Example
In providing its services, a janitorial company has an occasional request from a customer to use a
specific cleaning product that it does not normally use. The janitorial company must make special
purchases of these items which are infrequent and low dollar. Supply management would add
little value. It would, however, increase the number of small orders issued, increase
administrative costs, and lengthen the acquisition time.
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Acquisition Method — Purchase Order
Purchase orders (form, paper or electronic) are written contractual documents prepared by the
buying organization to describe all terms and conditions of an acquisition. Purchase orders are
used for simple, short-term purchases. Most organizations use them for standard, everyday
acquisitions.
Elements of Purchase Order Acquisition Method
Requirements
Term of Dollar
Make routine Usually Usually Varies Defined Defined Defined Predetermined
purchases and short-term one-time
meet immediate purchase,
needs but varies
While a purchase order evidences some relationship between the parties, by itself it does not
constitute a contract.
• Sometimes the purchase order merely shows that the buying organization has made an
offer to buy. This occurs when a buying organization sends an order to a supplier. The
buyer should request the supplier sign the purchase order and return an
acknowledgement copy in order to provide evidence of a valid offer and clear
acceptance.
• Sometimes the purchase order functions as an acceptance if it is issued in response to a
supplier’s bid or offer.
way.
Purchase Order — Example
A robotics manufacturer accepted an order from a multi-national company that increased its
demand for circuit boards by 1,800 per week for the next month. The manufacturer’s current
circuit board supplier cannot meet this demand and the manufacturer must fulfill this short-term,
immediate need.
way.
Acquisition Method — Systems Contract
A systems contract commits a supplier to keep adequate inventories of selected items and
deliver them on demand to the buying organization. Systems contracts are sometimes referred
to as stockless purchasing. They authorize designated employees of the buying organization,
using a predetermined release system, to place orders directly with the supplier for specified
items during a given contract period. Systems contracts are used for continuously needed items
where the buying organization wants to transfer responsibility to the supplier for maintaining
inventory, managing inventory, and on-time delivery.
Elements of Systems Contract Acquisition Method
Requirements
Transfer One year or On-going High Defined Unknown Unknown Predetermined
responsibility more
for
maintaining
and
delivering
inventory
A distinguishing feature of systems contracts is the high degree of integration between buyer
and supplier operations. The supplier must have specified materials available in specified
quantities when an order release is received. To enable the supplier to do this, the buying
organization must provide the supplier with accurate, detailed usage in advance of demand.
way.
Systems Contract — Example
An international consulting firm had on-going needs for office supplies. In examining past usage,
the buyer discovered that all locations buy many of the same items repetitively and frequently.
The buyer wanted to establish a long-term agreement with a supplier in which the supplier is
required to carry inventory and deliver on demand.
way.
Check Your Understanding
A scientific testing laboratory wants a supplier who will assist in re-engineering processes and
also replace equipment as necessary to support the changes. Technological change is rapid in
this industry. The buyer determines this is a one-time project that will be completed in the
intermediate to long-term range. The dollar value is high. None of the requirements are defined at
the outset, however, the buyer anticipates being able to identify ways to determine pricing during
the term of the agreement.
Since the requirements description was not defined, the buyer skipped phase two and moved
directly to phase three.
Requirements
Term of Dollar
Key Factors of Undefined Intermediate One-time High Unknown Unknown Unknown Unknown but
Purchase needs or to long-term project can identify
technology ways to
determine
later
Buying Strategy Not applicable since description is not fully defined.
way.
Topic Summary
Phase three in the acquisition method selection process is to select the type of acquisition
method for the purchase. This involves matching the key factors of the purchase and
characteristics of the selected buying strategy to elements of the various types of acquisition
methods to determine the best match.
Fundamental to selecting the acquisition method is an understanding of key elements of each

type. In deciding which method is best, the buyer needs to consider such things as:
• Is this a one-time purchase or a continuous need?

• Are the requirements defined?
• What costs should be considered?
• How much money is being spent?
Types of Acquisition Methods
Various acquisition methods are available to supply managers.
Acquisition Method Definition
Blanket Order A blanket order is a term commitment to a supplier for a total quantity of certain goods or
services. It is an obligation over a predetermined time at predetermined prices.
Consignment Buying In consignment buying, a supplier agrees to place its inventory in the buying organization’s
warehouse. The buying organization pays the supplier as it uses inventory items.
Contract Contracts are agreements between a buyer and seller that define goods or services to be
delivered. Contracts are generally used when the issues involved are more complex or the
arrangement covers a longer period of time.
Procurement Card Procurement cards are credit cards that provide a payment method for authorized internal
customers when dealing directly with suppliers to meet low-dollar, occasional needs.
Purchase Order A purchase order is a written contractual document prepared by the buying organization.
Typically, it is a standard, preprinted form in which the buying organization inserts specific
information detailing requirements for either single or multiple items.
Systems Contract A systems contract commits a supplier to keep adequate inventories of selected items on hand
and deliver them on demand.
way.
A summary of the elements of various types of acquisition methods follows:
Elements by Type of Acquisition Method
Requirements
Acquisition Term of Dollar
Method Use Agreement Need Value Description Quantity Delivery Price
Blanket Reduce One year or On-going Varies Defined Defined Unknown Predetermined
Order number of more except
small orders standing
order
Consignment Share Multi-year On-going High Defined Unknown Unknown Subject to
Buying inventory increase
costs
Contract Handle Usually one On-going or High Defined for May be May be Unit prices
complex year or one-time fixed price defined for defined for usually
issues or more, but purchase only fixed price fixed price predetermined
long-term may be on a only only in all but cost
agreements project basis reimbursement.
Total contract
value
frequently
unknown.
Procurement Meet Immediate One-time Low Defined Defined Defined Predetermined
Card immediate fulfillment purchase
need.
Eliminate
petty cash.
Reduce
number of
small orders.
Purchase Make routine Usually Usually Varies Defined Defined Defined Predetermined
Order purchases short-term one-time
and meet purchase,
short-term but varies
immediate
needs
Systems Transfer One year or On-going High Defined Unknown Unknown Predetermined
Contract responsibility more
for
maintaining
and
managing
inventory
and for on-
time delivery
to the
supplier
way.
Conclusion
Module Summary
A key step in the acquisition process is selecting the type of acquisition method or the way in
which the actual purchase will be made. The purpose of this module was to provide the user with
the ability to apply the most appropriate buying method to any purchasing situation.
When the buying organization selects the appropriate type of acquisition method, it minimizes its
costs and maximizes its buying power. This combination enables the organization to retain its
competitive edge. The type of acquisition method chosen establishes the basis for the interaction
between the buying organization and its supplier.
Selecting the type of acquisition method for a purchase is a three phase process.
• In phase one, the buyer identifies the key factors based on the requirements of the
purchase.
• In phase two, the buyer identifies the most appropriate buying strategy by matching the
key factors to characteristics of various buying strategies.
• In phase three, the buyer identifies the most appropriate type of acquisition method by
matching the key factors and selected buying strategy to elements of various types of
acquisition methods.
way.
Module Summary (continued)
Selecting the most appropriate type of acquisition method is not an exact science. While the
three phase acquisition method selection process provides a viable tool, the buyer must relate
its use both to the objectives of the particular purchase as well as the buying
organization’s environment and culture. Some exceptions that may occur include:
• Key factors and characteristics may not always be an exact match.

• A buying organization may have policies, practices or goals that affect the buyer’s choice
of buying strategy and/or acquisition method.
Only with complete information can the buyer make good decisions regarding the types of
acquisition methods to use. Applying the most appropriate buying method requires the buyer to:
• Work with the internal customer to fully identify all factors concerning the purchase
• Research current and projected market conditions to ascertain ways to benefit from
conditions
• Be fully apprised of and contribute to overall goals and strategies of the organization
Having completed this module, you should now be able to:
• Describe various types of acquisition methods

• Identify a variety of different types of purchases
• Discuss the advantages and uses of different acquisition strategies
• Assess an intended purchase and determine the most appropriate buying method
way.
Glossary
B Back to top
Bid
A legally binding offer to sell or to buy. In public sector purchasing, a bid is an offer in a sealed
bidding process, as opposed to other forms of procurement where the offer may be referred to as
a proposal or a quotation.
C Back to top
Contract
A written or oral agreement between two or more competent parties that defines a job or service
to be performed and which is legally enforceable.
H Back to top
Hedging
A "futures" purchase or sale entered into for the purpose of balancing a sale or purchase already
made, or under contract, in order to offset the effect of potential market price fluctuations.
P Back to top
Procurement Card
A payment method whereby requisitioners are empowered to deal directly with suppliers for low-
dollar, high frequency, typically MRO-type purchases by using a card issued by a bank or major
credit card provider. The cards reduce paperwork and enable purchasing and accounts payable
personnel to focus on more value-added activities. Also referred to as a "purchasing card" or "p-
card."
S Back to top
Specifications
The key method of communicating requirements and expectations both with internal users and to
external suppliers.
Supply Management
The identification, acquisition, access, positioning, and management of resources an organization
needs in the attainment of its strategic objectives.
T Back to top
Terms and Conditions

Factors that the buyer and supplier work out in initiating a relationship, such as length of time the
buyer has to pay the invoice, expected quality levels, lead times, delivery terms, and transfer of
title for goods.
way.
way.

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Efficient Supply Systems: Acquisition Methods

The acquisition process involves a series of activities

When the buying organization selects the

• How ordering will occur

To truly add value to the organization, buyers and

• How to reduce administrative burden

Upon completion of this module, you should be able to:

• Describe various types of acquisition methods

• Uses of purchases may support Buying strategies are used to match

Acquisition Method Selection Matrix

Acquisition Method Selection Matrix

Acquisition Method Selection Matrix

Short-term, Immediate Need

Undefined Needs or Technology

Sometimes organizations look to outside A university is replacing all of its information

Acquisition Method Selection Matrix

Key Factors of Short-Term, Immediate Need Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Purchase for Continuous Supply

Key Factors of Continuous Supply Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Key Factors of Long-Term Agreement Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Key Factors of Undefined Needs or Technology Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Key Factors of Low Usage Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Types of Purchases Definition

Key Factors by Type of Purchase

Among the buying strategies available to supply managers are:

Hand-to-mouth buying is a short-term strategy Strapped for cash, a struggling organization

Speculative buying refers to purchases made A hosiery manufacturer is discontinuing one of

Acquisition Method Selection Matrix

Hand-to-mouth buying is a short-term strategy using frequent purchases in small quantities

Characteristics of Hand-to-Mouth Buying Strategy

Key Factors of Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Characteristics of Hedging Buying Strategy

Key Factors of Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Characteristics of Integrated Supply Buying Strategy

Key Factors of Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Leveraged buying, or cooperative or consortium buying, typically is used to increase purchasing

Characteristics of Leveraged Buying Strategy

Key Factors of Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Characteristics of Speculative Buying Strategy

Key Factors of Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix

Characteristics of Spot Buying Strategy

Key Factors of Purchase

Acquisition Method Selection

Acquisition Method Selection Matrix