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11
Purchasing
Purchase Categories
Component parts
 Raw materials
 Process equipment
 Support equipment
 Services
(These may be routine, ongoing purchases or non
routine purchases/ a new buy, an infrequent
purchase, a major acquisition)

NARROW SET OF ACTIVITIES OF
PURCHASING

Purchasing was not seen as an activity of strategic
importance. (Day-to-day, short term basis)

It involved following a series of prescribed steps,
which included;
– writing up a purchase order,
– contracting suppliers for pricing,
– following up on a supplier who failed to deliver.

It was not the responsibility of purchasing to question
those needs, for the long-term relationships with
suppliers, or to understand the needs of the end
customer.
Procurement
Activities of procurement
•Selects and qualifies
suppliers
•Rates supplier
performance
•Negotiates contracts
•Compares price,
quality, and service
•Sources goods
•Times purchases
CR (2004) Prentice Hall, Inc.
•Sets terms of sale
•Evaluates the value
received
•Measures inbound quality if
not a responsibility of
quality control
•Predicts price, service, and
sometimes demand
changes
•Specifies form in which
goods are to be received
10-32
The Strategic Role of
Procurement
1.
Access to External Markets
2.
Supplier Development and Relationship
Management
3.
Relationship to Other Functions
1. Access to External Markets
Through;

external contracts with the supply market,

information about new technologies, new
materials/services, new sources of supply, and
changes in market condition

purchasing can help reshape the organization’s
strategy to take advantage of market
opportunities.
2. Supplier Development and
Relationship Management

identifying and developing new and existing
suppliers.

Supplier development: a systematic organizational
effort to create and maintain a network of competent
suppliers and to improve various supplier capabilities
that are necessary for the buying organization to
meet its increasing competitive changes.
Long term relations  supplier development
efforts

Early Supplier Involvement

ESI (Early supplier involvement)-Getting suppliers involved
early in the development of new products and services or
modifications to existing offerings------reduction in
development times—quick launch---competitive advantage

Concurrent engineering is a type of early supplier
involvement where the engineers in the buying and selling
firms work together on product development or product
improvement.
Buyer- Motorola/Supplier-Philips: The chipsets developed
through the ESI program will enable Motorola to maintain
its leadership position.

3. Relationship to Other
Functions

Every department within an organization relies
on the purchasing function for some type of
information or support.

Purchasing may play a support role and as well
as a strategic function.

Being well informed allows the purchasing
function to better anticipate and support the
needs of other functional areas.
Importance of procurement

Purchasing is responsible primarily for;
– Inbound or upstream channel activities
Decisions impact on sales
 Purchasing has a leverage effect
 Cost of materials and equipment
purchased

Stages in Purchasing

Preliminary stage

Establish
relationship
o
Establish need

Identify potential
suppliers
o
o
Document contacts
Feedback

Evaluate relationship
o
Determine selection criteria
Identify potential suppliers
o

Screen and select
o
o
Contact potential suppliers
Evaluate suppliers
Choose
Continue at current level
Expand relationship
Reduce/dissolve interaction
o
o
o
o
SUPPLIER SELECTION AND
EVALUATION
Purchasing managers may consider a broad range of
factors such as
 lead time,
 on time delivery performance,
 ability to expedite,
 flexibility
 quality
 supplier proximity
 price competitiveness,
 post purchase sales support
when making the purchasing decision.
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10
Performance Measurement
and Management
Performance measurement involves monitoring and
evaluating activities to determine their conformance to
requirements.
Useful tools for this important effort are scorecards
which are used to:

communicate expectations or requirements

indicate their relative importance

measure performance

highlight improvement opportunities
HP’s SRM
(Supplier Relationship Management)

HP utilizes a number of ways to measure supplier performance.

Procurement Management Process (PMP) : It covers a number of areas related
to suppliers, including identification of needs, evaluation, selection, contracting,
and execution.

High Performance Supplier Scorecard- This is HP's way of measuring supplier
performance in technology, quality, assurance of supply, cost, business terms,
general business environment, etc.
Supplier Reverse Scorecard- HP takes the information that suppliers provide,
brings it back in-house, and actually changes the way it does business, when it
makes sense to do so.
–
–
The Operational Reverse Scorecard- transactional activities.
The Strategic Reverse Scorecard--at the executive level of the company, and focuses on strategic things
.
Quality Insurance

High quality material—longer life span, higher customer service, lower
overall product costs, higher prices for finished goods

Selection of best quality-cost combination offering supplier!!!!
Supplier Certification—NO INSPECTION of incoming material
Reliability proven suppliers



SUPPLIER CERTIFICATION: In the certification process, the
supplier’s quality levels and processes are closely evaluated by
members of the buying firms.
Warner Bross, Starbucks certification and auditing systems
Starbucks
• Strategic Supplier: Achieved a minimum of 80% in
each of the scored subject areas (social responsibility,
environmental leadership-coffee production,
environmental leadership-coffee processing).
• Preferred Supplier: Achieved a minimum of 60% in
each of the scored subject areas
• Verified Supplier: When applicant achieved less than
60% or more in each of the scored subject areas
•All suppliers with a ‘meaningful ongoing relationship’ must also be
Profiled and Audited.
Profiled and audited suppliers get some benefits:
•Suppliers only need to provide company information once
•Suppliers are able to review their own detailed report online comparing
them to ‘ideal supplier’ which shows their strengths and weaknesses and
so allows suppliers to improve.
•The opportunity to make their company’s details easily available to all
operating companies within the STARBUCKS COFFEE Group.
•Use of the ‘STARBUCKS COFFEE Supplier Accreditation Programme’
certificate and logo for promotional purposes.
Timing of Purchases
Methods
•According to market conditions
-Speculative buying
-Forward buying
-Buying to current requirements
10-49
Timing of Purchases (Cont’d)
Speculative buying
Buying more than the foreseeable requirements at
current prices in the hope of reselling later at higher
prices. Some of the purchased quantities may be used
in production and some simply resold.
Forward buying




Buyer commits to buy a contracted quantity at a
future date at a contracted price
Due to the potential supply constrictions buying in
quantities exceeding current requirements, but not
beyond foreseeable needs.
Takes advantage of favorable prices in an unstable
market
Protects from anticipated shortages or delays the
impact of rising prices
Volume Contracts
To leverage over time purchase of
various business units, locations…
 Combining purchases
 Cumulative quantity discounts (smaller
more frequent buyes ) & non-cumulative
quantity discounts (price for each order)

Stockless Purchasing

The buyer firm does not carry inventory of
purchased materials

A means of reducing materials-related costs such as
unit purchase price, transportation,
inventory,administration.

Contracts are arranged for a given volume of
purchases over a specified period of time.
Best suited for frequently purchased low-value
items
Adminis. Costs > Unit Prices

Objectives of Stockless
Purchasing








Lower inventory levels,
Reduce the supplier base,
Reduce administrative cost and paperwork,
Reduce the number of purchases that purchasers have to
handle, freeing up time for more important activities,
Achieve volume leverages with suppliers, lowering costs
and improving service,
Provide for timely delivery of material directly to the user,
Standardize purchase items where possible,
Have supplier manage inventory and, in some cases, place
orders.
Integrated Supply
A purchaser combines all buys of like
items with one supplier
 Office supplies, small tools…
 Further reduction in adminis. costs

10 14
Types of Relationships
Partnerships
Arm’s
length
Type I
Type II
Type III
Joint
venture
Vertical
integration
Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing
Supply Chain Partnerships,” The International Journal of Logistics Management, Volume 7, No. 2. (1996), p.2.
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Partnerships - Definition
A tailored business relationship based on
mutual trust, openness, shared risk
and
rewards that yields a strategic competitive
advantage, resulting in business performance
greater than would be achieved individually.
Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing
Supply Chain Partnerships,” The International Journal of Logistics Management, Volume 7, No. 2. (1996), p.2.
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10
Why Partner?





To gain advantages of vertical
integration while still maintaining
organizational independence
To take advantage of “best in class”
expertise
To achieve service improvements
To gain operational efficiencies
To respond to competition
Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing
Supply Chain Partnerships,” The International Journal of Logistics Management, Volume 7, No. 2. (1996), p.2.
Arm’s Length
No sense of joint commitment
 When exchange ends, relationship ends

Partnership
No ideal partnership model
 Majority Arm’s Length and Type I
 Coca-Cola & Mc Donalds-> Type III
