Purchasing

Chapter 3
Materials Management
Dr.Shaker Al-Qudah

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  Purchasing can simply be considered the process of buying.
Many assume purchasing is
 solely the responsibility of the purchasing department.
However, the function is much
 broader and, if carried out effectively, all departments in the
company may be involved.
 Obtaining the right material, in the right quantities, with the
right delivery (time and
 place), from the right source, and at the right price are all
purchasing functions.

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 Purchasing and Profit Leverage
 manufacturing firms spend about 50% of their sales dollars in
the purchase
 of raw materials, components, and supplies. This gives the
purchasing function
 tremendous potential to reduce costs and increase profits

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 Purchasing Objectives
 The objectives of purchasing can be divided into five categories:
 ■■ Obtaining goods and services of the required quantity and quality.
 ■■ Obtaining goods and services at the lowest total cost.
 ■■ Ensuring the best possible service and prompt delivery by the supplier.
 ■■ developing and maintaining good supplier relations and developing potential
suppliers.
 ■■ Selecting products and suppliers that minimize the impact on the
environment.
 To satisfy these objectives, some basic functions must be performed:
 ■■ determining purchasing specifications: right quality, right quantity, and right
delivery
 (time and place).
 ■■ Selecting supplier (right source).
 ■■ negotiating terms and conditions of purchase (right price).
 ■■ Issuing and administration of purchase orders and agreements.
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 Outsourcing
 outsourcing as “the process of having suppliers
provide goods and services that were previously
provided internally.”
 One method of outsourcing is off shoring, which is
defined as “outsourcing a business function to
another company in a different country than the
original company’s country.”

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 Purchasing Cycle
 The purchasing cycle consists of the following steps:
 1. receiving and analyzing purchase requisitions.
 2. Selecting suppliers, including researching and finding potential
suppliers, issuing requests
 for quotations, receiving and analyzing quotations, and selecting
the right supplier.
 3. determining the right price.
 4. Issuing purchase orders and agreements.
 5. Following up to ensure delivery dates are met.
 6. receiving and accepting goods.
 7. Approving supplier’s invoice for payment.

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  At a minimum, the purchase requisition contains the following
information:
 ■■ Identity of originator, signed approval, and account to which
cost is assigned.
 ■■ Material specification.
 ■■ Quantity and unit of measure.
 ■■ required delivery date and place.
 ■■ Any other supplemental information needed.

 Electronic requisition systems are now widely used and are often
part of enterprise resource planning (ERP) software.

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 Establishing Specifications
 When purchasing an item or a service from a supplier,
several factors must be taken
 into consideration when specifications are being developed.
These can be divided into
 three broad categories:
 ■■ Quantity requirements.
 ■■ Price requirements.
 ■■ Functional requirements.

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 Functional Requirements
 Functional specifications are concerned with the end
use of the item and what the item is expected to do.
 Functional specifications and quality Functional
specifications are closely tied to the quality of a product or
service.
 There are four phases to providing user satisfaction:
 1. Quality and product planning.
 2. Quality and product design.
 3. Quality and manufacturing.
 4. Quality and use.

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  For manufactured products, it is the responsibility of
manufacturing, at a minimum, to meet the specifications
provided by the product designer.
 Value analysis the systematic use of techniques that identify a
required function, establish a value for that function, and finally
provide that function at the lowest overall cost.

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 Functional Specification Description

 Functional specification can be described in the following ways

or by a combination of them:
 1. By brand.
 2. By specification of physical and chemical
characteristics, material and method of
 manufacture, and performance.
 3. By engineering drawings.
 4. By miscellaneous attributes.

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  Description by Brand
 description by brand is most often used in wholesale or retail
businesses but can also
 be used extensively in manufacturing. This is particularly true under
the following
 circumstances:
 ■■ Items are patented, or the process is secret.
 ■■The supplier has special expertise that the buyer does not have.
 ■■The quantity bought is so small that it is not worth the buyer’s
effort to develop
 specifications.
 ■■The supplier, through advertising or direct sales effort, has
created a preference on the
 part of the buyer’s customers or staff.

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  Description by Specification
 There are several ways of describing a product, but whatever method is
used, description by specification depends on the buyer describing in detail
exactly what is wanted. One or more of the following is typically used:
 ■■ Physical and chemical characteristics. The buyer must define
the physical and chemical properties of the materials wanted.
Petroleum products, pharmaceuticals, and paints are often specified in this
way.
 ■■ Material and method of manufacture. Sometimes the
method of manufacture determines the performance and use of a
product. For example, hot- and cold-rolled steels are made differently and
have different characteristics.
 ■■ Performance. This method is used when the buyer is
primarily concerned with what the item is required to do and is
prepared to have the supplier decide how performance is to be attained.
For example, a water pump might be specified as having to deliver so many
gallons per minute. Performance specifications are relatively easy to
prepare and take advantage of the supplier’s special knowledge.
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 characteristics of description by
specification
 ■■ To be useful, specifications must be carefully designed. If they are too
loosely drawn, they may not provide a satisfactory product. If they are too
detailed and elaborate, they are costly to develop, are difficult to inspect, and
may discourage possible suppliers.
 ■■ Specifications must allow for multiple sources and for competitive
bidding.
 ■■ If performance specifications are used, the buyer is assured that if the
product does not give the desired results, the seller is responsible. They
provide a standard for measuring and checking the materials supplied.
 ■■ not all items lend themselves to specification. For example, it may not be
easy to specify color schemes or the appearance of an item.
 ■■ An item described by specification may be no more suitable, and a great
deal more expensive, than a supplier’s standard product.
 ■■ If the specifications are set by the buyer, they may be expensive to
develop. They will be used only when there is sufficient volume of purchases
to warrant the cost or where it is not possible to describe what is wanted in
any other way.
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  Standard specifications have been developed as a
result of much study and effort by governmental and
nongovernmental agencies
 There are several advantages to using standard
specifications. First, they are widely known and accepted
and, because of this, are readily available from most
suppliers.
 Second, because they are widely accepted, manufactured,
and sold, they are lower in price than nonstandard items.
Finally, because they have been developed with input from a
broad range of producers and users, they are usually
adaptable to the needs of many purchasers.

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  Engineering Drawings
 Engineering drawings describe in detail the exact configuration
of the parts and the assembly.

 Miscellaneous Attributes
 There are a variety of other methods of specification, including
the famous phrase, “Give me one just like the last one

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 Selecting Suppliers
 Sourcing
 There are three types of sourcing: sole, multiple, and single.
 1. Sole sourcing implies that only one supplier is
available because of patents, technical
 specifications, raw material, location, and so forth.
 2. Multiple sourcing is the use of more than one supplier
for an item. The potential advantages of multiple sourcing are
that competition will result in lower price and better service and
that there will be a continuity of supply.
 3. Single sourcing is a planned decision by the
organization to select one supplier for an item when several
sources are available. It is intended to produce a long-term
partnership. This is discussed at more length in Chapter 15, in the
section on supplier partnerships.

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 Factors in Selecting Suppliers

 Technical ability
 Manufacturing capability
 Reliability In selecting a supplier, it is desirable to pick
one that is reputable, stable, and financially strong.
 After-sales service
 Supplier location
 Lean capabilities
 Other considerations : Price

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 Identifying Suppliers

 Some aids for identifying sources of supply include:

 ■■ Salespersons of the supplier company.
 ■■ Internet.
 ■■ Catalogues.
 ■■ Trade magazines.
 ■■ Trade directories.
 ■■ Information obtained by the salespeople of the buyer
firm.

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 Final Selection of Supplier

 The challenge is finding some method of combining these

two major factors that will enable a buyer to pick the best
supplier. One method involves a supplier ranking
method, as follows:
 1. Select those factors that must be considered in
evaluating potential suppliers.
 2. Assign a weight to each factor.
 Rate the suppliers for each factor.
 Rank the suppliers

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 Price determination

 Basis for Pricing: fair price is sometimes used to describe

what should be paid for an item.

 Fixed costs are costs incurred no matter the volume

of sales. Examples are equipment depreciation, taxes,
insurance, and administrative overhead. Variable costs are
those directly associated with the amount produced or sold

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 Competitive Bidding

 Competitive bidding occurs when a buyer compares the price of

a product from various suppliers and simply chooses the lowest
price. This can be the formal process of sending out quotations
and analyzing the results or simply comparing catalogue or
advertised prices

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 Price Negotiation

 One important factor in the approach to negotiation is the type of

product. There are four categories:
 1. Commodities. Commodities are materials such as copper
 Standard products. These items are provided by many
suppliers
 Items of small value. These are items such as maintenance
or cleaning supplies and represent purchases of such small value
that price negotiation is of little purpose.
 Made-to-order items. This category includes items made to
specification or for which quotations from several sources are
received

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 Impact of material requirements - Planning on
Purchasing
 Purchasing can be separated into two types of activities: (1) procurement
and (2) supplier scheduling and follow-up.
 Planner/buyer concept: Planner/buyers do the material
planning for the items under their control, communicate the schedules
to their suppliers, follow up, resolve problems, and work with other
planners and the master scheduler when delivery problems arise. The
planner/buyer is responsible for the following:
 ■■ determining material requirements.
 ■■ developing schedules.
 ■■ Issuing shop orders.
 ■■ Issuing material releases to suppliers.
 ■■ Establishing delivery priorities.
 ■■ Controlling orders in the factory and to suppliers.
 ■■ Handling all the activities associated with the buying and production
scheduling functions.
 ■■ Maintaining close contact with supplier personnel.
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  Contract buying usually an MRP system generates frequent
orders for relatively small quantities. This is particularly true for
components that are ordered lot-for-lot. It can be costly, inefficient,
and sometimes impossible to issue a new purchase order for every
weekly requirement.
 Supplier responsiveness and reliability Because material
requirements often change, suppliers must be able to react
quickly to change.
 Close relationship with suppliers Contract buying and the need
for supplier flexibility and reliability mean the buyer/supplier
relationship must be close and cooperative.
 Electronic data interchange Electronic data interchange (EDI)
enables customers and suppliers to electronically exchange
transaction information such as purchase orders,

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  vendor-managed inventory (VMI). In this concept, a
supplier maintains an inventory of certain items in the
customer’s facility.
 Internet technology has changed the purchasing
function in many ways.
 Intranet, Extranet

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 Environmentally Responsible Purchasing
 Purchasing is responsible for managing waste products in most
organizations since they have:
 ■■ First-hand knowledge of price trends for waste products.
 ■■ Contact with salespeople who are an excellent source of
information as to possible uses of waste material.
 ■■ Familiarity with the company’s own needs, or uses for
materials within the organization.
 ■■ Knowledge of legislation involving the transportation and
handling of environmentally sensitive materials.
 Reduce, Reuse, and Recycle is a widely used phrase to
guide people in lowering the impact they have on the
environment

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 Expansion of Purchasing Into supply chain
management
 This concept of the supply chain has four major components that are
 managed:
 ■■ The flow of physical materials from suppliers, downstream through
the company itself, and finally to distributors and/or customers.
 ■■ The flow of money upstream from customers back to the
companies and suppliers.
 ■■The flow of information up and down through the stream.
 ■■ The flow of products back (upstream) from the customers,
typically for repairs or recycling.This is known as reverse logistics.

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  Although several impacts on the supply chain perspective have
been observed and
 formalized, two in particular have become formalized and
noteworthy:
 ■■ Customer relationship management (CRM)
includes several activities with the intent to build and
maintain a strong customer base. Customer wants and needs are
assessed and cross-functional teams from the company work to
align company activities around those customer needs.
 ■■ Supplier relationship management (SRM) is similar
to CRM, with the focus for
 these activities being the building and maintaining of close, long-
term relationships with key suppliers.

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  One critical reason for developing formal links and
relationships in the supply chain is to help control the
bullwhip effect. This effect occurs when there is
uncertainty in the supply chain based on the use of
forecasts

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 Some organizational Implications of supply chain
management
 Their cost focus has altered dramatically.
 Cross-functional teams are now used to plan and control the
supply chain.
 The decision on whether the purchasing function should be
centralized or decentralized can be impacted by supply chain
management.
 decision making has changed from the “I say and you do” or a
negotiated perspective with suppliers, to one of “let’s talk about
the best way to handle this and make a mutually advantageous
decision.

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 Some organizational Implications of supply chain management ….

 Information sharing has changed from simply giving out

information about the order to the sharing of important
information about the business itself, which requires
 mutual trust and cooperation between entities.
 ■■ Measurement systems look at all aspects of the supply chain
and not just supplier performance.
 ■■ There is a growth in electronic business (e-business). This
implies using the internet more for handling business
information flows and transactions.
 ■■ The environment must be considered in the acquisition,
storage, use, and disposal of all materials

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 Savings Can Be Substantial
 There are many advantages associated with an effective supply chain
perspective. Some of these savings include the following:
 ■■ More effective product specification, allowing for efficient product
substitutions and product specifications focused on fitness of use.
 ■■ Better leveraging of volume discounts and supplier consolidation.
 ■■ long-term contracts with efficient communication systems, significantly
reducing the administrative cost of ordering and order tracking.
 ■■ More effective use of techniques such as electronic commerce, using
credit cards for payments, and blanket ordering.
 ■■ reducing environmental costs by avoiding potentially hazardous materials
and exercising the 3 rs of reduce, reuse, and recycle.

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