PURCHASING MANAGEMENT

INTRODUCTION TO PURCHARING
MANAGEMENT
 PURCHASING
• 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.

• 2 CATEGORIES
– Merchants
– Industrial buyer
 PURCHASING
• 2 CATEGORIES
– Merchants
• includes the wholesaler and retailers who primarily purchase for resale
purpose.
• purchase merchandise in volume to take advantage of quantity
discounts and other incentives such as transportation economy and
storage efficiency
• They create value by consolidating merchandise, breaking bulk and
providing the essential logistical services.
 PURCHASING
• 2 CATEGORIES
– Industrial buyers
• whose primary task is to purchase raw materials for conversion
purposes.
• also purchase services; capital equipment; and maintenance, repair
and operating supplies.
• are the manufacturers, although some service firms such as
restaurants, landscape gardeners and florists also purchase raw
materials for conversion purposes.
 WHY PURCHASING IS IMPORTANT?
• PURCHASING
– helps companies who struggle to increase customer value by
improving performance
– has a major impact on product and service quality.
– helps companies that are seeking to increase the proportion of
parts, components, and services they outsource in order to
concentrate on their own areas of specialization and competence.
– increases the importance of the relationships between
purchasing, external suppliers, and quality.
– acts as the liaison between suppliers and engineers, can also
help improve product and process designs.
 DEFINITION OF TERMS
• PURCHASE SPEND
– is the money a firm spends on goods and services.

• PROFIT LEVERAGE EFFECT

– measures the impact of a change in purchase spend on a firm’s
profit before taxes, assuming gross sales and other expenses
remain unchanged.
– The measure is commonly used to demonstrate that a dollar
decrease in purchase spend directly increases profits before
taxes by the same amount.
 DEFINITION OF TERMS
• RETURN OF ASSET (ROA)
– is a financial ratio of a firm’s net income in relation to its total
assets.
» TOTAL ASSETS = current and fixed assets.
• CURRENT ASSETS - include cash, accounts receivable and inventory
• FIXED ASSETS - include equipment, buildings and real estate
– indicates how efficiently management is using its total assets to
generate profits. A high ROA suggests that the management is
capable of generating large profits with little invstment.

• RETURN OF INVESTMENT
– is the ratio referred in ROA
 DEFINITION OF TERMS
• INVENTORY TURNOVER
– shows how many times a firm’s inventory is utilized and
replaced over an accounting period, such as a year.
– to compute inventory turnover ratio is: ratio of the cost of goods
sold over average inventoy at cost.
– In general, low inventory turnover indicates poor sales,
overstocking and/or obsolescence.
 DEFINITION OF TERMS
• TRADITIONAL
PURCHASING
PROCESS
– is a manual, paper-based
system.
– The manual purchasing
system is slow and prone
to errors due to
duplications of data
entries during various
stages of the purchasing
process.
 DEFINITION OF TERMS
• MATERIAL REQUISITION (MR)
– The purchasing process starts when the material user initiates
a request for a material by issuing MR in duplicates.
» The number of duplicates issued depends on the internal accounting control
system of the organization.
» Generally, the issuer retains a copy and the warehouse receives the original
plus a duplicate.
– The product, quantity and delivery due date are clearly
described on the material requisition.
 DEFINITION OF TERMS
• PURCHASED REQUISITION
– instead of a material requisition, is used in some firms.
• TRAVELING REQUISITION
– is used for materials and standard parts that are requested on a
recurring basis.
– Instead of describing the product on the generic material
requisition, the product description and other pertinent
information, such as delivery lead time and lot size, are pre-
printed on the traveling requisition.
 DEFINITION OF TERMS
• PLACE ORDER RELEASES
– can also be used to release requisitions or to place orders directly
with the suppliers.
– this approach is suitable for firms that use the same components
to make standard goods over a relatively long period of time.
• PURCHASE ORDER (PO)
– When a suitable supplier is identified, or a qualified supplier is on
file, the buyer issues a PO in duplicate to the selected supplier.
– the original purchase order and at least a duplicate are sent to the
supplier.
 DEFINITION OF TERMS
• PURCHASE ORDER
– An important feature of the
purchase order is the terms
and conditions of the
purchase, which is typically
preprinted on the back.
– The purchase order is the
buyer’s offer and becomes
a legally binding contract
when accepted by the
supplier.
 ROLE OF SUPPLY MANAGEMENT IN AN
ORGANIZATION
Traditionally, purchasing was regarded as being a service to
production and corporate executives paid limited attention to
issues concerned with purchasing. However, as global
competition intensified in the 1980s, executives realized the
impact of large quantities of purchased material and work-in-
process inventories on manufacturing cost, quality, new
product development and delivery lead time. Savvy managers
adopted new supply chain management concepts that
emphasized purchasing as a key strategic business process
rather than a narrow specialized supporting function to overall
business strategy.
 PURCHASING
• PURCHASING
– is a key business function that is responsible for acquisition of
the required materials, services and equipment.
• SUPPLY MANAGEMENT
– is increasingly being used in place of purchasing to describe the
expanded set of responsibilities of the purchasing professionals.
– The traditional purchasing function of receiving requisitions and
issuing purchase orders is no longer adequate, but a holistic and
comprehensive acquisition strategy is required to meet the
organization’s strategic objectives.
DIFFERENCE BETWEEN PURCHASING AND
SUPPLY MANAGEMENT
• PURCHASING
– is a functional group (i.e., a formal entity on the organizational
chart) as well as a functional activity (i.e., buying goods and
services).
– The purchasing group performs many activities to ensure it
delivers maximum value to the organization. Purchasing has
been referred to as doing “the five rights”:
» getting the right quality
» in the right quantity
» at the right time
» for the right price
» from the right source
DIFFERENCE BETWEEN PURCHASING
AND SUPPLY MANAGEMENT
• PURCHASING
– Examples include
» supplier identification and selection
» buying
» negotiation and contracting
» supply market research
» supplier measurement and improvement
» purchasing systems development
DIFFERENCE BETWEEN PURCHASING
AND SUPPLY MANAGEMENT
• SUPPLY CHAIN 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.''
– The traditional purchasing function of receiving requisitions and
issuing purchase orders is no longer adequate, but a holistic
and comprehensive acquisition strategy is required to meet the
organization’s strategic objectives.
DIFFERENCE BETWEEN PURCHASING
AND SUPPLY MANAGEMENT
• SUPPLY MANAGEMENT
– is a strategic approach to planning for and acquiring the
organization’s current and future needs through effectively
managing the supply base, utilizing a process orientation in
conjunction with cross-functional teams (CFTs) to achieve the
organizational mission. Similar to our definition, the Institute for
Supply Management defines supply management as the
identification, acquisition, access, positioning, and management
of resources and related capabilities an organization needs or
potentially needs in the attainment of its strategic objectives.
DEFINING SUPPLY MANAGEMENT
 DEFINING SUPPLY MANAGEMENT
• STRATEGIC ORIENTATION/RESPONSIBILITIES
– required pursuing activities which are those that have a major
impact on longer-term performance of the organization.
– These longer-term responsibilities are not pursued in isolation,
but should be aligned with the overall mission and strategies of
the organization.
– a strategic responsibility that develops a system that enable
internal users to order routine supplies is considerably more
important.
 DEFINING SUPPLY MANAGEMENT
• MANAGING SUPPLY BASE
– It requires purchasing professionals to work directly with those
suppliers that are capable of providing world-class performance
and advantages to the buyer. Think of supply management as a
progressive and supercharged version of basic purchasing.

• PROCESS APPROACH
– process of identifying, evaluating, selecting, managing, and
developing suppliers to realize supply chain performance that is
better than that of competitors.
 DEFINING SUPPLY MANAGEMENT
• CROSS-FUNCTIONAL
– meaning it involves purchasing, engineering, supplier quality
assurance, the supplier, and other related functions working
together as one team, early on, to further mutual goals.
– Instead of adversarial relationships, supply management
features a long-term win-win relationship between a buying
company and specially selected suppliers.
 SUPPLY CHAIN AND VALUE CHAIN
• SUPPLY CHAIN ORIENTATION
– is a higher-level recognition of the strategic value of managing
operational activities and flows within and across a supply
chain.
• SUPPLY CHAIN
– is a set of three or more organizations linked directly by one or
more of the upstream or downstream flows of products,
services, finances, and information from a source to a
customer.
– are composed of interrelated activities that are internal and
external to a firm.
 SUPPLY CHAIN AND VALUE CHAIN
• SUPPLY CHAIN MANAGEMENT
– endorses a supply chain orientation and involves proactively
managing the two-way movement and coordination of goods,
services, information, and funds (i.e., the various flows) from
raw material through end user.
– requires the coordination of activities and flows that extend
across boundaries.
– A process consists of a set of interrelated tasks or activities
designed to achieve a specific objective or outcome.
 SUPPLY CHAIN AND VALUE CHAIN
• VALUE CHAIN
-is composed of primary and support activities that can
lead to competitive advantage when configured properly.
Modified version of Porter's
value chain model

This also defines some

important supply chain–related
terms and places them in their
proper context.
 SUPPLY CHAIN AND VALUE CHAIN
• EXTENDED VALUE CHAIN OR EXTENDED
ENTERPRISE
– states that success is a function of effectively managing a
linked group of firms past first-level suppliers or customers.
ILLUSTRATION OF SUPPLY CHAIN
 SUPPLY CHAIN UMBRELLA
• Purchasing • Order Processing
• Inbound Transportation • Production Planning,
• Quality Control Scheduling and Control
• Demand & Supply Planning • Warehousing/Distribution
• Receiving, Materials • Shipping
Handling and Storage • Outbound Transportation
• Materials or Inventory • Customer Service
Control
 SUPPLY CHAIN UMBRELLA
• PURCHASING
– Most organizations include purchasing as a major supply chain
activity.

• INBOUND TRANSPORTATION
– Larger organizations usually have a specialized traffic and
transportation function to manage the physical and
informational links between the supplier and the buyer.
– For some organizations, transportation is the single largest
category of single costs,especially for highly diversified
organizations.
 SUPPLY CHAIN UMBRELLA
• QUALITY CONTROL
– Almost all organizations recognize the importance of supplier
quality and the need to prevent, rather than simply detect,
quality problems.
– The emphasis has shifted from detecting defects at the time of
receipt or use to prevention early in the materials sourcing
process.
– Progressive organizations work directly with suppliers to
develop proper quality control procedures and processes.
 SUPPLY CHAIN UMBRELLA
• DEMAND AND SUPPLY PLANNING
– This includes forecasts of anticipated demand, inventory
adjustments, orders taken but not filled, and spare-part and
aftermarket requirements.
– Supply planning is the process of taking demand data and
developing a supply, production, and logistics network capable
of satisfying demand requirements.
 SUPPLY CHAIN UMBRELLA
• RECEIVING, MATERIAL HANDLING AND STORAGE
– All inbound material must be physically received as it moves
from a supplier to a purchaser.
– Receiving, materials handling, and storage are usually part of
the materials management function because of the need to
control the physical processing and handling of inventory.
– Receipts from users indicating that services have been
performed are alsoBrun through receiving to trigger invoice
payment.
 SUPPLY CHAIN UMBRELLA
• MATERIALS OR INVENTORY CONTROL
– The terms “materials control” and “inventory control” are
sometimes used interchangeably.
– The materials control group is often responsible for determining
the appropriate quantity to order based on projected demand and
then managing materials releases to suppliers.
– This includes generating the materials release, contacting a
supplier directly concerning changes, and monitoring the status of
inbound shipments.
– Materials control activities are sometimes the responsibility of the
purchasing department, particularly in smaller organizations.
 SUPPLY CHAIN UMBRELLA
• MATERIALS OR INVENTORY CONTROL
– The inventory control group is often responsible for
determining the inventory level of finished goods required to
support customer requirements, which emphasizes the physical
distribution (i.e., outbound or downstream) side of the supply
chain.
– Integrated supply chain management requires that the
materials and inventory control groups coordinate their efforts
to ensure a smooth and uninterrupted flow to customers.
 SUPPLY CHAIN UMBRELLA
• ORDER PROCESSING
– Order processing helps ensure that customers receive material
when and where they require it.
– Problems with order processing have involved accepting orders
before determining if adequate production capacity is available,
not coordinating order processing with order scheduling, and
using internal production dates rather than the customer’s
preferred date to schedule the order.
 SUPPLY CHAIN UMBRELLA
• PRODUCTION PLANNING, SCHEDULING AND
CONTROL
– These activities involve determining a time-phased schedule of
production, developing short-term production schedules, and
controlling work-in-process production.
– The production plan often relies on forecasts from marketing to
estimate the volume of materials that are required over the near
term.
 SUPPLY CHAIN UMBRELLA
• WAREHOUSING/DISTRIBUTION
– Before a product heads to the customer, it may be stored for a
period in a warehouse or distribution center. This is particularly true
for companies that produce according to a forecast in anticipation
of future sales.
• SHIPPING
– This activity involves physically getting a product ready for
distribution to the customer.
– This requires packing to prevent damage, completing any special
labeling requirements, completing the required shipping
documents, and/or arranging transportation with an approved
 SUPPLY CHAIN UMBRELLA
• OUTBOUND TRANSPORTATION
– Fewer organizations “own” the transportation link to their
customers, compared with just a few years ago. Increasingly,
full-service transportation providers are designing and
managing entire distribution networks for their clients.
• CUSTOMER SERVICE
– Customer service includes a wide set of activities that attempt
to keep a customer satisfied with a product or service. The
three primary elements of customer service are pre-transaction,
transaction, and post-transaction activities.
FOUR ENABLERS OF PURCHASING AND
SUPPLY CHAIN
EVOLUTION OF PURCHASING AND SCM
• Period 1: The Early Years (1850–1900)
• Period 2: Growth of Purchasing Fundamentals (1900–
1939)
• Period 3: The War Years (1940–1946)
• Period 4: The Quiet Years (1947–Mid-1960s)
• Period 5: Materials Management Comes of Age (Mid-
1960s–Late 1970s)
• Period 6: The Global Era (Late 1970s–1999)
• Period 7: Integrated Supply Chain Management(Beyond
2000)