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 CHAPTER TWO

Objectives and Organization

for Effective Purchasing
and Supply Management

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Goals of the Purchasing Function

• Provide an uninterrupted flow of materials, supplies

and services required to operate the organization
• Keep inventory investment and loss at a minimum
• Maintain and improve quality
• Find or develop competent suppliers
• Standardize, where possible, the items bought
• Purchase required items and services at lowest cost

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Goals of the Purchasing Function

• Achieve harmonious, productive working

relationships with other functional areas within the
organization

• Accomplish the purchasing objectives at the lowest

possible level of administrative costs

• Improve the organization’s competitive position

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Purchasing’s Prime Decision Authority

• Select the supplier

• Use whichever pricing method is appropriate

• Question the specifications

• Monitor contacts with potential suppliers

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Various Titles of the Chief

Purchasing Officer

• Director of Purchasing

• VP of Purchasing

• Manager of Purchasing

• VP of Materials Management

• Materials Manager

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Purchasing Reporting Relationships

Position to Whom the CPO Reports 1988 % 1995 %

President 16% 16
Executive VP 19 15
Senior VP/Group VP * 19
Financial VP 7 10
Manufacturing/Operations VP 24 15
Materials/Logistics VP 8 7
Engineering VP 1 1
Administrative VP 13 9
Other (many of whom were VPs) 12 8
* category not identified in study
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Functions that Report to Purchasing:

CAPS Study
Function 1988 % 1995 %
Scrap/surplus disposal 57 63
Materials and purchasing research * 60
Inbound traffic 40 51
Stores/warehousing 34 41
Inventory control 37 41
Material planning * 40
Outbound traffic 31 39
* category not identified in study
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Purchasing Activities

• Purchasing/buying
• Purchasing research
• Inventory control
• Transportation
• Environmental and investment recovery/disposal
• Forecasting and planning
• Outsourcing and subcontracting
• Nonproduction/nontraditional purchases
• Supply chain management
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Typical Purchasing Organization

Structure - Medium Sized Company
Director of
Purchasing

Commodity Commodity Manager Materials

Manager Manager Administration Manager
and Processes

Buyer Buyer Manager Stores/

e-Purchasing Warehouse
Manager
Buyer Buyer Manager
p-cards Receiving
Inspection
Manager
Manager
Purchasing Manager
Research Transportation

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Potential Advantages and Disadvantages

of Centralization
Advantages Disadvantages

• narrow specification and job boredom

• greater buying specialization
• ability to pay for talent
• consolidation of requirements - clout
• coordination of policies and procedures
• effective planning and research
• common suppliers
• proximity to major organizational decision makers
• critical mass
• firm brand recognition and stature
• reporting line - power
• strategic focus
• cost of purchasing low
• lack of job flexibility
• corporate staff appears excessive
• tendency to minimize legitimate differences in
requirements
• lack of recognition of unique needs
• focus on corporate requirements, not on business unit
strategic requirements
• even common suppliers behave differently in geographic
and market segments
• distance from users
• tendency to create organizational silos
• customer segments require adaptability to unique situations
• top management not able to spend time on suppliers
• lack of business unit focus
• high visibility of purchasing costs

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Potential Advantages and Disadvantages of

Decentralization
Advantages Disadvantages
• easier coordination/communication with operating • more difficult to communicate among business units
department • encourages users not to plan ahead
• speed of response • operational versus strategic focus
• too much focus on local sources - ignores better supply
• effective use of local sources
opportunities
• no critical mass in organization for visibility/
effectiveness - “whole person syndrome”
• lacks clout
• business unit autonomy
• suboptimization
• business unit preferences not congruent with corporate
preferences
• small differences magnified
• reporting line simplicity • reporting at low level in organization
• undivided authority and responsibility • limits functional advancement opportunities
• suits purchasing personnel preference • ignores larger organizational considerations
• broad job definition • limited expertise for requirements
• geographical, cultural, political, environmental, social, • lack of standardization
language, currency appropriateness
• hide cost of supply • cost of supply relatively high

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Potential Advantages of the Hybrid

Structure
Centralized Decentralized

Disadvantages Advantages Advantages Disadvantages

Hybrid
structure
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Purchasing and Supply Teams

• Cross-functional teams
• Teams with suppliers
• Teams with customers
• Teams with suppliers and customers
• Supplier councils - key suppliers
• Purchasing councils - purchasing personnel only
• Commodity management teams
• Consortiums

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Team Leader Responsibilities

• Work with the team to establish and commit to

performance goals
• Secure individual member involvement and
commitment
• Manage internal team conflict
• Help maintain team focus and direction
• Secure required organizational resources

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Team Leader Responsibilities

• Prevent team domination by a member or function

• Deal with internal and external obstacles confronting
the team
• Coordinate multiple tasks and manage the status of
team assignments
• Clarify and help define each team member’s role
• Provide performance feedback to members

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Keys for Successful Consortiums

• Reducing total costs for the consortium members

– Through lower prices, higher quality and better
services
• Eliminating and avoiding all real and perceived
violations of anti-trust regulations
• Installing sufficient safeguards to avoid real and
perceived threats concerning disclosure of
confidential and proprietary information

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Keys for Successful Consortiums

• Mutual and equitable sharing of risks, costs and

benefits to all stakeholders, including buying
firms/members, suppliers and customers
• Maintaining a high degree of trust and
professionalism
• Maintaining a strong similarity among consortium
members and compatibility of needs, capabilities,
philosophies and corporate cultures

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