CHAPTER 2:

PURCHASING MANAGEMENT

Ye a r 2 0 2 4
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 After learning this chapter,
CHAPTER OBJECTIVES you are able to :
Describe the role of purchasing and its strategic
impact on an organization’s competitive advantage.

Describe the traditional purchasing process, e-

procurement, public procurement, and green
purchasing.

Analyze the pros and cons of single sourcing

versus multiple sourcing.

Use the break-even analysis tool to determine the

conditions when choosing between in-house
production and outsourcing.

Understand and appreciate the trends in ethical

and sustainable sourcing.
CONTENT 1. The Purchasing Process
2. Sourcing Decisions: The Make-or-Buy Decision
3. Supplier Selection
4. How Many Suppliers to Use
5. International Purchasing/Global Sourcing
6. Ethical and Sustainable Sourcing Defined
7. Summary
 PURCHASING IN SUPPLY CHAIN MANAGEMENT

Purchasing
profession
The purchasing profession:
The act of obtaining merchandise; capital
Merchants
equipment; raw materials; services; or
- Wholesalers Industrial buyers
maintenance, repair and operating (MRO)
supplies in exchange for money or its equivalent. - Retailers

Whose primary task

Primary focus of this chapter: Who primarily
is to purchase raw
➔Industrial buyers purchase for resale 5
materials for
purposes
conversion purposes
THE ROLE OF SUPPLY MANAGEMENT IN AN ORGANIZATION

Many successful businesses are treating purchasing as a key strategic process

 THE ROLE OF SUPPLY MANAGEMENT IN AN ORGANIZATION

Purchasing can contribute to these objectives by:

The primary goals of purchasing:
▪ Actively seeking better materials and reliable suppliers.
To ensure uninterrupted flows of raw
▪ Working closely with and exploiting the expertise of
materials at the lowest total cost, to improve
strategic suppliers to improve the quality of raw materials.
quality of the finished goods produced and
to maximize customer satisfaction. ▪ Involving suppliers and purchasing personnel in product
design and development efforts.
 THE PURCHASING PROCESS
TRADITIONAL MANUAL PURCHASING SYSTEM
 THE PURCHASING PROCESS
TRADITIONAL MANUAL PURCHASING SYSTEM

1 day 2 hours 2 hours

Search goods
Fill in requisition Send to buyer Buyer prints order

1 day

2 hours 1 day 1 day

Payment Matching invoice Accountant Delivery

 THE PURCHASING PROCESS
ELECTRONIC PROCUREMENT SYSTEM (E-PROCUREMENT)
 THE PURCHASING PROCESS
ELECTRONIC PROCUREMENT SYSTEM (E-PROCUREMENT)

1 hour 30 mins

Search goods Order on web

1 day
30 mins

Payment Generate invoice

 THE PURCHASING PROCESS
ADVANTAGES OF E-PROCUREMENT SYSTEM

1. Time savings
2. Cost savings
3. Accuracy
4. Real time
5. Mobility
6. Trackability
7. Management
8. Benefits to the suppliers
E-PROCUREMENT SYSTEM: PROCUREMENT CREDIT CARD/
CORPORATE PURCHASING CARD

Place order Authorized

End-user suppliers
organization
Receive goods/services
Receive Submit
Provide Make
payment transaction
data payment

How P-card works

Merchant acquirer
Card issuer
Process Request
Request Provide payment authorization
authorization authorization
Process payment Process payment

Processor Request Request

Network Processor
authorization authorization
 MATRIX INTEGRATION OF SUPPLY CHAINS

Supplier 1 Supplier 2 Supplier n

Manufacturer 1 Manufacturer 2 Manufacturer n

Vertical

Warehouse/DC Warehouse/DC Warehouse/DC

1 2 n

Retailer 1 Retailer 2 Retailer n

Customer 1 Customer 2 Customer n

Horizontal
 SOURCING DECISIONS: THE MAKE-OR-BUY DECISION

Outsourcing Reasons for Buying or Outsourcing

Refer to buying materials or components from suppliers 1. Cost advantage
instead of making them in-house.
2. Insufficient capacity

3. Lack of expertise

4. Quality

Reasons for Making

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 variable cost

 MAKE-OR-BUY BREAK-EVEN ANALYSIS

Consider a hypothetical situation in which a firm has the option to make or buy a part.
Its annual requirement is 15,000 units.
A supplier is able to supply the part at $7 per unit. The firm estimates that it costs $500
to prepare the contract with the supplier.
To make the part, the firm must invest $25,000 in equipment and the firm estimates that
it costs $5 per unit to make the part.
 MAKE-OR-BUY BREAK-EVEN ANALYSIS

Break-even Analysis

Break-even Point, Q

Total Cost to Make = Total Cost to Buy

➔ $25,000 + $5Q = $500 + $7Q
➔ Q = 12,250 units
BREAK-EVEN POINT PRACTISE
BREAK-EVEN POINT PRACTISE
BREAK-EVEN POINT PRACTISE
BREAK-EVEN POINT PRACTISE
 SUPPLIER SELECTION

1. Process and product technologies

2. Willingness to share technologies and information
3. Quality
4. Cost
5. Reliability
6. Order system and cycle time
7. Capacity
8. Communication capability
9. Location
 HOW MANY SUPPLIER TO USE
❖ Sole sourcing:
Refers to the situation when the supplier is the only available source.
❖ Single sourcing:
Refers to the deliberate practice of concentrating purchases of an
item with one source from a pool of many potential suppliers.

Reasons Favoring a Single Supplier Reasons Favoring Multiple Suppliers

1. To establish a good relationship 1. Need capacity

2. Less quality variability 2. Spread the risk of supply interruption

3. Lower cost 3. Create competition

4. Transportation economies 4. Information

5. Proprietary product or process 5. Dealing with special kinds of

purchases businesses

6. Volume too small to split

 How Many Suppliers to Use: Fact

At Microsoft Corporation, employees are served both

lunch and dinner. However, the number of people
who have lunch is always higher than the number of
people who have dinner, because not everyone has
to work overtime. Therefore, the lunch provider will
be more beneficial. Nonetheless, Microsoft
employees complain that the quality of the lunch here
is very bad. Lots of employees ask for changing the
recipes or even changing the cooks, but Microsoft
thinks these are not effective solutions.
What would you do?
 PURCHASING ORGANIZATION
❖ Centralized purchasing:
Where a single purchasing department, usually located at the firm’s corporate office, makes all the purchasing
decisions, including order quantity, pricing policy, contracting, negotiations and supplier selection and evaluation.
❖ Decentralized purchasing:
Where individual, local purchasing departments, such as at the plant level, make their own purchasing decisions.

Advantages of Centralized Advantages of Decentralized

1. Concentrated volume 1. Closer knowledge of requirements

2. Avoid duplication 2. Local sourcing

3. Specialization 3. Less bureaucracy

4. Lower transportation costs

5. No competition within units

6. Common supply base

INTERNATIONAL PURCHASING/ GLOBAL SOURCING

Quality of
overseas Delivery speed
products

Lower the price

Countertrade
of materials
Why global
sourcing?
 PROCUREMENT FOR GOVERNMENT/NON-PROFIT AGENCIES
Public procurement or public purchasing:
Refers to the management of the purchasing and
supply management function of the government
and nonprofit sectors, such as educational
institutions, hospitals and the federal, state and
local governments.

• Principle 1 – Consider whether a material/product is

needed before purchasing it or not.
• Principle 2 – Purchase a product considering the
various environmental impacts over its life cycle -
from extraction of raw materials to disposal.
• Principle 3 – Select suppliers who make a conscious
efforts to care for the environment.
• Principle 4 – Collect environmental information on
products and suppliers.
Ethical and Sustainable Sourcing Defined

Ethical sourcing policies should include:

➢Determining where all purchased goods come from and how they
are made;
➢ Knowing if suppliers promote basic workplace principles (such as
the right to equal opportunity and to earn a decent wage, the
prohibition of bonded, prison or child labor, and the right to join a
union);
➢ Use of ethical ratings for suppliers alongside the other standard
performance criteria;
➢ Use of independent verification of vendor compliance;
➢ Reporting of supplier compliance performance to shareholders;
➢ Providing detailed ethical sourcing expectations to vendors.
SUMMARY

❖ Purchasing is an important strategic contributor to overall business competitiveness. It is the largest

single function in most organizations, controlling activities and transactions valued at more than 50
percent of sales. Every dollar saved due to better purchasing impacts business operations and profits
directly.
❖ Purchasing personnel talk to customers, users, suppliers and internal design, finance, marketing
and operations personnel, in addition to top management. The information they gain from all this
exposure can be used to help the firm to provide better, cheaper and more timely products and
services to both internal and external customers.
THANK YOU