PURCHASING –the act of obtaining merchandise, capital equipment; raw materials; services;

maintenance, repair and operating (MRO) supplies in exchange for money or its equivalent.

It can be classified into two categories:

 Merchants buyers – includes the wholesalers and retailers who primarily purchase for resale
purposes. They purchase their merchandise in volume to take advantage of quantity
discounts and other incentives such as transportation economy and storage efficiency.

 Industrial buyers – whose primary task is to purchase raw materials for conversion purposes.
The typical industrial buyers are the manufacturers, restaurants, landscape, gardeners and
florists.

The primary goals of purchasing are:

 to ensure uninterrupted flows of raw materials at the lowest total cost

 to improve quality of the finished goods produced

 to optimize customer satisfaction

Purchasing can contribute:

 by actively seeking better materials and reliable suppliers

 working closely with

 exploiting the expertise of strategic suppliers to improve the quality of raw materials

 involving suppliers and purchasing personnel in new product design and development
efforts

The involvement of purchasing and strategic suppliers in concurrent engineering activity is essential
for selecting components and raw materials that ensure that requisite quality is designed into the
product and to aid in collapsing design-to-production cycle time.

The purchasing process

1. identifying needs (product description & specification)

2. sourcing (supplier selection & pricing)

3. establishing sale contact (agreement on sale term & conditions)

4. delivering (inspection & acceptance)

5. requesting payment (issuance of commercial invoice)

 from manual or paper-based system to automated or electronic-based system

 goal: to ensure the efficient transition of information from the users to the purchasing
personnel and ultimately to the suppliers.

 Process: once the information is transmitted to the appropriate suppliers, the system must
also ensure the efficient flows of the purchased materials from the suppliers to the users and
the flow of invoices from the suppliers to the accounting department. The system must have
internal control mechanism to prevent abuse of the system.
  Purchase Order (POs) should be pre-numbered and issued in duplicate, and buyers should
not authorize to pay invoices.

 Pre-numbered POs make it easier to trace any missing or unaccounted for purchase order.

 A duplicate PO should be issued to the acctg dept for internal control purposes and to inform
the dept of a future payment or commitment of resources.

The Manual Purchasing System

 Starts with material requisition (MR) or product requisition – the product, quantity and
delivery due date are clearly described on the MR.

 Traveling requisition – used for materials and standard parts that are requested on a
recurring basis. The product and pertinent info such as delivery lead time, lot size are
preprinted on the TR.

 Planned order releases – to make standard goods over a relatively long period of time.

Request for Quotation – if there is no current supplier for the item, the buyer must identify a pool of
qualified suppliers and issue a RFQ

Request for Proposal – allows suppliers to propose new material and technology, thus enabling the
firm to exploit the expertise of suppliers.

Supplier Development – a growing trend among firms that practice SCM. Firms may assist existing or
new suppliers to improve their processing capabilities, quality, delivery and cost performance
by providing the needed technical and financial assistance.

Purchase Order – is the buyer’s offer and becomes a legally binding contract when accepted by the
supplier. An important feature of PO is the terms and conditions of the purchase which is typically
preprinted at the back. The supplier must acknowledge and return the duplicate copy of the PO to
indicate the acceptance of the order.

Sales Order – the supplier’s offer and becomes a legally binding contract when accepted by the
buyer.

Follow-up – a proactive approach to prevent late delivery.

Expediting – reactive approach that is used to speed up an overdue shipment.

Electronic Procurement Systems (e-Procurement) – the buyer transfers the MR data to the Internet-
based e-procurement system and assigns qualified suppliers to bid on requisition.

Advantages of the e-Procurement System

 Time savings Mobility

 Cost savings Trackability

 Accuracy Management

 Real time Benefits to the Suppliers

Small Value Purchase Orders should be minimized to ensure that buyers are not overloaded with
unnecessary purchases that may compromise the firm’s competitive position.
Supplier Selection

Factors that firms should consider while selecting suppliers:

1. Product and process 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

Reasons Favoring a Single Supplier

1. To establish a good relationship 4. Transportation economics

2. Lee quality variability 5. Proprietary product or process purchases

3. Lower cost 6. Volume too small to split

Reasons Favoring More Than One Supplier

1. Need capacity

2. Spread the risk of supply interruption

3. Information

4. Dealing with special kinds of businesses.