Purchasing and

Supply Management

Dr. Stephen H. Russell

Goddard School of Business and Economics
Weber State University

Chapter 4 1
Course Introduction

 Me
 You
 Syllabus

2
Chapter 1

Introduction to Purchasing
and Supply Management

Chapter 4 3
Types of Purchasing
 Retail Buying
 Industrial Buying*
 Buying for Institutions
 Public Sector Purchasing

4
Categories of Industrial Purchases
• Raw Materials
• Components and subassemblies Direct
Materials
• Finished products
• MRO supplies
• Packaging materials
• Services
• Capital assets
• Transportation
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 The Logistics Model

Manufacturing Distribution
Warehouse
Centers
Firm

Suppliers Retail Stores

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 The Logistics Model

Manufacturing Distribution
Warehouse
Firm
Centers

Suppliers Retail Stores

Inbound Logistics Outbound Logistics

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Mother Earth to consumer . . .
A Supply Chain

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Mother Earth to consumer . . .
A Supply Chain
Place Utility Time Utility

Form Utility

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Mother Earth to consumer . . .
A Supply Chain

Information

Materials and products

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Mother Earth to consumer . . .
A Supply Chain

Information

Materials and products

A supply chain is the integration of sequentially-related firms’ inbound and

outbound logistics, together with operations (manufacturing and
service), and supporting information systems.

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Understanding Terms
Supply Chain
Logistics
Inbound Logistics or
Materials Management

Purchasing or
Procurement }

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Understanding Terms
Supply Chain
Logistics
Inbound Logistics or
Materials Management

Purchasing or
Procurement } Enhanced becomes
Supply
Management—also
called Strategic
Sourcing

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Understanding Terms
 Purchasing
 Procurement
 Supply Management (also called
Strategic Sourcing)
 Materials Management
 Supply Chain Management

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 Supply Management as
compared to Purchasing

Supply Management is Purchasing +

EPI + ESI + CFT + Supplier development +
Long-term contracts with world-class suppliers

Under supply management, partnerships (or strategic

alliances) based on mutual trust are formed with key
suppliers and these suppliers are viewed as extensions of
the firm.
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Materials Management
 Definition - Materials management is the
planning and control of the flow and stock of
materials to support production.
 Materials Management Activities
 Materials planning and scheduling

 Purchasing

 Transportation

 Warehousing

 Inventory control

 Salvage and scrap disposal

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Materials Management
 Definition - Materials management is the
planning and control of the flow and stock of
materials to support production.
 Materials Management Activities
 Materials planning and scheduling

 Supply Management

 Transportation

 Warehousing

 Inventory control

 Salvage and scrap disposal

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Materials Management
 Definition - Materials management is the
planning and control of the flow and stock of
materials to support production.
 Materials Management Activities
 Materials planning and scheduling

 Strategic Sourcing

 Transportation

 Warehousing

 Inventory control

 Salvage and scrap disposal

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Materials Management
 Definition - Materials management is Inbound
Logistics. on
 Materials Management Activities
 Materials planning and scheduling

 Supply Management

 Transportation

 Warehousing

 Inventory control

 Salvage and scrap disposal

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Course Theme
Supply management can have a major impact
on organization success by influencing:
 Cost  Technologies and
 Quality innovation
 Sales  Customer service
 Profits  Competitive
advantage
 Product
development time

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 Requirements for a field to be
classified as a Profession
 Scientific principles and intense preparation
required of practitioners
 Scholarly body of literature
 Professional organization of high repute
 Certification program
 Requirement for continuing education
 Code of ethics

Supply Management is clearly a profession!

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Purchasing through the years
 Clerical Purchasing
 Arms length relationship with suppliers
 Adversarial: Win-Lose
 Price is the key factor
 Short term contracts; lots of supplier
switching
 Emphasis is on competition
 Buyers are “paper pushers” (clerks)
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Purchasing through the years
 Managerial Purchasing (1970s  )
 Purchasing is now viewed, not as a cost
center, but as a value contributor
 Supplier partnerships
 Long-term contracts
 Quality, service, and price considerations
 Negotiation as well as competitive bidding

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Purchasing through the years
 Strategic Sourcing (Supply Management)
[2000  ]
 Rationalization of the supplier base
 Long-term strategic alliances with key suppliers
 Institutional trust
 Emphasis is not on a specific contract but on the
relationship
 Senior Management involvement
 e-Technologies
 Relationship-specific capital investment

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Purchasing through the years
 Strategic Sourcing (Supply
Management)

In short, Strategic Sourcing is capturing

world-class suppliers and building
alliances with them.

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 Types of Supplier
Relationships

• Transactional—emphasis is on price
• Partnership—supplier is viewed as a
resource
• Strategic Alliance—supplier is
critical to the success of the firm and
is viewed as a part of the business
enterprise
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 Trust levels
Institutional Trust
Trust

Personal Trust

Transactional Partnership Strategic Alliance

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Which type of relationship is
appropriate?
 Many suppliers of a not-very-differentiated material? T
 Short-term need for a material or service? T
 Long-term requirement for a professional service from a
capable supplier? P
 Found a world-class supplier interested in a mutually
beneficial long-term contract? P or A
 See potential to develop a supplier into a highly capable
source? P
 Do you require a great deal of flexibility or responsiveness
from a supplier? P or A
 Is a material critical to your business? Is a supplier strategic
to your business? A

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Why Purchasing is Important
 Materials is a logical cost-reduction area
 Value-added contributions
 Purchasing as a profit producer
 Profit-Leverage Effect
 Return on Investment Effect

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Why Purchasing is Important
 Materials is a logical cost-reduction area
Purchased materials: the biggest element
of cost in manufacturing industries

Materials/Sales Revenue
Manufacturing Industries 55%
Services Industries 30%

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Why Purchasing is Important
Industry Materials/Sales Revenue
Petroleum 76%
Automobile 70%
Wood Products 61%
Textile Mills 59%
Food Manufacturing 59%
Machinery 50%
Electrical Equipment49%
Computers and electronics 44%

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Why Purchasing is Important
Value-added contributions
 Cost  Technologies and
 Quality innovation
 Sales  Customer service
 Profits  Competetive
advantage
 Product
development time

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Why Purchasing is Important
 Purchasing as a profit producer

Profit = Revenues - Cost

1. Purchasing’s impact on revenues

2. Purchasing’s impact on costs

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 Why Purchasing is Important
 Profit-Leverage Effect
A $100,000 increase in sales generates an $8,000 increase in profits (assuming
an 8% margin)
A $100,000 reduction in material costs will generate a $100,000 increase in
profits.
A $1,250,000 increase in sales generates the same increase in profits as a
$100,000 reduction in materials costs (in this example)
THEREFORE, in this example, the Profit-Leverage Effect is . . .

$1,250,000
 12.5
$100,000
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Why Purchasing is Important
 Return on Investment Effect

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Why Purchasing is Important
 Return on Investment Effect

Profit Margin X Asset T.O. Ratio = ROI

Net Income Sales

X  ROI
Sales Total Assets

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 Return on Investment
Example
Net Income Sales
X  ROI
Sales Total Assets
1.
$80,000 $1,000,000
X  .16
$1,000,000 $500,000

2. Assume: Material costs are 50% of Sales Revenue;

Inventory is $150,000 of the $500,000 in total assets.
Further assume that Supply Management has been able to
obtain a 10% reduction in material costs. This means that
money tied up in inventory will drop to $135,000 and that
Net income increases by 10% of 50% of $1,000,000.
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 Return on Investment
Example
Net Income Sales
X  ROI
Sales Total Assets
1.
$80,000 $1,000,000
X  .16
$1,000,000 $500,000

2. $130,000 $1,000,000
X  .268
$1,000,000 $485,000
A 10% reduction in materials costs increases ROI by 67.5%, in this example

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 Four Enablers of Excellent
Supply Management

Capable Human Proper Organizational Performance

Resources Design IT Measurement

•Team skills
•Manage Relationships
•Cost Mgt Tech
•E-commerce
•Negotiation skills
•Contract management
experience
• Other

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 Four Enablers of Excellent
Supply Management

Capable Human Proper Organizational Performance

Resources Design IT Measurement

•Team skills •Centralized

•Manage Relationships •Decentralized
•Cost Mgt Tech •Purchasing Councils
•E-commerce •Co-location of
•Negotiation skills buyers with users

•Contract management •CFTs

experience
• Other

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 Four Enablers of Excellent
Supply Management

Capable Human Proper Organizational Performance

Resources Design IT Measurement

•Team skills •Centralized •Requirements

•Manage Relationships Planning
•Decentralized
•Cost Mgt Tech •B2B
•Purchasing Councils
•E-commerce •Inventory
•Co-location of
visibility
•Negotiation skills buyers with users

•Contract management •CFTs

experience
• Other

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 Four Enablers of Excellent
Supply Management

Capable Human Proper Organizational Performance

Resources Design IT Measurement

•Team skills •Centralized •Requirements •Suppliers

•Manage Relationships Planning
•Decentralized •Supply
•Cost Mgt Tech •B2B Management
•Purchasing Councils
function
•E-commerce •Inventory
•Co-location of
visibility
•Negotiation skills buyers with users

•Contract management •CFTs

experience
• Other

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Let’s move on . . .

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