1. PURCHASING MANAGEMENT
Chapter 2
PURCHASING MANAGEMENT

2. Disclaimer
These slides do not replace the prescribed material. All prescribed material need to be studied for assignment and examination purposes
Some of the slide content is based on the 2015 Cengage Learning Instructor resources.

3. Chapter Outline Introduction A Brief History of Purchasing Terms
The Role of Supply Management in an Organization
The Purchasing Process
Sourcing Decisions – The Make or Buy Decision
Roles of Supply Base
Supplier Selection
How Many Suppliers to Use
Purchasing Organization
International Purchasing/Global Sourcing
Procurement for Government/Non-Profits Agencies 3

4. A Brief History of Purchasing
Purchasing is a key business function that is responsible for acquisition of required materials, services, and equipment. The acquisition of services is also called contracting. Considering the strategic role and additional skills and knowledge required for purchasing, the term supply management is often used to describe the expanded set of responsibilities of purchasing professionals. You can find a definition of supply management in the list of key terms in your tutorial letter 101 as well as in activity 3 of the MO001. It is important to note that in the government sector, purchasing is often referred to as procurement.

5. The Role of Supply Management in an Organisation
The primary goals of purchasing are:
Ensure uninterrupted flows of raw materials at the lowest total cost,
Improve quality of the finished goods produced, and
Maximize customer satisfaction.
Purchasing contributes to these objectives by:
Actively seeking better materials and reliable suppliers,
Work closely with and exploiting the expertise of strategic suppliers to improve quality and materials
Involving suppliers and purchasing personnel in new product design and development efforts.

6. The Role of Supply Management in an Organisation (Continued)
The Financial Significance of Supply Management
Profit-Leverage Effect
The main aim of the profit leverage effect is to indicate that the same reduction in purchase spend will result in the same amount of profit increase (given that all other costs and expenses remain unchanged).
Return on Assets (ROA) Effect
The main aim of the return on investment effect is to determine how effective purchasing strategies resulting in lower purchase spend will affect the return on investment ratio. Note that a reduction in purchase spend will result in lower total assets (because of the lower raw material inventory).
Inventory Turnover Effect
The main aim of the inventory turnover effect is to determine how many times a firm’s inventory is utilised and replaced in one financial year.

7. The Purchasing Process – e-Procurement (Continued)
Advantages of the e-Procurement System
Time savings
Cost savings
Accuracy
Real time
Mobility
Trackability
Management
Benefits to the suppliers

8. Small Value Purchase Orders
Processing costs for small value purchases are minimised through:
Procurement Credit Card/Corporate Purchasing Card (P-card)
Blanket or Open-End Purchase Orders
Blank Check Purchase Orders
Stockless Buying or System Contracting
Petty Cash
Standardization & Simplification of Materials & Components
Accumulating Small Orders to Create a Large Order
Using a Fixed Order Interval

9. Sourcing Decisions – The Make or Buy Decision
Outsourcing: Buying materials and components from suppliers instead of making them in-house. The trend has moved toward outsourcing.
Backward vertical integration: Refers to acquiring sources of supply
Forward vertical integration : Refers to acquiring customer’s operations.
The Make or Buy decision is a strategic decision

10. Sourcing Decisions – The Make or Buy Decision (Continued)
Reasons for Buying or Outsourcing
Cost advantage
Insufficient capacity
Lack of expertise
Quality

11. Sourcing Decisions – The Make or Buy Decision (Continued)
Reasons for Making
Protect proprietary technology
No competent supplier
Better quality control
Use existing idle capacity
Control of lead-time transportation, and warehousing cost
Lower cost

12. Sourcing Decisions – The Make or Buy Decision (Continued)
If an organisation has decided to source a product from a suitable supplier, it is useful to employ the make-or-buy break-even analysis for computing the cost-effectiveness of such a sourcing decision. There are five assumptions underlying break-even analysis. They are highlighted below.
1. All costs involved can be classified under either fixed or variable costs.
2. Fixed cost remains the same within the range of analysis.
A linear variable cost relationship exists.
The fixed cost of the make option is higher because of initial capital investment in equipment.
5. The variable costs of the buy option are higher because of supplier profits.

13. Roles of Supply Base
Supply Base - list of suppliers that a firm uses to acquire its materials, services, supplies, and equipment
Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base
See video as part of this folder

14. How Many Suppliers to Use
Single-source (supplier rationalization) – This may be risky. Current trends favor fewer sources.
Reasons Favoring Multiple Suppliers
Need capacity
Spread risk of supply interruption
Create competition
Information
Dealing with special kinds of business
Reasons Favoring a Single Supplier
To establish a good relationship
Less quality variability
Lower cost
Transportation economies
Proprietary product or process
Volume too small to split

15. Purchasing – Centralised vs. Decentralised
Purchasing Organization is dependent on many factors, such as market conditions & types of materials required
Centralised Purchasing - purchasing department located at the firm’s corporate office makes all the purchasing decisions
Decentralised Purchasing - individual, local purchasing departments, such as plant level, make their own purchasing decisions

16. Purchasing – Centralised vs. Decentralised (Continued)
Advantages -
Centralization
Concentrated volume-
Avoid duplication
Specialization
Lower transportation costs
No competition within units
Common supply base
Advantages - Decentralization
Closer knowledge of requirements
Local sourcing
Less bureaucracy