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Chapter Three
Purchasing and
Materials Management

McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
THE OBJECTIVES OF PURCHASING

1. PROVIDE APPROPRIATE LEVELS OF SUPPLY

+
1. THE APPROPRIATE LEVEL OF QUALITY

+
1. THE LOWEST TOTAL COST

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 MISSING THE POINT:
PURCHASE PRICE Vs. TOTAL COST
• Determining the “price” a company pays goes
beyond the dollar cost.

• TOTAL COST = PURCHASE PRICE +

DELIVERY + STORAGE + SERVICE

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 WHAT COMPANIES REALLY PAY
FOR OWNERSHIP
• Cost of ownership goes beyond the price paid for a
product

• TOTAL COST OF
OWNERSHIP = PRODUCT PRICE
+ DELIVERY
+ INSTALLATION
+ MAINTENANCE / REPAIR
+ POWER COSTS
+ SUPPLY COSTS
+ OPERATING COSTS
+ FINANCING

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 USING VALUE ANALYSIS
THE OBJECTIVES OF VALUE ANALYSIS:
• REDUCE COSTS AND/OR
• IMPROVE DESIGN
What is COMPARE New
Currently BENEFITS Alternatives
RECEIVED
Being Done Being
FUNCTIONS OF
PRODUCT
Considered
COST OF
MATERIALS
WORK PROCESS
INVOLVED
OUTCOME: GREATER VALUE FOR LESS COST
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 Step 8
Evaluation of product performance
Step 7
Selection of an order procedure
Step 6
Evaluation of proposals and
selection of a supplier
Step 5
Acquisition and analysis of proposals
Step 4
Search for qualified suppliers
Step 3
Development of detailed specifications
Step 2
Definition of the product-type needed
Step 1
Recognition of a need

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 PURCHASING PARTNERSHIPS ARE
MADE WITH VENDORS WHO PROVIDE:
• High-purchase-volume materials, components or
strategic products

• Information and training for effective product use

• Services requiring specialized knowledge for cost

reductions and/or performance

• Materials unavailable elsewhere

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 IMPROVE PERFORMANCE:
STAYING AHEAD OF PURCHASING TRENDS

1. REDUCE PURCHASING COSTS

• CUTBACK ON EMPLOYEES

• REDUCE NUMBER OF VENDORS/ TRANSACTIONS

• BUILD RELATIONSHIPS

• CENTRALIZE PURCHASING ACTIVITIES

• USE THE INTERNET

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 IMPROVE PERFORMANCE:
STAYING AHEAD OF PURCHASING TRENDS (continued)

2. OUTSOURCE IN-HOUSE ACTIVITIES

• TRAINING

• MANUFACTURING

• PROCESSING ACTIVITIES

• INVOLVE SUPPLIERS (ESI)

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 IMPROVE PERFORMANCE:
STAYING AHEAD OF PURCHASING TRENDS (continued)

3. CROSS-FUNCTIONAL TEAMS – MADE UP

OF COMPANY DEPARTMENTS,
SUPPLIERS, CUSTOMERS

4. INCREASE PROFESSIONALISM THROUGH

CERTIFICATION PROGRAMS AND
ESTABLISH A CODE OF ETHICS

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 SALES SURVIVAL QUESTIONS:
CAN YOUR SALESPEOPLE ANSWER
THE FOLLOWING QUESTIONS?

1. WHAT IS A CROSS-FUNCTIONAL TEAM?

2. CAN YOU RECOGNIZE ONE AT YOUR CLIENT’S

ORGANIZATION?

3. DO YOU KNOW HOW TO GET YOUR COMPANY INCLUDED

IN YOUR CLIENT’S CROSS-FUNCTIONAL TEAM?

4. WILL YOUR COMPANY GIVE YOU THE PEOPLE RESOURCES

TO SUPPORT YOUR CLIENT’S NEEDS?

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 SUCCESSFUL CROSS-FUNCTIONAL
PURCHASING TEAMS DEPEND ON:

• APPROPRIATE LEADERSHIP

• FACE-TO-FACE COMMUNICATION

• CONTINUITY– IN IT FOR THE LONG TERM

• TOP-LEVEL COMMITMENT to provide for key

individuals’ full participation

• EMBRACING DIVERSITY of experience, backgrounds,

outlooks, and corporate philosophy

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 Changing company focus: MAKE-OR-BUY?
Purchasing Determines Who Provides Best Value for Lowest Cost

Best-Value Provider
Action In-House Partner
•Training
•Transaction Processing
•Paper Processing
•Product Design
•Product Manufacturing
•Component Part Manufacturing
•R&D
•Marketing
Sales
Advertising
Research
Support
•Human Resources Administration

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MAKE-OR-BUY DECISION ANALYSIS
RISK ASSESSMENT
FINANCIAL RISKS MARKETING RISKS
Resource Allocation Customer Impact
Investment of Resources Supplier Impact
Accurate Cost Analysis
Legal Issues

MANUFACTURING RISKS POLITICAL RISKS

Reliability Management commitment/
Expertise willingness to partner
Equipment Turf Battles
Patent Protection Internal Strife

ACCEPTABLE RISK UNACCEPTABLE RISK

Buy the Products, Retain Production and
Components or Services Provide Services
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