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Purchase Management is a function of materials management in a company. Their basic

function is procuring the inputs for production function. This function encompasses
suppliers in the market external to the organization and several internal to the

Till recently, the purchasing process simply involved placing an order with the supplier who
offered the lowest price. Nowadays, increase in competition and market demand and scarcity
of resources have forced
organizations to reexamine their
purchasing activities. The
purchasing department functions
have expanded considerably and
include activities such as
verifying the credentials of
suppliers, inspecting the quality
of the material to be purchased,
ensuring the timely delivery of
the material, etc.

While the value of purchased

items varies from industry to industry, it adds up to more than fifty percent of sales in all
industries. Purchase management is regarded as a significant activity in many organizations
because of the high cost involved in carrying out purchasing activities, increasing quality
benchmarks, and increasing global competition.
Purchase departments buy raw materials, parts, machinery, and services used by production
systems. The objective of purchase management is to procure the right equipment, materials,
supplies and services in the right quantity, of the right quality, from the right suppliers, at the
right time, at the lowest price.


Purchase management is considered to be very important function of materials management

in a company. Its importance is felt even outside the formal scope of materials management.
As the purchase decisions commit a very large portion of financial resource of the company
purchase function is said to be highly important. Purchase personnel deal with large number
of external agencies while performing their functions. Hence they represent company’s
reputation in the outside world. As they negotiate and finalize deals worth lot of money for
the company their integrity is of utmost importance for the organization.


Primary objective or goal of purchasing function is making inputs available to the conversion
process at minimum cost to the final output of the company. Thus focus is on system output
rather than on micro level objectives.

The inputs to be made available are raw materials, semi finished items, bought out items etc.
There are certain parameters to be monitored for fulfilling the system objectives. We can call
them goals of purchasing. These goals are popularly known as 5R’s of purchase namely, right
price, right quantity, right quality, right place and right time. In simple terms, if the above
5Rs are achieved primary objective is fulfilled:-

• Right Price: Right price is determined by costing the production process of the
supplier. Right price is determined by allowing reasonable profit for the supplier and
insisting and helping to reduce cost. Tender system should be used to identify lowest
responsible bidder rather than lowest bidder. Principles normally used to ensure right
price are cost structure and learning curve.

• Right Quantity: Right quantity of purchase is the one that ensures no excess and no
shortage. High priority items are subjected to EOQ analysis to determine the right
quantity for purchase. This ensures overall minimum cost for inventory.

• Right Quality: In an item purchased should ensure adhering to mutually accepted

standard by supplier and customer at the time of finalizing the purchase order. The
accepted standard may be a drawing, a sample, a grade or a universal standard like DIN,
IS, BS etc.

• Right Place: is the one where the item is going to enter the value stream. If the item is
not available here, when needed, it is in short supply for the process.

• Right Time: is as decided by production schedule for meeting customer’s



The effectiveness of purchasing activities can be enhanced by proper organization and

coordination of the activities. There are two types of purchasing system:-

Centralized purchasing system

• Decentralized Purchasing system

i. Centralized purchasing system: In a centralized purchasing system, all purchasing

activities of an organization are carried out by a separate department. A centralized
system is effective when an organization has a number of production sites within the
same site which requires the material with same or similar specifications. In such cases,
a centralized system allows pooling of all the requirements so that benefit of bulk
purchasing can be realized. The centralization also leads to consistency in buying
policies and uniformity in maintaining purchasing records.

ii. Decentralized Purchasing System: In a decentralized purchasing system, the heads of

different departments purchase the needed materials according to their specific
requirements. This method gives each department the flexibility to alter its purchasing
policies on the basis of specific requirements.

However, most organizations do not totally depend on any one system: instead, they use a
combination of both the systems.


The purchase department is one of the key players in achieving the strategic objectives of a
firm. Functions of purchasing department or often categorized as the responsibilities of
Purchasing Manager are:-

• Vendor Development: The primary responsibility of a purchase manager is to search

for and identify a list of possible suppliers. He should ensure that sources of supplies
are reliable and stable.

• Selection of Suppliers: The purchase manager should examine the cost of the material
and other aspects. And selection should be made after analyzing all the relevant

• Contract Negotiations and Communication Interface: Once a vendor is selected, the
purchasing manager should negotiate and establishes the terms and conditions of
contract to be drawn between the two parties.

• Value Analysis: The purchasing manager conducts value analysis that aims at
achieving cost effectiveness and maintaining the required level of quality.


In an organization all activities are carried out according to systems and procedures for
reducing variations and errors arising out of individuality. This makes performing the
function simple and less prone to errors. Purchase organization also consists of such systems
established for smooth running of purchasing function. These systems are pre purchase
system, ordering system, post purchase system.

1. Pre Purchase System: This system lays down how purchase activity is initiated. Various
activities controlled by this system are requisitioning, selection of suppliers and obtaining
& evaluating quotations.

• Requisitions: Requisition for an item may be made by anyone in the organization.

Pre purchase system prescribes separate requisition form for capital equipment as
this purchase activity is controlled by a separate system. Requisition for an item
shall be made in a standard format. This format ensures that indenting person
furnishes all relevant information like quantity, specifications, etc. and gets the
purchase authorized by competent authority in the organization. Thereby making
purchase activity easier and less time consuming. This system shall identify the
hierarchical level competent to authorize the purchase depending on the nature
and value of the item.

• Traveling requisitions: In an inventory system where an item is made a

stock item to be perpetually maintained at a minimum level, purchase activity is
triggered by stores function based on ROL. The requisition is a permanent
document with specification, authorization and quantity required permanently
marked on it. The traveling requisition returns to indenting department after
purchase is initiated.

• Inquiries: Pre-purchasing system prescribes standard formats for making
inquiries in the market for supply of a particular product. These are standard forms
boldly declaring that they are not explicit or implicit purchase orders.

2. Ordering System: Purchase order is the most important element in ordering system.
Purchase manager releases the purchase order after selecting the supplier and finalizing
the price and other conditions of sale. Once the purchase order is raised and accepted it
becomes a legal document.

Contents of the purchase order are:-

Purchase order reference number

Description of materials and specifications
Quantity required and delivery schedule
Price and discounts
Shipping instructions
Location where the material is to be shipped
Signature of the authorized officer
Detailed terms and conditions:-
Several numbers of copies made to be forwarded to various recipients. Many companies color
code the copies making the color destination specific.
Original and a copy is sent to the supplier for acknowledgment of the original order. This
acknowledgment is acceptance of terms and conditions of purchase order.
One copy is sent to the receiving department for making necessary receiving arrangement
One copy is sent to the indenting department for information.
One copy is sent to finance department for organizing payment to the supplier.
Post Purchase System: This system includes follow up procedures, receipt and checking
• Follow up procedures: Follow up is an expensive activity for an organization. Hence
this should be minimized and made more effective. A sound procedure for follow up
is required to eliminate duplication and ineffectiveness. After conducting FSN
analysis follow up frequency should be fixed for follow up according to FSN status

so that follow up doesn’t become wasteful. Follow up responsibility is assigned to
buyers responsible for areas in which suppliers are situated.

• Receipt: Receipt system should ensure that defects in receipt process are eliminated
proactively. A systematic record of all receipts, carrier details and descriptions is
maintained. This record is in chronological sequence of arrival of supplies. The
system ensures that inspection of consignments received is arranged in time and
payment to suppliers for accepted consignments is organized. In many organizations
a receipt section handles this activity centrally.

• Invoice checking: supplier sends his invoice to customer’s finance department for
payment for the goods supplied. Invoice checking system ensures that the invoice is
checked against the PO terms, receipt details, quantity received, inspection reports
[accepted quantity and rejected quantity], losses, damages etc. this system helps
materials management to coordinate with finance department for payment to


Source is the place from where we procure our inputs. These inputs may be in the form of
raw materials, out sourced components or semi finished items. Manufacturing companies
outsource large number of items as they slim down processes.

Following reasons are considered to be making source an important element in materials
Source of market intelligence: source is a window through which the buyer organization
looks at the world outside. Source provides access to the real time information about the
phenomenon. Information about current trends and industrial climate is obtained from
the sources.
Crucial for product quality: buyer organizations depend on out sourced components for
producing the product which central to the objectives business. Reliance on capabilities
of supplier to meet tough quality standards is very high in current business environment.
Member in the value chain: supply source is an important element in the value chain. Any
cost added to the value chain reaches the end user as price. Hence effectiveness and
efficiency of the source becomes vital to business.
Import substitution, cost reduction, value improvement: as indigenization of sub assemblies,
components and spare parts is necessary to reduce the cost of product in competition,
buyer organizations turn to supply sources to develop these items. Several trials and
corrections may be required to finalize the substitute. In house capacity is generally not
available for this kind of trials. A resourceful supplier is very useful in this process. Same
logic holds good in other exercises for cost reduction and value improvement. It is quite
logical that entire process is not outsourced but isolated developmental activities are
invariably done. It is common knowledge that many small scale companies do not have
full-fledged tool rooms but rely on sources for all tool room activities.


The major principles on which purchasing policies should be based are a sound orientation,
reflect a cross –functional approach and be directed at improving the company’s bottom line.

i. Business orientation

Developing a purchasing and supply strategy requires a thorough understanding of the

company’s business policies. The following questions are important to determine how

purchasing and supply strategies will need to support the company in meeting its goals and

- What end-user market is the company targeting and what are the major developments
going on in those markets?

- What competition is the company suffering from and what leeway does the company
has in setting its own pricing policies?

- To what extent can material’s price increases can be passed onto the last customer or
is it impossible?

- What changes are happening in the company’s product, production and information

- What investments will be made by the company in terms of new products and

- What products will be taken out of the market for the years to come?

ii. Integrated, cross-functional approach

Purchasing decisions cannot be made in isolation, and should not be aimed at optimization of
purchasing performance only. Purchasing decisions should be made taking into account the
effects of these decisions on other primary activities like:-

- Production planning

- Materials management

- Transportation

Therefore purchasing decisions need to be based on balancing total cost of ownership. When
buying for instance, a new packaging line it is important to consider not only the initial
investment, but also the costs which will be incurred in the future for buying accessories,

spare parts and services. This example itself illustrates the complexity of its type of purchases
and the different kind of decisions that need to be made.

Careful decision making in those circumstances, therefore requires a cross functional and
team based approach among all the business disciplines affected by it. This can only be done
when top managers are involved. The purchasing and supply manager will lead the
developing of such views and visions.

iii. Bottom-line orientation

The purchasing should provide a healthy commercial opposition vis-à-vis its internal
customers. Through their activities the buyers should make their company more and more
cost aware. They should consistently look for improving the price/value ratio of the goods
and services bought by the company. To accomplish this, purchasing should be able to
suggest alternatives to existing product designs, materials or components to be used and
alternative suppliers. Experience with companies in which purchasing is recognized as a
bottom-line driven activity shows this function contributes to a permanent reduction in cost
price of the end product, whilst stimulating innovation from the suppliers at the same time.


Important areas to consider when implementing supply and purchase policy are supply,
product and supplier quality, materials costs and prices, supplier policy and communication

i. Supply

Supply is aimed at the optimization of both the ordering process and the incoming materials

Purchasing order processing entails handling of:-

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- Purchasing requisitions

- Order processing and expediting

- Development of efficient, computer –supported order routines

Materials and supply planning relates to:-

- Issuing materials delivery schedules to suppliers

- Reducing supplier lead times

- Troubleshooting in case of delivery problems

- Reducing (pipeline) inventories

- Monitoring supplier delivery performance

ii. Product and supplier quality

Central to this aspect are the materials specifications. Two important subjects of concern here
are purchasing early involvement in design and product development and improving product
and supply quality performance. Activities which may contribute to both areas are:-

• Standardization of materials-by striving for standardization or simplification of

product- specifications, the buyer may reduce product variety resulting in both cost
reduction and supplier dependence at the same time;

• A purchasing policy focussed on the life cycle of the end products- there is not much
point in investigating material quality improvements used in products which will be
eliminated shortly;

• Specific quality improvements- negotiating targets on improving reject rates, reducing

incoming inspection, and negotiating quality agreements;

• Agreeing on and gradually extending permanent warranty conditions that are to be

provided by the supplier;

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• Initiating special programmes in the field of value analysis to simplify product design
and/or reduce product costs;

iii. Materials cost policy

The objective of cost policy is twofold:-

- First to obtain control of materials cost and prices in such a way that suppliers are
unable to pass on unjustified price increases to the company.

- Second, to systematically reduce the supplier’s materials cost through joint, well
prepared action plans.

In order to be successful in both aspects a thorough knowledge of the supplier’s pricing

policies and cost structure is required. Understanding and knowledge of the market structures
and of their susceptibility of the price paid to market and cost factors is necessary. It should
be decided for what products to build detailed cost models, for what models to monitor
underlying cost factors, and for what products to develop detailed materials budget estimates.

iv. Supplier policy

The supplier policy is focused on the systematic management of the company’s supplier base.

- Decisions need to be made for what commodities to pursue a multiple sourcing

strategy or to go for single sourcing or a partnership relationship.

- Suppliers who perform best should be rewarded with more business in the future.

- Targets and possible projects for future co-operation should be determined carefully.

- Relationships with suppliers who consistently fail to meet the company’s expectations
should be terminated.

However such decisions need to be made based on detailed data on how the supplier
performed in the past and be implemented carefully.

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v. Communication policy

The company’s purchasing policies need to be communicated both internally and to suppliers.
Companies use the Intranet for the former and many employ their own Purchasing Websites
in order to communicate their future materials requirements and ways of working to their

The next step is that preferred suppliers have access to the customer’s Intranet through which
internal users can order directly from them through their electronic catalogues.

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The purchasing manager conducts value analysis that aims mainly at achieving cost
effectiveness and maintaining the required level of quality. Value analysis is an organized
effort that studies in detail the ‘value’ of material. Value Analysis reviews the design changes
with the objective of eliminating high cost materials and the materials that are technically
obsolete and reducing the number of parts. After analyzing the functions and cost of material,
the purchasing manager evaluates the possibilities of using the material.

Value Analysis evaluates the materials by seeking answers to the following questions:-

- What is the function of the item?

- Is it possible to run the system without the item?

- Can the item be substituted with a standard part?

- How much does the item cost?

- How much does the substitute, if any, cost?

- Can the functions performed by two or three materials be clubbed together and be
replaced by any other material?

Value Analysis involves the coordinated efforts of the engineering, production and the
purchasing personnel and helps in reviewing purchase activities to ensure that expenditures
result in the receipt of appropriate value.

The step by step procedure of Value Analysis is given below:-

- Examine all the products/materials that are being reordered and identify each
product/material that needs an improvement.

- Gather all possible information about the designs, costs and so forth of the product.

- Form a team that includes experts from various functional areas that are related to the
functions performed by the material.

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- Generate alternatives by generating new ides and evaluate different ways of
accomplishing the task.

- Evaluate the alternatives on criteria like cost and feasibility and eliminate the non
feasible alternatives.

- Refine the feasible alternatives and select the optimal one.

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The make-or-buy decision is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier). The buy side of the
decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm
that has developed a product or part—or significantly modified a product or part—is having
trouble with current suppliers, or has diminishing capacity or changing demand.

Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the
strategic level is the more long-range of the two. Variables considered at the strategic level
include analysis of the future, as well as the current environment. Issues like government
regulation, competing firms, and market trends all have a strategic impact on the make-or-buy
decision. Of course, firms should make items that reinforce or are in-line with their core
competencies. These are areas in which the firm is strongest and which give the firm a
competitive advantage.

Considerations that favor making a part in-house:-

• Cost considerations (less expensive to make the part)

• Desire to integrate plant operations
• Productive use of excess plant capacity to help absorb fixed overhead (using existing
idle capacity)
• Need to exert direct control over production and/or quality
• Better quality control
• Design secrecy is required to protect proprietary technology
• Unreliable suppliers
• No competent suppliers
• Desire to maintain a stable workforce (in periods of declining sales)
• Quantity too small to interest a supplier
• Control of lead time, transportation, and warehousing costs
• Greater assurance of continual supply
• Provision of a second source
• Political, social or environmental reasons (union pressure)
• Emotion (e.g., pride)

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Factors that may influence firms to buy a part externally include:-

• Lack of expertise
• Suppliers' research and specialized know-how exceeds that of the buyer
• cost considerations (less expensive to buy the item)
• Small-volume requirements
• Limited production facilities or insufficient capacity
• Desire to maintain a multiple-source policy
• Indirect managerial control considerations
• Procurement and inventory considerations
• Brand preference
• Item not essential to the firm's strategy


It is a philosophy concerning how to run a manufacturing organization, which entails all

aspects of the business system in general, and design, manufacturing and supply management
in particular. Fundamental to lean management is that it transfers the maximum number of
tasks and responsibilities to those workers actually adding value to the product and it has in
place a system for detecting the defects that quickly traces every problem.

Important features of lean management are:-

• Teamwork among line workers, who are trained in a variety of skills to conduct
different jobs within their working group. These not only relate to manufacturing
tasks; workers are also trained to do simple machine repairs, quality checks ,
housekeeping and material ordering.

• Simple, but comprehensive information display systems that make it possible for
everyone in the plant to respond quickly to problems and understand the plant’s
overall situation.

• Total commitment to quality improvement5 on the shop floor. Workers are

encouraged to think and act positively on how to improve the effectiveness of their
work, whereas their supervisors need to provide active support to bring these ideas to

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The average supply base is much smaller in lean management system .Suppliers are usually
involved in new product development in a very early stage. Supplier along with engineers
from the manufacturer may work full time at each other premises when solving technical
problems and/or working out improvements .

Suppliers are confronted with well defined targets in terms of quality improvement, lead time
reduction and cost reduction and are, by means of a simple grading and performance system,
fully informed as to whether they meet contractual obligations.


The principle of just-in-time (JIT) means that all materials and products become available at
the very moment when they are needed in the production process, not sooner and not later,
but exactly on time and in exactly the right quantity .It implies that nothing is produced if
there is no demand. The production process is in fact ‘pulled’ by customer orders. When no
customer orders have been received, manufacturing activities will come to an end and the
spare time is used to do minor repairs/maintenance, housekeeping and/or prepare for
materials planning.

A second characteristic of JIT principle is related to quality awareness, smaller batch sizes
which make it necessary to detect quality defects at an early stage.

The JIT concept cannot be limited to production only. It must be supported and implemented
in every functional area in the organization .Applied to purchasing JIT is a philosophy that
aims to make the required materials and products available at exactly the time they are
needed, so that value is added only to the product which is to be manufactured , and indirect
costs are avoided . JIT has a major impact on both the quality and quantity of the materials to
be purchased.

The JIT approach is characterized by regular but flexible supply .ordered materials are
delivered frequently in different quantities. To facilitate this, the supplier is informed of the
production planning and the related purchasing requirements on a daily, weekly and monthly
basis through delivery schedules which are available on-line. In this way

Conditions are renegotiated with the supplier. Targets for productivity improvement and cost
reduction, as required by the producer, are also part of these negotiations.
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As far as quality is concerned, the guiding principle is zero defects. Imposing quality targets
upon suppliers may represent large savings to the producer, both in terms of a reduction of
the numbers of incoming quality inspections and a reduction of buffer stock. In this way the
supplier is educated towards a better quality performance.


Vendor Management is the management and control, by an entity, of those third parties that
supply goods and/ or services to that entity. It is the discipline of establishing service, quality,
cost, and satisfaction goals and selecting and managing third party companies to consistently
meet these goals:-

• Establishing Goals- Just as employees need clearly established goals, operations need
clearly defined performance parameters. When selecting or managing vendors,
vendor managers must optimize their opportunity to achieve these goals by using third
parties companies.
• Selecting Vendors- The fine art of vendor management is essential to optimizing
operational results. Different vendors have different strengths and weaknesses, and it
is the vendor manager’s responsibility to match the right company with the desired
performance characteristics. Failure to consider this comprehensively could lead to
complete failure.
• Managing Vendors- On a daily basis, vendor managers must monitor performance,
provide feedback, champion new projects, define or approve/disapprove change
control processes, and develop vendors. There’s a tremendous amount of detail to this
aspect of the discipline, and we’ve covered this in many posts here.
• Consistently Meet Goals- Operations must perform within statistically acceptable
upper and lower control bounds. Everything the vendor manager does should focus
on meeting goals, from providing forecasts to defining requirements, from ensuring
vendors have adequate staff to ensuring the staff have completed all required training.


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An important objective in purchase management is that of maintaining good relations with
vendors. A good vendor is an asset of the company; and, therefore, just as customer goodwill
is considered important, a good relationship with the vendor should be treated likewise. A
vendor who supplies the proper quality material in proper amounts in proper time is not very
easy to find. Moreover, there are many situations where materials are required in hurry. There
are situations where materials are in shortage in the supply market. In all such situations,
good relationships with the vendors pay dividends. This may entail: personal relationship,
professional relationship:-

- By helping the vendor in times of stress and strain with financial aid, by providing
management skills if necessary, and,

- Maintaining a healthy professional relationship by fair negotiation, fair evaluation

and fair compensation.

The modern management theory and world class manufacturing call for a long-term, almost a
lifetime, association with the vendors. This also means that there will be fewer vendors but
these will be dedicated vendors- almost a part of organizational family.

Until the present and even now, the Indian industry has not given/is not giving much
importance to vendor relations. The emphasis, if any, has been on vendor selection and on
monitoring the performance of the vendor through a vendor rating system. Vendor is the
entity that is, generally, taken for granted. This attitude is: All said and done, the vendors for
the company may change over a period of time. They may change to another business; some
of them may not give the desired performance in quality, delivery and price, and therefore,
one should always expect a drop-out rate in the vendors list of the company.


1. The production capabilities of the vendor

(a) Capacity to manufacture the required product in desired quantities.

(b) Possibility of future expansion in capacity.

(c) The understanding or the knowledge of the vendor regarding the buying company
and its need.

2. The financial soundness of the company

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(a) The vendor company’s capital structure.

(b) Whether it belongs to a larger group of companies; whether it is a Private Limited

or a Public Limited company.

(c) The profitability record of the company in the past.

(d) Expansion plans of the company in the future.

3. Technical capabilities

(a) Whether the available machines are capable of the required quality of materials?
What are the future plans of the vendor?

(b) Whether there are enough technical skills available with the vendor?

(c) Whether there is proper research, design and development facility available with
the vendor?

(d) What is the record of the vendor in filling the orders of other buying companies in
the same business?

(e) What has been the consistency in the quality produced by the vendor?

(f) Whether the vendor has appropriate storage and warehouse facilities to retain the
quality of the product produced?

(g) Whether proper quality control procedures are being followed in the vendor

4. Other considerations

(a) What are the working conditions in the vendor company?

(b) How are the industrial relations in the vendor company?

(c) Whether there is any possibility of disruption of the supply of materials in terms of
quantity and/or quality due to human relations problem in the vendor company?


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Vendor Managed Inventory (VMI) is a supply chain practice where the inventory is
monitored, planned and managed by the vendor on behalf of the consuming organization,
based on the expected demand and on previously agreed minimum and maximum inventory
levels. In its simplest form, Vendor Managed Inventory is the process where the vendor
assumes the task of generating purchase orders to replenish a customer’s inventory. VMI is a
term that is used to describe many types of supply chain initiatives.
Traditionally, success in supply chain management derives from understanding and managing
the trade off between inventory cost and the service level.

The Vendor Managed Inventory Approach

VMI reduces stock-outs and reduces inventory in the supply chain. Some features of VMI

• Shortening of the supply chain

• Centralized forecasting
• Frequent communication of inventory, stock-outs, and planned promotions. Electronic
Data Interchange (EDI) linkages facilitate this communication.
• No manufacturer promotions
• Trucks are filled in a prioritized order. For example, items that are expected to stock
out have top priority, then items that are furthest below targeted stock levels, then
advance shipments of promotional items (promotions allowed only in transition
phase), and finally, items that are least above targeted stock levels.
• Relationship with downstream distribution channels
• Result: Inventory reduction and stock-out reduction

VMI is based on the belief that supplying parties are in a better position to manage inventory
as they have better knowledge of the goods production capacities and lead times. Also it is
based on the belief that allowing vendors to manage inventory reduces the number of layers
in the supply chain, increasing stock visibility and reducing overall inventory levels. To
enable VMI, sales data must be provided to the vendor via Electronic Data Interchange (EDI),
other electronic means, or via traditional human agents at outlets.

Origin of Vendor Managed Inventory

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VMI started in the retail business and grew out of Efficient Consumer Response (ECR),
where consumer satisfaction or rather consumer expectation of stock availability is an
important way to have a competitive edge over others. Wal-Mart is one of the successful
pioneers of this supply chain strategy.

VMI is now gradually progressing towards strategic-partnership based forms. These

influences the way companies plan their inventory, evolving to Collaborative Planning,
Forecasting and Replenishment (CPFR).

Usage of Vendor Managed Inventory

• Error sensitive industries. Example: Pharmaceutical Sector.

• Multiple outlets, fast-moving consumer goods. Example: Wal-Mart.
• Perishable goods. Example: K Mart.
• Valuable and unpredictable components. Example: PC manufacturing.
• Strong competition (small margins). Example: Automotive.

Steps in Vendor Managed Inventory

VMI should be achieved in a number of phases:-

1. Communicate expectations of all parties.

2. Retailer/distributor must commit to sharing precise information.
3. Vendor must ensure reliable transmission, receipt, and use of information.
4. Agreement on ordering policy, risk and reward sharing.
5. Commit time and resources.
6. Extensive testing.
7. Implementation and evaluation. Adjust.
8. Appreciate vendors that manage the inventory well. Example: promotion to Category
Captain, profit sharing schemes, etc.

Strengths of Vendor Managed Inventory

• Supply Chain level

o Lower inventory levels at total supply chain level.
o Less overhead.

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o Increased sales.
o Reduces human data entry errors.

• Vendors
o Better insight in customer demand (better resource usage, reduced raw and
finished goods inventories).
o Improved, more direct communication with customers.
o Improved market analysis.
o Increased sales via lower out of stock rates.
o Opportunity to provide category management and other value-added services.
• Suppliers
o Reduced replenishment times and lower inventory costs.
o Increased sales through reduced stock outs.
o Less redundancy.
o Build strategic strengths through establishing strong supply chain
o Vendor assistance with category management.
• End-users
o Increased service level.
o Reduced stock outs

Limitations of Vendor Managed Inventory

• Success of VMI initiative depends on the strength of relationship between the vendors
and retailers.
• Increased dependency between the parties and increased switching costs.
• Lack of trust to exchange data can result in the ineffective implementation in one or
more of the following forms:
o Inventory invisibility.
o Inventory imbalance.
• Costs of technology and changing organization.
• Extensive data- and EDI testing is needed.

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• Loss of necessary shelf space at the selling party may result in less attention by
buyers, compared to competitors that are not into VMI yet.
• Special promotions or events need to be communicated beforehand to avoid
replenishment planning mistakes (loss of flexibility).
• Increased vulnerability for non-foreseeable risks such as employee strikes, hurricanes,
etc. due to lower inventory levels.
• Most of the benefits are for the end client and for the selling party, while the vendor
does much of the work.

Assumptions of Vendor Managed Inventory

VMI is usually successful for industries and organizations with the following characteristics:

• Multiple outlets, because this increases the benefits compared to traditional inventory
• Severe consequences in case of human errors (Pharmaceutical).
• Industries with steady and high volumes (Retail, Consumer Products).
• Industries with high-value inventory and a high level of demand unpredictability
(High Tech).
• Management with strong leadership capability to form strategic long term partnerships

VMI Implementation Challenges

VMI can be made to work, but the problem is not just one of logistics. VMI often encounters
resistance from the sales force and distributors. At issue are roles and skills, trust, and power
shifts. Some of the sales force concerns are:

• Loss of control
• Effect on compensation - incentive bonuses may depend on how much is sold, but
sales force has less influence under VMI.
• Possible loss of job
• Scepticism that it will function well - technical problems

25 | P a g e
• Concern that reduced inventory will result in less shelf space and therefore loss of
market share. This concern can be addressed by filling the shelf space with other stock
keeping units from the same vendor.


Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are
given standing, status, or title according to their attainment of some level of performance,
such as delivery, lead time, quality, price, or some combination of variables. The motivation
for the establishment of such a rating system is part of the effort of manufacturers and service
firms to ensure that the desired characteristics of a purchased product or service is built in and
not determined later by some after-the-fact indicator. The vendor rating may take the form of
a hierarchical ranking from poor to excellent and whatever rankings the firm chooses to insert
in between the two. For some firms, the vendor rating may come in the form of some sort of
award system or as some variation of certification. Much of this attention to vender rating is a
direct result of the widespread implementation of the just-in-time concept in the United States
and its focus


Vendor performance is usually evaluated in the areas of pricing, quality, delivery, and
service. Each area has a number of factors that some firms deem critical to successful vendor

Pricing factors include the following:-

• Competitive pricing: The prices paid should be comparable to those of vendors

providing similar product and services. Quote requests should compare favorably to
other vendors.
• Price stability- Prices should be reasonably stable over time.
• Price accuracy: There should be a low number of variances from purchase-order prices
on invoiced received.
• Advance notice of price changes: The vendor should provide adequate advance notice
of price changes.

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• Sensitive to costs: The vendor should demonstrate respect for the customer firm's
bottom line and show an understanding of its needs. Possible cost savings could be
suggested. The vendor should also exhibit knowledge of the market and share this
insight with the buying firm.
• Billing: Are vendor invoices are accurate? The average length of time to receive credit
memos should be reasonable. Estimates should not vary significantly from the final
invoice. Effective vendor bills are timely and easy to read and understand.

Quality factors include:-

• Compliance with purchase order: The vendor should comply with terms and conditions
as stated in the purchase order. Does the vendor show an understanding of the customer
firm's expectations?
• Conformity to specifications: The product or service must conform to the specifications
identified in the request for proposal and purchase order. Does the product perform as
• Reliability: Is the rate of product failure within reasonable limits?
• Reliability of repairs: Is all repair and rework acceptable?
• Durability: Is the time until replacement is necessary reasonable?
• Support: Is quality support available from the vendor? Immediate response to and
resolution of the problem is desirable.
• Warranty: The length and provisions of warranty protection offered should be
reasonable. Are warranty problems resolved in a timely manner?
• State-of-the-art product/service: Does the vendor offer products and services that are
consistent with the industry state-of-the-art? The vendor should consistently refresh
product life by adding enhancements. It should also work with the buying firm in new
product development.

Delivery factors include the following:-

• Time: Does the vendor deliver products and services on time; is the actual receipt date
on or close to the promised date? Does the promised date correspond to the vendor's
published lead times? Also, are requests for information, proposals, and quotes swiftly

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• Quantity: Does the vendor deliver the correct items or services in the contracted
• Lead time: Is the average time for delivery comparable to that of other vendors for
similar products and services?
• Packaging: Packaging should be sturdy, suitable, properly marked, and undamaged.
Pallets should be the proper size with no overhang.
• Documentation: Does the vendor furnish proper documents (packing slips, invoices,
technical manual, etc.) with correct material codes and proper purchase order
• Emergency delivery: Does the vendor demonstrate extra effort to meet requirements
when an emergency delivery is requested?

Finally, these are service factors to consider:-

• Good vendor representatives have sincere desire to serve. Vendor reps display
courteous and professional approach, and handle complaints effectively. The vendor
should also provide up-to-date catalogs, price information, and technical information.
Does the vendor act as the buying firm's advocate within the supplying firm?
• Inside sales. Inside sales should display knowledge of buying firms needs. It should
also be helpful with customer inquiries involving order confirmation, shipping
schedules, shipping discrepancies, and invoice errors.
• Technical support. Does the vendor provide technical support for maintenance, repair,
and installation situations? Does it provide technical instructions, documentation,
general information? Are support personnel courteous, professional, and
knowledgeable? The vendor should provide training on the effective use of its
products or services.
• Emergency support. Does the vendor provide emergency support for repair or
replacement of a failed product.
• Problem resolution. The vendor should respond in a timely manner to resolve
problems. An excellent vendor provides follow-up on status of problem correction.

A more comprehensive approach is needed for suppliers that are critical to the success of the
firm's strategy or competitive advantage. For firms that fall into the latter category
performance may need to be measured by the following 7 C's.

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1. Competency-managerial, technical, administrative, and professional competence of
the supplying firm.
2. Capacity-supplier's ability to meet physical, intellectual and financial requirements.
3. Commitment-supplier's willingness to commit physical, intellectual and financial
4. Control-effective management control and information systems.
5. Cash resources-financial resources and stability of the supplier. Profit, ROI, ROE,
asset-turnover ratio.
6. Cost-total acquisition cost, not just price.
7. Consistency-supplier's ability to exhibit quality and reliability over time.


Benefits of vendor rating systems include:-

• Helping minimize subjectivity in judgment and make it possible to consider all

relevant criteria in assessing suppliers.
• Providing feedback from all areas in one package.
• Facilitating better communication with vendors.
• Providing overall control of the vendor base.
• Requiring specific action to correct identified performance weaknesses.
• Establishing continuous review standards for vendors, thus ensuring continuous
improvement of vendor performance.
• Building vendor partnerships, especially with suppliers having strategic links.
• Developing a performance-based culture.

Vendor ratings systems provide a process for measuring those factors that add value to the
buying firm through value addition or decreased cost. The process will continually evolve and
the criteria will change to meet current issues and concerns.


Many companies are now confronted with diminishing growth opportunities, which results in
a situation where an increase in turnover can only be realized at the expense of the
competition and only with a great deal of effort. This leads to increased pressure on sales
prices and consequently on cost prices and margins, which causes two developments.
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- On the one hand it has resulted in shifts of power between purchasing and selling
parties in many markets. Due to the fact that in many cases the market has changed
from seller’s market to buyer’s market, the role of the buyer is now more dominant
than a number of years ago.

- On the other hand the increasing pressure on sales prices and margins has resulted in
an increased pressure on direct materials-related costs. Because the purchasing prices
determine the sales prices in the industrial sector to a large extent, the company will
be constantly on the look-out for opportunities to keep these prices as low as possible.

As a result of both developments, the purchasing and supply strategies of industrial

companies have undergone major changes.

Several examples of these changes are presented below:-

i. Co-ordination of purchasing requirements: In companies with several manufacturing

plants, important purchasing advantages can be realized by combining policy is seen to
emerge in many European companies of this type, even across national borders.
Traditionally this was already common for raw materials; at present however, a similar
approach is used for the purchase of computer hardware and software, capital goods and
components. Good examples of companies with an active policy concerning purchasing
co-ordination are, apart from the automotive and computer industry, Shell, Philips
electronics and Alcatel.

ii. Integration of purchasing in logistics: Automation enables companies to improve

materials planning and supply systems. It furthermore may significantly improve the
productivity within the materials area. An integrated approach of materials management
requires close cooperation between the production planning, inventory control, quality
inspection and purchasing. To achieve succesful automation, system standardization is a
prerequisite. Purchasing cannot be allowed to follow its own course. To ensure effective
integration of the different materials related areas. Purchasing increasingly is integrated
into supply chain management.

iii. Integration of purchasing in engineering and production planning: In practice,

supplier selection is determined to a large degree by the technical specifications. Once
established, this specification is often very difficult to change. From a commercial point
of view it is undesirable that specifications are defined towards a particular supplier; in
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that case purchasing often ends up with a monopolist, which seriously hampers
negotiating. To prevent this it is desirable to include purchasing in the development
process at an early stage. The goal is to make optimal use of purchasing knowledge of
products and markets for the benefit of the product design.

iv. Make or Buy: Practice shows that several production activities can be done cheaper and
faster by specialized suppliers. Moreover, companies may take greater demands in
terms of quality on external suppliers than on their own. This is why in some industrial
branches, the purchasing to sales ratio has been steadily rising. For some companies
these have resulted in detailed make or buy studies. Purchasing should always be
closely involved in this type of study, because they are the logical source of market

v. Reciprocity agreements and compensation obligations: Companies operation on

international markets is often obliges to compensate their sales turnover by counter
purchase obligations. The recent opening up of the eastern European block has counter
trade an actual issue. Buying from these countries may even open up interesting sales
opportunities. Purchasing become involved in fulfilling such obligations

vi. Total quality control and just-in-time production: In several companies a growing
interest in quality improvement and increased productivity can be observed. The
activities of the European foundation for Quality Management, initiated by the
presidents of 14 European industries on 5 September 1988, illustrate the first; several
EEC programmes, aimed at logistics, the second. There is a growing awareness in the
international business scene that, if Europe wishes to remain competitive on a world
scale in several sectors, Improvements must be made in both the level of costs and the
level of quality of the end products.


The Internet and e-commerce is drastically changing the way purchasing is done. Internet use
in buying has led to the terms "e-purchasing" or "e-procurement." Certainly, communication
needed in competitive bidding, purchase order placement, order tracking, and follow-up are
enhanced by the speed and ease afforded by establishing online systems. In addition,
negotiation may be enhanced and reverse auctions facilitated. Reverse auctions allow buying
firms to specify a requirement and receive bids from suppliers, with the lowest bid winning.
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E-procurement is considered one of the characteristics of a world-class purchasing
organization. The use of e-procurement technologies in some firms has resulted in reduced
prices for goods and services, shortened order-processing and fulfillment cycles, reduced
administrative burdens and costs, improved control over off-contract spending, and better
inventory control. It allows firms to expand into trading networks and virtual corporations.

Criteria for e-purchasing include:

• Supporting complete requirements of production (direct) and non-production

(indirect) purchasing through a single, internet-based, self-service system.
• Delivering a flexible catalog strategy.
• Providing tools for extensive reporting and analysis.
• Supporting strategic sourcing.
• Enhancing supply-chain collaboration and coordination with partners.


Since the purchasing department deals with large sums of money purchasing personnel may
in some cases may take part in unethical and illegal activities such as manipulating
quotations, fixing prices, favoring up specific supplier and so on.

Most organisations develop a set of rules and guidelines to ensure that their purchasing
manager conduct business in ethical manner. Some of these rules are:-

- The organization’s interest should be kept in mind while purchasing.

- No undue favor should be taken from or given to suppliers.
- All purchasing activities should be conducted honestly and truthfully.
- All purchasing commitments should be completed on time.

Organisation can reduce the temptation to adopt unethical practices by compensating

employees suitably.


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For many businesses, the advantages of online procurement have been tantalizingly clear but
damnably distant. Long ago, these companies recognized that getting rid of paper-based
purchasing could save them money. Their executives realized that electronic procurement
could eliminate human errors and speed up business processes.

But, these savvy companies weren’t willing to pay hundreds of thousands, even millions of
dollars for a full ERP or e-Procurement implementation that would take months, if not years,
to implement. So, these companies sat on the sidelines, monitoring the war stories of e-
Procurement projects that failed.

Today, companies can opt for hosted e-Procurement solutions that are “pay-as-you-go”
systems, instead of committing to an extensive internally managed and funded program.
Hosted e-Procurement is part of the On-Demand movement typified by technology providers
such as Salesforce.com and Perfect Commerce


The advantages of electronic procurement are well documented. In an enterprise with buyers
distributed throughout the organization, e-Procurement allows purchasing professionals to
regain control of the purchasing process. With all purchases going through an e-Procurement
system, the purchasing department can ensure that buying complies with negotiated contracts.
It reduces “maverick” or off-contract purchasing.

At the same time, e-Procurement streamlines and automates the purchasing process by
eliminating paper or faxed purchase orders (POs) and supplier responses. Instead,
standardized electronic documents reduce human errors and dramatically speed up PO
processing, cutting time from days or weeks to minutes. Purchasing cycle times may be cut
by 75 percent or more. Workflows in the e-Procurement software correctly route requests for

In short, procurement becomes more efficient. People who once shuffled paperwork can be
assigned to higher-value procurement activities like purchasing analysis or supplier

Departments can get immediate visibility into the status of all orders and requisitions, saving
on urgent phone calls and faxes. In addition, reporting can provide data to purchasing
33 | P a g e
managers to help analyze performance. Conducting this type of analysis allows some
companies to cull their number of suppliers and keep only the best ones.


Anyone sitting on the sidelines watching as the benefits of on-demand unfolded and who
elected to hold-off on buying pricey procurement software is a candidate for hosted e-
procurement. This includes large enterprises that have implemented ERP (enterprise resource
planning) software but haven’t purchased the procurement modules. Another category: Mid-
sized enterprises that couldn’t justify the expense of procurement software and on-going
support in their IT budgets.

In addition, many Global 2000 companies have grown by mergers and acquisitions, leaving
them with a hodge-podge of different procurement systems. In some cases, past policies of
decentralized IT decisions resulted in multiple procurement systems installed in different
divisions or geographies. Instead of “ripping and replacing” these existing investments, these
enterprises can transition their procurement process to Perfect Commerce’s Procurement
Manager and their hosted supplier network, The Open Supplier Network to get centralized
visibility throughout the enterprise and to enforce purchasing contracts.

We needed to quickly consolidate these functions in order to accomplish our goal of

delivering continuous improvement to our customers, shareholders and employees. We chose
Perfect Commerce based on their proven processes and depth of expertise in bringing
programs on line quickly and efficiently.”


For a good e-Procurement solution, the first principle is to distribute purchasing decisions
(when to buy and how much to buy) to authorized users in operating units. At the same time,
a good system enforces rules set by purchasing management on preferred suppliers, approved
items, terms and other aspects. In other words, enterprises should set policies globally, but
implement them locally.

Second, a good system must provide tools for central purchasing to aggregate demand from
throughout the organization so it can negotiate better deals. That requires centralized
visibility into purchasing activity throughout the enterprise. You can’t get a better deal, if you
34 | P a g e
don’t know how much you’re buying. Once negotiated, those contracts must be enforced no
more buying from petty cash and getting reimbursed for office supplies.

Third, procurement is not a stand-alone activity, and e-procurement must be integrated with
existing back-end financial, accounts payable and invoice management applications. Make
sure the connections are easy. Does the hosted e-procurement service support SAP, Oracle,
PeopleSoft or other enterprise financials? Does it allow for XML dispatching of POs and
Change Orders? Does it integrate easily with supplier hubs?

Fourth, don’t forget invoicing and receiving. A good e-procurement solution either addresses
these activities with a complete “purchase-to-pay” system or links easily to an enterprise’s
existing capabilities.

Fifth, the value a company gains from an e-Procurement system depends mightily on how
many employees use it to make purchases. Ease of use, intuitive interfaces and powerful
search features will boost compliance.

Sixth, look for catalogue management tools and services. Catalogues change, so insist on
management tools to keep listings up-to-date.

Finally, the success of an e-Procurement system is influenced by the number of suppliers

using it. Just because a supplier is online doesn’t mean it can use your system. Look for a
network that not only has many suppliers but also a network where many of your suppliers
already connected. Those suppliers will be immediately available to you. For suppliers not on
the network, you should be able simply to invite them to join, and then expect easy on-


Although much attention is focused on direct procurement (materials that are utilized in a
company’s final product), AMR Research found that enterprises also can realize important

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benefits from indirect e-procurement. (Indirect procurement refers to the everyday materials
and services needed to run a business — MRO, industrial items, office supplies, etc.)

Importance of benefits Rating In Hard ROI

Purchase price reduction 6.6 89%
Reduce Maverick Buying 6.6 83%
Increase process of
6.6 77%
Free staff for strategic
5.9 51%
Staff reduction 4.3 51%
Getting business units to work
4.1 23%
together cross functionally

Table:-Ranked benefits of indirect procurement

As the table above illustrates, the biggest gains come from better pricing, sticking to
authorized contracts and reduced paperwork.
“The strategic relationship between Office Max and Perfect Commerce has helped customers
accelerate their e-purchasing initiatives. This partnership benefits customers accessing The
OSN with the fastest deployment capability in the industry. Customers can begin realizing the
gains of implementing an automated procurement process in just days, not weeks and months
as can be the case.”Jim Carrington, Director, Electronic
Commerce, OfficeMax (formerly Boise Office Solutions)

Features to look for:

Beyond those high-level principles, companies must decide on purchasing criteria that will
serve them for the long term. Among the areas to consider: Easy to use. Is the user interface
intuitive? If not, your roll-out could be slowed by the need to extensively train your
purchasing users. Ask whether your e-procurement provider offers training services to users.

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Easy to locate items. Every e-Procurement system has a search function, but users look for
items in different ways. You want multiple ways to search or browse catalogues. Once found,
users want to save their commonly purchased items for future use. Also, they need to identify
preferred suppliers quickly.

Punch-out and round-trip. These capabilities allow buyers to access content or

configuration tools on a supplier’s Web site using the buyer’s own e-Procurement software.
This real-time access to configuration tools and product information is critical for products
with many configurations or options and for products that must be customized for each buyer.

Customize workflows. Every organization has its own authorization and approval processes,
and an e-procurement solution should adapt to existing practices or allow enterprises to
improve them. These include configurable approvals and routing and spending limits for

Create single requisitions. Buyers want to specify purchases once and have them approved
and implemented without more paperwork. That means a single requisition for multiple
suppliers and shipping addresses.

Generate POs. Does the eProcurement system automatically create purchase orders, send
them electronically to suppliers, and request electronic confirmations? It should.

Check order status. Users should be able to log on and instantly see all their open orders and
requisitions and their status. Handle receivables. Reconciliation of items ordered to items
received, and items invoiced should be easy.

Global flexibility. Global companies need an e-procurement solution that can handle
multiple languages and multiple currencies

What about my suppliers?

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As mentioned above, an e-Procurement system only works if your suppliers are able to
receive and process POs from it. Slow supplier adoption has hampered many e-Procurement

Here’s what to look for:

A single connection.-Your company wants a single connection to many suppliers, not point-
to- point links for each supplier.

Open system.- For suppliers not already connected to your network, look for whether
suppliers can get online easily, accept electronic POs and issue invoices and ASNs, etc.

Catalogue management. -Suppliers should be able to submit their own catalogue or obtain
assistance in creating and loading them. Make sure those resources are available on the
network you choose.

Manage buyers-Suppliers need tools to manage multiple buyers (you and their other clients)
on the same system.

Killer combination.-procurement Manager and The Open Supplier Network

Perfect Commerce offers a hosted e-Procurement solution, Procurement Manager, that lets
purchasing departments take back control of their purchasing processes. Procurement
Manager, built on sound procurement principles, offers a complete solution that gives buyers
centralized control of their entire procurement process.

Procurement Manager’s end-to-end functionality comes with features sophisticated buyers

will prize:
·Automated requisitions and purchase orders.
· Searches by supplier, manufacturer, keywords or UNSPSC commodity codes.
· Comparisons of products and pricing from multiple suppliers.
· A single requisition for multiple suppliers and shipping addresses.

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· Automated workflows that conform to enterprise business processes.
· Support for multiple payment methods.
· Detailed reports on transaction and purchasing activity.
· Integration of PO extracts to AP and financials.
· Integration with invoice management, providing 2- and 3-way reconciliation and dispute

In addition, Perfect Commerce’s Procurement Manager works closely with Perfect

Commerce’s Open Supplier Network (The OSN), which lists 8,000 suppliers and 21 million
products ready for purchase. Many enterprises will find their current suppliers already on The
OSN, the largest independent supplier network in the world. The OSN offers an “easy on-
ramp” with automated tools not only for buyers but for suppliers too. Together, The OSN and
Perfect Commerce’s hosted Procurement Manager comprise an “On- Demand” solution that
delivers the fastest road to ROI. With a low start-up investment and quick
deployment, Perfect Commerce’s automated processes save enterprises time and money.
With Perfect Commerce, the promised benefits of automated procurement are delivered with
a typical 75% reduction in purchasing cycle time and true visibility into enterprise-wide
procurement spending. Procurement Manager connects seamlessly not only to The OSN but
also to enterprise applications, enabling straight-through processing with financial and
accounts payable systems. Procurement
Manager’s flexibility lets companies configure it to their business processes, including
management approvals. In short, hosted procurement streamlines the purchasing process
through automation and improves spend management.

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PZ Cussons is a major manufacturer of personal healthcare products, and consumer goods. It
operates worldwide, especially in Africa and Commonwealth nations. The company is listed
on the London Stock Exchange and a constituent of the FTSE 250 Index.

40 | P a g e

PZ Cussons was founded in 1879 as a trading post in Sierra Leone by George Paterson and
George Zochonis as Paterson Zochonis. The British-owned company expanded its operations
into nearby Nigeria before the end of the 19th century PZ expanded considerably during the
20th century, acquiring factories and establishing offices in Ghana and Kenya. It was one of
three or four firms which commercially dominated Guinea as a colony before 1958. In 1975
the Company acquired Cussons Group (founded by Thomas Cussons). Later that century
more offices and factories were acquired in Asia, with PZ's first factory built in Thailand in
1986, and operations expanded into Indonesia in 1988. In 1993 PZ bought the state-owned
Pollena Wroclaw in Poland, followed in 1995 by Pollena Uroda and in 2002 Paterson
Zochonis Plc was renamed PZ Cussons Plc.

In 2004 PZ Cussons sold the 1001 Carpet Cleaner brand to the American WD-40 Company
for £6.2 million.

In 2005 PZ Cussons closed their Nottingham factory (founded by Gerard Bros.), and
relocated the operations to Thailand. In 2006 PZ Cussons announced a plan to move their
remaining English factory from Kersal to Swinton, both in the City of Salford.

In 2008 PZ Cussons Plc acquired the Sanctuary Spa and Sanctuary products business.

41 | P a g e
1879 George Paterson and George Zochonis set up a trading post in Sierra Leone

1899 Paterson Zochonis (PZ) opens a branch office in Nigeria

1948 PZ acquires its first soap factory in Nigeria

1969 A manufacturing base is established in Ghana

1973 PZ enters the detergent and refrigerator markets simultaneously in Nigeria

1975 PZ acquires Cussons Group Ltd

1976 Soap manufacture starts up in Melbourne, Australia

1977 Minerva SA, a leading Greek edible oils and fats manufacturer, is acquired

1983 PZ purchases its first soap factory in Kenya

1986 Manufacture begins at the Pathum Thani site in Thailand

1988 PT Cussons Indonesia is established

1993 PZ buys the state-owned Pollena Wroclaw in Poland, followed in 1995 by Pollena

2003 PZ Cussons Plc enter into a joint venture (Nutricima) with Glanbia Plc to supply
evaporated milk and milk powder in Nigeria

2005 Nutricima JV commences manufacture in Nigeria

2008 PZ Cussons Plc acquires the Sanctuary Spa and Sanctuary products business

Strategy of Company

PZ Cussons operates in Africa, Asia and Europe with its strategy built on four core principles.

We operate in selected markets that have the potential for future growth, both in mature and
emerging markets. Our presence across Africa, Asia and Europe ensures a naturally balanced
portfolio of global markets, which we continually review to ensure they provide the Group

42 | P a g e
with the best opportunities for profitable growth. We take pride in our knowledge of local
markets which enables us to respond quickly and appropriately to local needs.

We develop leading brands for the markets in which we operate. Whilst some have global
reach, the majority of our brands are sold only in local and regional markets as we create
products that are particularly suited to local needs and tastes. Our strategy is to grow these
brands so they achieve category leading positions in their markets and we continually review
and expand the categories in which we operate to ensure profitable growth. We are proud of
our portfolio of category leading brands which are developed to satisfy the particular needs of
local consumers.

We operate world class supply chain networks that enable us to deliver our brands quickly
and efficiently to our local consumers. Our distribution systems vary by market type, from
traditional supply chain models in mature markets to extensive nationwide depot networks in
emerging markets. We continually adapt our methods of distribution to suit our local markets
and to changing market needs. We take pride in our flexible distribution capability which is
tailored specifically for the local market.

We recruit, develop and retain a great team of people who are aligned with our values and
who can drive our plans for growth. Our aim is to create a high performance culture offering
career experiences and development. We work together as a true meritocracy where
leadership is determined by talent.


PZ Cussons has factories in Salford and a number of countries abroad including Poland,
Thailand and Indonesia.

The PZ Cussons Group operates in Europe, Africa and Asia, in both mature and emerging

43 | P a g e

• PZ Cussons' main brand is the Imperial Leather range of soaps, bath and shower and
cosmetic products.
• It also produces Joy soaps, Cussons Kids toiletries, Premier soaps, Carex anti-
bacterial moisturisers,
• Cussons baby lotions, Luksja gels and soaps, Makler perfumes, Pearl soaps, Sweet
Seventeen teenage cosmetic products, Venus range of hair care products,
• Original Source shampoos and gels, Morning Fresh dishwash liquid, Flourish
Toothpaste, Elephant Extra Detergent, Radiant Laundry Granules,
• Robb mentholated rubs, Duck Laundry Soap and Minerva Olive Oils.

Purchase Procedure of PZ CUSSONS

The specifications and number/quantity and delivery of

equipment, devices and materials are determined by the
department that will be using the product or materials. The
Purchasing Department conducts purchase activities based on

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purchase requests submitted by the Concern department.
The Purchasing Department, at its sole discretion, selects
companies from which estimates will be sought. Suppliers are
selected from the files of "Companies with Previously
Established Business Relationships", "Companies from Which
Estimates Can Be Requested" and "Products and Suppliers".
Selection is made by comprehensively evaluating such factors as
the quality and performance of the equipment, device(s) or
Selection Of
materials to be purchased, compatibility with existing facilities,
degree of reliability, product requirements including safety,
delivery time, the scale of the order, after-sale service and the
company's previous business record.
As a rule, when requesting an estimate from a company that it
has selected, PZ Cussons will set out a specification from listing
PZ Cussons requirements in respects of quality, performance
standard, size, inspection and method of inspection. The selected
ESTIMATE companies will be asked to submit cost estimates and
REQUEST specifications to PZ Cussons prior to a specified date.

Specification sheets submitted by potential suppliers at their

own expense are checked by the Purchasing Department and
the department that will be using the product, in order to
determine whether the required standards are met by the
product. All products must pass this examination. During this
ESTIMATE process, Osaka Gas may request additions or changes to the
After valid cost estimates and specifications have been
comprehensively evaluated in respect of price, technical
requirements, etc. PZ Cussons will commence negotiation with
the company with the most attractive proposal to discuss the
NEGOTIATION 45 | P a g e
amount of the contract and other terms and conditions. The
selection of such a company shall be made by PZ Cussons at its
sole discretion. Contract terms and conditions will be decided
upon mutual agreement.
The business will be established upon conclusion of a contract,
in the form of a written document if necessary. The obligations
and liabilities of PZ Cussons arise only when such contract is
CONTRACT concluded.
Delivery dates specified in the contract must be strictly
observed. Precise details of the delivery schedule will be
agreed between the supplier and the relevant department of PZ
Cussons. Delivered equipment, device or materials must pass
inspections conducted by the relevant department of PZ
DELIVERY Cussons. When deemed significant, an interim inspection may
be conducted during the manufacturing process.

Payment will be made according to the payment terms

specified in the contract.



• Operations Management By S.N. Charry

• Purchase and Supply Management by Arjan J Van Welee
• Operation Management by ICFAI Business School
• Operation Management by K. Ashwathapa
• Purchase Management by L.C. Jhamb
• Wikipedia

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