Text Book

Purchasing & Supply Management

Leenders . Fearon
Flynn . Johnson 12th Edition

The Challenge of
Purchasing and Supply
Management
 The Foundations of Supply Chain
Management
Supply Supplier management, supplier evaluation, supplier
Management certification, strategic partnerships

Demand management, MRP, ERP, inventory

Operations visibility, JIT (AKA lean production & Toyota
Production System), TQM (AKA Six Sigma)

Transportation management, customer relationship

management, distribution network, perfect order
Logistics
fulfillment, global supply chains, service response
logistics

Key process integration, performance

Integration
measurement
Purchasing to Supply Management
• Movement from clerical to managerial
activity
• Integration into corporate strategy
• Transition to a process oriented, strategic
function
• Purchasing potential contribution
• Process & knowledge management
emphasized
Advantages of creation of a Special
Department
• Easier to standardize

• Cuts down on duplication and allows room for

application of electronic supply systems

• Contracts that provide pricing on the

organizations total requirements. Long term
benefits.

• Prevents interdepartmental competition in

periods of material shortages.
Advantages of creation of a Special
Department
• Better control over purchases

• Development of specialization and

expertise

• Essential for strategic Supply Chain

Management
Objectives of Purchasing & Supply
Management
1. Right Materials
2. Right Quantity
3. Right Time
4. Right Place
5. Right Source
6. Right Service
7. Right Price
Potential Contribution of Purchasing / Supply Management
The Purchasing /Supply Management department has the potential to,
and should play key role in developing and operational zing a strategy
leading to sharpened efficiency and heightened competitiveness,
through action such as:

• fighting inflation by resisting unnecessary price hikes

• Significantly reducing investment in materials inventory through better planning

and supplier selection.

• Raising the quality level of purchased materials and parts inputs, so that the
quality an consistency of end product/service outputs can be improved

• Reducing the materials segment of cost of goods-sold

• Effecting product ad process improvements through encouraging and facilitating

early, open communication between buyer and supplier, to mutual benefit of both
parties.
 Purchasing

The process of buying; learning the need,

locating ad selecting a supplier, negotiating price
and other pertinent terms, and following up to
ensure delivery.

Procurement

Not limited, but also includes the storage, traffic,

receiving, incoming inspection, and salvage.
 Material Management
the integration of related materials functions to provide
cost –effective delivery of materials and services to the
organization, includes a number of separate groups,
such as material planning and control, material and
purchasing research, purchasing, inbound traffic,
incoming quality control, inventory control, production
scheduling, receiving, stores, in-plant materials
movement, and scrap and surplus disposal.

Others names used for materials management,

Integrated Logistic and Supply Chain Management.
 Logistic Management

The part of SCM that plans, implements,

and controls the efficient, effective flow
and storage of goods, services, and
related information from the point of origin
to the point of consumption in order to
meet customers requirement.

Include the inbound, outbound and

external movements.
 Purchasing and Logistic
Purchasing influences a number of logistics-related activities, such
as how much to buy and inbound transportation. To ensure timely
delivery of product at given time, close related to transport, such as
how much to buy considering availability of transportation with out
disturbing the material flow from point of origin to point of
consumption.

Major Logistic Activities

Customer Service Parts and service support
Demand forecasting/Planning Plant and warehouse site selection
Inventory Management Purchasing
Logistic Communication Return goods handling
Material Handling Reverse logistic
Order Processing Traffic and Logistic
Packaging Warehouse storage
 Supply Management Vs Supply Chain Management

Supply Chain Management emphasizes all aspects of delivering products to

customers, whereas supply management emphasizes only the buyers –
supplier relationships.

SCM represents the philosophy of doing business that stresses processes

and integration. Supply management seems to be the term that now is more
commonly used to refer to the systems approach when it comes to the
purchasing function.

The use of the concepts of purchasing, procurement,

material management, and supply and supply chain
management will vary from organization to organization.
Significance of Material Cost
Purchase value Vs Sales Value in different industries
 Importance of Decision Making in the Purchasing /
Supply Management

The following decision will have a major impact on the

organizational goal, final customer, profitability, return on assets,
etc
•Make or Buy
•Price
•Where shall be order place
•Maximum or Minimum Order Size
•Best alternative in case of any emergency
•Transportation mode and Cost considering quality and timely delivery
•Long term or short term contract
•Dispose of surplus material
•Reactive and Proactive – Wait or Act now?
 Nine Goals of Purchasing
1. Provide an Uninterrupted Flow of
Materials: Loss of Production

2. Keep Inventory Investment & Loss at a

minimum.
3. Find or Develop Competent Suppliers.
E.g. Otsuka
 Nine Goals of Purchasing
4. Standardize Items: lower prices through mass
volume purchases.

5. Maintain & Improve Quality:

Attention. Begin Best end up with a quality
product.

4. Purchases done resulting in lower total costs.

Less spending on repairs & returns.
 Nine Goals of Purchasing
7. Achieve Harmonious Productive Relationships
with other Functions within the Organization

8. Accomplish objectives at lowest possible

Administrative costs: efficient team

9. Improve Organizations Competitive

Advantage: Work as a team, Customer
Satisfaction
 Purchasing Prime Decision
• Select the Supplier
– Capability
– Services
– Reliability
• Use Whichever Pricing Method is Appropriate
– Total cost of Ownership
– Determine the optimal price
– Ultimate lowest possible Cost
• Question the specification
– Specification
– Alternative (but final decision is end user’s hand)
• Monitor Contacts with Potential Supplier
– User contact a potential supplier directly
– Requisitioned sometimes make commitments to suppliers
– If Supplier technical personnel need to talk directly with engineer or operating personnel
 Purchasing Activities
Area of Responsibility Activities
Purchasing / Buying •Creating contract and supply agreements for materials, services, and capital items

•Managing key purchasing processes related to supplier selection, supplier evaluation,

negotiation, and contract management
Purchasing Research •Identifying better techniques and approaches to supply management , including
benchmarking processes and systems
•Identifying medium –and long-term changes in markets, and developing appropriate
commodity plans to meet future needs .
• Identifying supply chain rends and opportunities for better materials and services

Inventory Control •Managing inventories and expediting material deliveries

•Establishing and monitoring vendor-managed inventory systems
Transportation •Managing inbound and outbound transportation services, including carrier selection

Environmental and investment •Managing supply chain related activities to assure compliance with legal and regulatory
recovery/disposal requirements and with company environmental policies
•Managing disposal of surplus materials and equipment

Forecasting and planning •Production planning and forecasting of short-, medium and long-term requirements

•Supporting the transition from internal production to external supply and vice versa

Nonproduction/ Nontraditional •Managing cost effective delivery of nonproduction and nontraditional purchases , such
purchases as offices supplies, security services, janitorial services,
Supply Chain Management •Implementing and managing key suppliers relationships and supplier partnership,
including supplier development and participation on cross – functional teams
•Developing strategies that use the supply network to provide value to end customers and
contribute to organization al goals.
 Advantage & Disadvantages of Centralization
Advantages Disadvantages
Greater Buying specialization •Narrow specialization and job boredom
•Lack of job flexibility

Ability to pay for talent Corporate staff appears excessive

Consolidation of requirement •Tendency to minimize legitimate differences in

requirements
Coordination and control of policy and procedures •Lack of recognition of unique needs

Effective planning and research •Focus on corporate requirements, not on business unit
strategic requirement
•Most Knowledge sharing one – way.

Common Suppliers •Even common supplier behave differently in geographic

and market segment
Proximity to major organizational decision makers •Distance from users

Critical mass •Tendency to create organizational silos

Firm brand recognition and stature •Customer segment require adaptability to unique situations

Reporting line – Power •Top management not able to spend time on suppliers

Strategic focus •Lack of business unit focus

Cost of purchasing low •High visibility of purchasing costs

 Advantages & Disadvantages of Decentralization
Advantages Disadvantages

Easier coordination/communication with operating •More difficult to communicate among business units
department
Speed of response •Encourages users not to plan ahead
Operational vs strategic focus
Effective use of local sources •To much focus on local sources. Ignore the better supply
opportunities.
•No critical mass in organization for visibility /
effectiveness – whole person syndrome.
Lacks clout
Business and autonomy Sub optimization
Business unit preferences not congruent with corporate
preferences
Small differences get magnified

Reporting line simplicity Reporting at low level in organization

Undivided authority and responsibility Limit functional advancement opportunities

Suits purchasing personnel preference Ignores larger organization consideration

Broad job definition Limited expertise for requirements

Geographical, cultural, political, environmental , social , Lack of standardization

language , currency appropriateness
Hide the cost of supply Cost of supply relatively high
 Consortiums
Consists of two or more independent organization
that join together, either formally or informally, or
through an independent third party, for the
purpose of combining their individual
requirement for purchased materials, services
and capital goods to leverage more value added
pricing, service, and technology from their
external suppliers than could be obtain if each
firm purchase goods and services alone.
 Concern about consortia
• Anti trust issues
• Unmanageable
• Fear of Open enrollment
• Fear that the competition might be allowed to join
• Disclosure of sensitive information
• Supplier resistance
• Availability of suitable distribution channels
• Unequal size of members
• Uncertainty
• Standardization & Compliance
• Governance
 Six Objectives of Consortium
• Reducing total Cost
• Eliminating and avoiding violations of anti
trust regulations
• Installing sufficient safeguards
• Mutual and equitable sharing
• High degree of trust & Professionalism
• Maintaining Similarity
 Procurement Process
Requisitions

Negotiations Purchase
& Awards Orders

Catalog
Content Sourcing Ordering
Management Receiving

Analysis

Supplier
Management Payment

Supplier
Performance
Information System &
Purchasing
 Internal Information Flows to Purchasing

• Planning
• Sales Forecasting
• Budgeting & Financial Control
• Accounting
• Legal
• Engineering
• Production & Production Control
• Inventory Control
• Quality Control and Receiving
 External Information Flows to
Purchasing
• General Market Conditions
• Sources of Supply
• Suppliers’ Capacity
• Suppliers’ Production Rate
• Suppliers’ Labor Conditions
• Price, Discount, Customs, Sales and Taxes
• Transportation Availability and Rates
• New Product and Product Information
 Information flows from Purchasing
to Organization
• General Management
• Engineering
• Product Development
• Marketing
• Production
• Legal
• Finance and Accounting
• Stores
Steps in Purchasing Cycle /Process
1. Recognition of need
2. Description of need
3. Determination and analysis possible sources
of supply
4. Determination of price and terms
5. Preparation and placement of the purchase
order
6. Follow-up and/or expedite the order
7. Receipt and inspection of goods
8. Clear the invoice and pay the supplier
9. Maintain records and relationships
Quality Specification and
Inspection
 Determination of Need
• Quality Concerns Drive Supply Initiatives
• How the need is described and how its quality is
determined and measured
• Before the input can be acquired effectively and
efficiently it is necessary to identify exactly what is
needed
• The role if quality is to determine how needs are
define , what constitute a best way and what action
purchaser take to ensure that the right quality is
supplied
 Determination of Need
• Determination of Need is a Three Step
Process
– The organization needs our established by
focusing the needs of our customers
– It is determine what the market can supply .
– What constitute good value under the
circumstances
 Need can be categorize
• Every organization’s needs can be divided
into various categories
– Raw material
– Purchase parts
– MRO (maintenance, repair, operating)
– Packaging
– Services
– Resale item’s
– Equipments , machineries
Three role of every organization
The transformation and value-added chain

Customer Supplier Converter

Supplier Converter Customer

Converter Customer Supplier

 Identifying value opportunities
• 70% of opportunities for value Improvement lies in the first two phases
of the acquisition process
1. Need identification
2. Description

Early supply and supplier involvement

Early supply and supplier involvement (ESI) help ensure that is what is specify is
also procurable and represent good value.
 Opportunity to affect value during the six
steps of the acquisition process

High

Acquisition process chart

Opportunity to
affect value

Low
Need Potential
Description Selection Receipt Payment
recognition suppliers
 Method of description
• Purchasing role and describing needs

– Purchasing department is responsible to provide goods and services to the

user as per their specification and what exactly they want and need at a
given point of time with quality ,quantity and safe .

Description mean anyone of various methods by which a buyer conveys

to a sailor a clear accurate picture /information/detail of the required
product .
The term specification will be used in the narrower and commonly
accepted sense referring to one particular form of description .
 Method of description
1. By brand

2. Or equal

3. By specification
– Physical or chemical characteristics
– Material and method of manufacture
– Performance or function

4. By engineering drawing

5. By miscellaneous method
• Market grades
• Sample

6.By a combination of two or more method

 Standardization and simplification
• Standardization means:
– agreement on definite sizes
– Quality
– design
Simplification refer to a reduction in number of sizes, designs and so far .

The challenge in an organization is where to draw the line between

standardization and simplification , on the one hand, and suitability
uniqueness , on the other hand.
For e.g.: in the automotive industry has used this approach extensively to
cut costs, improve quality, and still give the appearance of extensive
consumer option.
 Global standardization
• Standardization is important to all, not just for leveraging purchases
across the group , but also in terms of our ability to design and build
a product for our costumer that is consistent, regardless of where it
is manufacture .This can only be done if we use the same supplier
who can provide support everywhere in the world .

For example:
Made by Toyota not made in Japan
 Quality , suitability, and best buy
• Quality
– Quality is a simplest sense refer to the ability of the supplier to provide services
in conformance with specification .
– Quality may also refer to whether the item performs in actual use to the
expectations of the original requisitioned , regardless of conformance with
specification .
•Suitability
•Refer to the ability of material , good , or services to meet the intended functional use .In a pure sense ,
suitability ignores the commercial consideration and refer to the fitness for use

•Best buy
•The best buy puts equality , reliability and suitability into a sound procurement
perspective. The best buy assumes , of necessity , a certain minimum measure of
suitability but consider ultimate's needs , cost and procrability transportation , and
disposal as well
•For example :
if the prices of copper increases from 1 to 1.5 USD or more , its relationship to
aluminum or other substitutes may change
Total quality management (TQM)
• Four features of TQM:
– Qulity must be integrated through out the organization’s activities
– Their must be employ commitment to continuous improvement.
– The goal of costumer satisfaction, and a sustametic and
continuous research process related to costumer satisfaction ,
drives TQM systems.
– Suppliers are partners in the TQM process .

TQM stresses quality as the integrated force in the organization to

work, all stages in the production process must conform to
specification that are driven by the needs and wants of the final
costumer
 Quality Dimensions
• The product quality is used as a competitive tool in the market .

• Supplier perform crucial part in the success of organization by

providing quality goods and services .

• New management tools and techniques like MRP, JIT, and

stockless purchasing all required that what is delivered by a supplier
confirm the specification.

• Quality improvement is a continuing challenge for both buyer and

seller .

• Close corporation/good relationships between buying and selling

organization in necessary to achieve significant over time .
 Eight Dimensions Of Quality
• Performance. The primary function of the product or services.
• Features. The bells and whistles .
• Reliability. The probability of failure with in a specified time period
• Durability. The life expectancy .
• Conformance. The meeting of specification.
• Serviceability. The maintainability and ease of fixing
• Aesthetics. The look , smell , feel , and sound .
• Perceived quality. The image in the eye of costumer

From a procurement point of view , the ninth dimension should be “

procurability ” – the short – and long-term availability on the
market at reasonable prices and subject to continuing
improvement
 Quality function deployment (QFD)
Is an important aspect of TQM and represent a method for developing
new product with higher quality with less cost and in less time .
For example : Toyota
Four stages of QFD process
•Product planning , to determine design requirements .
•Parts deployment , to determine parts characteristics .
•Process planning , to determine manufacture requirements
•Production planning ,to determine production requirement .

Supplier role in each stage

•Product planning. Provide expertise in analyzing costumer requirements
and generating a list of new product ideas
•Part deployment . Provide alternative design concepts and estimates the
manufacture cost of various parts
•Process planning. Supplier can determine their own existing processes
constrains
•Production planning. Help develop performance measurements criteria for
production planning
 Benefits of QFD
1. Reducing or eliminating engineering changes during product
development.
2. Reducing product development cycle time.
3. Reducing startup cycle time .
4. Minimizing product failures and repair costs over the product life .
5. Creating product uniformity and reliability during production .

Supply management , well-functioning buyer-supplier relationship are

a key contribution that purchaser and supply management can make
the organization TQM & QFD
Thank You