CLASSIFICATION OF PURCHASED GOODS

The purchasing process concern large goods and services. Purchased materials and services can be
grouped into the following categories:

Raw materials; materials which have undergone no transformation or

a minimal transformation and which serve as the basis materials for a
production process

Supplementary materials; materials that are not absorbed

physically in the end product

Semi-manufactured products; products that have already been

processed once or more times and that will be processed further at a
later stage

Components; manufactured goods that will not undergo additional

physical changes, but which will be incorporated in a system with which
there is a functional relationship by joining it with other components

Finished products; all products which are purchased to be sold, after

negligible added value, either together with other finished products and/or
manufactured goods

Investment goods or capital equipment; products that are not

consumed immediately, but which purchasing value is depreciated over a
period of time

Maintenance, repair and operating materials (MRO items);

materials, which are necessary for keeping the organization running in
general and for the support activities in particular

Services; labour intensive, non material activities that are executed by third
parties on a contract basis

PURCHASING VS PROCUREMENT:
Purchasing: acquiring goods, works or servicesfrom a nominated supplier.
-component of wider function of procurement
-consists of ordering, expediting, receipt and payment
Procurement: totality of acquisiton starting from identification of a requirement to the disposal of that
requirement at the end of its life.
-includes pre-contract activities: sourcing
-and post-contract: contract management, supplier relationship manangenet activities.
-procurement relates to goods, works and service requirements.

Sourcing: Searching markets for sources of goods and services.

 Strategic sourcing- making sure everything is being sourced as efficiently as possible

Procurement Management: All activities required to manage supplier relationships in a way so that
their activities are alligined with the company’s overall business strategies and interests.

Value chain management- all stakeholders belonging to same value chain are challenged to improves
the company’s value proposition to its final end-customers

Strategic: long term,performance and value oriented

-procurement
-sourcing
-supply chain management
-Value chain management
Operational: short term, deal and margin oriented.
-ordering
-buying
-purchasing

Challenges and changes in Purchasing

Global sourcing- components sourced from foreign,low cost countries. Reason why large
manufacturing have International Purchasing Offices (IPOs) in diff regions of world.

Leveraged Procurement and supply strategies- companies with several manufacturing plants,
important purchasing advantages can be realized by combining purchasing requirements.

Corporate social responsibility- product should be environmentally friendly, clean and originate from
countries with free trade.

Resource scarcity- poses challenges on purchasing professionals who need to develop a much more
forward outlook on how to secure company’s future requirements for critical materials and products.

Supplier Integration- integrated materials management requires close cooperation between production
planning, inventory control, quality inspection and purchasing.

Early supplier Involvement- increasing innovations in industry come from suppliers, getting them
involved early becomes prime concern.

Changing Purchase Agenda

Purchasing cost reduction Value Improvement Risk management

supply base reduction Revenue growth thru new
product standardization products
global sourcing Improving customer value
propositions
outsourcing+offshoring
Early supplier improvement in
contract management NPD
Faster new product intro
Co-branding and advertising
Single vs multiple sourcing
Performance-based contracting
Corporate social resp.
Sustainable purchasing
Supplier auditing
Supplier quality assurance
Supplier financial position
Intellectual property (IP)
protection