PURCHASING/PROCUREMENT

MANAGEMENT

1

Chapter Objectives

Define and differentiate procurement and

purchasing

Appreciate the role of purchasing in

organisation

Outline the purchasing process

Identify and analyse the various Sourcing

decisions

Understand the contribution of

International/global sourcing to supply chain

2

Introduction: Statistics & the Relevance of

Purchasing

Ghana's public procurement expenditure rose fromGH¢1.4 billion in 2005 to GH¢1.78 billion in 2006

Represents between 50-70 per cent of the nationalbudget apart from personnel emolument.

Public procurement accounts for up to 50-70% ofimports, representing between 18.2% to 25.48% of thecountry’s Gross Domestic Product (GDP).

In many companies, the allocation of corporate revenue isas follows: 55% purchase; 20% payroll or salaries; 15%facilities and 10% profit.

The above statistics show the need to managegovernment and organizations’ purchases efficiently.

3

Defining Procurement and Purchasing

The terms “Purchasing” and “Procurement” are often used interchangeably.

So what is the difference between purchasing and procurement?

Procurement, as defined by “Purchasing Insight” is the overarching function that describes the activities and processes to acquire goods and services OR

the acquisition of goods and/or services at the best possible total cost of ownership, in the right quantity and quality, at the right time, from the right source, and at the right place for the direct benefit or use of corporations

4

The term “Purchasing”, on the other hand, refers to

the process of ordering and receiving goods. It is a subset

of the wider procurement process.

Generally, purchasing refers to the process involved in

ordering goods such as request, approval, creation of a

purchase order record (a Purchase Order or P.O.) and the

receipting of goods.

Difference - Procurement involves the activities involved

in establishing fundamental requirements, (Laws), sourcing

activities such as order specifications, market research

and vendor evaluation and negotiation of contracts.

It can also include the purchasing activities required to

order and receive goods

5

Key Difference

The term procurement extends purchasing

activities to a more strategic and process-

orientated level and includes selection of supply

source locations, determination of the form in

which the material is to be acquired, timing of

purchase, price determination and quality control.

6

The Role of Purchasing in the Firm

The importance of purchasing in any firm is largely

determined by these four factors:

availability of materials (if product is volatile and price

instability, then top procurement officers should be

involved)

absolute dollar volume of purchases (even small unit

savings add up quickly when purchased in large volumes.)

percentage of product cost represented by materials

(>40% of product cost, efficient purchasing can produce a

significant savings), and

the types of materials purchased (quality)

7

Role of the Purchasing Unit

In progressive firms, purchasing has a hand in new product development.

The design stage is the point at which the vast majority of the cost of making an item can be reduced or controlled.

In a product development team, purchasing representatives have the opportunity to help determine the optimal materials to be used in a new product, propose alternative or substitute materials, and assist in making the final decision based on cost and material availability.

Purchasing representatives may also participate in a make-or-buy analysis at this point.

Purchasing also improves positively a firm’s cost structure through reduction of all direct materials costs: this will immediately lead to an improvement of the company’s sales margin, which in turn will affect return on net assets in a positive manner

8

The procurement/Purchasing Process

Procurement is the acquisition of goods or commodities

by a company, organization, institution, or a person.

This simply means the purchase of goods from suppliers

at the lowest possible cost.

The best way to do this is to let the suppliers compete

with each other so that the expenses of the buyer are

kept at a minimum.

The purchasing process begins with the user/buyer stating

the specification of the quality and quantity of goods

required.

9

The procurer then begins to search the market for bidders.

After identifying the suppliers, a request for bids, proposals, quotes, and information can be made.

However, direct contact with bidders can also be made instead of advertising the above requests.

After selecting the suitable bidders, a quality check is essential in order to confirm the suitability of the goods in question.

The next step would be negotiation of the terms, conditions, quality, and delivery schedules.

Logistics and payment are the next two important processes that determine the safe delivery and the payoff of goods.

10

Evaluating Suppliers

The purchasing manager must identify all potential

suppliers for the items being purchased.

The next step is to develop a list of factors to

evaluate each supplier. These should complement the

factors used earlier in supplier selection.

Once the factors have been determined the

performance of individual suppliers should be

evaluated on each factor (e.g. product reliability, price,

ordering convenience!

11

• The next step is to develop a weighted compositemeasure for each factor by multiplying the supplier'sevaluation by the factor's importance.

• The addition of the composite scores for eachsupplier provides an overall rating that can becompared to the ratings of other suppliers.

• The higher the composite score, the more closely thesupplier meets the needs and specifications of theprocuring company.

• Going through the process itself is one of the majorbenefits of this approach

12

13

Maxcell Ghana Limited is a growing craft and pottery

business run by a native of New Koforidua. The company

employs artisans to produce clay bowls and mugs with

authentic Ashanti designs and colours. The management is

searching for competent suppliers of their raw materials

and therefore placed a Request For Proposal (RFP)

advertisement in the national dailies. Four potential

suppliers responded to the advertisement, and in the

company’s bid to select the right supplier, Maxcell’s

management came up with the following selection criteria

which it will use to evaluate the potential suppliers:

Criterion Weight

Quality 8

Delivery 6

Cost 4

Service 2

Using a 1-5 scale, 5 representing ‘excellent’ score and 1,

‘poor’ score, Maxcell’s management came up with the

following scores based on each supplier’s proposals:

Criterion/S

upplier

Supplier A Supplier B Supplier C Supplier D

Quality 4 3 5 2

Delivery 4 5 2 3

Cost 5 2 2 5

Service 3 5 1 2

Required:

Based on the above selection criteria and scores of the

suppliers, which supplier will Maxcell’s management select?

Sourcing Decisions

The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier).

The buy side of the decision also is referred to as outsourcing.

Make-or-buy decisions usually arise when a firm that has developed a product or part—or significantly modified a product or part—is having trouble with current suppliers, or has diminishing capacity or changing demand.

18

Factors that may influence firms to make

Items that fit under one of these three categories are considered strategic in nature and should be produced internally if possible.

(1) the item is critical to the success of the product, including customer perception of important product attributes;

(2) the item requires specialized design and manufacturing skills or equipment, and the number of capable and reliable suppliers is extremely limited; and

(3) the item fits well within the firm's core competencies, or within those the firm must develop to fulfil future plans.

19

Factors that may influence firms to make

Cost considerations (less expensive to make the part)

Desire to integrate plant operations

Productive use of excess plant capacity to help absorb

fixed overhead (using existing idle capacity)

Need to exert direct control over production and/or

quality

Better quality control

Design secrecy is required to protect proprietary

technology

Unreliable suppliers etc

20

Factors that may influence firms to

Outsource

Lack of expertise

Suppliers' research and specialized know-how exceeds

that of the buyer

cost considerations (less expensive to buy the item)

Small-volume requirements

Limited production facilities or insufficient capacity

Indirect managerial control considerations

Procurement and inventory considerations

Brand preference

Item not essential to the firm's strategy

21

International/Global Sourcing

22

Global sourcing is a sourcing strategy that effectively

broadens the scope of the procurement process to

include companies that operate in other countries.

The use of global sourcing has been the driving force

behind the development and expansion of the global

economy. Including suppliers from around the world in

the bidding process for large contracts reduces prices

and increases competition.

23

Three main industries that are ideal for global souring:

1. manufacturing,

2. skilled services and

3. telephone call centers.

Manufacturing

Manufacturing costs vary internationally due to

currency conversion and the cost of living in different

countries. The costs of labor and materials are lower in

developing nations than in industrialized countries. This

difference translates into significant savings in salary and

benefit costs.

24

Skilled Services

Skilled services such as purchasing, engineering, information

technology professionals and consultants are a growing

area of global sourcing. The level of skill and knowledge

held by these professional allows them to provide high

quality services to their employers.

Due to the lower cost of living in different nations, many

firms are building their professional services departments

outside the developed nations.

25

Telephone Call Centers

Telephone call centers have grown exponentially in India

and other countries where English is the primary

language. The staff, equipment and construction costs for

these facilities are significantly less than in developed

countries.

In addition, there is a large pool of potential employees who

are interested in this type of employment opportunities.

The Role of Purchasing Department

Finding and approving suppliers

Purchasing at least total cost to the company

Ensuring delivery of goods and services at the right time

Warning all concerned if deliveries are not going to be met

Verifying invoice presented by suppliers

Organizing all discussions with suppliers, both actual and potential

Speculative buying is sometimes a duty of the buying department

26

Advising on prices for materials or services to

be used in new or modified designs

Acting as a ‘window – on – the – world’

27