Chapter 8 Procument and Supply Chain Management

8.3 Purchasing

8.3.1 Introduction to  Purchasing

    Purchasing is notsimply buying goods and services, and it is a group of functionalactivities associated withbuying the goods and services required by organizations.

    These activitiesinclude supplier identification and selection, buying,negotiation and contracting, supply market research, suppliermeasurement and improvement, and purchasing systems development.

    Purchasing department must develop and maintain close relationships with other functional groups within the organization which may include manufacturing, marketing, technology and finance. Effective communication with these departments is essential and necessary for the whole organization to keep as competitive. For example, if a supplier’s com-ponents are defective and causing problem for manu-facturing, then the purchasing department must work with the supplier to improve their quality. 

8.3.2 Need of Purchasing

         Nowadays the need for purchasing to be involved in corporate strategyhas received a great deal of attention. The reason is that the amount of moneyspent on purchasing has increased significantly, and the potential savings fromstrategic management of purchasing are considerable. Another factor is thetrend toward outsourcing, which means firms must manage their supplierseffectively. Now it is believed that suppliers play a critical role insupporting a firm’s competitive strategy, whether it is cost leadership,differentiation, or a mixed strategy.

8.3.3Decision of Purchasing

      Purchasing those products and services which firms can not produce isnecessary and easily understood, but if they can make or provide these productsand services in-house, what will they do? Decisions about whether a producer ofgoods or services will insource or outsource are also called make-or-buydecisions. Answering such questions is often not as obvious as black and white.

8.3.4 Purchasing Process

    The purchasing process usually consists ofsix stages：

 n  Identify user need for product and service

 n  Evaluate potential suppliers

 n  Supplier selection

 n  Purchase approval

 n  Release and receive purchase requirements

 n  Measure suppliers’ performance

1. IdentifyUser Need for Product of Service

         The purchasing process begins with identifying materials or servicesneeded by an internal user. Material requirements might include equipment,components, raw materials, or even completely finished products. Examples ofservice can be a need for computer programmers, transportation carriers, ormaintenance service providers. Users may use different ways to communicate withpurchasing, such as by phone, word-of-mouth, or through the internal computernetworks.

 2.EvaluatePotential Suppliers

         Once a firm identifies potential items to be purchased, it must gatherand evaluate information on potential suppliers, and this is the caseparticularly for a new purchase. A list of potential suppliers can be generatedfrom a variety of resources, including market representatives, trade shows,trade journals, the current suppliers, and the Internet.

3.Supplier Selection

         Selecting suppliers is one of the most important activities performed bycompanies, since mistakes made during this stage can be damaging andlong-lasting. When price is a main criteria and the required item or servicehas clear specifications, competitive bidding is the commonly used method.Generally the lowest bidder receives the contract; otherwise, the buyer mustexplain why it did not get the contract. However, when non-price variablesexist, then the buyer and seller usually negotiate directly. Finally, thepurchasing team will select a supplier based on the bids received or thenegotiation result, and then move on to the next stage.

4.Purchase Approval

         After the supplier is selected, purchasing grants an approval topurchase the product or service. This is accomplished through issuing apurchase order (PO), also called a purchase agreement. The purchase order willspecify the details agreed by the buyer and seller, such as quantity, price,delivery date, method or delivery, and so on. It should be noted that nowadaysmore and more firms are using computerized databases to perform these tasks andare moving to a “paperless” office.

5.Release and Receive Purchase Requirements

         At this stage, purchasing or other functional groups must monitor theprocess carefully. Lots of potential conflicts may occur at this period, sincethe supplier and buyer are two separated groups in traditional sense and theirgoals may be in conflict. For example, the supplier wants to produce and shipin an economic size, while the buyer’s goal is to minimize inventory and expectsmall orders and short lead time.

6.Performance Measurements

         Suppliers’ performance is critical to an organization, and evaluationshould be conducted on a continuous basis. A supplier that performs well canhelp organizations be more efficient, produce higher quality products orservices, reduce costs, and increase profits. However, very few companies havedeveloped systems to measure their suppliers’ performance.