Chapter 5 - Purchasing Management

What is the definition of procurement?

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and purchasing goods and services.

How is purchasing defined?

Obtaining goods and services from an external supplier in exchange for money or its equivalent.

What is the relationship between purchasing and procurement?

Purchasing is a specific component of the broader procurement process focused on ordering goods and services.

What is supply management?

The identification, acquisition, and management of resources an organization needs to meet its strategic objectives.

What is the purpose of a purchase requisition?

It is an internal document used to define the need for specific goods or services.

Does a purchase requisition constitute a legal contract?

No, it does not create a contractual relationship.

What is a purchase order (PO)?

An official offer issued by a buyer to a supplier to acquire goods or services.

At what point does a purchase order become a binding contract?

When the supplier accepts and confirms the purchase order.

What is e-procurement?

The business-to-business purchase and sale of supplies and services over the internet.

What is a Request for Information (RFI)?

A process used to collect written information about the capabilities of potential suppliers.

What is the primary goal of supply management?

To identify, acquire, and manage resources to meet organizational strategic objectives.

What does the procurement process include beyond the act of purchasing?

Supplier vetting, contract negotiation, and the establishment of payment terms.

What is a Request for Proposal (RFP)?

A document used to evaluate a supplier's capability to provide a product or service.

What is a Request for Quote (RFQ)?

A document used to solicit price and delivery bids from suppliers.

What is the primary objective of purchasing?

To ensure an uninterrupted flow of materials and services at the lowest overall cost.

How does purchasing improve organizational operations?

By improving quality, reducing costs, and supporting customer satisfaction.

What is the initial step in the purchasing process?

Identifying a need and creating a purchase requisition.

When are RFPs or RFQs typically utilized?

When selecting a supplier for new or routine purchases.

What document is issued immediately after a supplier is selected?

A purchase order.

What occurs during the fulfillment stage of purchasing?

The supplier delivers goods according to the purchase order.

What is the purpose of inspecting goods upon receipt?

To ensure items meet quantity and quality requirements.

What is a 3-way match in the purchasing process?

Matching the purchase order, goods receipt, and invoice.

Why is the 3-way match performed before payment?

To verify accuracy and ensure the payment is correct.

What is inventory turnover?

The number of times inventory is sold and replaced over a specific period.

What does a high inventory turnover rate indicate?

Efficient inventory usage.

What is the sequence of events following the identification of potential suppliers?

Suppliers are evaluated and selected.

What is the final step in the purchasing process mentioned?

Payment is processed.

What does a low inventory turnover ratio indicate?

Excess inventory or poor sales performance

Define the profit leverage effect.

A decrease in purchasing costs directly increases profit

Why is the profit leverage effect significant?

Every dollar saved in purchasing adds directly to the bottom-line profit

What is return on assets (ROA)?

Profit generated relative to total assets

What is the total cost of ownership (TCO)?

The sum of all costs associated with acquiring, using, and maintaining a product

What does the acronym QSDP represent in the context of TCO?

Quality, Service, Delivery, and Price

Why is TCO a critical metric for purchasing decisions?

Because the purchase price is only a portion of the total cost

What is the make vs buy decision?

The choice between producing a product internally or purchasing it from an external supplier

List the qualitative factors involved in make vs buy decisions.

Control, quality, supplier reliability, and strategic considerations

List the quantitative factors involved in make vs buy decisions.

Costs such as labor, materials, capacity, and overhead

What are common reasons for a company to choose to 'make' a product?

To control quality, protect technology, or reduce costs

What are common reasons for a company to choose to 'buy' (outsource) a product?

Lower cost, lack of internal expertise, or superior supplier capability

Define outsourcing.

Purchasing goods or services from an external supplier

What are the primary benefits of outsourcing?

Reduced costs, increased flexibility, and the ability to focus on core activities

What are the primary risks associated with outsourcing?

Loss of control and increased dependence on suppliers

What is insourcing?

The process of bringing production back in-house

What is co-sourcing?

A strategy utilizing a combination of internal resources and external providers

What are the advantages of e-procurement?

Faster processing, reduced costs, fewer errors, and improved communication