Chapter Three

Purchasing and
Materials Management

Review of Chapter Two

1.

2.

4-stage relationship development process: Essence of each stage

Awareness buyers & sellers engage in arms-length evaluations
of potential partners;
Exploration interaction occurs and tentative associations may
form;
Expansion increasing dependence between exchange partners.
One party has made a successful request for adjustment & start to
seek more from current partners;
Commitment partners adapt & resolve disputes internally in order
to sustain the relationship.
Mechanisms to sustain strategic relationships
House calls; trading places; managing dependence; supplier
pledges; contracts and ownership

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Learning Objectives

Understand the basics of supply chain management

Discuss the objectives of purchasing department

Explain ideas of appropriate quality, EOQ and total

cost of ownership

Describe the processes that purchasing uses to evaluate

vendors and their offering, as well as how the process
varies depending on the organizations experience

Recognize the major ethical issues facing purchasing

agents and how they respond to those issues

Understand differences in government purchasing

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Supply Chain Management

Supply chain management involves proactively planning and

coordinating the flow of products, services, and information among
connected firms focusing on creating and delivering value to end
users.

The goal of SCM is purchasing and logistical efficiencies (The

profit impact derived from purchasing and logistical efficiencies
often outweighs that from market penetration).

Why has SCM come to the forefront in recent years?

Technological advancements and global competition have FORCED
marketers to seek ways to improve marketing satisfactions (faster
distribution /better pre/post sale service), shorten production times,
and lower costs. These can be achieved by an efficient SCM.
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The Objectives of Purchasing

1.

Secure appropriate levels of the supply of the right

product or service (Quantity)

+
2.

Secure the correct level of quality (Quality)

+
3.

Secure the lowest total cost (Cost)

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Quality: What is appropriate quality?

Quality must be appropriate to consumer expectations,
usage requirements, and/or mandated standards.
Buying goods of excessive quality only increase cost.
In other words, quality must be acceptable to the consumer
AND sufficient to survive the environment and types of
use/abuse it will face.

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Quantity: What is Economic Order Quantity?

EOQ is the quantity that minimizes both ordering and storing
costs.
A buyer should AVOID a PURE EOQ purchasing policy.
One strategy of EOQ is forward buying.

The practice of purchasing larger quantities than are

currently needed whenever discounts exceed carrying
costs.

That means buy a lot more than they immediately need in

order to get the cheaper price.

Forward buying will create a spike in sales and other

production problems for the manufacturers.
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Cost: What is the total cost of ownership?

The total cost of ownership is the purchase price PLUS costs

associated with installing, using, maintaining, insuring, supplying,

and servicing the product.

To determine the price, a company pays goes beyond the

dollar cost: TOTAL COST = PURCHASE PRICE + DELIVERY
+ STORAGE + SERVICE

Value analysis
-

Value analysis is a method of comparing the benefit, function, and

cost of materials, components and work processes;
The objective is to reduce cost and/or improve purchasing design
(quality, quantity and cost)
The procedure of the analysis is to compare what is currently being
done with new alternatives being considered in terms of benefits
received, functions of product, cost of materials and work process
involved
The outcome is to win greater value for less cost
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What Companies Really Pay for Ownership?

Cost of ownership goes beyond the price paid for a product
TOTAL COST OF
OWNERSHIP = PRODUCT PRICE
+ DELIVERY
+ INSTALLATION
+ MAINTENANCE / REPAIR
+ POWER COSTS
+ SUPPLY COSTS
+ OPERATING COSTS
+ FINANCING

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Value Analysis
The objectives of value analysis:
Reduce costs and/or
Improve design
COMPARE
What is
- Benefits received
Currently
- Functions of product
Being Done
- Cost of materials

New
Alternatives
Being
Considered

- Work process involved

OUTCOME: GREATER VALUE FOR LESS COST
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Purchasing Philosophy
Adversarial Purchasing Philosophy
-

A traditional purchasing philosophy

The firm utilizes several vendors for each product (just give any vendor
a portion of its business)
Developed in order to increase competition among the buyers
Consequences: lower prices while increasing the level of service and
attention paid to the account

Partnership Purchasing or Preferred Supplier Systems

-

Seeks to maximize the benefits of collaboration

Makes a long-term commitment to a vendor
Purchasing partnerships are made with vendors who provide

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Purchasing partnerships are made with

vendors who provide:
High-purchase-volume materials, components or strategic
products
Information and training for effective product use
Services requiring specialized knowledge for cost reductions
and/or performance
Materials unavailable elsewhere

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Supplier Evaluation
Buy-Grid Model

A general model of rational organizational decision making

- Buy-phase model (go through 8 steps beginning with problem recognition,

search, evaluate and select)

- Buy-class model (the type of buying decision based on the experience of

the buyer with a purchase of a particular product: new buys & straight
rebuys & modified rebuys)
Multiattribute Decision Making

- Based on the idea that people compare products across features weighted
by importance
- Assumptions: rationality and knowledgeable buyers
- Can be used to evaluate potential suppliers and current suppliers as well

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Step 8
Step 8
Evaluation of product performance
Evaluation of product performance
Step 7
Step 7
Selection of an order procedure
Selection of an order procedure
Step 6
Step 6
Evaluation of proposals and
Evaluation of proposals and
selection of a supplier
selection of a supplier
Step 5
Step 5
Acquisition and analysis of proposals
Acquisition and analysis of proposals
Step 4
Step 4
Search for qualified suppliers
Search for qualified suppliers
Step 3
Step 3
Development of detailed specifications
Development of detailed specifications
Step 2
Step 2
Definition of the product-type needed
Definition of the product-type needed
Step
Step1 1
Recognition
Recognitionofofa aneed
need
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Buy-class Model
Type of buying decisions
1. New buys
- Follow complete buying process (all steps taken)
- Never purchase before
- With emphasis on product definition & development of product specification
2. Straight rebuys (Automatic purchasing)
- Require the least buying process steps to complete
- Only two steps are required: need recognition & placing an order
- Image advertising works
3. Modified rebuys
- The same product or product type is being purchased
- But most of the decision steps are still taken
- Comparison advertising works
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Trends in Purchasing
1.

Reducing purchasing costs

2.

Outsourcing in-house activities

3.

The development of cross-functional teams

4.

Increasing professionalism through certification programs

and establishes a code of ethics

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Trends in Purchasing
One trend is reducing purchasing costs:
Cutback on employees through early retirement and layoffs
Reduce number of vendors/transactions buying more in the
same amount of time by buying more from the same vendors,
reduce shopping around
Build relationships increases the importance of developing
strategic relationships with customers
Centralize purchasing activities the concentration of
purchasing within company headquarters for closer
supervision and strategizing
Internet makes centralization easier to accomplish

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Trends in Purchasing
The second trend is outsource in-house activities
Outsourcing: the process of buying products/services from another

firm, usually one that was previously created in-house. E.g., a company
hires an ad agency to do all of its advertising, an exhibit company to
handle all of its trade shows, and a marketing research firm to conduct all
of its research. Then the company can focus on its core business.

Many things can be outsourced including training, manufacturing,

processing activities and involve suppliers to help design new products or
processes.

See make-or-buy decision analysis (depends on who provides best value

for lowest cost)

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Make-or-buy Decision Analysis

RISK ASSESSMENT
FINANCIAL RISKS
Resource Allocation
Investment of Resources
Accurate Cost Analysis
Legal Issues

MARKETING RISKS
Customer Impact
Supplier Impact

MANUFACTURING RISKS
Reliability
Expertise
Equipment
Patent Protection

POLITICAL RISKS
Management commitment/
willingness to partner
Turf Battles
Internal Strife

ACCEPTABLE RISK
Buy the Products,
Components or Services

UNACCEPTABLE RISK
Retain Production and
Provide Services
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Trends in Purchasing
The third trend is the development of cross-functional teams
Cross-functional teams: include members of various functional
areas; include personnel from suppliers, company departments and
customers

Take advantage of the different types of expertise

Factors lead to effective cross-functional teams:

Appropriate leadership;
Face-to-face communication;
Continuity in it for the long term;
Top-level commitment to provide for key individuals full participation;
Embracing diversity of experience, backgrounds, outlooks and corporate
philosophy

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Purchasing in Government
1.
2.
3.

Government is the largest single buyer, the largest single

employer, the largest single landlord.
Government often adjusts its purchasing to achieve social
and/or political goals
Government often removes the profit motive and add the
power to tax

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Ethics in Purchasing
1.

What is ethics? Ethics are moral codes of conduct, rules for how
someone should operate that can be followed as situations demand

2.

3.
4.

Two basic dimensions guide ethical issues in purchasing:

fairness (any competitor has equal opportunity to sell to the buyer and
equal access to information from the buyer) and responsibility to the
buying organization.
Two worrisome activities: gift giving and information access &
use.
Why should any for profit firm be concerned with ethics?
any trade-off of short-term profits for long-term ethics is short-sighted. In
the end, buyers will support those that have earned their trust and value
their reputation.

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