SCM--- Purchasing

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Session -2 Session -2

SCM - PurchasingSCM - Purchasing

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IntroductionIntroductionPurchasing- Purchasing-

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

Merchant BuyersMerchant Buyers--Wholesalers and retailers who purchase for Wholesalers and retailers who purchase for resaleresale

Industrial BuyersIndustrial Buyers-- Purchase raw materials for conversion, services, Purchase raw materials for conversion, services, capital equipment, & MRO suppliescapital equipment, & MRO supplies

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A Brief History of Purchasing TermsA Brief History of Purchasing Terms

• Purchasing Purchasing - key business function for acquiring materials, - key business function for acquiring materials, services, & equipmentservices, & equipment

• ContractingContracting - term- term often used for the acquisition of often used for the acquisition of servicesservices

• Supply ManagementSupply Management - a newer term that encompasses all - a newer term that encompasses all acquisition activitiesacquisition activities– Institute of Supply management defined supply Institute of Supply management defined supply

management as the “Identification, acquisition, access, management as the “Identification, acquisition, access, positioning, and management of resources an positioning, and management of resources an organization needs or potentially needs in the organization needs or potentially needs in the attainment of its strategic objectives.”attainment of its strategic objectives.”

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The Role of Purchasing in an The Role of Purchasing in an OrganizationOrganization

The primary goals of purchasing are:The primary goals of purchasing are:1.1. Ensure uninterrupted flows of raw materials at the Ensure uninterrupted flows of raw materials at the

lowest total cost, lowest total cost,

2.2. Improve quality of the finished goods produced, and Improve quality of the finished goods produced, and

3.3. Optimize customer satisfaction. Optimize customer satisfaction.

Purchasing contributes to these objectives by: Purchasing contributes to these objectives by: – Actively seeking better materials and reliable Actively seeking better materials and reliable

suppliers, suppliers, – Work closely with strategic suppliers to improve Work closely with strategic suppliers to improve

quality materials, and quality materials, and – Involving suppliers and purchasing personnel in new Involving suppliers and purchasing personnel in new

product design and development efforts.product design and development efforts.

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The Role of Purchasing in an Organization The Role of Purchasing in an Organization (Cont.)(Cont.)

The Financial Significance of Supply ManagementThe Financial Significance of Supply ManagementProfit-Leverage EffectProfit-Leverage Effect

A decrease in purchasing expenditures directly A decrease in purchasing expenditures directly increases profits before taxes (assuming no increases profits before taxes (assuming no decrease in quality or purchasing total cost)decrease in quality or purchasing total cost)

Return on Assets (ROA) EffectReturn on Assets (ROA) EffectA high ROA indicates managerial prowess in A high ROA indicates managerial prowess in generating profits with lower spending (caveat- ROA generating profits with lower spending (caveat- ROA ratios vary from one industry to another)ratios vary from one industry to another)

Inventory Turnover Effect Inventory Turnover Effect Increased inventory turnovers indicate optimal Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased utilization of space and inventory levels, increased sales, avoidance of inventory obsolescesales, avoidance of inventory obsolesce

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The Purchasing Process - The Purchasing Process - Manual Purchasing Manual Purchasing (older system)(older system)

Step 1- Material Requisition/Purchase Step 1- Material Requisition/Purchase RequisitionRequisition -- Stating product, quantity, and Stating product, quantity, and delivery date. May originate as a delivery date. May originate as a planned order planned order releaserelease from the MRP system. from the MRP system. Traveling requisitionTraveling requisition used for recurring orders.used for recurring orders.

Step 2- The Request for Quotation (RFQ) Step 2- The Request for Quotation (RFQ) -- Buyer Buyer identifies suppliers & issues a request for quotation identifies suppliers & issues a request for quotation (RFQ) for routine items or a (RFQ) for routine items or a Request for Proposal Request for Proposal (RFP)(RFP) for more demanding products. for more demanding products. Supplier Supplier DevelopmentDevelopment is used to develop supplier is used to develop supplier capabilitiescapabilities..

Step 3- The Purchase Order (PO) -Step 3- The Purchase Order (PO) - Is the buyer’s Is the buyer’s offer & becomes a binding contract when accepted by offer & becomes a binding contract when accepted by supplier. When initiated by the supplier on their own supplier. When initiated by the supplier on their own terms, the document is a terms, the document is a sales ordersales order. The . The Uniform Uniform Commercial Code (UCC)Commercial Code (UCC) governs transactions in governs transactions in the U.S., except Louisiana.the U.S., except Louisiana.

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The Purchasing Process- The Purchasing Process- (Cont.)(Cont.) Manual Purchasing Manual Purchasing (Fig. 2.1)(Fig. 2.1)

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MaterialsAvailable?

Yes

IssueMaterials

MR File

Materials

PO 3

MR 2

AccountingInformation

for charging theappropriatedepartment

Accounts Payable

+

MR File

Materials

MR 2

+Materials

MR 2

ShipMaterials

DO 3

DO 2

DeliveryOrderDO 1

PO 2

PurchaseOrderPO 1

INV 2

InvoiceINV 1

Storage/Warehouse AccountingUsers/RequisitionSuppliers Purchasing

PO 4

PO 3

PO 2

PurchaseOrderPO 1

PO File

MR 2

MaterialsRequisition

MR 1

MR 3

MR 2


MR 1

START

No

MR 2


MR 1

Issue PO

PO 2

DeliveryOrderDO 1

InvoiceINV 1

DO 2

PO 2

DeliveryOrderDO 1

DO 2

+

MaterialsAvailable?

Yes

IssueMaterials

IssueMaterials

MR FileMR File

MaterialsMaterials

PO 3

MR 2

PO 3PO 3

MR 2MR 2





Accounts Payable

+

MR FileMR File

MaterialsMaterials

MR 2MR 2

+MaterialsMaterials

MR 2MR 2

ShipMaterials

ShipMaterials

DO 3

DO 2

DeliveryOrderDO 1

DO 3DO 3

DO 2DO 2

DeliveryOrderDO 1

DeliveryOrderDO 1

PO 2

PurchaseOrderPO 1

PO 2PO 2

PurchaseOrderPO 1

PurchaseOrderPO 1

INV 2

InvoiceINV 1

INV 2INV 2

InvoiceINV 1

InvoiceINV 1

Storage/Warehouse AccountingUsers/RequisitionSuppliers Purchasing Storage/Warehouse AccountingUsers/RequisitionSuppliers Purchasing

PO 4

PO 3

PO 2

PurchaseOrderPO 1

PO 4PO 4

PO 3PO 3

PO 2PO 2

PurchaseOrderPO 1

PurchaseOrderPO 1

PO FilePO File

MR 2


MR 1MR 2MR 2


MR 1


MR 1

MR 3

MR 2


MR 1

MR 3MR 3

MR 2MR 2


MR 1

START

No

MR 2


MR 1MR 2MR 2


MR 1


MR 1

Issue PO

PO 2

DeliveryOrderDO 1

PO 2PO 2

DeliveryOrderDO 1

DeliveryOrderDO 1

InvoiceINV 1

InvoiceINV 1

DO 2

PO 2

DeliveryOrderDO 1

DO 2DO 2

PO 2PO 2

DeliveryOrderDO 1

DeliveryOrderDO 1

DO 2DO 2

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The Purchasing Process -The Purchasing Process -ee-Procurement-Procurement

Step 1- Material user inputs a materials Step 1- Material user inputs a materials requisition requisition - Relevant information such as - Relevant information such as quantity and date needed.quantity and date needed.

Step 2- Materials requisition submitted to buyer Step 2- Materials requisition submitted to buyer -- At purchasing department (hardcopy or At purchasing department (hardcopy or electronically). electronically).

Step 3- Buyer assigns qualified suppliers to bid Step 3- Buyer assigns qualified suppliers to bid - - Product description, closing date, & conditions Product description, closing date, & conditions are given.are given.

Step 4- Buyer reviews closed bids & selects a Step 4- Buyer reviews closed bids & selects a suppliersupplier

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The Purchasing Process- The Purchasing Process- (Cont.)(Cont.) e-Procurement e-Procurement (Fig. 2.4)(Fig. 2.4)

Materials User Purchasing Department/Buyer

Prepares MaterialsRequisition – inputs

information intocomputer system

Materials Requisition is transmitted

electronically to a buyer

Buyer reviews Materials Requisition

Extracts and mergesMaterials Requisition

data into Internetbased B2B system

Assigns suppliers torequisition on B2B

system for bidding andspecifies closing date and

other conditions

Collects and reviews bidssubmitted by suppliersthrough Internet based

B2B system or fax

Selects a supplierbased on quality, cost and

delivery performance,then issues a

Purchase Order

Purchase Order is transmitted electroni-cally (or faxed) to thesupplier

Materials User Purchasing Department/Buyer

















other conditions



other conditions


B2B system or fax


B2B system or fax



Purchase Order



Purchase Order



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The Purchasing Process – The Purchasing Process – (Cont.)(Cont.)e-Procuremente-Procurement

Advantages of the Advantages of the e-e-Procurement SystemProcurement System

– Time savingsTime savings– Cost savingsCost savings– AccuracyAccuracy– Real timeReal time– MobilityMobility– TrackabilityTrackability– ManagementManagement– Benefits to the suppliersBenefits to the suppliers

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Small Value Purchase OrdersSmall Value Purchase Orders

Processing costs for small value purchases Processing costs for small value purchases are minimized through:are minimized through:

– Procurement Credit Card/Corporate Procurement Credit Card/Corporate Purchasing CardPurchasing Card

– Blanket or Open-End Purchase OrdersBlanket or Open-End Purchase Orders

– Blank Check Purchase OrdersBlank Check Purchase Orders

– Stockless Buying or System ContractingStockless Buying or System Contracting

– Petty CashPetty Cash

– Standardization & Simplification of Matls & Standardization & Simplification of Matls & ComponentsComponents

– Accumulating Small Orders to Create a Accumulating Small Orders to Create a Large OrderLarge Order

– Using a Fixed Order IntervalUsing a Fixed Order Interval

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Sourcing Decisions: The Make-or-Buy DecisionSourcing Decisions: The Make-or-Buy Decision

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

• Backward vertical integrationBackward vertical integration refers to acquiring refers to acquiring sources of supply sources of supply

• Forward vertical integrationForward vertical integration refers to acquiring refers to acquiring customer’s operations.customer’s operations.

The Make or Buy decision is a The Make or Buy decision is a strategicstrategic decision. decision.

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Sourcing Decisions: The Make-or-Buy Sourcing Decisions: The Make-or-Buy Decision (Cont.)Decision (Cont.)

Reasons for Buying or OutsourcingReasons for Buying or OutsourcingCost advantageCost advantage: Especially for components : Especially for components

that are non-vital to the organization’s that are non-vital to the organization’s operations, suppliers may have operations, suppliers may have economies economies of scaleof scale..

Insufficient capacityInsufficient capacity: A firm may be at or near : A firm may be at or near capacity and capacity and subcontractingsubcontracting from a supplier from a supplier may make better sense.may make better sense.

Lack of expertiseLack of expertise: Firm may not have the : Firm may not have the necessary technology and expertise.necessary technology and expertise.

QualityQuality: Suppliers have better technology, : Suppliers have better technology, process, skilled labor, and the advantage of process, skilled labor, and the advantage of economy of scale.economy of scale.

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Sourcing Decisions: The Make-or-Sourcing Decisions: The Make-or-Buy Decision (Cont.Buy Decision (Cont.))

Reasons for MakingReasons for Making– Protect proprietary technology Protect proprietary technology – No competent supplierNo competent supplier– Better quality controlBetter quality control– Use existing idle capacityUse existing idle capacity– Control of lead-time transportation, and Control of lead-time transportation, and

warehousing costwarehousing cost– Lower costLower cost

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Sourcing Decisions: The Make-or-Sourcing Decisions: The Make-or-Buy Decision Buy Decision (Cont.)(Cont.)

The Make-or-Buy Break-Even AnalysisThe Make-or-Buy Break-Even Analysis

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Roles of Supply BaseRoles of Supply Base

Supply BaseSupply Base-- list of suppliers that a firm uses to list of suppliers that a firm uses to acquire its materials, services, supplies, and acquire its materials, services, supplies, and equipmentequipment

Firms emphasize long-term strategic supplier Firms emphasize long-term strategic supplier alliances consolidating volume into alliances consolidating volume into one or fewerone or fewer suppliers, resulting in a suppliers, resulting in a smaller supply basesmaller supply base

Preferred suppliersPreferred suppliers provide: provide:– Early supplier involvement- Information on the Early supplier involvement- Information on the

latest trends in materials, processes, or latest trends in materials, processes, or designsdesigns

– Information on the supply marketInformation on the supply market– Capacity for meeting unexpected demandCapacity for meeting unexpected demand– Cost efficiency due to economies of scaleCost efficiency due to economies of scale

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Supplier SelectionSupplier Selection

– Product and Product and process process technologiestechnologies

– Willingness to Willingness to share technologies share technologies & information & information [Early supplier [Early supplier involvement (ESI) involvement (ESI) and concurrent and concurrent engineering (CE)]engineering (CE)]

– QualityQuality

– Cost Cost (Total cost of (Total cost of ownership or ownership or acquisition)acquisition)

– Reliability Order Reliability Order System & cycle timeSystem & cycle time

– CapacityCapacity– Communication Communication

capabilitycapability– LocationLocation– ServiceService

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

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How Many Suppliers to Use How Many Suppliers to Use

Reasons Favoring a Reasons Favoring a Single SupplierSingle Supplier

• To establish a good To establish a good relationshiprelationship

• Less quality variabilityLess quality variability• Lower costLower cost• Transportation Transportation

economieseconomies• Proprietary product or Proprietary product or

processprocess• Volume too small to splitVolume too small to split

Reasons Favoring Reasons Favoring Multiple SuppliersMultiple Suppliers

• Need capacityNeed capacity• Spread risk of supply Spread risk of supply

interruptioninterruption• Create competitionCreate competition• InformationInformation• Dealing with special Dealing with special

kinds of businesskinds of business

Single-source - a risky proposition. Current trends favor fewer sources.

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Purchasing: Centralized vs. Purchasing: Centralized vs. Decentralized Decentralized

Purchasing OrganizationPurchasing Organization is dependent on is dependent on many factors, such as market conditions & many factors, such as market conditions & types of materials required.types of materials required.

– Centralized PurchasingCentralized Purchasing-- purchasing purchasing department located at the firm’s department located at the firm’s corporate office makes all the purchasing corporate office makes all the purchasing decisions.decisions.

– Decentralized PurchasingDecentralized Purchasing-- individual, individual, local purchasing departments, such as local purchasing departments, such as plant level, make their own purchasing plant level, make their own purchasing decisions.decisions.

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Purchasing: Centralized vs. Decentralized Purchasing: Centralized vs. Decentralized (Cont.) (Cont.)

Advantages- Advantages- CentralizationCentralization•Concentrated volume- Concentrated volume- •Leveraging purchase volumeLeveraging purchase volume•Avoid duplicationAvoid duplication•SpecializationSpecialization•Lower transportation costsLower transportation costs•No competition within unitsNo competition within units•Common supply baseCommon supply base

Advantages- Advantages- DecentralizationDecentralization

– Closer knowledge of Closer knowledge of requirementsrequirements

– Local sourcingLocal sourcing– Less bureaucracyLess bureaucracy

A hybrid purchasing organization - • Decentralized-centralized (large multiunit org)-

decentralized corporate and centralized at business unit

• Centralized-decentralized (large org w/centralized control) centralized large national contracts at corporate level and decentralized items specific to business unit

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International Purchasing/Global SourcingInternational Purchasing/Global Sourcing

Reasons for Global Sourcing-Reasons for Global Sourcing- Opportunity to improve Opportunity to improve quality, cost, and delivery performancequality, cost, and delivery performance

Potential Challenges-Potential Challenges- Requires additional skills and Requires additional skills and knowledge to deal with international suppliers, logistics, knowledge to deal with international suppliers, logistics, communication, political environment, and other issues communication, political environment, and other issues

• Import broker or sales agent-Import broker or sales agent- performs service for a fee performs service for a fee • Import merchant-Import merchant- buys and takes title to the goods buys and takes title to the goods • Trading company-Trading company- imports & carries wide variety of goodsimports & carries wide variety of goods• Tariff and non-tariff barriers-Tariff and non-tariff barriers- International trade International trade

organizations strive to reduce barriersorganizations strive to reduce barriers• CountertradeCountertrade- raw materials are traded for goods and - raw materials are traded for goods and

services services

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SCM--- Purchasing