PURCHASING

Meaning, Role and Objectives

• Purchasing refers to a business

or organization attempting to
acquire goods or services to
accomplish the goals of the
enterprise.
 The Role of Purchasing in the Supply Chain

• Purchasing is responsible primarily

for inbound or upstream,
channel activities whereas
logistics spans both inbound and
outbound relationship and
material flows.
• SLIDES FOR READING
ASSIGNMENT:

• 5 TO 7 - THREE
 Purchasing Activities

1.Development of the Purchasing

Function
• In many ways, purchasing today
stand at a crossroads in its
development

•
 Purchasing Activities

• Activities such as purchase order

placement,
• Follow-up and expediting

• Using EDI (Electronic Data

Interchange)
 Purchasing Activities
2.The Role of Purchasing in Total Customer
Satisfaction
• high quality,
• reliable goods and services on a
• timely basis at a
• reasonable cost often directly affects
customer satisfaction
 Purchasing Activities

• A POINT TO NOTE

• An organization cannot provide its

ultimate customers with better quality
goods and services than what it receives
from its supplier.
 Purchasing Activities

Total Customer Satisfaction Depends on Supplier Performance

Customer

Total customer satisfaction

Quality Cost Delivery Service Quantity Strategic

Organizatio
n

Quality Cost Delivery Service Quantity Strategic

Supplie
• SLIDES FOR READING ASSIGNMENT:

• 11 TO 19 - NINE
 Purchasing Activities

3. The Strategic Role of Purchasing

• Is to perform sourcing related activities in a way

that support the overall objectives of the
organization
i. Access to External Markets
ii. Supplier Development and Relationship
Management
iii. Relationship to Other Function
 Purchasing Activities

i. Access to External Markets

• Through external contacts with the supply
market, purchasing can gain important
information about new technology,
potential new materials or services, new
sources of supply and changes in market
conditions.
 Purchasing Activities

ii. Supplier Development and Relationship

Management
• Purchasing can help support the organization’s
strategic success by identifying new and existing
suppliers

• Getting suppliers involved early in the development of

new products and services or modifications to existing
offering can reduce development times

• Among the primary purchasing activities are supplier

selection, evaluation and ongoing management
(sourcing), total quality management and purchasing
planning
 Relationship to Other Function

iii.Relationship to Other Function

• Virtually every department within an organization
relies on the purchasing function for some type of
information and support

• Purchasing often has the same functional reporting

relationship as logistics, which is helpful for
coordinating materials management

• Purchasing and logistics need to work closely in

coordinating inbound logistics and associated material
flows
 Purchasing Activities
4.Supplier Selection and Evaluation

• The most important activity

• The buying process is complex because the variety

of factors that must be considered when making a
purchase

• There are 5 steps of purchasing process for

managing supplier relationship and follow up
(please see next slide)
5 phases in the selection development and management of
purchasing relationships

Phase 1-Preliminary phase

• Establish need for purchase
• Formation of a team is needed

Phase 2-Identify potential suppliers

• Determine selection criteria/approach
• Identify potential suppliers

Phase 3-Screen and select

• Contact potential suppliers
• Evaluate suppliers
• Choose

Phase 4-Establish relationship

• Document expectation/contacts
• provide high attention level
• Give prompt feedback

Phase 5-Evaluate relationship

• Continue at current level
• Expand/build relationship
• Reduce/dissolve interaction
 Purchasing Activities

Purchase Categories
• There are 6 major purchase categories in most
companies:
a) Component parts
b) Raw materials
c) Operating supplies
d) Support equipment
e) Process equipment
f) Services.
 Purchasing Activities
Evaluating Suppliers
• To determine the impact of supplier
performance on productivity, performance must
be measured and evaluated
• A variety of evaluation procedures are possible
• Most important, always use consistent
procedures to increase the objective of the
process.
• The manager must identify all
potential for the items being
purchased
• The next step is to develop a list of
factors to evaluate each supplier
– (Please see next slide)
 Example of an evaluation procedure
Rating of supplier Importance of Factor to Weighted
Factor (1 = Worst Rating Your Firm (1 = No Composite Rating
5 = Highest Rating) Importance; 5 = (0 = Minimum;
12345 Highest Importance) 25 = maximum)
12345

Supplier A
Product reliability
Price
Ordering convenience
After-sale service

Total supplier A

Supplier B
Product reliability
Price
Ordering convenience
After-sale service

Total supplier B

Supplier C
Product reliability
Price
Ordering convenience
After-sale service

Total supplier C
• SLIDES FOR READING ASSIGNMENT:

• 23 TO 26
 Purchasing Activities

Selecting Suppliers
• Selecting the right suppliers has an immediate
and long term impact on the firm’s ability to
serve its customer

• The supplier selection process is more difficult

when materials are being purchased in
international markets or for international
operations
 CONTD.
• Reward associated with proper supplier selection
and evaluation;

 Reduction in the cost of materials  increase the

profit margin on every unit manufactured and sold

 Customer service improvement are possible

because the manufacturing process can operate
smoothly with no slowdowns or shutdowns
 Purchasing Activities

5. Total Quality Management

• Quality management is one of the important

consideration in materials acquisition

• Materials of higher quality may require fewer

fabrication processes or have a longer life span,
resulting in lower overall product costs or higher
prices for finished product.
 Contd.
• After the required quality level has been determined
and specifications developed, usually by manufacturing,
it becomes purchasing responsibility to secure the
proper materials

• The correct quality specification must be given to

suppliers. The supplier that offers the best cost-quality
combination that meets the specifications should be
selected
RESUME PRESENTATION
 Purchasing Activities

6.Just-in-Time (JIT)

• JIT focuses on the identification and

elimination of waste wherever it is found in
the manufacturing system

• Elimination of waste  aim of reducing

waste and cost throughout the entire supply
chain
 Contd.
• JIT implementation involves the initiation
of a “pull” system of manufacturing
(matching production to known demand)

• THE BENEFITS INCLUDE

• significant reductions of raw material,
work-in-process, and
• finished good inventories and
• large decreases in the amount of space
required for the manufacturing process
 Contd.
i. Difficulties in Implementing JIT
• One of the most frequent reasons is lack of
cooperation from supplier  due to changes in
the supplier’s system

• Quantity mismatch

• The supplier and buyer are normally required to

provide each other with access to their master
production planning system, shop floor schedule,
and material requirements planning system.
 Example: Master Production Scheduling
• Computations WEEK
1 2 3 4 5 6
CUSTOMERS 500 1000 500 200 700 1000
BRANCH WAREHOUSES 200 300 400 500 300 200
MARKET RESEARCH 0 50 0 0 10 0
PRODUCTION RESEARCH 10 0 0 0 0 0

TOTAL DEMAND 710 1350 900 700 1010 1200

BEGINNING INVENTORY 1120 410 560 1160 460 950
REQUIRED PRODUCTION 0 1500 1500 1500
ENDING INVENTORY 410 560 1160 950 1250
 Relationship to Other Function

ii. Importance of Buyer-Supplier

Communication

• Suppliers are given long–range insight into

the buyer’s production schedule

• The schedule for the nearest several

weeks is frozen  allows the supplier to
acquire raw materials in a stockless
production mode and to supply the buyer
without inventory buildups
 Contd.
• Purchases and suppliers must cooperate
and have a trusting relationship in order to
convert supply chains to JIT operations

• Supplier selection, single sourcing, supply

management and supplier communication
become critical issues for purchasing and
materials managers in implementing JIT
7.Purchase Agreement
• The purchase order may specify price and
overall quantity, but the supplier will
deliver in accordance with a schedule or
with daily production needs

• The buyer expects and receives the exact

quantity

• Saves much time in negotiating and

pricing the order
 Purchasing Activities
8. Value Analysis

• When negotiating a purchase agreement, the

supplier receives the buyer’s specifications and
provides a bid price.

• If the price is too high, the buyer may visit the

supplier’s plant to review its processes

• The objective is to identify areas where the

supplier’s costs exceed the value added and, if
possible, to modify the minimal specifications in
order to reduce the supplier’s cost and the bid
price.
 Purchasing Activities

9. “Loose” Engineering Specifications/ Early

Supplier Involvement
• The concept of getting the supplier involved in
the design process is often called early supplier
involvement (ESI)
• Concurrent engineering is a type of early
supplier involvement where the engineers in the
buying and selling firms work together on

product development or product improvement.

 Contd.
• Engineers and quality control people
may pay frequent visit to a supplier’s
plant to answer engineering questions
and identify potential quality problem
before they surface.
 Purchasing Activities

10.Control of Inbound Transportation

• JIT purchasing requires steady, reliable
incoming deliveries.
• The objective is to avoid excessive
inventory carrying costs for materials that
arrive early and avoid disruptions in
manufacturing operations when goods
arrive late.
 Contd.
• Therefore, the buying firms must become involved
in selecting both the transportation mode and the
specific carrier
• For example, CTI and Ryder integrated Logistics,
review manufacturers production schedule pickup
of the materials, pickup and time-sequence the
materials, and deliver them directly to the JIT
production line.
 Purchasing Activities

11. JIT II
• JIT II is an innovative type of purchasing
relationship which aims JIT principles at the
purchasing function
• In JIT II, the supplier places one of its
employees, called an “in-plant,” in the buying
company’s office, replacing a purchaser,
planner, and sales person.
 CONTD.
• The in-plant representative places order, practices
concurrent engineering, and has full access to all of
buyer’s facilities, information, and employees.
• The supplier benefits include greater integration
with the customer, improved communications, more
efficient administrative process, and savings on
“sales effort.”
 OBJECTIVES OF PURCHASING

• To meet the needs of the

manufacturing function or other
internal functions for which it was
buying
 Objectives continued

• 6-’R’s. Focused on getting the

• right product or service to the

• right place at the

• right time, in the
• right quantity and quality in the

• right condition from the

• right source and at the
• right price
• Played a role in keeping the
operation running smoothly by
ensuring a reliable source of supply
THANK YOU