CHAPTER 2- PURCHASING

MANAGEMENT

Prof O S Rao
 Learning Objectives
You should be able to:
– Describe the role of purchasing and understand its impact on
an organization’s competitive advantage.
– Have a basic knowledge of manual purchasing and e-
procurement.
– 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.

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 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.

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 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

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

Merchant Buyers-
wholesalers and retailers who purchase for resale.

Industrial Buyers-
purchase raw materials for conversion, services, capital equipment,
& MRO supplies.

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 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.

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 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 buyer’s
offer & becomes a binding contract when accepted by supplier.

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The Purchasing Process- Cont.

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 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

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 The Purchasing Process- Cont.
Advantages for the e-Procurement System

– Time savings
– Cost savings
– Accuracy
– Real time
– Mobility
– Trackability
– Management
– Benefits to the suppliers

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 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

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 Sourcing Decisions: The Make-or-
Buy 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 customer’s operations.

The Make or Buy decision is a strategic decision.

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 Sourcing Decisions: The Make-or-
Buy Decision- Cont.
Reasons for Buying or Outsourcing
 
• Cost advantage: Especially for components that are non-vital to the
organization’s 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.

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 Sourcing Decisions: The Make-or-
Buy 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

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Sourcing Decisions: The Make-or-
Buy Decision- Cont.
The Make-or-Buy Break-Even Analysis

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 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

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 Supplier Selection
The process of selecting suppliers, is complex and should
be based on multiple criteria:

– Product and process – Order System and cycle

technologies time
– Willingness to share – Capacity
technologies and – Communication capability
information – Location
– Quality
– Service
– Cost
– Reliability

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 How Many Suppliers to Use 
Single-sourcing- a risky proposition. Although trends favor
fewer sources, avoid single source.

Reasons Favoring a Single Reasons Favoring More than

Supplier One Supplier

• To establish a good relationship • Need capacity

• Less quality variability • Spread risk of supply
• Lower cost interruption
• Transportation economies • Create competition
• Proprietary product or process • Information
• Volume too small to split • Dealing with special kinds of
business

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 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 firm’s corporate
office makes all the purchasing decisions.

– Decentralized Purchasing- individual,

local purchasing departments, such as
plant level, make their own purchasing
decisions.

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 Purchasing: Centralized vs.
Decentralized   
Advantages- Centralization Advantages- Decentralization
– Concentrated volume- – Closer knowledge of
leveraging purchase volume requirements
– Avoid duplication – Local sourcing
– Specialization – Less bureaucracy
– Lower transportation costs
– No competition within units
– Common supply base
 

A hybrid purchasing organization- both decentralized at

the corporate level and centralized at the business unit
level may be warranted.

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 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.

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