BBM 340: PURCHASING MANAGEMENT

COURSE INSTRUCTOR: DR. ZURAH C. MOHAMMED

TOPIC ONE
NATURE OF PROCUREMENT AND SUPPLY CHAIN
MANAGEMENT
INTRODUCTION
Purchasing describes the process of buying; learning of need, locating and
selecting suppliers negotiating prices and other pertinent terms, and follow up to
ensure delivery. It entails the following activities:
i) Purchase needs identification through liaison with user’ departments.
ii) Identification of potential suppliers
iii) Negotiation.
iv) Selection of suppliers. .
v) Market research for important materials.
vi) Analysis of proposals.
vii) Issuance of purchase orders.
viii) Maintenance of purchasing records.
Purchasing is a process of obtaining materials, works and services of the right
quality, in the right quantity, from the right source, delivered at the right time, to
the right place and at the right price (from stand point of objectives).

Procurement is a broader term (wider) and includes purchasing stock, receiving

incoming goods, inspection and salvage. Procurements process or concept
encompasses a wider range of supply chain activities than those included and
purchasing functions. It includes the traditional role, with more buyer participation
in related material activities. These activities include;
i) Description of requirements
ii) Materials research and value analysis activities.
iii) Extensive market research.
iv) Conduct of all purchasing functions.
v) Suppliers quality management
vi) Management of investments recovery activities (salvage of surplus and
scrap).
Essentially therefore procurement tends to be broader and more proactive, focusing
on Strategic matters, rather than mere implementation of purchasing concept.

Supply management is a system management concept employed by some

organizations designed to optimize the factors of materials costs, quality and
services. It is a process responsible for the development and management of a
firm’s material management of a firm total supply system.
It is the physical handling of stock awaiting issue or transport to the end user.
Managers should ensure that costs such as holding costs and ordering cost are kept
at minimum. It includes and expands the activities of the purchasing function and
the procurement process.
The other activities in supply management are:
i) Early Purchasing Involvement (EPI) and Early Supplier Involvement (ESI)
in product design and subsequent specification development for crucial
items.
ii) Heavy use of cross-functional teams in supplier qualification and selection.
iii) Purchasing partnering and strategic alliances with supplies.
vi) Continuous monitoring and improvement in the supply chain.
vii) Participation in strategic planning process.
Materials Management - It is the planning, organizing and control of all aspects
of inventory embracing procurement, warehousing, Work In Progress and
distribution of finished goods. Materials management includes the following
activities:
i) Purchasing and supply management activities.
ii) Inventory management
iii) Receiving activities
iv) Stores and warehousing
v) In-plant material movement
vi) Production planning, scheduling and control
vii) Scrap and surplus disposal.

Supply chain management is that network of organization that are involve

upstream and downstream linkages in the different process and activities that value
in the form of products and service in the hands of ultimate customers

Objectives of purchasing
1. To supply the organization with the flow of materials and service to meet its
needs
2. To ensure continuity of supply by maintaining effective relationship with
existing and by developing other sources of supply
3. To buy efficiently and wisely obtaining by an ethical means the best value
shilling spent
4. To maintain cordial relationship with others departments for the overall
benefit organization
5. To develop staff, policies, procedures and organization to ensure the achieve
n set objectives
6. To select the best supplier in the market
7. To help add value to the development of new products

Role of Procurement within an Organization

The objectives of a world-class procurement organization move far beyond the

traditional belief that procurement’s primary role is to obtain goods and services in
response to internal needs. To understand how this role is changing, we must
understand what purchasing is all about, starting with the primary objectives of a
world-class purchasing organization.

1. Support Operational Requirements

Supporting this flow requires purchasing to:

 Understand business requirements

 Buy products and services
o At the right price
o From the right source
o At the right specification that meets users needs
o In the right quantity
o For delivery at the right time
o To the right internal customer

Internal customers of purchasing include:

 Manufacturing
  Physical distribution centers
 Engineering and technical groups
 Research and development
 Information technology
 Transportation and other services

2. Manage the Procurement Process and the Supply Base Efficiently and
Effectively

To manage the procurement process and supply base efficiently and effectively
procurement must follow the following key steps:

 Identify opportunities
 Manage internal operations
 Achieve objectives

3. Identify opportunities where the procurement team adds true value:

 Evaluation and selection of suppliers

o All purchases should go through the approved procurement processes
o Engineering and other functional inputs are part of this process
o Sales personnel should not be allowed to enter contractual agreements
without procurement’s involvement
o Increasing use of sourcing teams
 Review of specifications or statement of work
o Review the requirements for the material or service being provided
o May be able to suggest alternative standardized materials that can
save the organization money
 o Periodic review of requisitions can allow greater leveraging of
requirements
 Acting as the primary contact with supplier

 Determining the method of awarding contracts

 Managing the supply base

o Current suppliers are competitive
o Identification of new potential suppliers and develop relationships
o Improvement and development of non-competitive existing suppliers

4. Manage its internal operations efficiently and effectively, including:

 Management of procurement staff

 Developing and maintenance of policies and processes
 Introducing and leveraging appropriate technology and systems
 Defining procurement strategy and structure
 Developing plans and measures
 Providing procurement leadership to the organization
 Providing professional training and growth opportunities for employees

5. Develop Strong Relationships with Other Functional departments

6. Support Organizational Goals and Objectives

Develop integrated purchasing strategies that support organizational strategies.

Effective purchasing strategies involve:

  Monitoring supply markets and trends (e.g., material price increases,
shortages, changes in suppliers) and interpreting the impact of these trends
on company strategies
 Identifying the critical materials and services required to support company
strategies in key performance areas, particularly during new product
development
 Developing supply options and contingency plans that support company
plans
 Supporting the organization’s need for a diverse and globally competitive
supply base

Procurement cycle

Definition

Every organization that operates a business has to purchase materials such as raw
materials, services etc. The procurement process has become part of today’s
efficient business operation. The Company can procure those materials as in-house
production or external procurement. Series of steps that must take place to
replenish stock in a distribution center. Identifying the items that must be procured
and determining the necessary quantities is the first step. This information is used
to generate a requisition which is sent to the purchasing department. The assigned
buyer requests bids and awards the purchase order to a vendor. When the ordered
items arrive, they are entered into the inventory system. The parameters for a
procurement cycle may be set by a known production schedule or vary based on
consumer demand or other factors.

Procurement Cycle consists of the following processes.

 1. Need identification
2. Vendor Selection
3. Request for Quotation
4. Purchase Requisition
5. Purchase Order
6. Goods Receipt
7. Goods Receipt Invoice
8. Invoice Verification
9. Payment to Vendors
10. Record Maintenance

1. Need identification

You need to identify that there is a need to update the inventory or stock. You may
also need a business service or ad hoc product

Materials requirements planning (MRP)

Refers to the technique of using a projected manufacturing production schedule to

figure out what supplied materials you will need, and when you will need
them. Materials requirements planning (MRP) type controls the MRP procedure,
pricing, material valuation. Material requirement planning carried out by MRP
controller in production department.

Purchase Requisition:- 

A purchase requisition is an internal request to purchasing.  You ask the buyer to

provide a certain quantity of a material or service on a certain date. A purchase
requisition can be created automatically by Material Requirement Planning (MRP)
or manually created. PR converts to RFQ, PO or outline agreement. Purchase
Requisition forms include the following information

 Material Qty, description of goods & service and total value.

 Department Account number.
 Signature by an Authorized Department. 
 Attached Quote from the vendor.
 Delivery instructions.
 Attach Quote from the suggested vendor.

2. Vendor selection:- 

Vendor selection is one of the important step in procurement process. With the
help of obtained quotations from sources and by comparing them, vendors are
selected

3. Request for Quotation:-

Requesting potential vendors to submit a quotation for a material or services.

Quotation contains the vendor’s terms and conditions and constitutes the basis for
vendor selection

4. Purchase Order:-

Purchase Order (PO) is a formal request to a vendor to supply certain materials or

services under the certain conditions. A Purchase Order (PO) can be created with
reference, or without reference to a purchase requisition, a request for quotation, or
another purchase order.
POs usually specify terms of payment, incoterms, delivery date, specifications,
material qty, price and reference or part numbers.

Types of purchase orders in procurement process:- Standard PO, Planned PO,

Contract PO.

5.  Goods Receipt:-

Goods Receipts (GR) is created to reflect the Goods Receipts for the specified
material ordered from a vendor using Purchase Order process. After receiving the
goods the company can record the following information, this information can be
used for accounting, stock check and rotation, to return any goods if there is a
problem

 What goods were delivered,

 Which vendor delivered the goods,
 Who, how, when goods were delivered and received the goods.

6. Goods Receipt Invoice (GRIN):- 

     Goods receipt Invoice process is one of the important process in procurement

process cycle. It is matching the goods that a company receives with the company
PO (purchase order). It involves checking the goods are not damaged and fit for
use, verifying the price, quantity, and payment terms. Goods movement are entered
in to the system with reference of Purchase order and goods receipt material
documents are posted, automatically appropriate general ledgers are posted and
stock accounts are updated.
7. Invoice Verification:-

  After GRIN process, next process of procurement to pay is invoice verification. It

plays an important role in procurement process and Materials Management Module
which performs the following tasks

 A Vendor Invoice can be created with reference to a Purchase Order, a

Goods Receipt, a Delivery Note.
 Invoice is verified in-terms of prices, quantity,
 Necessary approvals by project managers

After verifying all the data, the invoice is posted and the data is saved in the
system. The system updates the invoice data in Materials Management and
Financial Accounting.

8. Payment to Vendors:-
The last step in procurement process cycle is payment to vendors and it is also
known procure to pay process. Vendors are get paid as per payment terms. In this
fast technology world, companies can pay through many methods to vendors. For
example – through Net banking, Check payment, e-procurement etc

10. Record Maintenance

In the case of audits, the company must maintain proper records. These include
purchase records to verify any tax information and purchase orders to confirm
warranty information. Purchase records reference future purchases as well.

Relationship of procurement with other functions

We have discussed in the earlier section that organisations have replaced the
segmented structure of the procurement function with integrated structures, and
procurement has moved on from being a discrete activity to being the hub of a
large part of the organization’s business activity. By its very nature, procurement
has continuing relationships with many other functions in an organisation, in
addition to the relationships established with the organization’s suppliers and
customers. The procurement operations cut across most departmental lines.

Graphic illustration of procurement’s many interfaces within the organisation.

1.  Procurement and Design engineering

Procurement, Engineering and Production have many mutual problems. Design
engineering, like Production, greatly influences the amount of time Procurement
has to handle a procurement assignment. Engineering usually has the initial
responsibility for preparing the technical specifications for an organisation’s
products and the materials that go into them. To exercise this responsibility
effectively, Engineering must have the constant help of Procurement and
Production. A number of organisations have initiated early Procurement and early
supplier involvement programs to assist this effort. The prices paid for production
materials and the cost to fabricate them are inextricably related to their
specifications. Similarly, specifications can be written in a manner that reduces or
enlarges the number of organisations willing to supply specific items. If profit is to
be maximised, the materials specified by engineering must be both economical to
procure and economical to fabricate, and they should normally be available from
more than one efficient, low-cost producer.

2.  Procurement and Production

The Procurement-Production relationship begins when the Production function

transmits its manufacturing schedule or materials requisitions to the Procurement
function. Procurement subsequently translates these documents into a procurement
schedule. Procurement timing is often the most difficult problem faced when
making this translation. When Production does not allow Procurement sufficient
time to procure wisely, many needless expenses inevitably creep into the final
costs of an organisation’s products. When Procurement has inadequate time to
develop competition or to negotiate properly, premium prices are certain to be paid
for materials. Costly special production runs and premium transportation costs are
two additional factors that frequently result from inadequate procurement lead
time.
The potential consequences of a production stoppage cause many Production
managers to advocate an excessively large inventory of production materials.
Again, this is understandable. For Production managers to reach their main
manufacturing objective of low unit costs, they must minimize idle time and keep
the production line operating. However, Procurement has the related objective of
accomplishing the task with the minimum reasonable capital investment in
inventory, a major concern which production typically does not share with equal
intensity. The cost of carrying inventory is high

3. Procurement and Sales

All organizations recognize the direct relationship between the sales function and
profit. In their enthusiasm to increase sales, however, many organizations overlook
the leaks in profit that can occur when the sales activity is not properly meshed
with the Procurement and Production activities.

The Procurement-Production-Sales cycle has its genesis in a sales forecast. Most

sales forecasts include two important parts:

a. An estimate of sales based on what has happened in the past to an

organization’s products, territories and markets; and
b. An adjustment of this estimate to include changes the organization
expects in its future sales.

The changes reflect alterations in the marketing program and shifts in economic
and competitive conditions. The sales forecast is the basis for the production
schedule. The sales forecast also influences an organization’s capital equipment
budget, as well as its advertising campaigns and other sales activities.
4.  Procurement and Finance

Procurement’s relationship with Finance is different from its relationships with

Production, Engineering and Sales. The difference stems from the fact that cost
determinations cannot be hidden in the Procurement-Finance relationship as they
often can in the other relationships. The importance of good financial planning is
highlighted by the fact that poor financial planning is one of the major causes of
business failure. Among the basic data needed by an organization for proper
planning of its working capital and cash flow positions are accurate sales forecasts
and accurate procurement schedules. It is just as important for Procurement to
inform Finance of changes in its schedule, as it is to inform Production and Sales
of these changes.

Prompt payment to suppliers is a key contributor to good supplier relations. During

material shortage periods, an organization with a preferred customer status has a
much better chance of avoiding shortage problems experienced by most others.
Hence, a cooperative relationship between Procurement and Finance clearly can
impact the development of good supplier relations.
 TOPIC TWO

Definition of a supplier

A supplier is a business or individual that supplies a business with products or

services that can be used in the business for production purposes. For example,
the electricity company (supplies you electricity), a farming business (supplies
you with various grains like wheat, corn, spelt, etc.).

Importance of selecting the right supplier

1.     Supply of Quality materials or services.

Quality is the most important factor to the supplier selection process. In the
eyes of your customer, if your supplier has poor quality, it’s a direct reflection
on you, not the supplier. If a supplier lets you down, you will let your customer
down. If your supplier provides you with a low-quality component, it can
negatively affect your delivery and cost. When evaluating potential suppliers,
try to determine whether their culture is centered on quality by asking the
following: does the supplier have a quality program in place? Is the program
instilled from the top-down?   
2.      Efficient Delivery

The right supplier should be able to deliver the goods or services on time. It’s
essential to understand your potential supplier’s lead time and be familiar with
their supply chain. Since you are ultimately responsible for the final product
that is delivered to your customers, it’s critical to know where the components
are made, what the key processes and who is responsible for making them.
Having this knowledge increases your credibility and helps to ensure success in
meeting your commitment to your customers.

3.      Right Price

It’s important to keep in mind that the lowest price is not always the best value
for your money. If you want reliability and quality from your suppliers, you will
have to decide how much you're willing to pay and determine the balance you
want to strike between cost, reliability, quality, and service. The situation
should be a win-win situation.

4.      Flexible to new Innovation

A good supplier should make sure he is committed to keeping up with the latest
in technology. A good indicator of their commitment to innovation is whether
they have a qualified engineering organization on-site. If so, they are more
likely to be knowledgeable of new technology.

5. Supplier Involvement

A good supplier will always help his customers on expertise and experience in
developing a product specification that is designed for effective and efficient
product roll-out.
 6. Developing partnerships

Trust is the key in the relationship between buyer and supplier; success cuts
across both entities. Both parties should share information, reports, and other
tools to help manage their businesses, control costs, and track inventory.

7. Speed and flexibility

Speed and flexibility are fundamental, as being able to make small orders
frequently can prevent the issue of excessive inventory. If suppliers are flexible,
we can answer to changes in clients’ needs quickly. This is an added advantage in
times of emergencies.

Factors to consider when selecting supplier

What you should look for in a supplier

i. Reliability
Consistency is the key element in every single firm buying from potential
suppliers. Remember - if the supplier let you down, you may let your customer
down.

ii. Quality
The quality of your supplies needs to be consistent - your customers associate poor
quality with you, not your suppliers.

iii. Value for money

The lowest price is not always the best value for money. If you want reliability and
quality from your suppliers, you'll have to decide how much you're willing to pay
for your supplies and the balance you want to strike between cost, reliability,
quality and service.
iv. Form of communication
You need your suppliers to deliver on time, or to be honest and give you plenty of
warning if they can't. The best suppliers will want to talk with you regularly to find
out what needs you have and how they can serve you better.

v. Financial security
It's always worth making sure your supplier has sufficiently strong cash flow to
deliver what you want, when you need it. A credit check will help reassure you that
they won't go out of business when you need them most.

Vi. Technology

Not all vendors and suppliers have the technology capabilities you need to
understand the efficiency of the vendor in terms of technological capability.

The supplier selection process

Strategic sourcing is a complicated process involving a number of interrelated

tasks which includes.

i. Identifying or re-evaluating needs.

Make sure you know what you need. Don't be tempted by sales pitches that don't
match your requirements. Understand the difference to your business between a
strategic supplier, who provides goods or services that are essential to your
business - such as high-value raw materials - and non-strategic suppliers who
provide low-value supplies such as office stationery. You will need to spend much
more time selecting and managing the former group than the latter.

ii. Define or evaluate user’s requirements.

Users should give their specifications according to the needs in terms of qualities
and quantities.

iii. Decide make or buy decision.

After evaluating the user requirements, one is supposed to make a
decision whether to buy that tem or to make it. If it is impossible to
make that item then you make a decision to source it elsewhere.
iv. Identify type of purchase.
There are three types of purchase
a. Straight re-buy or routine purchase.
This applies where the item or commodity bought in is in
continuous or recurrent demand and the supplier is already
known
b. A modified re-buy
This situation applies where the demand for item is continuous
or recurrent, but on expanded or reduced level due to minor
changes that have been made to the product specifications
c. A new buy
New buy situation applies when the product or specification is
new or unfamiliar. Considerable expediting for supplier and
appraisal may be required as buyers may have little or no past
experience or which to draw.

v. Conduct market analysis

A source of supply can operate in a purely competitive market (many suppliers) an
oligopolistic market (a few large suppliers) or a monopolistic market ( one
supplier).

vi. Identify possible suppliers.

Choosing the right suppliers is essential for your business. Don't try to save time
by buying from the first supplier you find that may be suitable. It will be important
to try to identify available suppliers. This may include suppliers that the purchaser
has not previously used.

vii. Prescreen possible suppliers.

This process will involve reducing the number of suppliers to those that can meet
the purchaser’s specifications. It will be easier for you to manage - and probably
more cost-effective - if you limit the number of sources you buy from. This is
particularly the case with low value-added suppliers.

viii. Evaluate the remaining supply base.

This activity is often accomplished by means of competitive bidding.

ix. Choose the favorable supplier.

The choice of supplier determines the relationships that will exist between the
purchasing and supplier organizations and how the relationship will be structured
and implemented. It will also determine how relationships with non selected
suppliers will be maintained.

x. Deliver product /perform service

The completion of this activity also begins the generation of performance data to
be used for the next activity.

xi. Post purchase/ make performance evaluation.

The supplier’s performance must be evaluated to determine how well the

purchaser’s needs have been met. This will provide data for future sourcing.

Ways of evaluating supplier performance

The following are the factors to be considered when evaluating supplier

performance

1. Competency

First, look at how competent this supplier is. Make a thorough assessment of the
supplier's capabilities measured against your needs, but then also look at what
other customers think. How happy are they with the supplier? Have they
encountered any problems? And why have former customers changed supplier?

Look for customers whose needs and values are similar to yours, to ensure that the
information you gather is relevant to your organization.

2. Capacity

The supplier needs to have enough capacity to handle your firm's requirements. So,
how quickly will it be able to respond to these, and to other market and supply
fluctuations?
Look at all of the supplier's resources, too. Does it have the resources to meet your
needs, particularly when commitments to other clients are considered? (These
resources include staff, equipment, storage, and available materials.)

3. Commitment

Supplier needs to provide evidence that it's committed to high quality standards.
Where appropriate, look for quality initiatives within the organization, such as ISO
Certification.

The supplier also needs to show his commitment, as a customer, for the duration of
the time that is expected to work together. (This is particularly important if you're
planning a long-term relationship with the supplier.)

4. Control

Query how much control this supplier has over its policies, processes, procedures,
and supply chain.

How will it ensure that it delivers consistently and reliably, particularly if it relies
on scarce resources, and particularly if these are controlled by another
organization?

5. Technology

Not all vendors and suppliers have the technology capabilities you need to run
your restaurant as efficiently as possible. If a streamlined process is important to
you, make sure they are able to categorize your invoices properly and offer online
ordering options.

6. Payment Terms:

This can be a huge factor when considering your options, so always work with
your suppliers to get payment terms or cash discounts that work best for you.

7. Delivery Schedules:

Not all vendors will deliver what you need at a time that's best for you, so make
sure to ask about their flexibility when searching for the right vendors for your
restaurant.

8. Cost

Look at the cost of the product that this supplier provides. How does this compare
with the other firms that you're considering?

Most people consider cost to be a key factor when choosing a supplier. However,
cost is in the middle of the 10 Cs list for a reason: other factors, such as a
commitment to quality and financial health, can potentially affect your business
much more than cost alone, particularly if you will be relying on the supplier on an
ongoing basis.

9. Consistency

How will this supplier ensure that it consistently provides high quality goods or
services?
No one can be perfect all of the time. However, the supplier should have processes
or procedures in place to ensure consistency. Ask this supplier about its approach,
and get a demonstration and a test product, if possible.

10. Culture

The best business relationships are based on closely matching workplace values.
This is why looking at the supplier's business culture is important. For example,
what if your organization's most important value is quality and your main supplier
cares more about meeting deadlines? This mismatch could mean that it's willing to
cut corners in a way that could prove to be unacceptable to supplier.

11. Communication

Query how the supplier plans to keep in touch with you. Will its proposed
communication approaches align with your preferred methods? And who will be
your contact person at this firm?

It's also important to find out how the supplier will handle communications in the
event of a crisis.

Ways of developing potential suppliers

i) Provision of adequate lead time

Suppliers should be given sufficient time to deliver the required products. Unless
there is good competitive reason not to, share with them an honest projection of the
needs of the firm and keep them a breast of any significance changes in the
estimation. When developing lead times, it helps to be knowledgeable about
suppliers production methods and needs.
 ii) Payments on time

Prioritizing the payment of suppliers is very critical to every buyer. The firm can
negotiate for favourable payment terms before placing an order but once the order
has been placed, don’t renege or attempt to change the rules. Goodwill of the
supplier is always determined by timely payments by the buying firm.

iii) Information sharing with suppliers

Share critical information as early as possible. Information is the grease that makes
an integrated supply chain work. Waiting to share critical volume and timing
information with suppliers can create lost business for the company or excess
inventory and added costs for suppliers. Sharing information constantly, with
appropriate security and confidentiality, is critical for successfully managing a
supplier relationship.

iv) Personalizing the relationship

Companies often hold formal quarterly meetings without appropriate

representation in which the vast majority of time is spent on information best
provided through other communication forums. Instead, relationship meetings
should focus on critical issues, areas for supplier improvement and discussions on
how the buying organization can improve the relationship.

Ways of identifying potential suppliers

Suppliers can be found through a variety of channels. It's best to build up a shortlist
of possible suppliers through a combination of sources to give you a broader base
to choose from.

i. Recommendations
Ask friends and business acquaintances. You're more likely to get an honest
assessment of a business' strengths and weaknesses from someone who has used its
services.

ii. Directories
If you're looking for a supplier in your local area, it's worth trying directories such
as Yellow Pages and Thomson.

iii. Trade associations

If your needs are specific to a particular trade or industry, there will probably be a
trade association that can match you with suitable suppliers.

iv. Business advisors

Local business-support organizations, such as chambers of commerce, can often
point you in the direction of potential suppliers.

v. Exhibitions
Exhibitions offer a great opportunity to talk with a number of potential suppliers in
the same place at the same time. Before you go to an exhibition, it's a good idea to
check that the exhibitors are relevant and suitable for your business.

vi. Trade press

Trade magazines feature advertisements from potential suppliers.