Purchasing Exam 1

Why has purchasing moved from a clerical function to a strategic function?

The business environment changed: global competition, sophisticated customers, lower-cost expectations, abundant information, balanced buyer/supplier power, and increased outsourcing.

What is the key idea about modern competition?

Competition is now between supply chains, not just companies.

Why is outsourcing increasingly possible?

Cheap, widely available information allows supply-chain members to coordinate closely.

What are major factors driving supply chain management?

Information availability, competition, changing customer expectations, and the need to identify/mitigate risk.

What are the seven reasons purchasing is important?

Value/savings; relationships/innovation; quality/reputation; time-to-market; supplier risk; economic impact; competitive advantage.

What percentage of manufacturing revenue is purchased content?

More than 55%.

Why involve purchasing early in product design?

Identify and avoid costs before they become embedded in the product.

What is the old approach to supplier relationships?

A: Hard bargaining primarily focused on price.

What is the newer approach to supplier relationships?

Joint cost reduction where both buyer and supplier benefit and suppliers contribute ideas.

Why is supplier quality important?

Supplier quality affects product quality, and supplier failures can damage the buying company's reputation.

Why outsource non-core activities?

A: To allow the organization to focus on its core competencies.

What is the average improvement associated with early supplier involvement?

A: About 20% improvement in material cost, material quality, and development time.

What three factors amplify supplier risk?

A: G-S-J: Global sourcing, Single sourcing, JIT inventory.

What do global sourcing, single sourcing, and JIT have in common?

A: They can reduce costs but also increase vulnerability.

What is the supplier-risk solution emphasized in Chapter 1?

A: Business continuity plans

What does an ISM PMI above 50 indicate?

A: Economic expansion.

What does an ISM PMI below 50 indicate?

A: Economic contraction.

What are major purchasing activities?

A: Supplier identification/selection, buying, negotiation, contracting, supply-market research, supplier measurement/improvement, and purchasing-systems development.

What are the Five Rights?

A: Right Quality, Quantity, Time, Price, Source.

What is the memory hook for the Five Rights?

A: Q-Q-T-P-S.

What is purchasing?

A: A primarily transactional and tactical function involving buying, negotiating, contracting, and related activities.

What is supply management?

A: A broader strategic, cross-functional, relationship-driven approach to managing the supply base.

What makes supply management strategic?

A: Its long-term impact and alignment with the firm's mission and strategy.

What does a process approach to supply management involve?

A: Identifying, evaluating, selecting, managing, and developing suppliers.

What does cross-functional supply management mean?

A: It crosses functional boundaries, shares information, and treats suppliers as extensions of the buying company.

What is a supply chain

A: The flow of materials, information, and money across entities involved in producing and delivering a product.

What is a value chain?

A: The activities that create value for the customer.

Are supply chains and value chains identical?

A: No. They are related but focus on different aspects.

What is supply chain management?

A: Integrating and coordinating supply-chain flows and relationships across firms to serve the end customer.

What is an extended enterprise?

A: Treating suppliers, and sometimes customers, as an integrated extension of the firm.

What are the five purchasing objectives?

A: Supply continuity; manage sourcing process; supplier performance management; aligned goals with internal stakeholders; integrated strategies

What is the memory hook for the five objectives?

A: C-S-P-A-S: Continuity, Sourcing, Performance, Alignment, Strategy

Which purchasing objectives are primarily operational?

Continuity, sourcing, and performance

Which objectives focus on organizational integration?

Alignment, Strategy.

What is supply continuity?

A: Getting the right price, source, specification, quantity, and time to the right internal customer.

What does managing the sourcing process involve?

A: Staffing, budgets, training/development, and improving buying channels within P2P systems.

What is supplier performance management?

A: Selecting competitive suppliers, identifying promising new suppliers, improving existing suppliers, and developing new suppliers.

What does aligning goals with internal stakeholders mean?

A: Treating internal customers as stakeholders and using cross-boundary communication and collaboration.

What are integrated strategies?

A: Matching supply-management goals with organizational goals and making supply management a strategic competency.

What are the eight supply-management responsibilities?

Spend analysis; demand management/specifications/SOWs; category management and supplier evaluation/selection; contract management; cost management; P2P management; supplier relationship management; supply-management strategy.

What are the six P2P steps in order?

A:

1. Forecast & plan requirement

2. Need clarification/requisition

3. Supplier identification & selection

4. Approval & contract/PO generation

5. Receive material & documents

6. Settle, pay & measure performance

What is the P2P memory sequence?

A: Need → Find supplier → Approve/buy → Receive → Pay → Evaluate.

who starts the P2P process?

A: Internal customers such as projects or operations.

What functions enable P2P?

A: Finance, Legal, HR, and IT.

What is an advantage of existing suppliers?

Familiarity and an established track record.

What is a preferred supplier list?

A: A list of suppliers approved/preferred for purchasing.

What problem can new suppliers create?

A: Maverick spending and the need to identify, evaluate, and qualify candidates.

When should competitive bidding be used?

A: When requirements are clear, the market is competitive, qualified suppliers exist, volume is sufficient, suppliers have enough response time, and price is a major factor.

When should negotiation be used?

A: When requirements are complex/uncertain, multiple factors matter, early supplier involvement is desired, or supplier risks/costs are difficult to determine beforehand.

What is an RFQ?

A: A Request for Quotation, generally used for clearly specified requirements where suppliers provide pricing.

What is an RFP?

A: A Request for Proposal, generally used for more complex requirements where suppliers propose solutions and pricing.

What is normal practice for the minimum number of bids?

A: Three.

What should an RFQ/RFP include?

A: Enough information to respond accurately, a due date, and whether substitute offers are acceptable.

What is a purchase order?

A: A legally binding purchasing document/contract specifying the terms of the purchase.

When is a PO drafted?

A: After supplier evaluation and selection.

What does a PO contain?

A: Carefully defined terms, including standard boilerplate language and offer/acceptance.

Why is the PO important?

A: It is the most common and fundamental purchasing document.

What are the 10 PO elements?

A: Quantity, material specification, quality requirements, price, delivery date, delivery method, ship-to address, PO number, order due date, buyer name/address.

What is an easy PO memory framework?

A: What? When? Where? Who? How much?

Why does Accounting need the PO?

A: To know what was ordered and what should be paid.

Why does Receiving need the PO?

A: To compare incoming goods with what was ordered.

Why does Quality Control need the PO?

A: To know what specifications to inspect against.

What other groups need PO visibility?

A: The requisitioner, traffic management, and supply management.

What is a blanket PO?

PO used for repeated purchases over a period, typically about one year.

What is a material purchase release?

A: A release authorizing shipments under a blanket PO and communicating forecasted/actual needs.

What is an escape clause?

A: A provision allowing the buyer to exit or modify a blanket arrangement under specified conditions.

What is maverick spending?

A: Purchasing outside approved channels or preferred suppliers.

Escape clause

typically lets the buyer exit or adjust the blanket PO, for example if the supplier underperforms or needs change.

RFQ vs. RFP

: an RFQ usually focuses on price for clearly specified items, and an RFP is for more complex needs where suppliers propose solutions