Chapter 15

Purchasing and supply management

Learning outcomes
Theme 1: Purchasing and Supply Chain Management

• Explain the importance of the purchasing and supply function to a business;

• Explain control in the purchasing and supply function;
• Discuss the management tasks of the purchasing and supply manager;
• Describe the components of the purchasing process, explaining what each component entails;
• Describe each of the following components in the purchasing process:
• Quality decisions as a purchasing and supply activity;
• Selection of purchasing and supply quantities;
• Selection and management of suppliers;
• Pricing decisions;
• Timing of purchases.
Definitions

• Purchasing and supply management entails the planning,

organising, leading and controlling of all activities relating to the
purchase of materials and services from an external source.
• It is aimed at maintaining and improving the business’s
sustainability and efficiency of customer service.
• A supply chain is a network of organisations linked to each other
through buying and selling of materials, products or services.
The importance of the purchasing and supply function

The purchasing and supply function should:

• Select suppliers
• Purchase and arrange for the transport of materials to the business
• Decide what prices to accept
• Determine quantity and quality of materials or services
• Expedite and receive materials
• Control warehousing and inventory-holding
• Determine the timing of purchases.
The importance of the purchasing and supply function
(continued)
Greatest expenditure for the business
• Purchasing costs are the business’s biggest expense – represent an
area where cost savings can make a vital contribution to the
business profits
• Stock is held to prevent disruptions when there is interruption in
the flow of material to a business – aim to keep inventory levels
low without risking an interruption in the operational process.
Greatest expenditure for the business (continued)

• Profit-leverage means that purchasing costs constitute a major

portion of total cost, and saving on these costs has greater profit
potential than similar increase in sales
• Purchasing materials of the right quality and price at the right time
can make final products available in the right quantities at a
competitive price at the right time to its customers.
The management task of the purchasing and supply
manager
Purchasing and supply planning
• Purchasing and supply planning is subject to overall business
planning – should be conducted in consultation with other
functional areas of the business
• Planning takes place at the following levels:
• Strategic level
• Tactical or middle-management level
• Operations level
• Formulation of objectives is one of the most important planning
tasks.
The management task of the purchasing and supply
manager (continued)
The management task of the purchasing and supply
manager (continued)
Organising the purchasing and supply function
• Four main issues need to be addressed in organising the
purchasing and supply function:
• The place of the purchasing and supply function in the organisational
structure
• The internal organisation of the purchasing department
• Coordination with other functional management areas
• Cross-functional teams.
The management task of the purchasing and supply
manager (continued)
Place of purchasing and supply function in organisational structure
• Place of the purchasing and supply function in the business is
affected by two elements: Centralisation or decentralisation
The management task of the purchasing and supply
manager (continued)

Coordination with other functional management areas

• Coordination occurs at three levels:
• Various purchasing and supply activities must be coordinated internally in
the purchasing and supply function
• The purchasing environment must be coordinated with purchasing and
supply activities
• The purchasing and supply function must be coordinated with other
functional management areas, as well as the needs of the final consumer.
The management task of the purchasing and supply
manager (continued)

Cross-functional sourcing teams

• Tasks of cross-functional sourcing teams include:
• Supplier selection
• Negotiating corporate-wide purchasing agreements
• Developing cost-reduction strategies
• Developing sourcing strategies
• Developing suppliers and the evaluation of suppliers’ performance.
The management task of the purchasing and supply
manager (continued)
Control in the purchasing and supply function
• Control is essential
• Measures need to be put in place to ensure purchasing and supply
objectives are pursued within acceptable and accepted standards
or norms according to policy
• Specific attention should be given to the management task in the
purchasing and supply function, and the performance of
purchasing and supply activities.
The management task of the purchasing and supply
manager (continued)
The assessment of purchasing and supply management
• Essential that management performance be evaluated, just like
other activities of the purchasing and supply function
• Management is intangible and difficult to measure quantitatively
• Use of an evaluation sheet or questionnaire can be used to assess
management performance in purchasing.
The management task of the purchasing and supply
manager (continued)
• The assessment of purchasing and supply activities
• Control points used to gauge effectiveness of purchasing and
supply activities:
• Price proficiency
• Supplier performance
• Timeliness
• Cost-saving
• Workload
• Purchasing costs
• Inventory-holding
• Relationship performance with suppliers
• Relationship with other functional management areas.
The purchasing process and activities
Steps of the purchasing and supply
cycle:
• Development and description of a
need
• Choice of suppliers
• Research on prices and availability
• Issuing the order and concluding a
contract
• Follow-up and expediting
• Receipts, inspection and
distribution
• Handling errors and discrepancies
• Paying for the order
• Closing the order.
The purchasing process and activities (continued)

Quality decisions – a purchasing and supply activity

• Determining the right quality:
• Engineers and designers – technical considerations important
• End user and/or marketing function – commercial considerations
• Description of quality:
• Specifications –general method of describing quality
• Standardisation
• Other: Market grades, brands, SABS standards, engineering drawings and
samples.
The purchasing process and activities (continued)

Quality decisions – a purchasing and supply activity

• Control of quality:
• Inspection – During inspection samples of delivered materials or services
are subjected to tests by quality controllers
• Supplier certificate agreement
• SABS – ISO 9000 to ISO 9004 and ISO 14000 international standards.
The purchasing process and activities (continued)

Deciding on purchasing and supply quantities

• Need for inventory-holding
• Helps ensure the operations process continues without interruption
• Allows businesses to utilise cost savings through longer production runs and
volume discounts.
• Inventory costs
• Inventory-carrying costs
• Inventory-ordering costs
• Total inventory costs.
The purchasing process and activities (continued)

Deciding on purchasing and supply quantities

• Inventory-control systems
• The system of fixed order quantities
• The cyclical-ordering system
• The materials requirements planning (MRP) system
• The just-in-time (JIT) system
• The quick-response (QR) and automatic-replenishment (AR) systems
• The efficient consumer response (ECR) system.
The purchasing process and activities (continued)

The selection and management of suppliers

• The selection process:
• Compilation of a list of suppliers
• Reduce list to a short list
• Short list suppliers requested to give a quote or negotiations with them are
started
• Choose a supplier
• Evaluation of supplier performance.
The purchasing process and activities (continued)

The selection and management of suppliers

• Developing suppliers
• Black economic empowerment (BEE) through purchasing
• Materials or service not available
• Normal performance appraisals
• Long-term relationships with suppliers.
The purchasing process and activities (continued)

Pricing decisions
• Price determination
• Methods depend on nature of materials and the value of the transaction
• Published price lists, catalogues and brochures – suitable for the purchase
of standard materials of a low monetary value
• Quotations and tenders – suitable for less standardised materials of a
higher monetary value.
The purchasing process and activities (continued)

Timing of purchases
• The aims of buying at the ‘right’ time are:
• Ensure business is supplied on an ongoing basis
• Reduce risk of price fluctuations
• Keep inventory-holding at an optimal level.
• Factors influencing the scheduling of purchases:
• Internal factors
• External factors.
Summary

• Purchasing and supply function importance:

• Significant influence on profitability of business
• Greatest spender of business revenue
• Function makes it possible for business to sell final products at competitive
prices
• Should be planned, organised and controlled
• Main purchasing activities are quality, quantity, price, supplier
selection and timing
• Different purchasing and supply activities do not occur in isolation,
but on an integrated basis
• Integration allows the system to operate as a whole.