Purchasing and Vendor

Management

What Is Purchasing? Purchasing is a functional group and a

functional activity. Objectives of Purchasing may be defined as:

to buy materials of the right quality, in the right quantity from the right source delivered to the right place at the right time at the right price.

Purchasing is proactive. Purchasing is transactional as well as

relational Purchasing is strategic.

Perspectives on Purchasing Purchasing as a function: people use

specialized knowledge skills and resources to perform specialized tasks.

Purchasing as a process Purchasing as a link in the supply or value

chain. Purchasing as a relationship Purchasing as problem solving Purchasing as a discipline. Purchasing as a profession.

Definition of Purchasing:

The process undertaken by the organizational unit that, either as a function or as part of integrated supply chain, is responsible for procuring or assisting users to procure, in the most efficient manner, required supplies at the right time, quality, quantity and price and management of suppliers, thereby contributing to the competitive advantage of the enterprise and the achievement of its corporate strategy.

Purchasing and Change Globalization

Information Technology

Changing production and management philosophies.

Changing Aspects of Purchasing Structure: Horizontal, flatter, involving self-

managed teams and cross-functional relationships. It is an integrated part of Supply Chain Management.

Procedures: Based on IT applications; rapid, low cost. Increased emphasis on center-led user procurement.

Purchase Considerations: Subcontract or outsource non-core business.

Sourcing: reducing supplier base, global, increased use of purchasing consortia.

Changing Aspects of Purchasing Supplier Relationships: long-term

partnerships and collaborations; win-win negotiations, sharing of information.

Quality and Specifications: supplier specifications of design and quality.

Inventory and Lead times: Low due to JIT requirements, thus obviating waste.

Purchasing Performance: Assessed mainly on its value-added activities as part of supply chain.

Purchasing Process Cycle

1. Identify user need for product or service.

2. Evaluate potential suppliers.3. Bidding negotiation, & supplier

selection.4. Purchase approval.5. Release & receive purchase

requirements.

6. Measure supplier performance.

Improving the Purchasing Process

Online-requisitioning systems from users to purchasing

Procurement cards Electronic purchasing commerce Long-term purchase agreements Online ordering systems to suppliers Electronic Data Interchange Online ordering through electronic catalogs Allowing users to contact suppliers directly

Purchasing Integration

Purchasing in 1940s– VA & VE.Purchasing in 1950s– System

ContractingPurchasing in 1960s– Material

ManagementPurchasing in 1970s– MRPPurchasing in 1980s– JITPurchasing in 1990s– SCM

Purchasing Integration

Integration can occur in many forms:

1. Sourcing2. New-product development teams3. Cross-location teams4. Cross-organizational teams.

Characteristics of External Integration

One or more number of suppliers for each purchased item or family of items.

A win-win approach Joint efforts to improve supplier

performance. Joint efforts to resolve conflicts. Open exchange of information A credible commitment to work

together. A commitment to quality & defect-free

products.

Evolving from Adversarial to Collaborative relationships

Phase I: Traditional school of management

Phase II: Arms-length relationship

Phase III: Closer-buyer seller relationships

Phase IV: Total trust

Stages of Supplier Integration

One-night stand [competitive leverage]

Regular date [preferred supplier] Going steady [performance

partnerships] Living together [strategic alliances] Marriage [co-business integration]

Types of Purchasing Strategies:

Long term Supplier Relationship

Early supplier design involvement

Supplier Development

E-Reverse Auctions [e-RAs]

Early-Supplier Involvement [ESI]

Advantages:1. Reduced concept-to-customer

development time.2. Improved product specifications.3. Enhanced quality4. Access to new technology5. Lower development costs.6. Interchange of knowledge.7. Improved manufacturing.

Steps in Supplier Development

Step 1: Identify critical products for development.

Step 2: Identify critical suppliers.Step 3: Appraise Supplier performance.Step 4: Determine the gap between

present and desired supplier performance.

Steps in Supplier Development

Step 5: Form cross-functional supplier development.

Step 6: Meet with suppliers’ top management team.

Step 7: Agree how the perceived gaps can be abridged.

Step 8: Set deadlines for achievement.Step 9: Monitor improvements

Supplier Performance Measurement

Supplier Performance measurement includes the methods and systems to collect and provide information to measure, rate, or rank supplier performance on a continuous basis.

The measurement system is a critical part of the sourcing process– essentially serving as ‘supplier’s report card’.

Supplier Measurement DecisionsObjective [Quantitative Measures]:1. Delivery Performance: A buyer can

assess how well a supplier satisfies the quantity and due-date commitment.

2. Quality Performance: A buyer can compare a supplier’s quality against some previously specified performance objective.

3. Cost Reductions: Comparing supplier’s cost against other suppliers within the same industry.

Supplier Measurement DecisionsSubjective [Qualitative Measures]:1. Problem resolution ability.2. Technical ability3. Ongoing progress report4. Corrective action response5. Supplier cost reduction ideas.6. Supplier New-Product support.7. Buyer/Seller Compatibility.

Measurement Areas:Operational PurchasingCoordination with other functionsPurchasing Organization and systemBudget PerformanceCreative PerformancePolicy DevelopmentPlanning & forecasting

Measurement Areas:Area Measure

Quality Percentage of rejects in goods received; percentage of parts rejected in production & raw materials rejected.

Quantity Percentage of stock which has not moved over a specified period; number of production stock-outs; number of emergency orders; comparison of stock with target stock.

Timing Supplier’s actual delivery performance against promised; time taken to process requisitions; time taken for action.

Price Prices against standard; prices paid for key items compared with market indexes; price at the time of purchase against price at the time of use.

Operational Cost

Cost of processing an order; progressing costs as percentage of total; communication costs.

Types of Supplier Measurement Techniques

Categorical System

Weighted-Point System

Cost Based System

Supply-Base OptimizationAdvantages:a) Buying from World-class suppliersb) Use of full-service suppliersc) Reduction of supply base riskd) Lower supply base maintenance costse) Lower total product costf) Ability to pursue complex purchasing

strategies.

Risks in Maintaining Fewer Suppliers

1. Supplier Dependency

2. Absence of competition

3. Supply disruptions

4. Over aggressive supply reductions

Approaches to Supply Base reduction

Twenty-Eighty Rule

“Improve or Else” Approach

Triage Approach

Competency Staircase Approach

Purchasing Structure

Centralized Purchasing: Economies of Scale:1. Forecasting benefits2. Negotiation on quantities3. Compete for preferred supplier status4. Reduction in prices by spreading

overheads.5. Professional can be employed.

Coordination of Activities:1. Strategic focus possible2. Uniform policies can be adopted

such as ‘single sourcing’3. Competitive buying is eliminated.

Centralized Purchasing

Centralized Purchasing

Control of Activity:1. Separate profit centre2. Budgetary control3. Uniformity of prices.4. Inventories can be controlled.5. Performance can be monitored

Decentralized Purchasing

Closer to users and better understanding of local needs.

Response time to divisional or plant needs maybe rapid and of high quality.

Possibly closer relationship with suppliers.

Selecting local suppliers leads to lower transportation costs.

Geographical, cultural, political aspects maybe considered.

Centralized Purchasing Activities

Determination of major purchasing strategies and policies such as vertical integration, outsourcing, single and partnership sourcing.

Purchase of leverage, bottleneck, strategic products.

Purchase of capital equipment and systems.

Negotiating for bulk purchases.

Centralized Purchasing Activities

Purchasing research into market conditions, vulnerability and similar matters.

Rationalization of share of orders to be received by specific suppliers.

Control of group inventory. Staff training and development.

Decentralized Purchasing Activities

Small-value orders and maintenance, repair and operating (MRO) items.

Items used only for that plant. Emergency purchases. Local buying to save transport costs. Staff purchases.