Chapter 14 Purchasing and supply management
1. Importance of purchasing and supply...................................................................................... 2
1.1. Greatest expenditure of business ......................................................................................... 2
1.2. Inventory holding .................................................................................................................. 2
1.3. Profit leverage ...................................................................................................................... 2
1.4. Contribution to marketing of products ................................................................................... 3
2. Management task of purchasing and supply ........................................................................... 3
2.1. Purchasing and supply planning ........................................................................................... 3
2.2. Ongoing supply and purchasing function .............................................................................. 3
2.2.1. Place in organization structure...................................................................................... 4
2.2.2. Hierarchical level of purchasing and supply in organization structure............................ 4
2.2.3. Internal organizing of purchasing and supply ................................................................ 4
2.2.4. Co-ordination with other functional management areas ................................................ 4
2.2.5. Cross functional sourcing teams ................................................................................... 5
2.3. Control in purchasing and supply.......................................................................................... 5
2.3.1. Assessment of purchasing and supply activities ........................................................... 5
3. Purchasing process and activities ............................................................................................ 6
3.1. Purchasing process .............................................................................................................. 6
3.2. Quality decisions as a purchasing and supply activity........................................................... 6
3.2.1. Role of quality in purchasing ......................................................................................... 6
3.2.2. Determining right quality ............................................................................................... 6
3.2.3. Description of quality..................................................................................................... 6
3.2.4. Control of quality........................................................................................................... 7
3.3. Deciding on purchasing and supply quantities ...................................................................... 7
3.3.1. Need for inventory holding ............................................................................................ 7
3.3.2. Inventory costs.............................................................................................................. 8
3.3.3. Inventory control systems ............................................................................................. 8
3.4. Selection and management of supplies ................................................................................ 9
3.4.1. Importance of selecting suppliers.................................................................................. 9
3.4.2. Selection process ......................................................................................................... 9
3.4.3. Developing suppliers................................................................................................... 10
3.4.4. Long term relationships with suppliers ........................................................................ 10
3.5. Pricing decisions................................................................................................................. 10
3.5.1. Best price.................................................................................................................... 10
3.5.2. Price determination ..................................................................................................... 10
3.6. Timing of purchases ........................................................................................................... 11
3.6.1. Right time to buy......................................................................................................... 11
3.6.2. Factors influencing purchase scheduling .................................................................... 11
Chapter 14 Purchasing and supply management.doc 1
, • Buyers expertise can improve:
o Progressiveness
o Profitability
o Productivity
• Buyers need to be aware of market trends, seasons and state of the market
• Purpose of purchasing and supply function:
o To provide right material services and equipment
o At reasonable price
o Satisfy quality requirements
o Received in correct quantities
o At right time right place
• Purchasing supply function should:
o Select suppliers
o Purchase and arrange for transport to business
o Decide what price to accept
o Determine quality and quantity of materials
o Expedite and receive materials
o Control warehousing and inventory holding
o Determine timing of purchases
1. Importance of purchasing and supply
1.1. Greatest expenditure of business
• Purchasing cost is business greatest expense
• Profit = favorable difference between income and expenditure
1.2. Inventory holding
• Stock is held to prevent disruptions in transformation process
• Aim is to keep inventory levels as low as possible without interrupting operational process
• Reason – large sums of capital is tied up in inventory
• Warehousing 10 – 25% of total investment
• Includes:
o Financing warehouse
o Warehouse staff
o Insurance and obsolescence
1.3. 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
Chapter 14 Purchasing and supply management.doc 2
1. Importance of purchasing and supply...................................................................................... 2
1.1. Greatest expenditure of business ......................................................................................... 2
1.2. Inventory holding .................................................................................................................. 2
1.3. Profit leverage ...................................................................................................................... 2
1.4. Contribution to marketing of products ................................................................................... 3
2. Management task of purchasing and supply ........................................................................... 3
2.1. Purchasing and supply planning ........................................................................................... 3
2.2. Ongoing supply and purchasing function .............................................................................. 3
2.2.1. Place in organization structure...................................................................................... 4
2.2.2. Hierarchical level of purchasing and supply in organization structure............................ 4
2.2.3. Internal organizing of purchasing and supply ................................................................ 4
2.2.4. Co-ordination with other functional management areas ................................................ 4
2.2.5. Cross functional sourcing teams ................................................................................... 5
2.3. Control in purchasing and supply.......................................................................................... 5
2.3.1. Assessment of purchasing and supply activities ........................................................... 5
3. Purchasing process and activities ............................................................................................ 6
3.1. Purchasing process .............................................................................................................. 6
3.2. Quality decisions as a purchasing and supply activity........................................................... 6
3.2.1. Role of quality in purchasing ......................................................................................... 6
3.2.2. Determining right quality ............................................................................................... 6
3.2.3. Description of quality..................................................................................................... 6
3.2.4. Control of quality........................................................................................................... 7
3.3. Deciding on purchasing and supply quantities ...................................................................... 7
3.3.1. Need for inventory holding ............................................................................................ 7
3.3.2. Inventory costs.............................................................................................................. 8
3.3.3. Inventory control systems ............................................................................................. 8
3.4. Selection and management of supplies ................................................................................ 9
3.4.1. Importance of selecting suppliers.................................................................................. 9
3.4.2. Selection process ......................................................................................................... 9
3.4.3. Developing suppliers................................................................................................... 10
3.4.4. Long term relationships with suppliers ........................................................................ 10
3.5. Pricing decisions................................................................................................................. 10
3.5.1. Best price.................................................................................................................... 10
3.5.2. Price determination ..................................................................................................... 10
3.6. Timing of purchases ........................................................................................................... 11
3.6.1. Right time to buy......................................................................................................... 11
3.6.2. Factors influencing purchase scheduling .................................................................... 11
Chapter 14 Purchasing and supply management.doc 1
, • Buyers expertise can improve:
o Progressiveness
o Profitability
o Productivity
• Buyers need to be aware of market trends, seasons and state of the market
• Purpose of purchasing and supply function:
o To provide right material services and equipment
o At reasonable price
o Satisfy quality requirements
o Received in correct quantities
o At right time right place
• Purchasing supply function should:
o Select suppliers
o Purchase and arrange for transport to business
o Decide what price to accept
o Determine quality and quantity of materials
o Expedite and receive materials
o Control warehousing and inventory holding
o Determine timing of purchases
1. Importance of purchasing and supply
1.1. Greatest expenditure of business
• Purchasing cost is business greatest expense
• Profit = favorable difference between income and expenditure
1.2. Inventory holding
• Stock is held to prevent disruptions in transformation process
• Aim is to keep inventory levels as low as possible without interrupting operational process
• Reason – large sums of capital is tied up in inventory
• Warehousing 10 – 25% of total investment
• Includes:
o Financing warehouse
o Warehouse staff
o Insurance and obsolescence
1.3. 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
Chapter 14 Purchasing and supply management.doc 2
