CHAPTER 2- PURCHASING MANAGEMENTPrinciples of Supply Chain Management: A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *Learning ObjectivesYou should be able to:Describe the role of purchasing and understand its impact on an organizations 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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *Chapter Two OutlineThe Role of Purchasing in an OrganizationThe Purchasing ProcessSourcing Decisions: The Make-or-Buy DecisionRoles of Supply BaseSupplier SelectionHow Many Suppliers to UsePurchasing Organization: Centralized versus Decentralized PurchasingInternational Purchasing/Global Sourcing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *IntroductionPurchasing- 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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *The Role of Purchasing in an OrganizationThe 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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *The Purchasing ProcessManual 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 buyers offer & becomes a binding contract when accepted by supplier.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *The Purchasing Process- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *The Purchasing Process- Cont.Advantages for the e-Procurement System Time savingsCost savingsAccuracyReal timeMobilityTrackabilityManagementBenefits to the suppliers

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *Small Value Purchase OrdersProcessing costs can be substantial. Small value purchases should be minimized through: Procurement Credit Card/Corporate Purchasing CardBlank Check Purchase OrdersBlanket or Open-End Purchase OrdersStockless Buying or System ContractingPetty CashStandardization & Simplification of Matls & ComponentsAccumulating Small Orders to Create a Large OrderUsing a Fixed Order Interval

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *Sourcing Decisions: The Make-or-Buy DecisionOutsourcing -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 customers operations. The Make or Buy decision is a strategic decision.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *Sourcing Decisions: The Make-or-Buy Decision- Cont.Reasons for Buying or OutsourcingCost advantage: Especially for components that are non-vital to the organizations 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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *Sourcing Decisions: The Make-or-Buy Decision- Cont. Reasons for Making Protect proprietary technology No competent supplierBetter quality controlUse existing idle capacityControl of logistics- lead-time transportation, and warehousing costLower cost

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *Roles of Supply BaseSupply 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 designsInformation on the supply marketCapacity for meeting unexpected demandCost efficiency due to economies of scale

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *Supplier SelectionProduct and process technologiesWillingness to share technologies and informationQualityCostReliabilityOrder System and cycle timeCapacityCommunication capabilityLocationServiceThe process of selecting suppliers, is complex and should be based on multiple criteria:

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *How Many Suppliers to UseReasons Favoring a Single Supplier To establish a good relationshipLess quality variabilityLower costTransportation economiesProprietary product or processVolume too small to splitReasons Favoring More than One Supplier Need capacitySpread risk of supply interruptionCreate competitionInformationDealing with special kinds of business Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *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 firms 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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *

Purchasing: Centralized vs. Decentralized

Advantages- CentralizationConcentrated volume- leveraging purchase volumeAvoid duplicationSpecializationLower transportation costsNo competition within unitsCommon supply base Advantages- DecentralizationCloser knowledge of requirementsLocal sourcingLess bureaucracyA 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. 2005 Thomson Business and Professional Publishing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing *International Purchasing/Global SourcingGlobal 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. 2005 Thomson Business and Professional Publishing