Purchasing: A link in a Supply ChainHisham M. El-TawilEZZ Steel Corporate Procurement Planning S. ManagerB.Sc. Production Engineering (1997)MBA (Operations Management) (2013)

5 December 2015

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Content• Introduction & Definitions• Purchasing Hierarchy• Purchasing Methods• General Purchasing Cycle & Total Cost of Ownership• Global Sourcing• INCOTERMS

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What am I doing related to FIVE

Years Engineering?

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WHAT IS PURCHASING? 4

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Purchasing Definitions

• “The act of buying something” (Cambridge Dictionary)

• “The activity of acquiring goods or services to accomplish the goals of an organization” (BusinessDictionary.com)

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Purchasing vs. Procurement

Procurement• Vendors Selections• Vendors Evaluation• Market Research• Contract Negotiation

Purchasing• Request for Quotation• Approvals• Purchase order issuance• Receipt of Goods 6

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Procurement in Supply Chain

Supply Chain Management

Procurement

Purchasing

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Purchasing MUSTs• Right Solution• Right Price• Right Quality• Right Quantity• Right Time• Right Place• Right Source

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PURCHASING HIERARCHY 9

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Centralized vs. Decentralized Purchasing

Centralized Purchasing

Head Office / Board

Plant A Plant B

Production

Marketing / Sales

Plant C

Corporate Purchasing

Corporate Staff

De-Centralized Purchasing

Head Office

Plant A

Purchasing Dept.

Plant B

Purchasing Dept.

Plant C

Purchasing Dept.

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Centralization vs. Decentralization

Centralized Purchasing

• Economy of Scale• Uniform deal with

suppliers.• Easy Supply market

research• Unique materials / spares

specifications• Unique commercial

conditions among different business units

Decentralized Purchasing

• Strong Orientation & Communication with internal user / demander• Less Bureaucracy.• Shorter Lead time

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Purchasing Internal Network

Purchasing

Warehouse / Inventory

Control

Planning• Production• Materials

Demander• Production• Maintenance• Others

Accounting

Logistics

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PURCHASING CYCLE & TCO 13

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General Purchasing CycleDetermine

Needs / Receiving Purchase

requisitionSuppliers Selection

Request For Quotations

Price Determinati

on

Purchase Order /

Contracting

Follow-up delivery

Receiving & Accepting

Goods

Payment Approval

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The Best Offer• The lowest bid price is not always the best offer.• The best offer is the offer who represents the best value

Best Total Cost of Ownership

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Total Cost of Ownership TCO

TCOPurchase Price

Acquisition Cost• Logistics /

Handling• Insurance• Fees / Customs

Usage Cost• Lifetime / Unit

Consumption• Maintenance • Repairs

End of Life Cost

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PURCHASING METHODS 17

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Purchasing MethodsPurchasing Methods

Informal

Oral

Electronic / Credit card

Petty Cash Fund

Formal

Direct Order

Bidding

Long-Term Contract

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GLOBAL SOURCINGWhy Shall I (Sometimes) buy from a foreign Country?

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Definition

It is the process of sourcing (procuring) goods and/or services from the international market

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CONs & PROs of Global sourcing

PROs• Access to unavailable

materials in Local market• Cost reduction / Better

Prices• Broad list of alternative

Suppliers• New Ideas/solutions and

Experience Exchange• Better Quality

CONs• Higher Risk (Financial,

Political and Legal)• More complicated process

& Logistics• Longer Lead time• Higher hidden and non-

value added cost (Tariffs, Insurance, payment terms, etc.)

• Communications barriers21

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Methods of Payment in International trade

• Advanced Payment• Open Account• Documentary Collection• Documentary Credit (Letter of Credit)

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Each Method has its risk & cost

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Buyer (Importer) RiskSeller (Exporter) Risk

Open Account

Advance Payment

Payment Cost

Documentary Collection

Documentary Credit

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INCOTERMS 25

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Who Will pay Which Amount?

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Introduction to INCOTERMS• Published by International Chamber of Commerce (ICC)• Set of rules to explain trade terms (abbreviated in 3 letters)

reflecting Business-to-Business (B2B) practice in contracts of Sales of Goods

• INCOTERM arranges the Transfer of Risk and the Cost of Transfer.

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Incoterms

Any type of Transport

Sea Waterway Transport

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INCOTERMS: Ex-Work(Any way of transport)

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Cost

Risk

Seller Buyer

Delivery

Seller Warehouse

Buyer:• Loads goods• Pays transport• MIN Seller’s obligation

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INCOTERMS: FOB Port of Shipment(Sea water/ way of transport)

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Cost

Risk

Seller Buyer

Delivery

Seller:• Delivers goods till

the Vessel Rail.

Buyer:• Pays transportation & Insurance

from board of vessels

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In Summary• Purchasing is a process of buying the needs at right time,

quantity and quality.• Purchasing Hierarchy can be centralized, de-centralized or a

mix based on company size and business model.• Within a Purchasing cycle, the best deal is the deal that ensure

a best TCO (Total Cost of Ownership).• Global sourcing increase the company opportunity for better

purchase in an international competitive market.• A good Buyer has to select the best Purchasing Method and

best payment method.• International Community unified the terms of delivery and

shipping showing cost and risk for easy international trade. 30

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What do you think?

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Thank YouQ & A

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