1. CHAPTER 2- PURCHASING MANAGEMENT
Principles of Supply Chain Management:
A Balanced Approach
Prepared by Daniel A. Glaser-Segura, PhD

2. © 2005 Thomson Business and Professional Publishing
Learning Objectives
You should be able to:
Describe the role of purchasing and understand its impact on an organization’s competitive advantage.
Have a basic knowledge of manual purchasing and e-procurement.
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 versus multiple sourcing.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

3. Learning Objectives- Cont.
Describe centralized, decentralized, and hybrid purchasing organizations and their advantages.
Describe and understand how globalization impacts, purchasing, and describe and understand the opportunities and challenges of global sourcing.
Understand total cost of ownership and be able to select suppliers using more than unit price alone.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

4. © 2005 Thomson Business and Professional Publishing
Chapter Two Outline
The Role of Purchasing in an Organization
The Purchasing Process
Sourcing Decisions: The Make-or-Buy Decision
Roles of Supply Base
Supplier Selection
How Many Suppliers to Use
Purchasing Organization: Centralized versus
Decentralized Purchasing
International Purchasing/Global Sourcing
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

5. © 2005 Thomson Business and Professional Publishing
Introduction
Purchasing-
Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.
Merchant Buyers-
wholesalers and retailers who purchase for resale.
Industrial Buyers-
purchase raw materials for conversion, services, capital equipment, & MRO supplies.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

6. The Role of Purchasing in an Organization
The primary goals of purchasing are:
Ensure uninterrupted flows of raw materials at the lowest total cost,
Improve quality of the finished goods produced, and
Optimize customer satisfaction.
Purchasing contributes to these objectives by:
Actively seeking better materials and reliable suppliers,
Work closely with strategic suppliers to improve quality materials, and
Involving suppliers and purchasing personnel in new product design and development efforts.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

7. The Purchasing Process
Manual Purchasing-Older system, prone to duplication of effort and error
Step 1-Material Requisition/Purchase Requisition- stating product, quantity, and delivery due date are clearly.
Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers & issues a request for quotation (RFQ).   Step 3- The Purchase Order (PO)- The purchase order is the buyer’s offer & becomes a binding contract when accepted by supplier.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

8. The Purchasing Process- Cont.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

9. The Purchasing Process- Cont.
Electronic Procurement (e-Procurement)
Step 1- Material user inputs a materials requisition- relevant information such as quantity and date needed.
Step 2- Materials requisition submitted to buyer- at purchasing department (hardcopy or electronically).
Step 3- Buyer assigns qualified suppliers to bid- Product description, closing date, & conditions are given.
Step 4- Buyer reviews closed bids & selects a supplier
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

10. The Purchasing Process- Cont.
Advantages for the e-Procurement System
Time savings
Cost savings
Accuracy
Real time
Mobility
Trackability
Management
Benefits to the suppliers
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

11. Small Value Purchase Orders
Processing costs can be substantial. Small value purchases should be minimized through:
Procurement Credit Card/Corporate Purchasing Card
Blank Check Purchase Orders
Blanket or Open-End Purchase Orders
Stockless Buying or System Contracting
Petty Cash
Standardization & Simplification of Matls & Components
Accumulating Small Orders to Create a Large Order
Using a Fixed Order Interval
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

12. Sourcing Decisions: The Make-or-Buy Decision
Outsourcing -buying materials and components from suppliers instead of making them in-house. The trend has moved toward outsourcing.
Backward integration refers to acquiring sources of supply
Forward integration refers to acquiring customer’s operations.
The Make or Buy decision is a strategic decision.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

13. Sourcing Decisions: The Make-or-Buy Decision- Cont.
Reasons for Buying or Outsourcing
Cost advantage: Especially for components that are non-vital to the organization’s operations.
Insufficient capacity: A firm may be at or near capacity.
Lack of expertise: Firm may not have the necessary technology and expertise.
Quality: Suppliers have better technology, process, skilled labor, and the advantage of economy of scale.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

14. Sourcing Decisions: The Make-or-Buy Decision- Cont.
Reasons for Making
Protect proprietary technology
No competent supplier
Better quality control
Use existing idle capacity
Control of logistics- lead-time transportation, and warehousing cost
Lower cost
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

15. Sourcing Decisions: The Make-or-Buy Decision- Cont.
The Make-or-Buy Break-Even Analysis
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

16. © 2005 Thomson Business and Professional Publishing
Roles of Supply Base
Supply Base- suppliers that a firm uses to acquire its materials, services, supplies, and equipment.
Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.
Preferred suppliers provide:
Early supplier involvement- Information on the latest trends in materials, processes, or designs
Information on the supply market
Capacity for meeting unexpected demand
Cost efficiency due to economies of scale
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

17. © 2005 Thomson Business and Professional Publishing
Supplier Selection
The process of selecting suppliers, is complex and should be based on multiple criteria:
Product and process technologies
Willingness to share technologies and information
Quality
Cost
Reliability
Order System and cycle time
Capacity
Communication capability
Location
Service
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

18. How Many Suppliers to Use
Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.
Reasons Favoring More than One Supplier
Need capacity
Spread risk of supply interruption
Create competition
Information
Dealing with special kinds of business
Reasons Favoring a Single Supplier
To establish a good relationship
Less quality variability
Lower cost
Transportation economies
Proprietary product or process
Volume too small to split
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

19. Purchasing: Centralized vs. Decentralized
Purchasing Organization dependent on many factors, such as market conditions & types of materials required.
Centralized Purchasing- purchasing department located at the firm’s corporate office makes all the purchasing decisions.
Decentralized Purchasing- individual, local purchasing departments, such as plant level, make their own purchasing decisions.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

20. Purchasing: Centralized vs. Decentralized
Advantages- Decentralization
Closer knowledge of requirements
Local sourcing
Less bureaucracy
Advantages- Centralization
Concentrated volume- leveraging purchase volume
Avoid duplication
Specialization
Lower transportation costs
No competition within units
Common supply base  
A hybrid purchasing organization- both decentralized at the corporate level and centralized at the business unit level may be warranted.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

21. International Purchasing/Global Sourcing
Opportunity to improve quality, cost, and delivery performance.
Requires additional skills and knowledge to deal with international suppliers, logistics, communication, political environment, and other issues. 
Import broker or sales agent- performs service for a fee.
Import merchant- buys and takes title to the goods.
Trading company- imports & carries wide variety of goods.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing