Chapter 2 – p.

37

Purchasing
Management

Le Thi Thanh Ngan, MSc.

Le Thi Thanh Ngan, MSc.

Chapter objectives
After completing this chapter, you should be able to:
 Understand the role of supply management and its strategic impact on an
organization’s competitive advantage.
 Have a basic knowledge of the traditional purchasing process, e-procurement,
public procurement and green purchasing.
 Understand sourcing decisions and the factors impacting supplier selection.
 Understand the pros and cons of single sourcing versus multiple sourcing.
 Understand centralized, decentralized and hybrid purchasing organizations.
 Describe the opportunities and challenges of global sourcing and understand how
globalization impacts supply management.

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 Le Thi Thanh Ngan, MSc.

Lecture outline
In this chapter, you will learn about:
1. The Role of Supply Management in an Organization
2. The Purchasing Process
3. Sourcing Decisions: The Make-or-Buy Decision
4. Supplier Selection
5. How Many Suppliers to Use
6. Purchasing Organization
7. International Purchasing/Global Sourcing
8. Procurement for Government/Nonprofit Agencies
9. Ethical and Sustainable Sourcing Defined
10. Summary

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A Brief History of Purchasing Terms

Merchants – Wholesalers and retailers who purchase for resale
Industrial Buyers – Purchase raw materials for conversion,
services, capital equipment, & MRO supplies
Purchasing - key business function for acquiring materials,
services, & equipment
 A Brief History of Purchasing Terms
(Continued)

Supply Management - a newer term to describe the expanded set

of responsibilities of purchasing professionals
 Institute of Supply Management defined supply management as the
“Identification, acquisition, access, positioning, and management of
resources an organization needs or potentially needs in the attainment of
its strategic objectives.”

Le Thi Thanh Ngan, MSc.

Purchasing in SCM Purchasing profession

The purchasing profession:
the act of obtaining
merchandise; capital Merchants
equipment; raw materials; Industrial
- Wholesalers
services; or maintenance, buyers
repair and operating (MRO) - Retailers
supplies in exchange for
money or its equivalent.
whose primary
task is to
who primarily
purchase raw
purchase for
Primary focus of this chapter: materials for
resale purposes
conversion
Industrial buyers purposes

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 Definition of sourcing
 The body of integrated activities that focuses on the purchase of
materials, supplies, and services needed to reach the firm’s
strategic goals. In a narrow sense, sourcing describes the process
of buying, in a broader context, sourcing involves determining
the need, selecting the supplier, arriving at the appropriate price,
terms, and conditions, drafting the contract, and growing mutually
beneficial supplier relationships

Definition of procurement
 Procurement is the process of getting the goods and/or services
your company needs to fulfill its business model. Some of the tasks
involved in procurement include developing standards of quality,
financing purchases, negotiating price, buying goods, inventory
control and disposal of waste products like packaging.

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Le Thi Thanh Ngan, MSc.

The Role of Supply Management in an Organization

Source: Annual Survey of Manufactures, 1991–2015 U.S. Census Bureau.

Many successful businesses are treating purchasing as a key strategic process

5/3/2023 Source: U.S. Census Bureau, 2016 Annual Survey of Manufactures. 10

The Role of Supply Management in an Organization
The primary goals of
purchasing:
to ensure uninterrupted flows
of raw materials at the lowest
total cost, to improve quality
of the finished goods
produced and to maximize
customer satisfaction.
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The Purchasing Process
Traditional Manual Purchasing System
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Le Thi Thanh Ngan, MSc.
 Purchasing can contribute to these
objectives by:
 actively seeking better materials and
reliable suppliers
 working closely with and exploiting the
expertise of strategic suppliers to
improve the quality of raw materials
 involving suppliers and purchasing
personnel in product design and
development efforts
Source: U.S. Census Bureau, 2016 Annual Survey of Manufactures. 11
Le Thi Thanh Ngan, MSc.
12
 MSc. Le Thi Thanh Ngan

The Purchasing Process

Traditional Manual Purchasing System
1 day 2 hours 2 hours

Search Fill in Send to Buyer prints

goods requisition buyer order
1 day

2 hours 1 day 1 day

Payment Matching Accountant Delivery

invoice
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Le Thi Thanh Ngan, MSc.

The Purchasing Process

Electronic Procurement Systems (e-Procurement)

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 MSc. Le Thi Thanh Ngan

The Purchasing Process

Electronic Procurement Systems (e-Procurement)

1 hour 30 mins

Search goods Order on web Delivery

1 day

30 mins

Payment Generate invoice

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Le Thi Thanh Ngan, MSc.

The Purchasing Process

Advantages of the e-Procurement System
1. Time savings
2. Cost savings
3. Accuracy
4. Real time
5. Mobility
6. Trackability
7. Management
8. Benefits to the suppliers

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 Sourcing Decisions – The Make or Buy Decision

Outsourcing –
Buying materials and components from suppliers instead
of making them in-house. The trend has moved toward
outsourcing.
Backward vertical integration –
Acquiring sources of supply
Forward vertical integration –
Acquiring customers
The Make or Buy decision is a strategic decision

Le Thi Thanh Ngan, MSc.

Vertical integration of supply chain

Supplier 1 Supplier 2 Supplier n

Manufacturer 1 Manufacturer 2 Manufacturer n

Vertical

Warehouse/DC 1 Warehouse/DC 2 Warehouse/DC n

Retailer 1 Retailer 2 Retailer n

Customer 1 Customer 2 Customer n

Horizontal
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 Le Thi Thanh Ngan, MSc.

Vertical integration of supply chain

Advantages
1. No reliance on suppliers Disadvantages
2. Potential access to 1. Expensive
monopolizing suppliers
2. Reduces flexibility
3. Economies of scale
3. Loss of focus
4. Knocking off most popular
4. Not likely to have a culture
brand-name products
that supports both retail
5. Lower costs stores and factories

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Sourcing process Steps

Supplier Supplier
Make or Buy Pricing
scoring, Design Relat ionshi
decision, Spend Negot iat io
Assessmen Collaborat i p
Analysis, and n and Managemen
t and -on
RFQ cont ract t (SRM)
Select ion

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 Step 1: Make or Buy decision
Strategic Items: Are Availability of
Cost
items closely linked Production
Will be cheaper to
to the firm’s core Capacity:
make the item or to
competencies or are Can the item be
outsource it to a
critical to the made cost effectively
supplier
customer strategy? with current
processes?
Control :
How are
processing Quality: Risk
activities, costs, How is the quality to Is the product
quality, and be managed and and/or process
expertise to be does firm have the proprietary and can
managed inside required expertise? it be outsourced
and outside the
firm?

Le Thi Thanh Ngan, MSc.

Sourcing Decisions: The Make-or-Buy Decision

Outsourcing
refer to buying materials or
components from suppliers instead
of making them in-house.
Reasons for Buying or
Outsourcing
1. Cost advantage
2. Insufficient capacity
3. Lack of expertise
4. Quality
Reasons for Making
1. Protect proprietary
technology
2. No competent supplier
3. Better quality control
4. Use existing idle capacity
5. Control of lead-time,
transportation and
warehousing cost
6. Lower cost

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 Le Thi Thanh Ngan, MSc.

Make-or-Buy Break-Even Analysis

Consider a hypothetical situation in which a firm has the option to make

or buy a part. Its annual requirement is 15,000 units.
A supplier is able to supply the part at $7 per unit. The firm estimates
that it costs $500 to prepare the contract with the supplier.
To make the part, the firm must invest $25,000 in equipment and the
firm estimates that it costs $5 per unit to make the part.
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Le Thi Thanh Ngan, MSc.

Break-even point Practise

 4/p.71

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 Le Thi Thanh Ngan, MSc.

Break-even point Practise

 5/p.71

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Le Thi Thanh Ngan, MSc.

Break-even point Practise

 6/p.71

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 Le Thi Thanh Ngan, MSc.

Break-even point Practise

 7/p.71

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Le Thi Thanh Ngan, MSc.

Step 2: Supplier selection

Factors impacting supplier selection?

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Step 2: Supplier selection
Identifying suppliers

Where can you find information about suppliers?

29

Step 2: Supplier selection

30
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Categories of suppliers
• Meets disqualification
Disqualified criteria because of contract
violations, chronic
Disqualified underperformance, or lack of
quality

• Meets qualification
Qualified requirements and are
Qualified considered approved, but
not as first – tier suppliers
Certified • Meets certain criteria and
levels of performance that
Certified enable them to be considered as
possible suppliers
Approved
• Meets technical and quality
requirements and are
Approved authorized suppliers of
products and service
Preferred
• Meets criteria for superior
Preferred product, pricing, service,
and delivery and are
especially valuable to the
purchasing org.
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 Le Thi Thanh Ngan, MSc.

Supplier selection

1. Process and product technologies

2. Willingness to share technologies and information
3. Quality
4. Cost
5. Reliability
6. Order system and cycle time
7. Capacity
8. Communication capability
9. Location

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Le Thi Thanh Ngan, MSc.

Supplier Selection
The Total Cost of Ownership Concept

- Extends the traditional break-even analysis

- Add qualitative and quantitative factors: freight and
inventory costs, tooling, tariffs and duties, currency
exchange fees, payment terms, maintenance, and
nonperformance costs

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 Le Thi Thanh Ngan, MSc.

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Le Thi Thanh Ngan, MSc.

How Many Suppliers to Use

Sole sourcing:
refers to the situation when the supplier is the only available source
Single sourcing:
refers to the deliberate practice of concentrating purchases of an item with one
source from a pool of many potential suppliers.
Reasons Favoring a Single Supplier Reasons Favoring Multiple Suppliers
1. To establish a good relationship 1. Need capacity
2. Less quality variability 2. Spread the risk of supply interruption
3. Lower cost 3. Create competition
4. Transportation economies 4. Information
5. Proprietary product or process 5. Dealing with special kinds of
purchases businesses
6. Volume too small to split
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 Le Thi Thanh Ngan, MSc.

Purchasing Organization
Centralized purchasing:
is where a single purchasing department, usually located at the firm’s corporate office,
makes all the purchasing decisions, including order quantity, pricing policy, contracting,
negotiations and supplier selection and evaluation.
Decentralized purchasing:
is where individual, local purchasing departments, such as at the plant level, make their
own purchasing decisions
Hybrid purchasing:
Advantages of Centralized Advantages of Decentralized
1. Concentrated volume 1. Closer knowledge of requirements
2. Avoid duplication 2. Local sourcing
3. Specialization 3. Less bureaucracy
4. Lower transportation costs
5. No competition within units
6. Common supply base
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Le Thi Thanh Ngan, MSc.

International Purchasing/Global Sourcing

Quality of
Delivery
overseas
speed
products

Lower the
price of Countertrade
materials Why
global
sourcing?

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 Le Thi Thanh Ngan, MSc.

Procurement for Government/Nonprofit Agencies

Public procurement or public
purchasing: refers to the
management of the
purchasing and supply
management function of the
government and nonprofit
sectors, such as educational
institutions, hospitals and
the federal, state and local
governments
• Principle 1 – Consider whether a material/product is needed before purchasing it or not.
• Principle 2 – Purchase a product considering the various environmental impacts over its
life cycle - from extraction of raw materials to disposal.
• Principle 3 – Select suppliers who make a conscious efforts to care for the environment.
• Principle 4 – Collect environmental information on products and suppliers.
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Le Thi Thanh Ngan, MSc.

Ethical and Sustainable Sourcing Defined

Ethical sourcing policies should include:
 Determining where all purchased goods come from and how they are
made;
 Knowing if suppliers promote basic workplace principles (such as the right
to equal opportunity and to earn a decent wage, the prohibition of bonded,
prison or child labor, and the right to join a union);
 Use of ethical ratings for suppliers alongside the other standard
performance criteria;
 Use of independent verification of vendor compliance;
 Reporting of supplier compliance performance to shareholders;
 Providing detailed ethical sourcing expectations to vendors

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 Le Thi Thanh Ngan, MSc.

Summary
Over the last decade, the traditional purchasing function has evolved into an
integral part of supply chain management. Purchasing is an important
strategic contributor to overall business competitiveness. It is the largest
single function in most organizations, controlling activities and transactions
valued at more than 50 percent of sales. Every dollar saved due to better
purchasing impacts business operations and profits directly. Purchasing
personnel talk to customers, users, suppliers and internal design, finance,
marketing and operations personnel, in addition to top management. The
information they gain from all this exposure can be used to help the firm to
provide better, cheaper and more timely products and services to both
internal and external customers. Savvy executives are thus turning to
purchasing to improve business and supply chain performance.
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