Chapter 4.

Procurement
Management
MSc. Dang Thuy Long Chau
4.1. Introduction to
Purchasing Activities
4.1.1. Concept of Purchasing
Purchasing is the process of procuring goods, services, or raw materials
necessary for the production and business operations of an organization. It is
a specific transactional activity, with the primary goal of ensuring that goods
or services are purchased at a reasonable price, with assured quality, and
delivered on time.

The main characteristics of purchasing:

Focused on specific transactions: Purchasing primarily focuses on

executing buying and selling transactions, which includes selecting,
negotiating prices, signing contracts, and managing payments.
Operational function: Purchasing is an operational function, focused on
processing orders and managing the goods receipt process.
Short-term scope: Purchasing activities are typically short-term and
oriented towards specific objectives in each transaction.
Basic Purchasing Process

Step 1: Purchase Request

The first step is for an individual or department within the company to make a request to purchase necessary goods or
services.

Step 2: Supplier Communication

After the request is approved, the company will begin the process of contacting suppliers, finding suitable suppliers,
and negotiating the terms.

Step 3: Receiving the Order

Once the purchase terms are agreed upon, the supplier will ship the goods. This step involves receiving and inspecting
the goods to ensure they match the requirements.
Basic Purchasing Process

Step 4: Receiving the Invoice

After receiving the goods, the supplier will send an invoice requesting payment. This invoice will be checked to ensure
accuracy.

Step 5: Payment
The final step is to pay the supplier after verifying and confirming that the goods or services have been fully provided.

Each step in this process plays an important role in effectively managing the supply chain, helping to ensure that the
procurement process runs smoothly and transparently.
4.1.2. The Concept of Procurement
Definition Scope Key Activities
Procurement is the process of Procurement not only includes Procurement planning, sourcing
managing the entire cycle related transactional activities but also and supplier evaluation, contract
to finding, selecting, contracting, involves building strategies and negotiation, and supplier
and maintaining relationships with managing risks in the supply performance evaluation.
suppliers to meet the long-term chain.
needs for materials, goods, or
services for an organization.

Objectives
Procurement aims to create stability for the business, ensure a stable and high-quality supply, while optimizing costs
and supporting sustainable development.
Procurement Process
Procurement Process
1. Identify Needs: The company clearly identifies the necessary goods or services, with specific quantities and quality.
2. Evaluate and Select Vendor(s): The company searches, evaluates and selects the appropriate vendor based on factors
such as price, product quality, reliability and ability to supply goods.
3. Submit Purchase Requisition: The purchase requisition is submitted for approval from the authorized departments,
including detailed information about the product/service and estimated costs.
4. Create Purchase Order: After the purchase requisition is approved, the company will create an official Purchase Order
(PO). This order is the formal contract between the company and the supplier, clearly specifying the quantity, price, and
delivery terms.
5. Receive Goods or Services: The company receives the ordered goods or services from the supplier. Inspecting the
quality and quantity of the goods is crucial to ensure they match the terms in the purchase order.
6. Receive and Process Invoice: After receiving the goods/services, the supplier will send an invoice requesting payment.
The company will review the invoice to ensure accuracy and compliance with the agreed terms.
7. Payment: Once the invoice is confirmed to be accurate, the company will proceed with the payment to the supplier
according to the terms agreed upon in the contract or purchase order.
8. Record for Audit: The final step is to record and archive the documents related to the procurement process, including
the purchase order, invoice, and receiving records.
Procurement vs. Purchasing
Procurement Purchasing
- More strategic in nature, broader in scope - Tactical activities within the procurement process

- Includes evaluating and developing the supply base - Focused on acquiring goods to meet specific needs

- Improves the supply process and ensures continuity in - Involves specific transactions and executing
the supply chain purchases
Procurement vs. Sourcing vs. Purchasing
Procurement is a broad concept that encompasses the
entire process from identifying needs, finding sources of
supply, negotiating contracts, to purchasing and payment.
This process includes two main components: Sourcing
and Purchasing.

Sourcing
Sourcing is a part of Procurement, focusing on identifying
and selecting suitable suppliers. Activities include
analyzing requirements, market research, issuing RFPs,
evaluating and selecting suppliers, negotiating contracts,
managing relationships, and performance evaluation.

Purchasing
Purchasing involves the operational tasks and activities
related to placing orders, processing operational tasks,
inspecting deliveries, receiving and processing invoices, as
well as handling payments.
Case Study: Procurement,
Purchasing and Sourcing at
Samsung
Let's consider a large smartphone manufacturing company, such as Samsung. This company must manage the supply of
components from various suppliers around the world, from displays, processors, cameras, to smaller parts like batteries,
connectors and casings. Samsung will need to appropriately utilize the concepts of Procurement, Purchasing and Sourcing
to ensure a smooth supply chain operation.
Procurement at Samsung
Overview Specifics
Samsung does not simply purchase components. They Samsung has long-term agreements with key suppliers
need to manage the entire procurement cycle, including like Qualcomm (the processor manufacturer). This not
long-term planning, ensuring a stable supply, risk only ensures a stable chip supply, but also helps them
management (such as when suppliers cannot deliver on achieve better pricing through the long-term
time), and optimizing costs across the entire supply relationship. They can negotiate terms on pricing,
chain. quality, and delivery times, ensuring that no issues arise
that could impact production in the long run.
Sourcing at Samsung
Overview Specifics
Samsung does not rely on a single supplier for critical To reduce the risk of dependence on Qualcomm, Samsung
components like chips, as that could create supply may search for and negotiate with other chip suppliers like
disruption risks. They need to search for multiple different MediaTek or develop their own chips under the Exynos
suppliers around the world that can provide chips of brand. They will evaluate these suppliers based on criteria
equivalent quality and competitive pricing. like pricing, product quality, supply capability, and delivery
time, and then select the most suitable supplier for their
needs.
Purchasing at Samsung
Overview 1
During a specific period, Samsung needs to
purchase a certain amount of chips from
Qualcomm to manufacture a new phone model, 2 Specifics
such as the Galaxy S22. They will create a When Samsung decides to produce 10 million
purchase order and pay for the agreed-upon Galaxy S22 phones, they will carry out the
quantity of chips in the contract. purchasing process by placing an order for a
specific number of chips from Qualcomm, based
on the demand for this product. This is a
specific, short-term activity, focused on placing
the order, inspecting quality, receiving the goods,
and making payments according to the
previously signed contract.
4.2. Objectives of Purchasing
Management
4.2.1. Ensuring Continuous Supply
1 Objective
Ensure that all necessary materials and services are provided in a timely manner, without disrupting the
production process or the business operations.

2 Details
Businesses need to develop inventory stockpiling plans or establish long-term contracts with suppliers to
minimize the risk of supply shortages. Additionally, they should have contingency measures in place to
handle unexpected situations, such as when suppliers face delivery challenges or disruptions due to natural
disasters or pandemics.

3 Real-world Example
Toyota is a prime example of supply chain management to ensure continuous supply. Toyota has
implemented the Just-In-Time (JIT) model to minimize inventory levels, but has also built strong
relationships with its suppliers to ensure that the necessary components are delivered at the right time for
production. However, during the COVID-19 pandemic, Toyota faced challenges due to supply chain
disruptions from its overseas partners, which impacted its automobile production.
4.2.2. Optimizing Purchasing
Costs
Objective
Optimize the overall costs related to purchasing, including purchase price,
transportation costs, inventory holding costs, and other incidental
expenses.

Details
This not only involves buying at the lowest price, but also ensuring the
business receives the best value based on the Total Cost of Ownership
(TCO), including evaluating costs related to maintenance, operation, and
product quality.

Real-world Example
Walmart, one of the world's largest retail chains, leverages its massive
purchasing power to negotiate the lowest prices with suppliers.
Additionally, Walmart has invested heavily in inventory management and
logistics technology to minimize operating costs. Their mantra is to
always provide the lowest-cost goods, which has helped them maintain a
competitive edge in the market.
4.2.3. Maintaining and Developing
Relationships with Suppliers
Objective
1 Establish sustainable and long-term cooperative relationships with suppliers to achieve better quality,
delivery time, and payment terms.

Details
Purchasing management needs strategies to evaluate, select, and develop relationships with suppliers.
2
Maintaining good relationships can provide stable supply sources, favorable purchasing conditions, and
access to new products and services from suppliers.

Real-world Example
Apple is a typical example of maintaining strong relationships with suppliers. Apple has built long-term
3 cooperative relationships with chip manufacturers, display makers, and other component suppliers, such as
Foxconn. This not only ensures a stable supply, but also helps Apple negotiate better pricing and priority in
special transactions, such as large order volumes for new product launches.
4.2.4. Improving Product and Service Quality
Objective Details
Ensure that all raw materials, products or services Purchasing management needs to coordinate with
purchased by the business meet the required quality related departments such as production, research and
standards, contributing to maintaining or improving the development (R&D) to clearly define the quality
quality of the final product. standards that need to be met. At the same time, it is
also necessary to establish a quality inspection process
and scientifically evaluate suppliers to ensure
consistent and stable quality.

Practical Example
Starbucks is a company famous for improving product quality through purchasing management. Starbucks not only
buys coffee from certified farms, but also implements sustainable agriculture development programs with coffee-
supplying farmers. This helps them maintain stable coffee quality, while also demonstrating their commitment to
sustainable development and ethics in the supply chain.
4.2.5. Contributing to the Implementation of
the Company's Strategic Objectives
1 Objectives
Support the company in achieving its long-term strategic objectives such as market expansion, increased
competitiveness, and improved operational efficiency.

2 Details
Purchasing management must be aligned with the overall business strategy of the company, such as sourcing from
other countries to expand the supply network, or optimizing production costs to enhance market competitiveness.

3 Real-world Example
IKEA, the world's leading furniture retailer, has implemented a purchasing strategy of sourcing from countries with
low labor costs, such as China and India, to reduce production costs and optimize the supply chain. This has
enabled IKEA to offer high-quality products at affordable prices. IKEA's purchasing strategy not only supports its
short-term business objectives but also helps the company achieve its long-term goals of market expansion and
global competitiveness.
4.3. Detailed Purchase Order Process
Mechanism
Step 1: Initiate a Purchase
Request
1 Identify the Need
Departments such as production, maintenance, and R&D will
create a "Purchase Request" when they need to replenish
supplies, raw materials, tools, or fixed assets.

2 Provide Information
The request must include detailed information about the type
of goods, quantity, specifications, standards, required delivery
time, and purpose of use.

3 Approve the Request

The purchase request must be approved by the department
head or an authorized person before it is forwarded to the
Purchasing department.
Step 2: Prepare a Request for
Quotation
1 Process the Request
The Purchasing Department prepares a "Request for Quotation" based
on the request information and the criteria provided by the
departments.

2 Select Suppliers
Search for suppliers from the existing database or look for new
potential suppliers to ensure comparison.

3 Send Request for Quotation

Send the "Request for Quotation" to the suppliers to request
information on pricing, delivery time, payment terms, and related
terms.
Step 3: Receive and Monitor Supplier Quotes
Receive and Compile Compare Criteria Select Supplier
Quotes Compare criteria such as: product Based on the evaluation and
The Procurement Department quality, pricing, delivery time, comparison, select the supplier
receives and compiles quotes payment terms, warranty that best meets the company's
from suppliers. conditions, and supply capacity. requirements and conditions.
Step 4: Approve Supplier
Quotations
Submit Quotations
1 Supplier quotations will be submitted to the management team
or the authorized department for approval.

Compare and Evaluate

Compare the prices of the same item from different suppliers,
2
compare the new price with the old price, and evaluate the
supplier's capabilities.

Approve
3 After the quotation is approved, proceed with the next steps to
establish the purchase order or sales contract.
Step 5: Prepare the Purchase Contract/Order
Draft the Contract/Order Information in the Contract
The Purchasing Department prepares the Purchase Clearly state the supplier information, quantity, quality,
Contract or Purchase Order based on the approved price, delivery time, payment method, warranty
quotation. conditions, and other terms.

Periodic Purchase Orders Contract Signing

If the contract is to be executed in multiple batches, The Contract/Purchase Order is signed between the
issue a purchase order for each delivery batch with two parties and forwarded to the relevant departments
similar terms. (accounting, warehouse, production) for monitoring.
Step 6: Prepare the "Request for Goods
Receipt" and "Request for Goods Inspection"
Prepare the "Request for Goods Receipt" Receive into Inventory or Return Goods
and "Request for Goods Inspection" If the goods meet the requirements, they will be
The Purchasing Department will prepare the "Request received into inventory. If the goods do not meet the
for Goods Receipt" and "Request for Goods Inspection" requirements, feedback will be provided to the supplier,
so that the relevant departments (Warehouse and and the procedure for returning the goods will be
Accounting) can prepare to monitor them. These initiated. This ensures that the goods received into
departments will monitor and prepare for the receipt of inventory always meet the quality requirements and the
goods. company's needs.

1 2 3

Inspect the Goods

When the goods arrive at the warehouse, the
Warehouse department will inspect the goods based on
the contract/purchase order in terms of quantity, quality,
and technical specifications. This inspection ensures
that the goods meet all the agreed requirements.
Step 7: Inspect and Receive
Goods
1 Inspect Goods
Inspect the quantity, quality, specifications, and technical
parameters of the goods according to the contract or
purchase order.

2 Handle Inspection Results

If the goods meet the requirements, proceed with
warehousing. If not, prepare a report and provide feedback to
the supplier to arrange for return or adjustment.

3 Warehouse Goods
Goods that meet the requirements will be warehoused by the
Warehouse department. Update the information in the
warehouse management system and record the quantity and
quality of the received products.
Step 8: Payment
Based on the relevant documents (contract, warehouse receipt, goods inspection report, supplier invoice), the Purchasing
Department prepares the payment file.

Payment file
Supplier invoice, acceptance report or goods inspection report, warehouse
1
receipt, and other documents as required.

File review
2
The Accounting Department receives the file and reviews it.

Payment
3 If the file is valid, proceed with payment according to the
contract terms.

Feedback
4 If the file is not valid, provide feedback to the Purchasing
Department to supplement/revise.
Step 9: Monitor and Evaluate
Post-Purchase
Activity Description

Monitor Accounts Payable The Accounting Department

monitors the accounts payable
with suppliers until the payments
are fully settled.

Evaluate Suppliers After each order or after a period

of collaboration, evaluate the
suppliers based on their supply
performance.

Prepare Completion Report The Purchasing Department and

related departments prepare a
report and overall evaluation of
the purchasing process.
Key Considerations in the Purchasing
Process

Transparency and Close Coordination Document Retention Process

Accuracy Relevant departments such All documents and records Standardization
Each step in the process as Purchasing, Warehouse, must be carefully stored. The purchasing process
needs to ensure and Accounting need to This helps in easy needs to be standardized
transparency and accuracy. coordinate closely to ensure verification, evaluation, and and strictly adhered to. This
This helps avoid mistakes, timeliness and quality. handling of information in a helps mitigate risks, ensure
ensure objectivity, and Timely information transparent and efficient efficiency, and enhance the
improve the efficiency of exchange helps resolve manner. company's
the purchasing activities. issues effectively. competitiveness.
4.4. Purchasing Managers'
Index (PMI)
Concept and Structure of the PMI Index
What is the PMI Index? Structure of the PMI Index
The PMI (Purchasing Managers' Index) is an important The PMI index usually includes 5 key factors:
economic indicator that measures the manufacturing and
1. New orders
service activity of a country. It is based on a monthly
2. Output
survey of purchasing managers, evaluating the operational
3. Employment
situation of the manufacturing industry.
4. Delivery time
5. Inventory.

Each factor is evaluated on a scale from 0 to 100, where

50 is the neutral point, above 50 indicates that the
economy is expanding, and below 50 indicates that the
economy is contracting.
PMI Classification
Manufacturing PMI Non-Manufacturing PMI
Measures the state of the manufacturing sector, including Measures business conditions in the service and trade
factors related to factories and production lines. The sectors, excluding manufacturing.
components of the Manufacturing PMI include:

New Orders (30% weight)

Production (25% weight)
Supplier Delivery Times (15% weight)

Inventories (10% weight)

Employment (20% weight)
How to Calculate PMI
1 PMI Calculation Formula
PMI=(P1×1)+(P2×0.5)+(P3×0)

2 Meaning of Components
- P1 is the percentage of responses indicating the economic
situation "has improved".
- P2 is the percentage of responses indicating the economic
situation "has not changed".
- P3 is the percentage of responses indicating the economic
situation "has declined".
The Value and Significance
of PMI
PMI > 50
1 This indicates that the economy is growing, with production
and business activities expanding.

PMI = 50
2 This is a sign of stability, when there is no expansion or
contraction in the economy.

PMI < 50
When the PMI index is below 50, this indicates a decline in
3
production and business activity, which means a contraction of
the economy.
The Importance of the PMI Index
PMI is an early indicator of the economic condition as it provides the first signs of trends in the manufacturing and service
sectors, helping investors, policymakers, and analysts predict future economic conditions.

Early Indicator Manufacturing Assessment

PMI provides the first signs of economic trends Reflects the situation in the manufacturing sector

Service Assessment Forecasting

Measures activity in the service sector Helps predict future economic conditions
The Impact of the PMI Index
on Purchasing Managers
1 Assessing Supply and Demand
PMI is a useful tool for assessing the supply and demand
situation in the market.

2 Adjusting Plans
When the PMI index is high, purchasing managers can
increase their purchasing to meet the high demand.

3 Inventory Management
Conversely, when PMI is low, they can adjust their purchasing
plans to avoid excess inventory.
The Impact of the PMI Index
on Suppliers
Demand Forecasting The PMI index helps suppliers
forecast the amount of goods
needed

Adjusting Strategy Suppliers can adjust their

production and pricing strategies
to match market demand

Order Preparation If the PMI increases, suppliers can

prepare for an increase in orders

Adjusting Delivery Suppliers can adjust their delivery

times based on the PMI index
Advantages and Disadvantages of PMI
Advantages Disadvantages
Actual data: PMI is built based on actual surveys Reflects a single sector: The PMI index only
from managers, therefore accurately reflecting the focuses on the manufacturing or service sector,
current business situation. therefore does not fully reflect the economic

Comprehensive information: The PMI report situation of the entire country.

provides an overview of economic activity with The manufacturing sector is losing its importance:
monthly updated data, helping stakeholders make In some developed economies, the service sector
quick decisions. accounts for a larger share than manufacturing, so
the manufacturing PMI does not fully reflect all
economic aspects.
4.5. Classification of
Purchasing Methods
4.5.1. Classification by Purchasing Scale

Demand-based Purchasing Bulk Purchasing

This is a form of purchasing in small quantities to meet the This type involves purchasing in large quantities, often
immediate needs of the business. applied to products with long usage cycles or when the
business wants to take advantage of price discounts.
a. Demand-based
Purchasing
1 Definition
The business only buys the exact quantity of goods needed to be sold
within a certain period of time.

2 How to Determine
Based on market trends, product consumption rate, and actual
inventory levels.

3 Advantages
Simple determination method, reduced storage costs, quick capital
recovery, and reduced risk from price fluctuations.

4 Disadvantages
May experience stock shortages, higher purchasing costs, no access
to discounts, and missed business opportunities during "hot" product
trends.
b. Bulk Purchasing
Definition
A business buys a larger quantity of goods than its current sales needs.

Advantages
- Reduced purchasing costs due to supplier discounts
- Ability to choose reliable suppliers
- Can capitalize on market "hot spots" to earn high profits

Disadvantages
- Requires significant capital, causing financial difficulties
- High storage and insurance costs for the goods
- High risk due to natural disasters, theft, price drops, or obsolescence

So how do you decide when to buy in bulk?

4.5.2. Classification by Purchasing Method
a. Centralized Purchasing b. Decentralized c. Collaborative
Centralized purchasing is a Purchasing Purchasing and
purchasing method carried out by This purchasing method is carried Decentralized
a single unit for all departments or out by each independent Distribution
branches within the enterprise. department or branch, with each This is a combination of
department deciding its own centralized purchasing and
needs and selecting appropriate decentralized purchasing, which
suppliers. creates conditions for optimizing
purchasing efficiency.
a. Centralized Purchasing

1 2

Definition Advantages
Centralized purchasing is a form of procurement where a Reduced purchasing costs through better price
single unit makes purchases for all departments or negotiations with suppliers and consistent quality.
branches within an organization. This helps the company Strengthened management and transparency in
effectively manage purchasing and ensure consistency purchasing decisions.
in decision-making.
Improved operational efficiency by saving time and
effort.

3 4

Disadvantages Example
Reduced flexibility in meeting the specific needs of A company with multiple branches can establish a
each department. central purchasing department to procure materials and

Increased risk if the supplier encounters issues. equipment for all branches. This helps the company
optimize costs and ensure product quality.
b. Decentralized Purchasing
1 Definition
The company delegates the responsibility of sourcing supplies and working capital to smaller units.

2 Advantages
Aligns purchasing with market demand, allowing for quick response to specific requirements.

3 Disadvantages
Smaller purchase quantities, higher prices, and higher contract negotiation costs due to multiple individual
transactions.

4 Example
A manufacturing company with multiple branches, where each branch independently procures raw
materials suitable for their local production needs.

5 Considerations
This approach is suitable for small-scale businesses or those with diverse, flexible needs. However, the
costs and effectiveness should be carefully evaluated before implementation.
c. Collaborative Purchasing and
Decentralized Distribution
Definition Advantages Disadvantages
This is a form where businesses Reduces purchasing costs due to Requires close coordination,
collaborate to make joint bulk buying and increases complex management, and can
purchases, and then distribute the flexibility. In addition, collaborative lead to conflicts. The division of
products independently. purchasing also helps share risks, benefits and responsibilities needs
leverage resources, and enhance to be clearly defined.
competitiveness.

Example Note
A specific example is in Europe, where many Collaborative purchasing and decentralized distribution
independent small grocery stores have collaborated is an effective model suitable for businesses with
through purchasing alliances such as Edeka in Germany similar needs. To succeed, it requires strong
or Spar in multiple European countries. These stores commitment and a transparent management
are not commonly owned, but are independent mechanism.
businesses that have joined together to collectively
purchase from large suppliers at discounted prices, and
then independently distribute and sell to their own
customers.
4.5.3. Classification by Credit Term
The credit term is the period of time that a business is allowed to pay the supplier after receiving the goods or services.
Classifying by credit term helps businesses choose a suitable purchasing method based on their financial capability and
business needs.

There are three common purchasing methods based on credit term:

a. Immediate Payment b. Receive Goods First, c. Prepay, Receive Goods

Purchasing Pay Later Later
The business must pay the The business receives the goods The business pays part or all of the
supplier immediately after or services first and pays the value of the goods or services
receiving the goods or services. supplier after a certain period, before receiving the goods.
usually 30, 60 or 90 days.
a. Immediate Payment
Purchasing
Definition
The business pays immediately after receiving the goods from the
supplier.

Advantages
Reduces credit risk, may receive discounts from the supplier.

Disadvantages
Requires large working capital, may impact the company's cash flow.
b. Deferred Payment Purchasing
Definition Advantages Disadvantages
This is a form where a business This method brings many benefits However, delayed payment also
receives goods or services from a to the business, allowing them to means that the business has to
supplier first and pays later within access goods or services face credit risks, such as the
a certain period of time. The immediately without having to supplier may not deliver the goods
payment term is usually agreed spend a large amount of capital or services on time or may require
upon in the sales contract, which upfront. high interest rates.
can be 30, 60, or 90 days.

When should Deferred Payment Purchasing be used?

When the business needs the inventory immediately but does not have enough capital to pay right away.
When the business has a clear and certain financial plan about its ability to pay within the agreed time.

When the business wants to create financial leverage

c. Prepayment Purchasing
Definition
This is a common practice in cases where supply assurance is needed, especially when goods are scarce or custom
orders are required. Prepayment allows the supplier to have the necessary resources to manufacture or import the
goods as per the company's requirements.

Advantages
Potential price discounts, and assurance of supply in times of scarcity.

Disadvantages
High risk if the supplier fails to fulfill the commitment, impacting the company's cash flow.

When to use Prepayment Purchasing?

When goods are scarce

When the company has strong financial resources and can manage the risk
When the supplier is reliable
4.5.4. Classification by
Source of Goods
Classification by source of goods is a way to categorize purchasing
methods based on the origin of the goods. In other words, where do you
buy the goods from?
There are 3 main sources of goods: domestic, indirect imports, and direct
imports.
a. Domestic Purchasing
Definition
Domestic purchasing refers to a business purchasing goods from manufacturers, suppliers, or distributors within the
same country.

Advantages
- Reduced delivery time due to shorter geographical distance.
- Lower transportation costs compared to importing goods from abroad.
- Easier quality management as the manufacturer or supplier is nearby, allowing the business to effectively control
product quality.
- Supports the development of the domestic economy by promoting the production and consumption of local goods.

Disadvantages
- May be limited in product diversity and selection, especially when the business requires specialized or exclusive
products.
- Competitive pricing may be lower compared to imports, as the domestic market may not be as competitive as the
international market.
- Product quality may sometimes not meet international standards.

When to use domestic purchasing?

When the business needs to receive goods quickly
When the product is a common commodity
When the business wants to support the domestic economy
b. Purchasing from Abroad (International
Purchasing)
Commissioned Importing
1 The enterprise acts as an intermediary, importing goods according to the requirements of domestic
customers. This activity does not use the capital of the importing enterprise.

Direct Importing
2 The enterprise directly carries out all the steps from purchasing to selling. This process uses the capital of
the importing enterprise.

The Difference
3 Commissioned importing is an intermediary activity, while direct importing is the direct business activity of
the enterprise.

When should you purchase from abroad?

Enterprises should consider purchasing from abroad when:

- They need a diverse, abundant source of goods to meet domestic production and consumption needs.
4
- The products to be purchased have more competitive prices compared to domestic production.

- The products have higher quality and meet international standards.

- They cannot find suitable suppliers domestically.

b1. Commissioned Importing
Definition Advantages Disadvantages
Businesses import goods on No need to use capital, reduced Low profits as the business only
behalf of domestic customers, financial risk as the business does receives an intermediary service
acting as an intermediary without not directly own the goods. fee. The business depends on
using their own capital. This customer demand and the ability
activity is based on connecting to effectively source goods.
international suppliers with
domestic customers.
b2. Direct Importing
Definition
1 The enterprise carries out all the steps from purchasing to selling. This process requires the enterprise to
have capital and management capacity for the supply chain.

Advantages
2 Higher profits as the enterprise controls the entire value chain.

Strengthened reputation and independence in business operations.

Disadvantages
3 High financial risk as the enterprise is directly responsible for the goods.

Requires substantial knowledge and experience in importing to optimize efficiency.

Example
4 A footwear manufacturing enterprise directly imports leather raw materials from Italy, then manufactures
and sells the products in Vietnam.
4.5.5. Classification by Other Methods

Purchase by Contract Purchase by Order

This method is used when a business needs to This method is suitable for small orders that need to
purchase goods in large quantities over a long period be delivered quickly.
of time.

Direct Purchase Indirect Purchase

The business contacts the supplier directly to place The business uses the services of a third party to
orders and receive the goods. make purchases, such as an agent or broker.
a. Contract Purchasing

1 Definition 2 Advantages 3 Disadvantages

The enterprise signs a contract Ensures price stability and Lack of flexibility in case of
with the supplier, clearly supply source over a long rapid market changes.
specifying the sales conditions period of time.
The enterprise may face risks if
such as price, quantity, delivery
The enterprise can make long- it fails to accurately predict
time, and payment terms.
term plans based on the signed consumption demand or market
contract. changes.

4 Application
This method is often used for products with long production cycles and stable demand, such as: raw materials,
equipment, and machinery.
b. Order-based Purchasing
Definition Advantages
This method is based on the business receiving an Minimizes inventory risk, avoids capital being tied
order from the customer, and then placing an order with up.
the supplier. Suitable for small businesses, flexible in meeting
market demands.

Disadvantages Application
Dependent on the supplier for delivery time. Commonly used for products with rapidly changing
Risk of delays in meeting customer needs. demand, such as consumer goods and seasonal
products.
c. Direct Purchasing
1 Definition
Businesses transact directly with the manufacturer or supplier without
going through any intermediaries, agents, or distributors.

2 Advantages
Businesses can negotiate better prices by bypassing intermediaries.

Proactive control over product quality from the manufacturer.

3 Disadvantages
Requires strong relationships and the ability to find reliable sources of
supply.

Must manage all steps in the purchasing process, which can increase
the workload.
d. Indirect Purchasing
Definition 1
Indirect purchasing involves buying goods
through intermediaries, distributors, or agents.
These suppliers source the goods, handle 2 Advantages
transportation, and provide warranty for the Reduces management burden for the business,
products to the business. as the intermediaries handle transportation and
warranty.

Allows for purchasing smaller quantities

Disadvantages 3 compared to direct purchasing.
Prices are usually higher due to the involvement
of intermediaries.

Difficult to control product quality when going

through multiple intermediaries.
4.6. Supplier Management
Strategy
Kraljic Model - Supplier Position Matrix
The Kraljic Model classifies suppliers into 4 groups based on a matrix with two axes
a. Routine Supplier
Characteristics Management Strategy
The products or services provided are standardized Minimize management costs and transaction costs
and do not require special technology or quality. by standardizing the procurement process.
There are many suppliers in the market, so the Optimize administrative processes such as order
ability to replace the supplier is easy and does not placement, contract management, and payment
significantly impact the business operations. processing.
The purchase value is low, accounting for a small Simple contracts, easy to implement and terminate
portion of the total procurement budget. when needed.
The risk is low and does not significantly affect the Use automated purchasing methods such as E-
company's profitability or operations. procurement or electronic purchasing systems to
save costs and time.
Can connect with multiple suppliers to increase
flexibility and facilitate better price negotiations.
Effectively control inventory by applying low
inventory policies or the Just-in-Time (JIT)
management model.
Example: Apple's Routine Suppliers
Apple purchases these products from various suppliers. Additionally, Apple does not need to worry about finding new
suppliers, as there are many different suppliers ready to provide these products.

Product/Service Supplier Name

Product packaging Smurfit Kappa, International Paper

Office supplies Staples

Connectors and cables Foxlink

b. Bottleneck Supplier
Bottleneck suppliers are suppliers who hold a critical position in the supply chain, often providing highly specialized
products or services that are difficult to find in the market.

Unique Products High Risk Long-term Relationship

Suppliers provide rare or specialized Few suppliers available, replacing a Maintain good relationships with
products or services. supplier can disrupt production. suppliers to ensure a stable supply.
Bottleneck Supplier Management Strategy
Develop Partnership Manage Risks Negotiate Terms
Develop a partnership, even Proactively manage risks, seek Negotiate stable terms, not just on
potentially providing financial or alternative supply sources or build price but also on delivery times,
technological support to the relationships with backup support commitments, and other
supplier if necessary to ensure suppliers. non-financial factors.
supply continuity.

Contract Establishment Maintain Relationships

Establish long-term contracts with clear terms to avoid Maintain long-term relationships with suppliers to
supply shortages, while also ensuring mutual benefits ensure stability of supply.
and accountability.
Example: Apple's Bottleneck Suppliers
Apple is a massive technology company that relies on a few key strategic suppliers, especially for critical components like
processors. One example of an Apple Bottleneck Supplier is TSMC (Taiwan Semiconductor Manufacturing Company),
Apple's primary chip manufacturer. TSMC holds a monopoly position in producing the A-series and M-series chips for Apple
products like the iPhone, iPad, and Mac. Apple is heavily dependent on TSMC, as there are no other suppliers that can meet
Apple's advanced technical requirements.

Additionally, there are a few other Bottleneck Suppliers for Apple:

Product/Service Supplier Name

OLED Displays Samsung

Image Sensors Sony

Taptic Engine Vibration Motors Nidec

Bottleneck Suppliers provide specialized components that are difficult to replace, and disruptions in their supply would
significantly impact Apple's manufacturing operations.
c. Leverage Supplier

1 Standardized Products 2 Many Suppliers in the Market

The products or services provided by this supplier Due to the standardized nature, the business has
are typically highly standardized, easily substitutable, many options in the market. The presence of multiple
and can be purchased from multiple sources. competitors forces suppliers to provide better
However, the business still needs to ensure high service and more reasonable prices to maintain the
quality, stability, and the best value. business relationship.

3 Business Accounts for a Large 4 Significant Impact on Profitability

Purchase Volume Since the products from this supplier have a
In the relationship with the supplier, the business significant impact on the business's production
typically accounts for a large portion of the supplier's costs and profitability, optimizing the purchasing
total sales volume. This means the business has costs from this group can bring high efficiency to the
significant influence on the supplier's revenue, business operations. The ability to leverage
thereby creating superior negotiating power. economies of scale and purchasing power will help
the business reduce product costs or improve
service quality, thereby enhancing its
competitiveness.
Supplier Management Strategy: Leveraging
Supplier Capabilities

Leverage Purchasing Power Foster Competition Among Suppliers

Businesses use their purchasing power to negotiate Implement a multiple sourcing model to develop a pool of
favorable terms on pricing, discounts, payment conditions, suppliers, creating competition on price and quality, and
and delivery times to optimize costs. enabling the selection of the best supplier.

Establish Framework Agreements Manage Supplier Portfolio

Set up framework contracts to ensure quality standards, Regularly evaluate supplier performance and be ready to
delivery times, and supplier responsibilities, helping to replace them if they fail to meet requirements, ensuring
stabilize the supply chain in the long term. cost and quality optimization for the business. Additionally,
distribute orders across multiple suppliers to avoid over-
reliance on a single entity, ensuring flexibility and mitigating
disruption risks.
Example: Apple's Leverage Suppliers
Leverage Suppliers have high competition in the market, and Apple can use its large purchasing scale to negotiate
favorable terms while ensuring stable pricing and quality.

Product/Service Supplier Name

Standard components (RAM, hard drives) SK Hynix, Micron, Toshiba

Lithium-ion batteries ATL, LG Chem

NAND memory chips Toshiba, Samsung, SK Hynix

Speakers and microphones Goertek, AAC Technologies

d. Critical Supplier
Characteristics 1
Critical suppliers typically provide non-standard
products, services with high strategic
importance, and core technologies or services 2 Role
that directly impact the company's Critical suppliers play a critical role in
competitiveness. determining the quality, technology, or product
launch timing of the company.

Changing suppliers can lead to a loss of

Management Strategy 3 competitive advantage or serious disruption.
The company needs to build a long-term,
sustainable partnership with Critical suppliers.
Both parties must collaborate to minimize risks
and maximize opportunities.
Critical Supplier Management Strategy
Build Partnership Relationships
1 Establish long-term and sustainable partnership relationships, often symbiotic, where both parties benefit.

Cross-Investment and Collaboration

2 Cross-invest and closely collaborate on technology, production processes, and supply chain management to
create a sustainable connection.

Share Risks and Benefits

3 The business and supplier cooperate to minimize risks and maximize opportunities.

Strategic Partnership Contracts

Develop strategic partnership contracts (Strategic Partnership Agreements) with complex terms including
4
information sharing, product development collaboration, and mutual support commitments in crisis
situations.

Participate in Innovation and Development

5 Participate in the process of product innovation and development with suppliers to enhance interactivity and
improve competitive advantage for both parties.
Example: Apple's Critical Suppliers
Strategic Supplier or Critical Supplier are strategic partners that have a significant impact on Apple's entire supply chain
and product quality. Apple builds long-term partnerships with these suppliers and jointly develops technologies and
solutions to ensure the sustainability and competitiveness of their products.

Here is a list of Apple's Critical Suppliers:

Product/Service Supplier Name

Final Assembly (iPhone, iPad, MacBook) Foxconn, Pegatron

Gorilla Glass Corning

Comparison between Critical Supplier and
Bottleneck Supplier
Criteria Bottleneck Supplier Critical Supplier

Definition Supplies products/services with Supplies strategic or core

high specificity, difficult to replace, products/services that directly
with few suppliers and can cause impact the company's
disruption if not available. competitiveness and long-term
operations.

Product/Service Characteristics Unique products, with exclusivity or Products or technologies of

hard to find in the market (e.g. rare strategic importance, not easily
components, specialized replaceable, playing a crucial role in
technology). business operations.

Number of Suppliers Very few or only a limited number of Very few or exclusive, but with long-
suppliers can meet the term and comprehensive
requirements. collaboration with the company.

Risk of Change Changing suppliers can cause Changing suppliers can lead to loss
serious disruption, impacting the of competitive advantage, affecting
supply chain and production. the company's quality and
innovation.
Comparison between Critical Supplier and
Bottleneck Supplier
Criteria Bottleneck Supplier Critical Supplier

Stability Low stability, highly dependent on High stability if the relationship is

the current supplier. maintained well, as both parties
have long-term commitment and
investment.

Impact on the business Affects production schedule and Affects quality, technology,
costs (in case of disruption). competitiveness, and the
development of the business.

Management strategy Focus on maintaining a stable Build a strategic partnership,

supply, search for backup suppliers, collaborate on investments, share
and sign long-term contracts to benefits, and participate in the
reduce disruption risks. innovation process to enhance
competitiveness.

Specific examples - TSMC provides exclusive - Foxconn is responsible for

semiconductor chips to Apple. assembly and optimization of the
manufacturing process for Apple.
4.7. Evaluating and Selecting
Suppliers
The supplier selection process is one of the critical steps in procurement
management. Businesses need to identify key criteria such as cost, quality,
and delivery to evaluate and select suppliers that best meet their
requirements. This will help improve the efficiency of procurement and
establish strategic partnerships with suppliers.
4.7.1 Supplier Selection Process
Supplier Selection Process
The supplier selection process is an important process that helps businesses ensure that the selected suppliers will meet
the necessary technical, financial, and commercial requirements, while maximizing overall value. This process consists of
seven main steps:

1. Identify the business needs: The company needs to assess its purchasing needs based on product, service, and
technical requirements. This step also includes reviewing new product development plans to ensure appropriate
sourcing.
2. Determine key sourcing requirements: Criteria for sourcing such as product quality, cost, and delivery performance are
defined. These criteria may vary depending on the type of product and the company's requirements.
3. Determine the sourcing strategy: The company needs to decide on factors such as the number of suppliers (single or
multiple), associated services, short-term or long-term contracts, and domestic or international suppliers.
4. Identify potential suppliers: Based on the defined criteria, the company will create a list of potential suppliers that have
the capability to meet its requirements.
5. Narrow down the supplier pool: The supplier list will be narrowed down based on a preliminary evaluation of factors
such as pricing, quality, delivery time, and financial risk.
6. Validate and select the supplier: The company will verify the supplier information by visiting the supplier's facilities or
collecting feedback from the supplier's current partners.
7. Select the supplier and negotiate the contract: After selecting the supplier, the company will negotiate and sign the
contract, which clearly outlines the product, service, timeline, and budget terms.
4.7.2. Selecting Suppliers in
Purchasing Management
In the complex supply chain of a business, the evaluation and selection of
suppliers plays a crucial role, determining the effectiveness of production and
business operations. Selecting suppliers is not simply about finding the
lowest price, but about finding strategic partners who can grow alongside the
business on the path to sustainable development.

The challenge for purchasing management professionals is to strike a balance

between two factors: the reliability of the supplier and the optimal cost for the
business.
Key Criteria in Supplier Evaluation
Supplier evaluation needs to be based on multiple criteria, however, the three most important criteria that form the "golden
triangle" in the supplier selection process are:

Cost/Price Quality Delivery

This is the top priority factor in the The quality of input products directly The ability to meet delivery schedules,
context of fierce competition. Lower affects the quality of output products. deliver to the right location, and in the
costs help the company reduce The company needs to select right quantities is an important factor
product costs and enhance suppliers who can provide products to ensure continuous business
competitive advantage. and services that meet the required operations.
quality standards.
Cost/Price: The Profit Optimization Equation
In the context of fierce competition, optimizing procurement costs is a critical factor for many businesses. Selecting
suppliers with competitive prices helps companies minimize production costs and enhance their market competitiveness.

However, basing supplier selection solely on price can lead to potential risks in terms of quality and delivery timelines.
Therefore, businesses need to carefully balance the cost factor with other criteria to make the most appropriate decision.

Benefits: Risks:
Reduce product cost Compromised product quality
Strengthen competitive advantage Delivery timeline risks

Improve capital efficiency Impact on brand reputation

Quality: A Key Factor in Building Reputation
The quality of input products and services directly affects the quality of output products, which determines customer
satisfaction and the reputation of the business. Businesses need to establish a clear quality standard system and select
suppliers capable of meeting these standards.

However, choosing the supplier with the best product quality is not always the optimal solution. Businesses need to
consider their target customer segment and market characteristics to select suppliers with quality that is appropriate for
their business strategy.

1 2 3

Determine Quality Evaluate Supplier Monitor Quality

Standards Capabilities Conduct inspections and quality
Based on the product and service Through capability profiles, quality monitoring throughout the
requirements of the business and certifications, on-site assessments, collaboration process.
customer expectations. and customer references.
Delivery: Ensuring Continuous Production
Flow
Timely, accurate, and reliable delivery to the right location and in the right quantity and quality plays a crucial role, directly
impacting production progress and the ability to meet customer demand. Businesses need to select reputable suppliers
with strong logistics capabilities to ensure precise and timely delivery requirements are met.

Additionally, regularly monitoring and evaluating the supplier's delivery performance is essential. This helps the business
proactively manage risks and make appropriate adjustments to optimize business operations and production efficiency.

Order Processing Transportation

The supplier receives the order, verifies the Selection of the appropriate transportation
information, and confirms the order with method, tracking the delivery process, and
the procurement department. updating the receiving department.

1 2 3 4

Goods Preparation Handover

Inspection, packaging, labeling, and Inspection and confirmation of the quantity
transportation of the goods to the dispatch and quality of the goods at the delivery
warehouse. location.
Chapter 4 Summary
Procurement Management Objectives: Ensure continuous supply, optimize costs, build strong relationships with
suppliers, improve quality, and support the company's strategic goals.
Detailed Procurement Process: From initiating the request to payment and post-purchase evaluation, including key
steps such as requesting quotations, approving, and establishing contracts/purchase orders.
PMI Index: An important indicator reflecting the economic situation in the manufacturing, supply, and sales sectors,
which directly impacts the decisions of procurement managers and suppliers.
Procurement Classification: By scale, form, credit terms, product origin, and other methods, to flexibly meet business
needs.
Supplier Management Strategy: Based on the Kraljic model, suppliers are classified into 4 types (Routine, Bottleneck,
Leverage, Critical) to develop appropriate management strategies.