SCM Fall 17 - 3 - Purchasing Management

SCM-PURCHASING
1 (smikhi@yahoo.com) MANAGEMENT
Supply Chain Management by Sheikh Irfan
Introduction
Purchasing – “Act of obtaining merchandise, capital

equipment, raw materials, services; or maintenance,
repair and operating (MRO) supplies in exchange for
money or its equivalent.”
Purchasing can be classified into 2 categories:
Merchants – Purchase for re-sale. They create value by
consolidating merchandise, breaking bulk, and
providing the essential logistical services.
Industrial buyers – Purchase for conversion purposes.
They also purchase raw material, services, capital
equipment, and maintenance, repair, and operating
2
supplies.
(smikhi@yahoo.com)
The primary focus of this chapter is Industrial buyers.
Role of Purchasing in an organization
Traditionally, purchasing was regarded as being a service to
production.
Executives realized the impact of purchasing on
manufacturing cost, quality, new product development and
delivery lead time in 1980’s. Thus emphasizing on purchasing
as a key strategic business process.
Primary goals of purchasing are:
To ensure uninterrupted flow of raw materials and other
supplies at the lowest total cost.
To improve quality of the finished goods produced.
To optimize customer satisfaction.
Surveys show that over 50% of sales is spent on Raw
3
materials.
(smikhi@yahoo.com)
Purchasing process
Traditional – manual, paper-based system.
Contemporary – automated, electronic-based system.
Role of proper purchasing system is to ensure efficient
transition of information from users to the purchasing
personnel and ultimately to suppliers. The system must
also ensure the efficient flows of the purchased materials
from the suppliers to the users and the flow of invoices
from the suppliers to the accounting department.
Finally, the system must have an internal control
mechanism to prevent abuse of the system.

4 (smikhi@yahoo.com)
Manual Purchasing System
It is slow and prone to errors.
1. Material Requisition (or purchase requisition)
2. Request for Quotation (RFQ) or Request for Proposal
(RFP)
3. Purchase Order (PO)
MPR RFQ PO
PO
Acknowledgem DN Invoice
ent

Manual Purchasing
System
Purchase Requisition
7 Supply Chain Management by Sheikh Irfan
(smikhi@yahoo.com)
Purchase Order
Electronic Procurement Systems
EDI was developed in 1970’s to improve purchasing
process.
The whole purchasing process takes place online.
Advantages:
Time Savings
Cost Savings
Accuracy
Real time
Trackability
Management

Small Value Purchases
Small value purchases should be minimized to

reduce the costs.
Some Companies regularize small value purchases
later on to have a check and balance on such
outflows.
Some Do’s and Don'ts of small value purchases
through petty cash are:
Designate a Reasonable Amount
Specify What it Can Be Spent On
Don’t Give All Employees Petty Cash Access
10 Don’t replenish without previous adjustments
(smikhi@yahoo.com)
Sourcing Decisions: Make-or-Buy
Traditionally firms preferred the ‘make’ option by
using backward or forward integration.
Backward integration – Acquiring sources of supply.
Forward integration – Acquiring customers’ operations
(acquiring distributors or outbound logistics providers).
Recently, the trend has moved toward outsourcing
with creation of supply chain relationships.
It is a strategic decision that impacts an
organization’s competitive position.

Sourcing Decisions: Make-or-Buy
Reasons for Buying:
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
The Make-or-Buy Break-Even Analysis
Break-even analysis is a handy tool for computing the
cost-effectiveness of sourcing decisions.
Several assumptions underlie the analysis:
1. All costs can be classified under either fixed or variable cost.
2. Fixed cost remains the same.
3. A linear variable cost relationship exists.
4. Fixed cost of the make option is higher.
5. Variable cost of the buy option is higher.
Formula : Total Cost to Make = Total Cost to
Buy

Roles of Supply Base
Supplier base refers to the list of suppliers that a firm
uses to acquire its materials, services, supplies and
equipment.
Firms engaging in supply chain management
emphasize on consolidating into fewer suppliers.
Top performing suppliers also supply:
1. Product and process technology
2. Information on the latest trends
3. Information on the supply market
4. Capacity for meeting unexpected demand
5. Cost efficiency due to economies of scale
Supplier Selection
Factors that a firm should consider while selecting

suppliers include:
1. Product and process 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
15
10.Service
(smikhi@yahoo.com)
Supplier Base - How many Suppliers to Use
Single Sourcing vs multiple Suppliers
Reasons favoring more than One

Reasons favoring a Single Supplier
Supplier
1. To establish a good
1. Need Capacity.
relationship.
2. Spread the risk of supply
2. Less quality variability.
interruption Diversification.
3. Lower Cost. 3. Create competition.
4. Transportation economies. 4. Information.
5. Proprietary product or process 5. Dealing with special kinds of
purchases. businesses.
16 6. (smikhi@yahoo.com)
Volume too small to split.
Purchasing Organization: Centralized vs Decentralized
Actual buying process now involves product

design, production decisions and other aspects
of a firm’s operations.
Centralized Purchasing – A purchasing
department located at the firm’s corporate office
makes all the purchasing decisions.
Decentralized Purchasing – Individual, local
purchasing departments, such as at the plant
level, make their own purchasing decisions.
Hybrid Purchasing Organization
It is both decentralized at the corporate

level and centralized at the business unit
level.
It allows the firm to exploit the advantages
of both the centralized and decentralized
systems.

Advantages - Centralized vs Decentralized
Advantage of Advantages of
Centralization Decentralization
1. Closer knowledge of
1. Concentrated volume
requirements
2. Avoid duplication
2. Local Sourcing
3. Specialization
3. Less bureaucracy
4. Lower Transportation costs
4. Quick delivery
5. No competition within units
5. Better relationships with
6. Common Supply base
suppliers

International Purchasing/Global Sourcing
International agreements have provided opportunities for

firms to expand their supply base.
Various methods are employed for global sourcing.
Import broker or Sales agent
Import merchant
Trading company
When international trade expands, various
international trade organizations try to reduce tariff and
nontariff barriers among countries.
Tariff is an official list of schedule showing the duties,
taxes
Supply or
Chain customs.
Management by Sheikh Irfan
Nontariff is import quotas, licensing agreements,
Reasons for Global Sourcing
Firms expand their supply base for various reasons;

lower price, better quality, overseas supplier
holding the patent to the product, faster delivery,
better services, and better process or technology.
Main reasons:
1. To lower the price of materials.
2. The quality of overseas products may be better.
3. Firms may buy from foreign suppliers to support the local
economy by involving themselves in countertrade.
Countertrade is the process in which the contract
calls for
Supply Chain exchange
Management by Sheikh Irfan of goods for goods or
combination of goods plus services.
Potential Challenges for Global
Sourcing
Complexity and Costs involved in identifying,
selecting and evaluating suppliers may be very high.
International sourcing requires additional documents
to be generated and handled, sometimes standard
and sometimes specific.
Global purchasers must also deal with more complex
shipping terms like incoterms.
Other Challenges : Understanding tariff, customs clearance,
currency fluctuation problems, political, labor and legal problems, etc..


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SCM-PURCHASING

Purchasing – “Act of obtaining merchandise, capital

Supply Chain Management by Sheikh Irfan

Supply Chain Management by Sheikh Irfan

Supply Chain Management by Sheikh Irfan

Small value purchases should be minimized to

Supply Chain Management by Sheikh Irfan

Supply Chain Management by Sheikh Irfan

Factors that a firm should consider while selecting

Reasons favoring more than One

Actual buying process now involves product

It is both decentralized at the corporate

Supply Chain Management by Sheikh Irfan

Supply Chain Management by Sheikh Irfan

International agreements have provided opportunities for

Firms expand their supply base for various reasons;

Supply Chain Management by Sheikh Irfan

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