Chap 2: Purchasing Management

The purchasing profession

the act of obtaining merchandise, capital equipment; raw materials; services; or maintainance, repair and operating (MRO) supplies in exchange for money or its equivalent

Merchants

* Wholesalers
* Retailers

who primarily purchase for resale purposes

Industrial buyers

whose primary task is to purchase raw materials for conversion purpose

ex: services, capital equipment,...

The primary goals of purchasing

* to ensure uninterrupted flows of raw materials at the lowest total cost
* to improve quality of the finished goods produced
* to maximize profits along with customer satisfaction

Purchasing can contribute to these objectives by

* actively seeking better materials and reliable suppliers 


* working closely with and exploiting the expertise of strategic suppliers to improve the quality of raw materials 
* involving suppliers and purchasing personnel in product design and development efforts

THE PURCHASING PROCESS - E-PROCUREMENT

STEP 1 - Materials user enters a purchase request Relevant information such as quantity and date needed

STEP 2 - Purchase requisition approved and transmitted electronically to buyer At purchasing department (hard copy or electronically)

STEP 3 - Buyer review requisition, assigns qualified suppliers to bid (if over $50k) Product description, closing date, and conditions are given

STEP 4 - Buyer review closed bids and selects a supplier

The advantages of the e-procurement

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1. Time saving 
2. Cost saving 
3. Accuracy 
4. Mobility 
5. Real time 
6. Trackability 
7. Management 
8. Benefits to suppliers

Outsourcing

refer buying materials or components from suppliers instead of making them in-house

Reasons for Buying or Outsourcing

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1. Cost advantage 
2. Insufficient capacity 
3. Lack of expertise 
4. Quality 
5. Focus on core activities 

Reasons for Making

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1. Protect proprietary technology 
2. No competent supplier
3. Better quality control 
4. Use existing idle capacity 
5. Control of lead-time, transportation and warehousing cost 
6. Lower cost 

Break-even analysis

a handy tool for computing the cost effectiveness of sourcing decision when cost is the most important criterion


1. all cost involved can be classified under either fixed cost or variable cost
2. fixed cost remains the same within the range of analysis 
3. a linear variable cost relationship exists
4. fixed cost of the make option is higher because of the initial capital investment 
5. variable cost of the buy option is higher because of supplier profits

The complex process supplier selection that should be based on multiple criteria:

1. Product and process technologies 
2. Willingness to share technologies & information

* Early supplier involvement 


3. Quality 
4. Reliability 
5. Order system & cycle time 
6. Cost 

* Total cost of ownership or acquisition


7. Capacity 
8. Communication capability 
9. Location 
10. Service 

Reason Favoring a Single Supplier

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1. To establish a good relationship 
2. Less quality variability 
3. Lower cost 
4. Transportation economies 
5. Proprietary product or process purchases 
6. Volume too small to split 

Reasons Favoring Multiple Suppliers

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1. Need capacity 
2. Spread the risk of supply interruption 
3. Create competition 
4. Information 
5. Dealing with special kinds of businesses 

Centralized purchasing

a single purchasing department, usually located at the firm’s corporate office, makes all the purchasing decisions, including order quantity, pricing policy, contracting, negotiating and supplier selection and evaluation

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ex: Wal-Mart has a centralized purchasing department that handles the procurement of goods for all its stores across different locations. The company negotiates contracts and manages supplier relationships at the corporate level, allowing them to leverage their purchasing power and secure favorable terms and prices.

Decentralized purchasing

individual, local purchasing departments, such as at the plant level, make their own purchasing decisions

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ex: Starbucks Corporation, a global coffeehouse chain, utilizes a decentralized purchasing approach. Starbucks has regional purchasing teams that are responsible for sourcing and procuring coffee beans from different regions around the world. The regional teams have expertise in understanding the specific qualities and flavors of coffee from different origins and work directly with local coffee farmers and suppliers.

Advantages of Centralized

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1. Concentrated volume 
2. Avoid duplication 
3. Specialization 
4. Lower transportation costs 
5. No competition within units
6. Common supply base

Advantages of Decentralized 

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1. Closer knowledge of requirements 
2. Local sourcing 
3. Less bureaucracy 
4. More flexibility 
5. Shorter lead-time