PRODUCTI ON PLANNING & CONTROL, 1998, VOL. 9, NO.

6, 611± 618

Improving the e€ ectiveness of purchasing in a

small company: a case study
D. PERKINS and A. GUNASEKARAN

Keywords purchasing, SMEs, case study, recommendations 1. Introduction

Abstract. This paper deals with improving the e€ ectiveness of
purchasing in a small company. The purchasing has a tremen-
dous in¯ uence on the performance of manufacturing, as most of
the companies purchase about 60% of the components and raw
materials from suppliers. Also, the contribution of Small and
Medium Enterprises ( SMEs) to national economy is signi® cant.
Realizing the role of purchasing in SMEs, an attempt has been
made to present the experiences of improving the e€ ectiveness
of purchasing in a small company located in Germany. The
proposed purchasing system in the company has been suitably
embedded with the current MRP system. In addition, recom-
mendations for improving the e€ ectiveness of purchasing in
SMEs are presented.
Purchasing is of vital importance in manufacturing
because materials and components form a signi® cant
part of product costs. The e€ ectiveness of purchasing
improves the overall productivity of the manufacturing
organizations. Purchasing management has received
increasing attention in recent years because of its tremen-
dous in¯ uence on the production capabilities of the ® rm
( Scully and Fawcett 1994) . A number of articles has been
published on the practice of purchasing. However, most
of them deal with large-scale industries. Nevertheless,
SMEs play a major role in the national economy.

A uthors: D. Perkins and A. Gunasekaran, Department of Manufacturing and Engineering Systems,

Brunel University, Uxbridge, Middlesex UB8 3PH, UK.
DouglasPerkins is currently with the Department of Manufacturing and Engineering Systems
at Brunel University, UK. He worked in manufacturing industries for more than 15 years before he
returned to academia. He brings a rich experience of improving manufacturing productivity to the
academic pursuit. His main areas of research interests are business process reengineering, just-in-
time and productivity improvement. Mr Perkins has travelled widely to consult companies.

A. Gunasekaran is a Senior Lecturer of Operations Management in the Department of

Manufacturing and Engineering Systems at Brunel University, UK. He was awarded a PhD in
Industrial Engineering and Operations Research from Indian Institute of Technology, Bombay,
India. He has over 75 articles published in International J ournal of P roduction Research, I nternational
J ournal of Systems Science, I nternational J ournal of O perations and P roduction M anagement, Computers in
I ndustrial E ngineering: An International J ournal, E uropean J ournal of O perational R esearch, J ournal of
O perational Research Society, International J ournal of P roduction E conomics, Computers in Industry: A n
I nternational J ournal, International J ournal of Q uality & Reliability M anagement, International J ournal of
Computer- Integrated M anuf acturing, etc. He has presented over 40 papers in conferences and given a
number of invited talks in more than 20 countries. He is on the Editorial Board of many inter-
national journals. He has edited special issues for a number of international journals. Dr
Gunasekaran has been involved in several national and international collaborative projects that
are funded by private and government agencies. He is currently interested in researching Agile
Manufacturing, Concurrent Engineering, Manufacturing Strategy, Supply Chain Management,
Computer-integrated Manufacturing and Total Quality Management.

0953-7287/98 $12. 00 Ñ 1998 Taylor & Francis Ltd.

612 D . P erkins and A . Gunasekaran
Therefore, there is a need to help these companies to
improve their competitiveness and hence the national
economy. Realizing the importance of SMEs and their
performance, various productivity and quality improve-
ment strategies and methods have been implemented in
the past. However, purchasing has not received due
attention from SMEs fearing that they require new
investments in capital, e.g. labour and equipment.
However, experiences show that SMEs require a change
in their purchasing strategies and methods, but not
necessarily an investment in the capital resources, e.g.
automation. In order to motivate this aspect in SMEs,
a case study conducted in a small German company has
been presented in this paper. In addition, some of the
observations made from the case study may be useful to
practitioners in implementing new purchasing strategies
and methods in SMEs.
The organization of this paper is as follows: Section 2
deals with the background for the research. The details of
the case study conducted in a small German company are
presented in Section 3. The recommendations for
improving the e€ ectiveness of purchasing in SMEs are
presented in Section 4. Section 5 concludes the paper.
2. Background for the research
Most techniques for managing demand uncertainty
require a certain degree of stability in the environment,
since they are completely or partially based on the obser-
vation of historical data. When applied to a purchasing
system characterized by irregular and infrequent
demand, these techniques show poor performances. In
such an uncertainty, management calls for the gathering
of data using a computerized information system that
directly predicts future requirements. The main objective
of purchasing is that the raw materials and components
should be ordered such that the materials or components
are available at the right time, in the right quantity and
at the right place. To meet these objectives, many SMEs
have gone for MRP, JIT and computerized purchasing
systems, e.g. Electronic Data Interchange ( EDI) and
Electronic Fund Transfer ( EFT) . The purpose of using
accurate data in MRP is to obtain best ordering quan-
tities, and the number of orders that would lead to mini-
mum inventory cost and maximum productivity.
However, the lack of understanding of such a computer-
ized system and skills to fully exploit the system lead to
poor performance of purchasing system, and hence lower
productivity and quality. Some of the literature asso-
ciated with purchasing are discussed in this section to
motivate the researchers in purchasing and its impor-
tance in improving the overall performance of the organ-
ization.
Kotteaku et al. ( 1995) reported on the in¯ uence of
product complexity on the purchasing structure within
selected product type and phases of the purchasing pro-
cesses by using analysis of variance on data from Greek
manufacturing and utility enterprises. The results suggest
that all but one parameter varies considerably among
di€ erent degrees of product complexity, and that their
con® guration depends on attributes, e.g. product di€ er-
entiation, technical complexity, specialized installation
and existence of after sales service. One of the most fre-
quently discussed ways to reduce the overhead costs
associated with the JIT purchasing is automation.
Robots can have a role in sophisticated materials control
systems that automate logistical transactions; lasers can
read bar codes and eliminate the need for data entry
operators to record movement transactions manually;
computer-aided inspection can help reduce the costs of
processing quality transactions; a smoothly running
material requirements planning system can make the
processing of balancing transactions cheaper. Another
type of data integration unites manufacturing databases
with those of other functional areas. Most familiar is the
link between engineering and manufacturing established
by CAD/CAM systems, but there are others with equal
or greater potential impact. Flexibility forms an impor-
tant aspect of JIT purchasing systems.
Hand® eld and Pannesi ( 1995) examined four supply-
chain management strategies in make-to-order markets
that can lead to cycle-time reduction by cross-functional
product design participation, JIT purchasing systems
with suppliers, improved supplier delivery and quality
performance, and work-in-process lot size reduction.
Both JIT purchasing and supplier performance were
found to have a signi® cant e€ ect on lead-time competi-
tiveness, while cross-functional design and lot size reduc-
tion did not. Although the analysis suggests that the
greatest progress towards time-based competitiveness
can be made in the area of procurement of materials,
the study points to the importance of managing the entire
supply chain to attain this strategic advantage.
Bartezzaghi and Verganti ( 1995) illustrated a method
called order overplanning, speci® cally designed to man-
age uncertainty in manufacturing. It consists of an
expressive and consistent set of forecasting procedures,
planning principles and slack control techniques. From
a Master Production Scheduling ( MPS) perspective,
overlapping is similar to hedging and options overplan-
ning, that are gross requirements larger than expected
demand. The major di€ erence is that order overplanning
uses two distinct units in the MPS and forecasting pro-
cedures. While the MPS unit is an end item or module,
the forecasting unit is a customer order. This makes order
overplanning able to exploit early information generated
by each customer during its purchasing process, informa-
 Improving the e € ectiveness of purchasing in a small company
tion that otherwise would be lost. This marked advantage
comes to the disadvantage of an increased e€ ort of inte-
gration between sales and manufacturing, especially for
controlling the slack created to handle uncertainty.
Current changes in inventory management consider
the total logistics chain under the term logistics manage-
ment, placing a greater emphasis on purchasing rather
than producing in-house. Changes to recording methods
include the use of di€ erent methods of information col-
lection and processing, e.g. bar coding in retailing and
manufacture, and electronic exchange of information.
Control methods are more computer based and are
becoming part of increasingly integrated systems
( Bonney 1994) .
Recently, many attempts have been made to set up an
MRP system on microcomputer spreadsheets. While
these e€ orts are further indication of the extensive cap-
abilities of spreadsheets on microcomputers, there are
practical problems for an e€ ective MRP application in
the spreadsheet environment, even for small ® rms. Frazer
and Nakhai ( 1992) used Microsoft Excel to demonstrate
the di culties and some of them are: level of knowledge
required, speed of operation, ease of use, adapting the
model, screen capacity, customizing MRP reports, and
compatibility with other software programs, e.g. account-
ing and purchasing. Companies that are just starting out
on the JIT implementation or are in the midst of chang-
ing to JIT can bene® t from JIT deliveries from Suppliers.
Chua ( 1992) presented an inventory model to illustrate
how purchased-materials inventories can be managed
e€ ectively in this environment. More importantly, it
can be used to provide the motivation for such companies
to migrate from a `not quite JIT’ to a truly JIT environ-
ment in their internal operations.
The majority of articles on purchasing within manu-
facturing are conceptual and related to large-scale indus-
tries. To provide insights into the strategies and methods
of improving purchasing in SMEs, a case study con-
ducted in a small German company is presented in the
next section. As part of a research project on `Supply
Strategies in Small and Medium Enterprises’ co-ordi-
nated by the department of manufacturing and engin-
eering systems at Brunel University ( UK) , the authors
have conducted a case study in the German company.
The ® rst author ( D. P.) has worked on this research pro-
ject under the supervision of the second author ( A. G.) .
3. A case study
The company is a privately owned German Small
Enterprise1 and produces a wide range of high precision
1
For commercial reasons, the company wishes to remain anonymous.
613
thermoplastic parts and injection moulding tools for the
Original Equipment Manufacturer ( OEM) markets. The
medical, optical, automotive, electronic and in particular
the telecommunication industries form the main custo-
mer base. Export sales account for approximately 5%
of the turnover of DEM 23 million in 1995, reinvestment
in the business for 1996 accounted for approximately
DEM 2.3 million. The company has a well-trained work-
force and its own apprentice training school pays testa-
ment to this. Most of the senior management has risen
through the ranks, coming from a technical background
and have undertaken further training to a Higher
National Diploma equivalent quali® cation. A full service
is o€ ered by the company `a one stop shop’ from 3D
design, tool construction and maintenance, injection
moulding and ® nishing. Quality, dependability and ¯ ex-
ibility are the main focus of competitive advantage.
However, no o cial `mission statement’ exists and corpo-
rate objectives are not communicated to the lower levels
of the organization. Though well equipped in terms of
machinery and computer hardware, modern manu-
facturing techniques are noticeably absent. For example,
the company uses a very basic MRP system and no JIT
techniques are used. The management of its manufactur-
ing operations shows little understanding or appreciation
for such techniques.
The process ¯ ow diagram of a telecommunication
product is given in ® gure 1. Analysing the process ¯ ow
indicates that there are non-value adding activities, e.g.
inspection and unnecessary paper work takes place after
each stage of processing.
3.1. T he current purchasing system
A decentralized purchasing system is currently in use
and the logic of this is shown in ® gure 2. Each depart-
mental leader purchases items up to a set spending limit
without authorization, larger purchases requiring the
authorization of senior management. Each department
leader is responsible for the selection of suitable suppliers,
negotiating terms of supply and delivery, resolution of
problems, inventory management and re-ordering. The
purchasing system su€ ers from an ad hoc nature of many
purchased materials leading to poor inventory records,
small order penalties on some bought-in materials,
BOM inaccuracy, important information missing from
orders, no forward planning of purchases, large inventory
levels, consumption rates of some parts not accurately
known, and very high raw materials stock. There are
three purchase request systems as noted below:
( 1) Departmental proforma used for purchase
requests. These proformas are used for entry to a
614 D . P erkins and A . Gunasekaran

Figure 1. Process ¯ ow diagram.

computerized ordering system that produces an
o cial company order for fax transmission to the
respective supplier.
( 2) Almost all other departments use a simple pur-
chase request form, hand written by an authorized
person for entry to the computerized ordering
system as above.
( 3) Orders for some parts, e.g. assembly items are gen-
erated by customer orders. However, this system
does not make the best use of available computer
facilities. For example, an order for out of stock
raw material is not generated at the instant a cus-
tomer order is received. This process involves six
steps and four di€ erent individuals ( see ® gure 1) .
In most instances, the ® nal order for raw material
is made by the chief administration manager
( company policy) . Additional problems of the cur-
rent purchasing practice are:
3.2. O perational performance, observations and causes for poor
performance in the company
In this section, the details of operational performance,
observations and causes for poor performance in the com-
pany are discussed.
3.2.1. Q uality
Scrap levels are generally low and customer complaints
are infrequent. However, observations made when
defects did occur could be attributed to poor operator
performance, lack of management’s understanding of
TQM and their failure to implement preventive
methods. Quite often, obvious defects were missed by

• large amounts of time spent chasing paper ( e.g.

for invoice payment);
operators resulting in large numbers of defective parts.
Had some element of JIT been in use for, e.g. worker

• important information is often omitted from

purchase requests ( invoice payment);
empowerment, TQM and quality circles operators
would have been more aware of likely defects and the

• the company computer network is very much

under-utilized;
implications of such situations. Confusion also existed in
customer speci® cations, what was acceptable and what

• the physical layout of the company is far from

ideal.
was not acceptable. This could be seen at all levels of the
organization and in di€ erent departments.
 Improving the e € ectiveness of purchasing in a small company
Figure 2. The current purchasing system.
Each shift has a quality inspector, who every 2 h takes
parts from each machine ( injection moulding and ® nish-
ing departments) . These are measured and the results
entered onto a Computer-Aided Quality ( CAQ) data-
base. Furthermore, before dispatch on certain product
lines or further processing on others, a sample size from
each carton is visually inspected in the quality depart-
ment ( see ® gure 1) . These multi-stage inspections a€ ect
the overall performance of the production system.
Additional observations on the current purchasing
method include:
615
• there are various systems in use depending upon the
department ( no standardized system) ;
• all systems involve a huge amount of paper work.
3.2.2. Speed
The present customer ordering system is poorly organ-
ized ( see ® gure 2) . An analysis has been performed using
Gantt charts to illustrate the time delays that can and do
occur. Customer lead times depend upon available capa-
city, raw materials in stock and tool availability. No
forecasting or planning is undertaken in collaboration
with customers to enable schedules or raw material
requirements to be seen in advance. Raw material una-
vailability can be a problem with lead-times varying
from a few days to several weeks. This problem is not
solved by the company, as they have no system to forecast
their raw material requirements and no forum for discus-
sion with the suppliers. Deliveries can be made daily
depending on customer requirements by third party
hauliers and late deliveries are rare. Cycle times are gen-
erally ® xed by the product type, but total throughput
time is probably unknown and di cult to measure.
The process layout and subsequent material ¯ ow lead
to a large WIP and general inventory.
3.2.3. D ependability
As one of the company’s competitive strengths,
dependability is very good, this implies that the percen-
tage of deliveries made on time is very high. Sometimes
this is particularly hard to achieve in tool design and
manufacture when changes are made by the customer.
On a micro level, the internal dependability of each
department is good, each supporting the other. In most
cases, the company meets its promises made to customers,
although no major problem exists in this area of the
business, if other areas were improved dependability
could only become better.
3.2.4. F lexibility
No new products are developed in house, this is always
carried out with a customer. The company designs and
builds tooling for a speci® c job. This is a lengthy process
and there is always pressure for these times to be reduced.
There are no new technologies for, e.g. rapid prototyping
in use or currently under investigation in the company.
Set-up times are not problematic in themselves.
However, every mould has to be brought up to operating
temperature and most raw material has to be dried for
616 D . P erkins and A . Gunasekaran
around 4 h. No mould preheating devices are used or
under investigation, but more importantly, no system
exists for machine set-up and raw material drying to be
synchronized, this being the major problem in set-up
times. Generally, the company responds well to customer
changes and always endeavours to meet customers needs.
The under-utilized computer system in terms of hard-
ware and software capability does not lend itself to ¯ ex-
ibility or versatility. Moreover, the BOM used in some
instances is inaccurate and therefore unreliable.
3.2.5. Cost
No details on budgets were ever discussed. Therefore,
it is impossible to make quantitative analyses in this
respect. The amount of overhead cost is high for, e.g.
the cost of inspection, and some jobs are very labour
intensive ( an important consideration with high employ-
ment costs in Germany). E ciency could be improved
with the implementation of JIT elements and MRP tech-
niques, and in turn costs could be reduced in all areas
and productivity may increase. Resource utilization
appears to be high, i.e. all the machines are running
and all the people are working. However, this is insignif-
icant when the wider picture of operations is understood.
3.3. Improving the e € ectiveness of purchasing
Senior management felt that the company had grown
su ciently and was spending enough money to warrant
the establishment of a centralized purchasing depart-
ment. The current system described earlier provides for
e cient use of time and facilitates expertise in the selec-
tion of suitable suppliers. However, the move over to a
centralized purchasing department responsible for all the
company’s purchased materials and services would per-
mit:
•• a very large reduction in the supplier base;
the best terms with regard to quality, price, credit
and delivery;
• supplier quality and delivery performance measures
could be established and controlled;
•• better invoice payment and control;
inventory planning and control;
•• full use of all available computer facilities;
the advantages of the current system to remain.
At the end of the project, no de® nite strategy had been
adopted, although a call-o€ system for screen printing
inks had been established with a major supplier, and
many other suggested ideas were being followed up by
the management. In the latter stages of the project, vari-
ous purchasing activities were closely investigated. The
call-o€ system was allowing larger order quantities to be
held in stock at the supplier’s warehouse. A Microsoft
Excel spreadsheet was developed as a BOM of screen
printing ink using a monthly MPS. The logic of the
improved purchasing system is presented in ® gure 3.
The advantages of using such software are that it was
already used in the company and it could be developed
in-house. This software requires very little training in its
implementation and can readily be accepted by users.
The use of the Excel spreadsheet provided solutions to
the problems identi® ed earlier. A system now exists which
prevents ad hoc purchasing, avoids small order penalties,
but permits small delivery quantities, and introduces e -
cient computer-integrated inventory planning and con-
trol.
The overwhelming feelings that came from this
research project were the lack of understanding of the
modern manufacturing techniques that could be used
to lower costs, improve lead times, increase quality levels,
improve worker morale and reduce inventories, and the
fear of change at all managerial levels.
The company is not technologically isolated, as it is
well equipped in most departments. Computer tech-
nology is widespread. However, when examined closely
it is found that it is highly under-utilized and not always
capable of performing useful functions. The physical lay-
out of the company is far from ideal. The main injection
moulding area consists of three ¯ oors and a lower base-
ment area, and the physical ¯ ow of material and parts is
disjointed. It is also clear that the company should work
more closely with its customers and suppliers, using cus-
tomer schedules and forecasts to aid planning and pur-
chasing requirements. Most sta€ have lived in the same
small village and have only worked in the one company,
which has a marked in¯ uence on their ability to think in
a progressive fashion and realize that change is inevitable
and something that should not be feared. It has also been
said that the German culture is best suited in a disci-
plined and well-established environment. Change repre-
sents uncertainty, perhaps this is one reason why change
is a di cult concept for them to accept.
From a leadership aspect, the new Managing Director
is very young and the son of the former owner. This is not
a problem and is a clear opportunity for radical changes
to take place. In the company, there is no clear company
vision statement that can be claimed to be known by
every member of sta€ , as it is not well documented. In
addition, there is no governmental policy that has any
detrimental e€ ect on the company. Certain environmen-
tal conditions have to be met by the company because of
its business activities, in particular the disposal of its
waste material and storage of raw materials.
 Improving the e € ectiveness of purchasing in a small company
Figure 3. Logic of the proposed purchasing system.
617
4. Recommendations and suggestions for their
implementation
In this section, some of the recommendations made for
improving the purchasing system in the company and
suggestions for implementing them are presented.
4.1. R ecommendations
The following are the list of recommendations to
improve the e€ ectiveness of purchasing in SMEs:
( 1) Implement a JIT supply strategy, while fully util-
izing MRP and TQM techniques. The use of the
latter technique would introduce a continuous
improvement programme, employee empower-
ment and a team-working environment. Com-
bine MRP raw material requirements planning
and vendor kanbans for JIT delivery, and a kan-
ban control for internal material movement.
Improve work¯ ows to reduce cycle times, WIP
and inventory levels.
( 2) Closer integration of the existing networked com-
puter system to improve the ¯ ow and quality of
information company wide.
( 3) Make use of available commercial software, e.g.
spreadsheet and database applications to reduce
personnel non-acceptance of new applications,
reduce training needs and total costs.
( 4) Create a company mission statement, the what,
why, when communicated to all personnel com-
pany wide, acting as the springboard for the
change environment.
( 5) Carry out a benchmarking study of the purchasing
to set a baseline for new measures of performance.
( 6) Understand the complex issue of change manage-
ment, this without doubt will be the biggest chal-
lenge for the company.
4.2. Suggestions for implementations and associated risks
The implementation of new purchasing strategies and
methods may potentially bring to the surface critical
issues in employee relations, e.g. the number of job clas-
si® cations, width of job description, and employee train-
ing and development. A sound strategy for imple-
mentation includes a high level commitment on behalf
of the organization, from top management to the educa-
tion and involvement of all levels of employees. The
training and development, both technical and beha-
vioural, of managers and production workers are critical
to the success of the purchasing programme. For ex-
618 D . P erkins and A . Gunasekaran
ample, seminars or o€ -site away days could be used to
bring together key personnel to educate, de® ne goals and
objectives, and establish leadership and support for the
new purchasing strategy. This would allow the required
change-enabling conditions, e.g. the organizational,
behavioural, motivational and technical issues to be
fully understood before any change programmes were
implemented. In respect to the case study company, it
was envisaged that a small centralized purchasing
department would be created to ensure that materials
would be available JIT. The department would have
responsibility for selecting suitable suppliers, building
strong supplier partnerships, negotiating supply agree-
ments and resolution of supply problems.
The risks associated with implementing the recommen-
dations are:
•
departmental leaders would no longer have direct
control over their suppliers, this could lead to orga-
nizational tension;
•
a reduction in productivity and e ciency as new
working methods are implemented;
• additional investment required for training and
possible new equipment or software;
• organizational disruption caused by a resistance to
change.
5. Concluding remarks
In this paper, a case study is presented with an objec-
tive to discuss the strategies and methods for improving
the e€ ectiveness of purchasing. In addition, an overview
of the purchasing issues and a list of recommendations for
improving the e€ ectiveness of purchasing in SMEs are
presented. Continuous improvement is a key goal for a
healthy company. Emphasis should be placed on reduc-
tions in throughput time and elimination of unessential
activities and simpli® cation of essential activities, while
implementing new purchasing strategies and methods.
The following are the lessons learned from the case study:
( 1) A mechanism for operators to communicate to
higher levels is essential.
( 2) The implementation of a new purchasing strategy/
method in SMEs should start with schedule stabi-
lity and the development of long-term supplier±
customer relationships.
( 3) Customer± supplier relationships should be
exploited to the maximum.
( 4) New purchasing strategies/methods supporting
frequent purchases of small lot sizes will help
SMEs.
( 5) Simplifying operations, JIT purchasing ( Freeland
1991) , reducing WIP, inventory change manage-
ment and understanding organizational change
play a key role in improving the productivity of
SMEs.
Acknowledgements
The authors are grateful to Professor Asbjorn
Rolstadas, and two anonymous referees for their con-
structive and helpful comments on the earlier version of
the manuscript that helped to improve the presentation
of the paper considerably. Also, they would like to
acknowledge the assistance of the management and
workers of the company in Germany.
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