Chapter 15: Purchasing and Supply Management
Buyers expected to keep abreast of better substitute materials, new developments and technology in market
Buyers expertise can improve:
Progressiveness
Profitability
Productivity
Buyers need to be aware of market trends, seasons and state of the market
Purpose of purchasing and supply function:
To provide right material, services and equipment
At reasonable price
Satisfy quality requirements
Received in correct quantities
At right time and place
Purchasing supply function should (activities):
Select suppliers
Purchase and arrange for transport to business
Decide what price to accept
Determine quality and quantity of materials
Expedite and receive materials
Control warehousing and inventory holding
Determine timing of purchases
Purchasing and supply management entails the planning, organising, leading and controlling of all activities relating to the
purchase of materials and services from an external source
Aimed at maintaining and increasing the business’s profitability and efficiency of customer service.
Importance of purchasing and supply
Greatest expenditure of business
Purchasing cost is business greatest expense, esp. retailers
Purchasing costs - cost savings vital to business’s profits, since profit can be expressed as the favourable difference
between income and expenditure.
Inventory holding
Stock is held to prevent disruptions in transformation process (production or operational)
Aim is to keep inventory levels as low as possible without interrupting operational process
Reason – large sums of capital is tied up in inventory - could be used elsewhere
, Warehousing Costs (10 – 25% of total investment) & includes:
Financing warehousing
Warehouse staff
Insurance and obsolescence
Profit leverage
If purchasing cost constitute a major portion of total cost of business, a saving cost in purchasing has greater profit
potential than a similar increase in sales
Usually, greater profit potential in commercial organization than in manufacturing organization
Purchasing as a factor in profitability is also more critical when a business
frequently changes its suppliers
if the price of materials fluctuates continually
where fashion is concerned
where markets for the final product are highly competitive
The contribution of purchasing to profitability is less critical but still important where:
prices and suppliers are relatively stable
the industry is not characterised by innovation
Contribution to marketing of products
By purchasing material at right quality and price and time final products can be available in right quantities at a
competitive price at the right time to its customers
Retail buyer has greater influence on marketing of merchandise
Successful marketing = availability of right products, right time, in right quantities
Management task of purchasing and supply
Purchasing and supply planning
Formulating of objective which purchasing, and supply strive to reach by particular future period
Plans should include optimal application of resources (people, physical facilities and funds)
3 levels:
Strategic Level
– Supply-chain management approach - purchasing and supply involved in strategic planning.
– Long-term natured aimed at safeguarding materials provision, developing supplier sources and maintaining the
competitive position of the business
– Supplier alliances & development
– Supply-chain process integration
– Availability forecasting
– Policy formulation
, Tactical / Middle-Management Level
– Medium-term nature
– Budgeting
– Purchasing and supply system, organisation & methods
– Negotiation
– Human resources development
– Interface development with other functions and suppliers (by means of cross functional teams)
– Cost-reduction techniques.
Operational Level
– Short-Term nature
– Plans formulated for purchasing and supply function to proceed as smoothly as possible
– Expediting
– File and system maintenance
– Enquiries and quotations
– Pricing
– Returns and recycling
Business objectives Purchasing and supply objectives
To retain the market share To search for more unique products in the supplier market
To move from the speciality market to the To seek new and larger suppliers, and develop a new materials flow
general market system to handle larger quantities and a greater variety of items while
keeping total inventory volume as low as possible
To develop specific new products and services To seek or develop new suppliers
To develop an overall production capacity To develop systems that integrate capacity planning and purchasing and
plan, including an overall make-or buy policy supply planning, together with a policy of make-or-buy
To initiate a cost-reduction plan To standardise materials and reduce suppliers
Organising the purchasing and supply function
1. Place of purchasing and supply in organization structure
2. Internal organization of purchasing and supply function
3. Co-ordination with other functional management area
4. Cross functional teams
Small- and medium-sized businesses - purchasing of important items usually performed by the owner/entrepreneur,
while less important items, such as cleaning materials and refreshments, will be purchased by one of the clerks.
1. Place in organization structure
Affected by 2 elements:
Centralization or decentralization
Hierarchical level of purchasing and supply in organization structure
Buyers expected to keep abreast of better substitute materials, new developments and technology in market
Buyers expertise can improve:
Progressiveness
Profitability
Productivity
Buyers need to be aware of market trends, seasons and state of the market
Purpose of purchasing and supply function:
To provide right material, services and equipment
At reasonable price
Satisfy quality requirements
Received in correct quantities
At right time and place
Purchasing supply function should (activities):
Select suppliers
Purchase and arrange for transport to business
Decide what price to accept
Determine quality and quantity of materials
Expedite and receive materials
Control warehousing and inventory holding
Determine timing of purchases
Purchasing and supply management entails the planning, organising, leading and controlling of all activities relating to the
purchase of materials and services from an external source
Aimed at maintaining and increasing the business’s profitability and efficiency of customer service.
Importance of purchasing and supply
Greatest expenditure of business
Purchasing cost is business greatest expense, esp. retailers
Purchasing costs - cost savings vital to business’s profits, since profit can be expressed as the favourable difference
between income and expenditure.
Inventory holding
Stock is held to prevent disruptions in transformation process (production or operational)
Aim is to keep inventory levels as low as possible without interrupting operational process
Reason – large sums of capital is tied up in inventory - could be used elsewhere
, Warehousing Costs (10 – 25% of total investment) & includes:
Financing warehousing
Warehouse staff
Insurance and obsolescence
Profit leverage
If purchasing cost constitute a major portion of total cost of business, a saving cost in purchasing has greater profit
potential than a similar increase in sales
Usually, greater profit potential in commercial organization than in manufacturing organization
Purchasing as a factor in profitability is also more critical when a business
frequently changes its suppliers
if the price of materials fluctuates continually
where fashion is concerned
where markets for the final product are highly competitive
The contribution of purchasing to profitability is less critical but still important where:
prices and suppliers are relatively stable
the industry is not characterised by innovation
Contribution to marketing of products
By purchasing material at right quality and price and time final products can be available in right quantities at a
competitive price at the right time to its customers
Retail buyer has greater influence on marketing of merchandise
Successful marketing = availability of right products, right time, in right quantities
Management task of purchasing and supply
Purchasing and supply planning
Formulating of objective which purchasing, and supply strive to reach by particular future period
Plans should include optimal application of resources (people, physical facilities and funds)
3 levels:
Strategic Level
– Supply-chain management approach - purchasing and supply involved in strategic planning.
– Long-term natured aimed at safeguarding materials provision, developing supplier sources and maintaining the
competitive position of the business
– Supplier alliances & development
– Supply-chain process integration
– Availability forecasting
– Policy formulation
, Tactical / Middle-Management Level
– Medium-term nature
– Budgeting
– Purchasing and supply system, organisation & methods
– Negotiation
– Human resources development
– Interface development with other functions and suppliers (by means of cross functional teams)
– Cost-reduction techniques.
Operational Level
– Short-Term nature
– Plans formulated for purchasing and supply function to proceed as smoothly as possible
– Expediting
– File and system maintenance
– Enquiries and quotations
– Pricing
– Returns and recycling
Business objectives Purchasing and supply objectives
To retain the market share To search for more unique products in the supplier market
To move from the speciality market to the To seek new and larger suppliers, and develop a new materials flow
general market system to handle larger quantities and a greater variety of items while
keeping total inventory volume as low as possible
To develop specific new products and services To seek or develop new suppliers
To develop an overall production capacity To develop systems that integrate capacity planning and purchasing and
plan, including an overall make-or buy policy supply planning, together with a policy of make-or-buy
To initiate a cost-reduction plan To standardise materials and reduce suppliers
Organising the purchasing and supply function
1. Place of purchasing and supply in organization structure
2. Internal organization of purchasing and supply function
3. Co-ordination with other functional management area
4. Cross functional teams
Small- and medium-sized businesses - purchasing of important items usually performed by the owner/entrepreneur,
while less important items, such as cleaning materials and refreshments, will be purchased by one of the clerks.
1. Place in organization structure
Affected by 2 elements:
Centralization or decentralization
Hierarchical level of purchasing and supply in organization structure
