CHAPTER 2- PURCHASING MANAGEMENT

Principles of Supply Chain Management: A Balanced Approach

Learning Objectives
You should be able to:
Describe the role of purchasing and understand its impact on an organizations competitive advantage. Have a basic knowledge of manual purchasing and eprocurement. Understand and know how to handle small value purchase orders. Understand sourcing decisions and the factors impacting supplier selection. Understand the pros and cons of single versus multiple sourcing.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Learning Objectives- Cont.

Describe centralized, decentralized, and hybrid purchasing organizations and their advantages. Describe and understand how globalization impacts, purchasing, and describe and understand the opportunities and challenges of global sourcing. Understand total cost of ownership and be able to select suppliers using more than unit price alone.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Chapter Two Outline

The Role of Purchasing in an Organization The Purchasing Process Sourcing Decisions: The Make-or-Buy Decision Roles of Supply Base Supplier Selection How Many Suppliers to Use Purchasing Organization: Centralized versus Decentralized Purchasing International Purchasing/Global Sourcing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Introduction
PurchasingObtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.

Merchant Buyerswholesalers and retailers who purchase for resale.

Industrial Buyerspurchase raw materials for conversion, services, capital equipment, & MRO supplies.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

The Role of Purchasing in an Organization

The primary goals of purchasing are:
1. Ensure uninterrupted flows of raw materials at the lowest total cost, 2. Improve quality of the finished goods produced, and 3. Optimize customer satisfaction.

Purchasing contributes to these objectives by:

Actively seeking better materials and reliable suppliers, Work closely with strategic suppliers to improve quality materials, and Involving suppliers and purchasing personnel in new product design and development efforts.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

The Purchasing Process

Manual Purchasing-Older system, prone to duplication of effort
and error
Step 1-Material Requisition/Purchase Requisition- stating product, quantity, and delivery due date are clearly.

Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers & issues a request for quotation (RFQ).
Step 3- The Purchase Order (PO)- The purchase order is the buyers offer & becomes a binding contract when accepted by supplier.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

The Purchasing Process- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

The Purchasing Process- Cont.

Electronic Procurement (e-Procurement)
Step 1- Material user inputs a materials requisition- relevant information such as quantity and date needed. Step 2- Materials requisition submitted to buyer- at purchasing department (hardcopy or electronically). Step 3- Buyer assigns qualified suppliers to bid- Product description, closing date, & conditions are given.

Step 4- Buyer reviews closed bids & selects a supplier

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

The Purchasing Process- Cont.

Advantages for the e-Procurement System
Time savings Cost savings Accuracy Real time Mobility Trackability Management Benefits to the suppliers

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Small Value Purchase Orders

Processing costs can be substantial. Small value purchases should be minimized through:
Procurement Credit Card/Corporate Purchasing Card Blank Check Purchase Orders Blanket or Open-End Purchase Orders Stockless Buying or System Contracting Petty Cash Standardization & Simplification of Matls & Components Accumulating Small Orders to Create a Large Order Using a Fixed Order Interval

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Sourcing Decisions: The Make-orBuy Decision

Outsourcing -buying materials and components from suppliers
instead of making them in-house. The trend has moved toward outsourcing.

Backward integration refers to acquiring sources of supply Forward integration refers to acquiring customers operations. The Make or Buy decision is a strategic decision.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Sourcing Decisions: The Make-orBuy Decision- Cont.

Reasons for Buying or Outsourcing
Cost advantage: Especially for components that are non-vital to the organizations operations. Insufficient capacity: A firm may be at or near capacity. Lack of expertise: Firm may not have the necessary technology and expertise. Quality: Suppliers have better technology, process, skilled labor, and the advantage of economy of scale.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Sourcing Decisions: The Make-orBuy Decision- Cont.

Reasons for Making
Protect proprietary technology No competent supplier Better quality control Use existing idle capacity Control of logistics- lead-time transportation, and warehousing cost Lower cost

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Sourcing Decisions: The Make-orBuy Decision- Cont.

The Make-or-Buy Break-Even Analysis

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Roles of Supply Base

Supply Base- suppliers that a firm uses to acquire its materials, services, supplies, and equipment. Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base. Preferred suppliers provide:
Early supplier involvement- Information on the latest trends in materials, processes, or designs Information on the supply market Capacity for meeting unexpected demand Cost efficiency due to economies of scale

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Supplier Selection
The process of selecting suppliers, is complex and should be based on multiple criteria:
Product and process technologies Willingness to share technologies and information Quality Cost Reliability Order System and cycle time Capacity Communication capability Location Service

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

How Many Suppliers to Use

Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.
Reasons Favoring a Single Supplier
To establish a good relationship Less quality variability Lower cost Transportation economies Proprietary product or process Volume too small to split

Reasons Favoring More than One Supplier Need capacity Spread risk of supply interruption Create competition Information Dealing with special kinds of business

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Purchasing: Centralized vs. Decentralized

Purchasing Organization dependent on many factors, such as market conditions & types of materials required.
Centralized Purchasing- purchasing department located at the firms corporate office makes all the purchasing decisions. Decentralized Purchasing- individual, local purchasing departments, such as plant level, make their own purchasing decisions.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Purchasing: Centralized vs. Decentralized

Advantages- Centralization
Concentrated volumeleveraging purchase volume Avoid duplication Specialization Lower transportation costs No competition within units Common supply base

Advantages- Decentralization
Closer knowledge of requirements Local sourcing Less bureaucracy

A hybrid purchasing organization- both decentralized at the corporate level and centralized at the business unit level may be warranted.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

International Purchasing/Global Sourcing

Global sourcing Opportunity to improve quality, cost, and delivery performance. Requires additional skills and knowledge to deal with international suppliers, logistics, communication, political environment, and other issues.
Import broker or sales agent- performs service for a fee. Import merchant- buys and takes title to the goods. Trading company- imports & carries wide variety of goods.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing