BJMP3073

PURCHASING &
SUPPLY CHAIN

• CHAPTER 1
• 1.1 PURCHASING
• 1.2 PROFIT
• 1.3 VALUE ADDED
• 1.4 PURCHASING EVOLUTION 1
1.1 PURCHASING
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DEFINITION OF
PURCHASING
• Purchasing is the process
a business or organization uses to
acquire products / goods or services to
accomplish its goals.

• Purchasing is the act of buying the

products / goods and services that
a company needs to operate
and/or manufacture products.
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Purchase intention is the willingness of
a customer OR organization to buy a certain
product or a certain service.

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 The 2 Major Purchasing
Categories
1. Direct materials
• Directly related to the production of the finished goods
• Purchased in quantities based on complicated
production planning and control systems
• May involve long complicated negotiations
• 60~80% of the spend and 10~20% of the transactions

2. Indirect materials
• Not directly involved in the production of finished
goods
• 20~40% of the spend and 80~90% of the total number
of transactions 5
 DEFINITION OF PURCHASING
• Purchasing is a process in inventory management focused on
buying raw materials, goods and services. Purchasing includes
(i) supplier research, (ii) discussing prices, (iii) getting
contracts, (iv) payments $$$, (v) supplier relationship
management and (vi) enhancement of existing purchasing
systems.

Purchasing typically involves the immediate day-

to-day transactions between sellers and buyers.
Purchasing focuses buying, ordering, and paying
for the products and services that an
organization needs to operate on a daily basis.
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 Importance of
Purchasing

• The purchasing process is of importance because

it is used to identify user requirements,
effectively and efficiently and evaluate the
need, identify suppliers, ensure the payment
occur promptly and drive continuous
improvement.

• Buying of inventory is usually driven by the

purchasing department.

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 Support operational requirements - It includes
the basic requirements like buy products at right
Support price, from the right source, at right quantity
and quality.
Supply base management- One of the most
important objectives of purchasing function is the
Supply selection development maintenance of supply, a
The key process commonly known as Supply base
management.
objectives of
purchasing Develop strong Relationship with other
Develop functional groups
department
are:
Support organization goals and objectives that
Support comply with purchasing management
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 Raw Materials: These are things firm will use to create a
new product – like metals, lumber, rubber, cotton,
vegetables, fruits, or petroleum.

Semi-Finished Products or Components: These are things

firm need to support production of final product, such as
components, computer systems, etc.

Finished Products: These are things firm will use for internal
use or anything no need to process before selling to the final
customer. Things like - computers, utilities, carts, etc.
Types of
Maintenance, Repair, and Operating Items
Purchases (MRO): These are items that firms needs to operate but
do not sell to the customer. E.g., cleaning supplies, office
supplies, and spare parts for firm to keep operating.
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 Production Support Materials: This refers to
items firm will need to pack and ship items, such
Types of as tape, boxes, bags, labels, etc.

Purchase Services: These are services firm need to support

firm operations, such as digital marketing, web
hosting, customer support, legal team, etc.
Capital Equipment: Anything assets firm will use
for more than a year, such as buildings,
machinery, computers, etc.
Transportation: This is a specialized type of
service to handle firm’s inbound and outbound
material flows, such as third-party logistics, freight,
etc.
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 Discussion #1
New Price List Starts by
1 Oct 2022

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 • 1. Evaluate and select suppliers: The most important
duty of purchasing is to evaluate and right suppliers. It is
important to avoid "maverick buying and selling - a
situation that occurs when sellers contact and attempt to
sell directly to end users.
• 2. Review specifications: The right to question allows
purchasing to review specifications where required. The
Responsibilities right to question material specifications also helps avoid
of Purchasing developing material specifications that only a user's
Department favorite supplier can satisfy.
• 3. Act as the primary contact with
suppliers: Purchasing must act as the primary contact
with suppliers, but that other function should be able to
interact directly with suppliers as needed. involving
multiple people enables the communication process
between internal customers, purchasing, sale and
suppliers' internal functions to be more efficient and
accurate. 13
DIFFERENCES

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 1.2 PROFIT
• Profit is the money earned by a
business firm when its total
revenue exceeds its total expenses.

Profit is the money that is earned in

trade or business after paying the costs
of producing and selling goods and
services

Profit is the money a business

pulls in after accounting for all

expenses.
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https://www.youtube.com/watch?v=ZwTY3xD9joU&t=16s
 EXERCISE

(a) Find the Net

Profit
 Profit-Leverage Effect ($ millions)

Before Spend Decrease After 5% Spend Decrease

Sales: $500 Sales: $500

Purchases 300 Purchases 285
Labor 35 Labor 35
Overhead 100 Overhead 100
Gross Profit $ 65 Gross Profit $ 80
SG&A, Interest 40 SG&A, Interest 40
Profit: $ 25 Profit: $ 40

A 5% reduction in purchase cost

creates a 60% increase in profit
©2020 McGraw-Hill Education.
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Profit Leverage Effects

• https://www.youtube.com/watch?
v=M0kzgdVwrtI
• https://www.youtube.com/watch?
v=k5xuK6Z6Zgo

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 1.3 Value Added
Value is something a customer is willing to pay

• Value-added is the difference between the

price of a product or service and the cost
of producing it. The price is determined by
what customers are willing to pay based on
their perceived value.

Value-Added is a term that addresses special

features or improvements added to a product
or service to increase its monetary value and
desirability to consumers.

https://www.youtube.com/watch?v=avM3m5kR3cA
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How to Add Value
to Product &
Service
Value-Added in SC
/Logistics /
Manufacturing
• https://transportgeography.org/c
ontents/chapter7/logistics-
freight-distribution/logistics-
added-value-differentiation/
• https://www.youtube.com/watch
?v=GxxvdXcuQjM

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1.4 EVOLUTION OF PURCHASING / SC

https://app.myeducator.com/reader/web/908a/topic01/wu67g/
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