09/02/2025

Lesson 2

Purchasing
Management

Do Thi Thu Ha, PhD.

Do Thi Thu Ha, PhD.

Chapter objectives
After completing this chapter, you should be able to:
 Understand the role of supply management and its strategic impact on an
organization’s competitive advantage.
 Have a basic knowledge of the traditional purchasing process, e-procurement,
public procurement and green purchasing.
 Understand and know how to handle small value purchase orders.
 Understand sourcing decisions and the factors impacting supplier selection.
 Understand the pros and cons of single sourcing versus multiple sourcing.
 Understand centralized, decentralized and hybrid purchasing organizations.
 Describe the opportunities and challenges of global sourcing and understand how
globalization impacts supply management.

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Lecture outline
In this chapter, you will learn about:
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
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Supply chain management (SCM)

Supplier Manufacturer Warehouse Retailers Consumer

Distributor

Buy Make Move Sell Serve

things things things things things

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Purchasing in SCM Purchasing profession

The purchasing profession:
the act of obtaining
merchandise; capital Merchants
equipment; raw materials; Industrial
- Wholesalers
services; or maintenance, buyers
repair and operating (MRO) - Retailers
supplies in exchange for
money or its equivalent.
whose primary
task is to
who primarily
purchase raw
purchase for
Primary focus of this chapter: materials for
resale purposes
conversion
Industrial buyers purposes

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The Role of Purchasing in an Organization

The primary goals of  Purchasing can contribute to these
purchasing: objectives by:
to ensure uninterrupted flows
 actively seeking better materials and
of raw materials at the lowest
total cost, to improve quality reliable suppliers
of the finished goods  working closely with and exploiting the
produced and to maximize expertise of strategic suppliers to
customer satisfaction.
improve the quality of raw materials
 involving suppliers and purchasing
personnel in product design and
development efforts

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The Purchasing Process

Traditional Manual Purchasing System

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The Purchasing Process

Traditional Manual Purchasing System
1 day 2 hours 2 hours

Search Fill in Send to Seller(s)

goods requisition seller(s) export orders
1 day

2 hours 1 day 1 day

Payment Matching Accountant Delivery

invoice
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The Purchasing Process

Electronic Procurement Systems (e-Procurement)

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The Purchasing Process

Electronic Procurement Systems (e-Procurement)

1 hour 30 mins

Search goods Order on web Delivery

1 day

30 mins

Payment Generate invoice

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The Purchasing Process

Advantages of the 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

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e-Procurement System: Procurement Credit

Card/Corporate Purchasing Card
Place order Authorized
End-user
suppliers
organization
Transfer goods/services
Receive Submit
Provide Make payment transaction
report payment

How P-card works

Send data Provide Process Provide
authorization payment authorization
Process payment
Process payment

Processor Provide data Card issuer Provide

Processor
authorization
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Sourcing Decisions: The Make-or-Buy Decision

Common outsourcing activities include:
 human resource management
 facilities management
 supply chain management
 accounting
 customer support and service
 marketing
 computer aided design
Outsourcing:
 research
refer to buying materials or
 design
components from suppliers instead
 content writing
of making them in-house.
 engineering
 diagnostic services
 legal documentation

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Sourcing Decisions: The Make-or-Buy Decision

Reasons for Buying or Reasons for Making
Outsourcing 1.
1.

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Sourcing Decisions: The Make-or-Buy Decision

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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.
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Make-or-Buy Break-Even Analysis

Break-even Analysis

Break-even Point, QB
Total Cost to Make = Total Cost to Buy
 $25,000 + $5QB = $500 + $7QB
 QB = 12,250 units

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Procurement for Government/ Nonprofit Agencies

Public procurement or public Government procurement looks for:
purchasing: refers to the  Adequacy of resources, knowledge, staff, and
management of the operational ability
purchasing and supply  Ability to comply with production and delivery
management function of the schedules
government and nonprofit  Good performance record and reputation
sectors, such as educational  Legal eligibility
institutions, hospitals and  Access to proper equipment and facilities
the federal, state and local
governments

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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
10. Service
11. …..
12. …..
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Ethical and Sustainable Sourcing Defined

• 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 effort to care for the environment.
• Principle 4 – Collect environmental information on products and suppliers.
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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

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How Many Suppliers to Use

Sole sourcing:

Single sourcing:

Reasons Favoring a Single Supplier Reasons Favoring Multiple Suppliers

1. 1.

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Purchasing Organization
Centralized purchasing:

Decentralized purchasing:

Advantages of Centralized Advantages of Decentralized

1. 1.

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International Purchasing/Global Sourcing

Quality of
Delivery
overseas
speed
products

Lower the
price of Countertrade
materials Why
global
sourcing?

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Summary
Over the last decade, the traditional purchasing function has evolved into an
integral part of supply chain management. 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. Savvy executives are thus turning to
purchasing to improve business and supply chain performance.
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Remember, a real
decision is
measured by the
fact that you’ve
taken new action. If
there’s no action,
you haven’t truly
decided.

– Anthony Robbins –

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