Your SlideShare is downloading. ×
Chapter 2 Purchasing Management
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.


Introducing the official SlideShare app

Stunning, full-screen experience for iPhone and Android

Text the download link to your phone

Standard text messaging rates apply

Chapter 2 Purchasing Management


Published on

  • Be the first to comment

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

No notes for slide


  • 1. CHAPTER 2- PURCHASING MANAGEMENT Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD
  • 2. 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.
  • 3. 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.
  • 4. 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
  • 5. 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.
  • 6. The Role of Purchasing in an Organization
    • The primary goals of purchasing are:
      • Ensure uninterrupted flows of raw materials at the lowest total cost,
      • Improve quality of the finished goods produced, and
      • Optimize customer satisfaction.
    • 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.
  • 7. 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.
  • 8. The Purchasing Process- Cont.
  • 9. 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
  • 10. The Purchasing Process- Cont.
    • Advantages for the e-Procurement System
      • Time savings
      • Cost savings
      • Accuracy
      • Real time
      • Mobility
      • Trackability
      • Management
      • Benefits to the suppliers
  • 11. 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
  • 12. 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.
  • 13. 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.
  • 14. 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
  • 15. Sourcing Decisions: The Make-or-Buy Decision- Cont.
    • The Make-or-Buy Break-Even Analysis
  • 16. 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
  • 17. Supplier Selection
      • Product and process technologies
      • Willingness to share technologies and information
      • Quality
      • Cost
      • Reliability
      • Order System and cycle time
      • Capacity
      • Communication capability
      • Location
      • Service
    The process of selecting suppliers, is complex and should be based on multiple criteria:
  • 18. How Many Suppliers to Use 
    • 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
    Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.
  • 19. 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 .
  • 20. Purchasing: Centralized vs. Decentralized    
    • Advantages- Centralization
      • Concentrated volume- leveraging 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.
  • 21. 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.