Purchasingor

procurement

DEFINITIONS

Purchasing/Procurement is the responsibility for acquiring the goods & services that the organization needs, by any means.

Source: Meredith, J. & Shafer, S.Operations management for mbas.USA:John Wiley & Sons, Inc.2007.

Purchasing is a management control point where all significant purchases are monitored for the right authorization of the right item, at the right price, quality, and quantity, from the right supplier at the right terms, and at the right time

Source: www.businessdictionary.com/definition/purchasing

Purchasing, also known as procurement, is the acquisition of goods and services needed to support the various activities of an organization, at the optimum cost and from reliable suppliers. It is not a service function, but a profit making activity.

Source: www.dictionary.bnet.com/definition/Purchasing.html

GOAL OF PURCHASING

To develop and implement purchasing plans for products and services that support operations

strategies

DUTIES OF PURCHASING

Identifying sources of supply

Negotiating contracts

Maintaining a database of suppliers

Obtaining goods and services

Managing supplies

PURCHASING INTERFACES

Purchasing

Legal

Accounting Operations

Data processing

Design

Receiving Suppliers

THE PURCHASING CYCLE

A series of steps that begin with a request for purchase and ends with notification of shipment received in satisfactory condition

REQUISITION SELECT SUPPLIER

PLACE THE ORDER

RECEIVE ORDER MONITOR ORDER

Purchasing receives the requisition

CONTENTS OF REQUISITION:(a) Description of the item or material desired(b) Quantity & quality necessary(c) Desired delivery dates(d) The person/unit/department requesting the

purchase

STEP 1

STEP 2

Purchasing selects a supplier

Suppliers who have the capability of supplying the desired goods must be identifiedNew suppliers must be searched for if not currently included in the database

STEP 2

STEP 3

Purchasing places the order with a vendorInvolves the preparation of purchase ordersSuppliers will usually be asked to bid on the job if the order involves a large expenditure, specifically for a one-time purchase

Blanket purchase orders – cover large-volume, continuous-usage items, which often involve annual negotiation of prices with deliveries subject to request throughout the year

STEP 3

STEP 4

Monitoring orders

Allows the Purchasing Department to project potential delays and relay that information to the operating units

STEP 4

STEP 5

Receiving orders

Receiving must check incoming shipments for quality and quantityReceiving must notify purchasing, accounting, and the operating unit that requested the goods

STEP 5

Value Analysis -refers to an examination of the function of purchased

parts and materials in an effort to reduce cost and/or improve performance

CHECKLIST OF QUESTIONS THAT CAN GUIDE A VALUE ANALYSIS

1) Select an item that has a high annual peso volume.2) Identify the function of the item.3) Obtain answers to questions like the ff.: a. Is the item necessary? b. Are there alternative sources for this item? c. Can more/less processing be done on the item to save

cost or time?4) Analyze the answers obtained as well as answers to

other questions that arise, and make recommendations.

CENTRALIZED VS.

DECENTRALIZED PURCHASING

CENTRALIZED PURCHASING

Purchasing is handled by one special departmentBeneficial in purchasing high-volume, high-value items

ADVANTAGES:As the duplication of efforts in buying function is eliminated, its cost will be relatively less and it will be managed efficiently It will enable the purchase of standardized items through standardized procedureThe shifting of responsibility for wrong decisions is eliminatedBulk buying strengthens the bargaining position of the buyer. The advantage of the quantity discount can be tappedIt enables to develop and maintain good relations with the suppliers

DISADVANTAGES:The specific requirements of the individual items may not be attended successfullyThe centralized standard procedure may result in delays in receiving the materialsIt is likely that the centralized buying staff may not be expert in buying varied types of itemsIt may not be possible to tap the local resourcesIt adversely affects the employee morale

DECENTRALIZED PURCHASING

Individual departments or separate locations handle their own purchasing requirementsBeneficial for small and rush orders

ADVANTAGES:Provides awareness of differing “local” needs and better able to respond to those needAble to save on transportation costs by buying locallyEach unit can purchase its needs immediatelyTaps local resources

DISADVANTAGES:Does not enable standardized purchasingAllows shifting of responsibility for wrong decisionsLess likely to avail of quantity discounts due to small purchases

SINGLE-SOURCINGVS.

MULTI-SOURCING

Single-sourcing -the practice of obtaining all of one type of input

product, component, or service from a single supplier

Multi-sourcing -the practice of obtaining all of one type of input

product, component, or service from more than one supplier in order to maintain market bargaining power or continuity of supply

Single-sourcingAdvantages Potentially better quality because more supply quality

assurance possibilities

Strong relationships which are more durable

Greater dependency encourages more commitment & effort

Better communication

Easier to cooperate on new product/service development

Higher confidentiality

Disadvantages More vulnerable to disruption if a failure to supply occurs

Individual supplier more affected by volume fluctuations

Supplier might exert upward pressure on prices if no alternative supplier is available

Multi-sourcingAdvantages Purchaser can drive down price by competitive

tendering

Can switch sources in case of supply failure

Wide sources of knowledge & expertise to tap

Disadvantages Difficult to encourage commitment by supplier

Less easy to develop effective supply quality assurance

More effort needed to communicate

Suppliers less likely to invest in new processes

E-PROCUREMENT

The use of the internet to organize purchasingThe generic term used to describe the use of electronic methods in every stage of the purchasing process from identification of requirement through to payment, and potentially to contract management

BENEFITS OF E-PROCUREMENT

It promotes efficiency improvements in purchasing processesIt improves commercial relationships with suppliersIt reduces the transaction costs of doing business for suppliersIt opens up the marketplace to increased competition & thus keeps prices competitiveIt improves a business’s ability to manage its supply chain more efficiently

COMMENTS ON E-PROCUREMENT

The cost savings may be the most visible advantagesMuch of the advantages & time savings come from decreased need to re-enter infoOn-line auctions can compress negotiations from months to hours, or even minutesIt is a preventing development of closer partnership-type relationshipsEstablishing trust, getting an understanding of a trading partner’s aspirations and not squeezing every last cent out of them in the short term is the main reason for firms not getting involved in e-procurement

SUPPLIER MANAGEMENT

CHOOSING SUPPLIERS

Reliable & trustworthy suppliers are a vital link in an effective supply chainTimely deliveries of goods or services and high quality are among the ways that suppliers can contribute to effective operationsPurchasing has the ultimate responsibility for establishing & maintaining good supplier relationships

Vendor Analysis-evaluating the sources of supply in terms of price, quality, reputation, and service

MAIN FACTORS CONSIDERED IN SELECTING A VENDOR/SUPPLIER

Factor Typical questions

Quantity & quality assurance What procedures does the supplier have for quality control & quality assurance?

Flexibility How flexible is the supplier in handling changes in delivering schedules, quantity, and product or service changes?

Location Is the supplier nearby?

Price Are prices reasonable?Is the supplier willing to negotiate?Is the supplier willing to cooperate to reduce costs?

Product or service changes How much advance notification does the supplier require for product or service changes?

Reputation & financial stability What is the reputation of the supplier?How financially stable is the supplier?

Lead times & on-time delivery What procedures does the supplier have for assuring on-time deliveries?

Other accounts Is the supplier heavily dependent on other customers, causing a risk of giving priority to those needs over ours?

SUPPLIER CERTIFICATION

A detailed examination of the policies & capabilities of a supplierVerifies that a supplier meets or exceeds the requirements of the buyerCertified suppliers – also known as world class suppliers

ADVANTAGE: The buyer can eliminate much or all of the inspection

& testing of goods

SUPPLIER RELATIONSHIPS

Purchasing has the ultimate responsibility for establishing & maintaining good supplier relationshipsType of relationship is determined by the length of a contract bet. sellers & buyersShort-term contracts involve competitive biddingMedium-term contracts involve ongoing relationshipsLong-term contracts often evolve into partnerships

SUPPLIER PARTNERSHIPS

These imply fewer suppliers, longer-term relationships, sharing of information (forecasts, sales data, problem alerts), & cooperation in planning

ADVANTAGESHigher qualityIncreased delivery speed & reliabilityLower inventoriesLower costsHigher profitsImproved operations

DISADVANTAGESSuppliers may be hesitant because many of the benefits go to the buyerSuppliers may have to increase their investment in equipmentCultural differences may hamper the partnership