PURCHASING

MANAGEMENT
Old Supply Wisdom

“If you choose the right suppliers, all of your

supply problems will be solved”

“A well trained procurement organization

can add major dollars to the organization
through cost savings”
The Prologue

 Purchasing & Supply management has become increasing visible in

world where Supply is a major determinant of Corporate Survival &
Success

 Supply Chain Performance influences not only financial and

operational risks but also affects reputational risk

 Every organization needs suppliers and customers, as critical to an

organizational success, competitive advantage and customer
satisfaction
INTRODUCTION :WHAT IS PROCUREMENT?
• Procurement is viewed as a strategic function working to
improve the organization's profitability. 

• Procurement is seen as helping to streamline processes, reduce

raw material prices and costs, and identifying better sources of
supply.  In essence, helping to reduce the “bottom line”

• Procurement is an umbrella term under which Purchasing is just a

component.
INTRODUCTION :WHAT IS SOURCING?

• Sourcing, as the name implies, is a finding a source from

where the goods and services can be procured.
• It is a subsection of the procurement, where, procurement is
concerned with acquiring of goods and services, sourcing is
finding a least expensive supplier for those goods.
• Since the business profits heavily rely on finding the best
source of suppliers it is considered to be the first step taken
by the business before its first sale.
INTRODUCTION:WHAT IS PURCHASING?

• Purchasing refers to the portion of the procurement cycle that is

actively engaged in buying a product or service from a
supplier.
• Purchasing is only restricted to receiving and making
payments.
• Purchasing can be best known as the transaction-oriented
function of Procurement.
• If procurement is the subject, then purchasing is the verb.
PURCHASING MANAGEMENT
• The purchasing profession can be defined as the act of obtaining
merchandise; capital equipment; raw materials; services; or
maintenance, repair and operating (MRO) supplies in
exchange for money or its equivalent
• The purchasing profession can be broadly classified into two categories:
merchants and industrial buyers. The first category, merchants, includes the
wholesalers and retailers, who primarily purchase for resale purposes
• The second category is the industrial buyers, whose primary task is to
purchase raw materials for conversion purposes. Industrial buyers also
purchase services; capital equipment; and maintenance, repair and operating
supplies
PURCHASING MANAGEMENT
• The Institute of Supply Management (ISM) defines 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.”

• Key activities of supply management have expanded beyond

the basic purchasing function to include negotiations,
logistics, contract development and administration,
inventory control and management, supplier
management and other activities.
The Size of An Organization’s
Spend & Financial Significance
 The amount of money organizations spend with suppliers is staggering

 Profit-Leverage effect is measured by the increase in profit by decrease in purchase

spend

 The prime responsibility of supply is to manage the supply process with the lowest
reasonable levels of inventory

 To increase long-term share holder value, the company must increase revenue,
decrease cost or both

 Supply should not be focused on cost, but be concerned with revenue enhancement
Purchasing & Supply Management

 To increase long-term share holder value, the company

must increase revenue, decrease cost or both

 Supply should not be focused on cost, but be

concerned with revenue enhancement
Purchasing & Supply Management

 Multiple Sourcing increases security Vs single sourcing

 Strategic relations Vs Arm’s length transaction

 Negotiations Vs Competitive Bidding

 E-Commerce Vs Manual purchase

Importance of Purchasing
• Leverage factor
• In the current context leverage is the power of purchasing to enhance
the profitability
• Purchasing is the greatest expenditure in manufacturing industry – almost
over 5 0 % - 7 0 % o f t h e t o t a l r e v e n u e
• When purchases form a high proportion of the total costs, a modest saving on
bought-out items will result in a similar contribution to profits as would a
substantial increase in sale

• Honda New Model Cost= $18,000

• Total Assembled Parts Cost= $10,800(60%)
Supply Management and ROI
Labor Sales
$700,000 $5,000,000 Net income What if we
$400,000
decrease
Operating cost elements

Minus Profit
Materials
Cost of ($515,000)
margin materials cost
Goods Sold Divided by 8%
$2,300,000
$3,800,000 by 5%?
Sales (10.3%)
($2,185,000) ($3,685,000) $5,000,000 (or $115,000)
Plus
Overhead
$800,000 Other costs
$800,000
Return on
Investments
Multiply
10.0%

(13.0%)
Inventories
$500,000 Sales
$5,000,000
($475,000) Current assets Asset turnover
Assets

Account $1,100,000 Divided by rate

receivable 1.25
$300,000 Total assets
($1,075,000) (1.26)
Plus $4,000,000

Cash Fixed assets ($3,975,000)

$300,000 $2,900,000
The Role of Supply Management in an
Organization
 The primary goals of purchasing are:
 Ensure uninterrupted flows of raw materials at the lowest total cost,
 Improve quality of the finished goods produced, and
 Optimize customer satisfaction
 Keep Inventory Investment And Loss At Minimum

 Purchasing contributes to these objectives by:

 Actively seeking better materials and reliable suppliers,
 Work closely with and exploiting the expertise of strategic suppliers to
improve quality and materials
 Involving suppliers and purchasing personnel in new product design
and development efforts.
Procurement Strategy for Functional and
Innovative Products

Functional Products(Routine Buying)

Focus should be on minimizing total landed cost

 Functional products are maintenance, repair, and operating (MRO)

materials and other commonly purchased items and supplies.

 Characterized by low profit margins, relatively stable demands, and

high levels of competition.

 Thus, companies purchasing functional products most likely

concentrate on finding a dependable supplier selling at a low price.
Procurement Strategy for Functional and
Innovative Products

Innovative Products(Non- Routine Buying)

 Innovative products might be new types of control mechanisms, new
software applications, or a new robotics system.

 Innovative products are characterized by short product life cycles,

volatile demand, high profit margins, and relatively less competition

 The sourcing criteria for these products may be more closely aligned
with a supplier’s quality reputation, delivery speed and flexibility, and
communication capabilities.
Purchasing Process
1. Recognition of Needs
2. Description of Need (ESI Early Supplier Involvement)
3. Identification and analysis of possible sources of supply, issue
quotations
4. Supplier selection and determination of terms
5. Issue purchase orders
6. Follow-up to assure correct delivery
7. Receive and accept the goods
8. Approve invoice for payment
9. Maintaining record (Post purchase feedback)
Purchasing Process

 The traditional purchasing process is a manual, paper-based

system
 However, with the advent of information technology, personal
computers, local area networks and the Internet, many
companies are moving toward a more automated, electronic-
based system
Steps In The Purchasing Process-
1.Recognition of Need
 Any purchase originates with the recognition of a definite need
by individual / system
 The person responsible for a particular activity should know the
requirements of unit (How much & When)
 The supply department is responsible for helping to anticipate
the needs of using department
Steps In The Purchasing Process-
2.Description of Need
 It is essential to have accurate description of need requested by
Internal Customer

 In many organization, supply process is split into mini-processes

owned by individual function like Internal Customer, Buyers

 Factors to consider is either a best buying (Buyer’s intelligence)

or specific brand selection (established by internal user)
Steps In The Purchasing Process-
3.Identification Of Potential Sources

Issuing RFX
When items are not covered by contract, the buyer has three
options for requesting business from potential suppliers
 Request for Quotation (RFQ)
 Request for Proposal (RFP)
 Invitation for Bid (RFB)
Steps In The Purchasing Process-
3.Identification Of Potential Sources

Issuing an RF Reason

Request for Quotation • RFQ is used in situations where the buyer can clearly define the need
• Quotations are received from multiple suppliers

Request for Proposal • More complex needs at the buyer’s end

• Need expertise in developing and proposing a solution
• When price is highly negotiable

Request for Bid • Similar to RFP in terms of the bid specification

• Buyer is willing to use competitive bid process
Steps In The Purchasing Process-
4.Supplier Selection & Determination of
Terms

 Analysis of the quotes, bids or proposal

 Selection of the suppliers lead to order placement
 Steps involve from a simple bid analysis form to complex
negotiations
Steps In The Purchasing Process-
5.Preparation & Placement Of The
Purchase Order

 Placing an order usually involves preparation of a purchase order

 Need for legal compliances and proper transaction record

 Format and Routing vary great so must have serial number, date of
issue, the name and address of the supplier, quantity description

 It must contain provisions to protect the buyer from damage suits

caused by patent infringement
Steps In The Purchasing Process-
6.Follow-Up & Expediting

 At the time of order is issued, an appropriate follow-up date

is indicated
 It is a routine tracking to ensure supplier meets the
deadlines
Steps In The Purchasing Process-
7.Receipt & Inspection of Goods
The primary purposes of receiving are
 Check the physical order arrived
 Check for the condition
 Match the quantity ordered
 Ensure placement in warehousing
Steps In The Purchasing Process-
8.Invoice Clearing & Payment

 This involves alignment of Supply and Accounts payable

 To check the discrepancies in the invoice and time for correction
Steps In The Purchasing Process-
9.Maintenance of Record &
Relationship
 Focus on record maintenances for future
 For organization record keeping is crucial for fulfilling statutory and
compliance requirements.
 Organizations have to keep all records in such a manner that they
can be retrieved whenever required.
“When consumers purchase a Toyota, they
are not simply purchasing a car, truck or
van. They are placing their trust in our
company.” — Akio Toyoda