Chapter 1: Purchasing process

I. Purchasing process - Industrial purchasing process

1. Forecast and plan requirement
The purchasing cycle begins with the requirement of the need. In most of case, procurement
department have an annual or 6-month planning process, whereby they would review the
spending pattern for the organization (through a spend analysis) and prepare a plan what will
purchase. Purchasing is responsible for acquiring product and service for entire organization. Not
all the need can be forecasted ahead of time. When their need comes up suddenly, which is not
planned and there is no existing supplier. Such need is often handled through a shot buy
approach, the purchasing would support the marketing department to identify a supplier to
provide the product with lowest possible price and acceptable lead time vs level of quality.

2. Needs clarification
At certain point, the internal customer (department in the same company) identify the need in
details and clarify and communicate with the purchasing department what is needed, the
quantity, the due date that the products need to be available, the quality,….They can
communicate with the purchasing department through purchase requisition.
Ex: They need to clarify the product in details include item id, description includes material -
color, quantity, price range, date required, authorized name and signature in the purchase
requisition.

3. Supplier selection
Once the need and the description of the need is identified, there are 2 scenarios: (1) The need is
fulfilled by the supplier that has an existing contractual relationship with the buying company. (2)
the need is fulfilled by a new supplier that is not currently qualified to provide products and
service to the firm. In the first case, through the need forecasting process, purchasing personnel
have already identified which supplier need to be sourced for the need requirement. They
already finished the step to evaluate and prequalify the supplier. In the second case, where the
supplier not be identified yet, the purchasing need to select the supplier that fulfill the need. They
need to qualify and evaluate the supplier meet the criteria. Many criteria like the expertise,
operation performance, business practice and process,.. need to be considered carefully.
Competitive bidding and negotiation are 2 methods commonly used for final supplier selection
when there is no a preferred supplier.

4. Place the purchasing order: Purchase order and blanket purchase order
The original purchase order contains all negotiated terms and conditions for estimated
quantities over a period of time. Subsequently, releases of specific quantities are made against
the order. Releases may be executed by supply or, more efficiently, by production scheduling
directly to the supplier. An open-end order may remain in effect for a year, or until changes in
design, material specification, or conditions affecting price or delivery necessitate renegotiations.
Purchase order:
Blanket purchase order:

5. Receipt and inspection

- The prime purposes of receiving are to: 1. Confirm that the order placed has actually
arrived. 2. Check that the shipment arrived in good condition. 3. Ensure the quantity
ordered has been received. 4. Forward the shipment to its proper destination (storage,
inspection, or use). 5. Ensure that proper documentation of the receipt is registered and
accessible to appropriate parties. Shortages may occur because material has been lost in
transit, short-shipped, tampered with, or damaged in transit. Physical counts can be
forced by blocking receiving from access to the quantity ordered. If accurate amounts
are entered into the system, the order is closed out, inventory records updated, and the
invoice cleared for accounts payable to authorize payment.
- When quality is not assured, incoming inspection occurs. Damage may also occur during
transit, which has implications for carrier inspection and logistics processes. Decisions
 must be made about the need for inspection, the appropriate type of inspection, and the
most cost-efficient and effective method of inspection.

6. Invoice settlement and payment

- An invoice is a claim against the buying organization. Typically it shows order number
and itemized price. Invoice clearance procedures are not uniform. Checks and audits of
invoices are established based on cost-benefit analysis. The cost of a person’s time to
resolve minor variances may exceed the value of the variance. A decision rule may be
used that stipulates payment of the invoice as submitted, as long as the difference is
within prescribed limits: for example, plus or minus 5 percent or $25, whichever is smaller.
Accounts payable tracks variances to identify suppliers that are intentionally short-
shipping.
- Payment for services may vary somewhat from payment for goods. Some services require
prepayment, such as an eminent speaker; some, immediately upon delivery, such as
hospitality services, whereas others can be delayed. It may be difficult for small suppliers
to offer extended payment terms, and early payment may generate price or other
concessions. Progress payments are usual for large contracts spread over time, whereas
regular payments are appropriate for ongoing services such as building maintenance or
food service

7. Records maintenance
- The final step is to update records, including supplier performance scorecards. Electronic
files or hard copies of the order-related documents are stored or filed. Law, accounting
standards, company policy, and judgment determine which records are to be kept and
for how long. For example, a purchase order is evidence of a contract. It may be retained
much longer (normally seven years) than the requisition.

The basic records to be maintained, either manually or electronically, are: 1. PO log, which
identifies all POs by number and indicates the open or closed status of each. 2. PO file, containing
a copy of all POs, filed numerically. 3. Commodity file, showing all purchases of each major
commodity or item (date, supplier, quantity, price, PO number). 4. Supplier history file, showing
all purchases placed with major large total-value suppliers. 5. Outstanding contracts against
which orders are placed as required. 6. A commodity classification of items purchased. 7. A
database of suppliers. Additional record files may include:
1. Labor contracts, giving the status of union contracts (expiration dates) of all major suppliers. 2.
Tool and die record showing tooling purchased, useful life (or production quantity), usage history,
price, ownership, and location. This may prevent paying more than once for the same tooling. 3.
Minority and small business purchases, showing dollar purchases from each. 4. Bid-award history,
showing which suppliers were asked to bid, amounts bid, number of no bids, and successful
bidder, by major items. This may highlight supplier bid patterns and possible collusion.

8. Continuously measure and manage supplier performance

- Collection and analysis of performance data are the basis for determining how good a job
the supplier is doing. This information also allows for intelligent decisions about sources
for rebuys and useful feedback to current suppliers about areas of improvement.
Normally, the performance of the supplier is assessed regularly to reveal cycle time
reductions, opportunities for process improvements, cost reduction, and quality and
service improvements. Regular performance assessment is a catalyst for continuous
improvement
- Key Supplier Performance Indicators. Direct measures quantify supplier performance at
the time work is completed. Examples are on-time delivery, number of rejects, increase in
sales after a marketing campaign, and cycle time to develop a specific
product/service/technology in a development stage. Automation of real-time metrics
such as quality, quantity, price, and on-time delivery measures and careful selection of
 more time-consuming data collection activities help to reduce the time spent measuring
results.
- The supplier scorecard may include a summary statement of the supplier’s cost, quality,
and timeliness performance and a compilation of satisfaction surveys, real-time metrics,
variance of invoice amounts to estimates or contract negotiated rates, and other contract
related terms. Most supply professionals tend to separate suppliers into two categories:
new and current. A new supplier is one about which no track record is yet available. This
is a supplier new to the buying organization and in the process of attempting to meet its
obligations under its first contract. The new supplier can be considered probationary and
will normally be watched closely to ascertain whether preselection expectations
warranted awarding the business. For current and longer-term suppliers who have
already proven in the past that their performance meets minimum expectations, at least,
the evaluation of their performance may be more routine.

II. Tendering
2.1 Tendering types
- Open Tendering: This is a procurement method where the tender is open to any
qualifying supplier to submit a bid. The process is transparent, competitive, and designed
to provide equal opportunity to any company that wishes to bid. The bidding is
advertised publicly, and the best bid in terms of price and conformity to the
requirements is usually accepted. Example: A city government issues a public tender for
the construction of a new public library. All interested construction companies can obtain
the tender documents, submit their proposals, and the government will award the
contract to the company that meets the selection criteria and offers the best value.
- Limited Tendering: This is a less competitive process, restricted to pre-selected suppliers.
It's usually used when the requirements are specific and not all vendors are likely to meet
them, or in cases where there is a need for a rapid procurement process. Example: A
government agency responsible for space exploration may need a highly specialized
component for a satellite. They might invite bids from a limited number of suppliers
known to be capable of producing such specialized technology.
+ When a foreign donor provides financing, such as through Official Development
Assistance (ODA), there might be conditions attached to the use of those funds,
including specific procurement processes.
+ For tender packages with highly technical requirements, it may be more practical to
directly appoint a contractor known to have the specialized skills and experience needed.
+ For construction and installation that exceed a certain financial threshold, as mentioned
with the 5 billion Vietnamese Dong (VND), or for the procurement of goods exceeding
100 million VND, specific procurement rules may apply, possibly requiring a more
stringent tendering process.
+ Certain projects, such as those that are confidential or of national security importance,
may require a restricted tendering process to ensure control and security.
+ In emergency situations like natural disasters or war, the standard procurement
processes may be bypassed in favor of immediate direct appointment to address urgent
needs.
An example for these specific conditions could be as follows:
+ A foreign government offers ODA funds to build a bridge, stipulating that companies
from its own country must be included in the tender process.
+ A government's defense department directly appoints a contractor to develop a secure
communications system due to the sensitive nature of the project.
+ After an earthquake, a government might immediately contract with local construction
firms to rebuild critical infrastructure without going through
2.2 Tendering process
1) Identify the Need: This is the first step where the government institution recognizes
a requirement for goods or services to meet a particular objective.
Example: A local government realizes the need for new park benches due to increased
community use of public parks.
2) Financial Approval: Before proceeding, the need must be justified, and funding must be
allocated for the procurement.
Example: The local government's finance department approves a budget for purchasing the park
benches.
3) Develop Specification: Detailed specifications for the goods or services needed are
prepared, outlining features, standards, and performance criteria.
Example: Specifications for the park benches are drawn up, including materials, dimensions, and
resistance to weather.
4) Identify Suppliers & Collect Tender Document: Potential suppliers capable of fulfilling the
requirement are identified, and the necessary tender documentation is prepared.
Example: A list of suppliers specializing in outdoor furniture is compiled and tender documents
outlining the submission process are prepared.
5) Invite Tenders: A formal invitation to tender (ITT) is issued to potential suppliers, inviting
them to submit bids.
Example: An ITT is published on the government procurement website, inviting suppliers to
submit bids for the park bench supply contract.
6) Receive Tenders: Submitted tenders are received and registered for evaluation.
Example: Bids from several companies are received by the deadline and logged by the
procurement team.
7) Check and Evaluate Tenders: Each tender is checked to ensure compliance with the
tender requirements, and evaluated against the selection criteria.
Example: Each bid is reviewed to ensure it meets the park bench specifications and is evaluated
based on price, quality, and delivery time.
8) Award Contract: The best-value tender is selected, and the contract is awarded to the
chosen supplier.
Example: The contract for supplying park benches is awarded to the company that offered the
best combination of price, quality, and timely delivery.
9) Manage Contract: Once the contract is awarded, the relationship with the supplier is
managed to ensure compliance with the contract terms.
Example: The procurement team oversees the delivery and installation of the park benches,
ensuring it's done as per the contract.
10) Vendor Rating: After completion of the contract, the supplier's performance is evaluated
and rated for future reference.
Example: The supplier's performance is assessed based on criteria such as product quality,
adherence to timelines, and communication effectiveness. The rating is recorded for future
procurement activities
CHAP 2:
1. What is ROA?
ROA stands for "Return on Assets" and is a financial metric used to measure the profitability of a
company in relation to its total assets. It is calculated by dividing a company’s annual earnings by
its total assets. ROA gives investors and analysts an idea of how effectively a company is
converting the money it has to invest in assets into net income.
 2. Explain why ROA increases when inventory cost decreases?
- ROA increases when inventory costs decrease because this often leads to an
improvement in both components that determine ROA: investment turnover and profit
margin.
+ Investment Turnover (Sales/Total Asset): When inventory costs decrease, it can be a result
of better inventory management or a reduction in the amount of money tied up in
inventory. This reduction in inventory value effectively lowers the total assets if everything
else remains constant. Since sales remain constant and the total assets decrease due to
lower inventory, the investment turnover ratio increases.
+ Profit Margin (Profit/Sale): Lower inventory costs can also lead to a higher profit margin if
sales prices are maintained because the cost of goods sold (COGS) is a major part of the
expenses deducted from sales to calculate profit. With a decrease in inventory costs,
COGS decreases, leading to higher profits assuming sales remain constant. This
increased profit, when divided by sales, results in a higher profit margin.
Combining these two effects, if inventory cost decreases (leading to a reduction in total assets
and an increase in profit margin), the overall ROA (Investment Turnover * Profit Margin) would
increase, all else being equal. This is because you're generating more profit from each unit of
asset owned by the company.

3. How many type of purchases the company need to be purchased and listed? Give
an example for each type.
 1. Raw Materials: These are the basic materials that are used to produce goods. For
example, a furniture manufacturer might purchase lumber as a raw material to
create wooden furniture.
2. Semifinished Products and Components: These are items that have begun the
manufacturing process but are not yet complete. An example would be
computer chips bought by a computer assembly company to be used in the
manufacturing of their computers.
3. Finished Products: These are goods that are ready for sale to the end consumer.
For instance, a retail store might purchase finished smartphones from a
manufacturer to sell to its customers.
4. Maintenance, Repair, and Operating Supplies (MRO): These are items used in the
production process but are not part of the final product. An example would be
lubricants and cleaning supplies for machinery maintenance in a manufacturing
plant.
5. Production Support Items: These are items that support the production process
but are not raw materials or capital equipment. Gloves for workers on the
production line could be an example.
6. Services: This refers to intangible products that companies purchase to support
their operations. An example of services is a company hiring an accounting firm
to manage its finances.
7. Capital Equipment: This type of purchase refers to long-term assets that
businesses use to produce goods and services. An example would be a
construction company purchasing a new crane.
8. Transportation and Third-party Logistics Providers: These services are used to
move goods from one location to another. An example would be a company
hiring a shipping company to transport products to their customers or to the
marketplace.

4. Case 2.1 - Spartan heat exchangers inc

The case describes the situation at Spartan Heat Exchangers Inc. (Spartan), a company in
Springfield, Missouri, that designs and manufactures specialized industrial heat transfer
equipment for various industries. Rick Coyne, the materials manager, is tasked with adapting the
materials department to support a new business strategy aimed at standardization of product
lines in the face of increased competition and changing customer expectations.
Company Background: Spartan is a reputable company with $25 million in sales, operating in a
125,000-square-foot plant. It is owned by Krimmer Industries and is recognized for its customized
heat transfer products internationally.
Current Business Strategy: Historically, Spartan prided itself on offering customized products
and was one of the few companies in the industry to do so. However, this approach has become
less sustainable as customers are now prioritizing cost and faster delivery over customization.
Manufacturing Process: Spartan has a job shop operation that is highly customized, moving jobs
from one work center to another, accompanied by a bill of material and engineering drawings.
This process involves several complex steps, from fitting liner tubes to welding and assembling
the final product.
Materials Department: The department is responsible for sourcing raw materials and managing
inventory, which is currently valued at $3.5 million, with raw materials constituting about 40% of
it. They work with more than 350 vendors, but there are issues with material shortages, stockouts,
and inventory discrepancies.
New Competition: Spartan faces stiff competition from Korean firms, which compete on price,
and European firms, which compete on delivery lead times and price through standardized
product lines and assembly-line manufacturing processes.
New Business Strategy: To address the competition, Spartan's senior management has decided
to shift to standardizing product lines, reducing delivery lead times from 14 to 6 weeks, and
significantly cutting production costs. Customized designs will no longer be offered.
Challenges for the Materials Department: Rick's department must adjust to the new strategy
by reducing customer lead times, increasing inventory turns to 20 times, eliminating raw
material stockouts, and cutting costs for purchased goods by 10% over the next 12 months.
Rick Coyne supports the new direction and sees it as an opportunity for major improvements. He
recognizes the need to develop a detailed plan to present to Max Brisco, the vice president of
manufacturing, aligning the materials department with the new corporate strategy within the
given timeframe.

Recommendations:
Supplier Consolidation and Partnership:
Reduce the number of suppliers to streamline the procurement process.
Foster closer relationships with key suppliers to improve lead times and negotiate better prices.
Engage in long-term contracts with reliable suppliers to ensure consistent supply and cost
savings.
Inventory Management Optimization:
Implement an inventory management system like Just-In-Time (JIT) to reduce raw material
stocks and free up capital.
Adopt tools for better forecasting and demand planning to minimize stockouts and excess
inventory.
Improve inventory turnover by regularly reviewing stock levels and lead times, and adjusting
them to new production schedules.
Standardization of Products:
Work closely with the design and engineering teams to identify common components across
different products to increase the possibility of bulk purchasing.
Standardize parts where possible to reduce the complexity and variety of inventory needed.
Process Improvement:
Map out current processes and identify bottlenecks and waste.
Adopt lean manufacturing principles to improve efficiency and reduce lead times.
Standardize work processes to reduce variability and improve predictability.
Technology and Systems Upgrade:
Invest in an Enterprise Resource Planning (ERP) system to better manage the flow of information
and materials.
Use Material Requirements Planning (MRP) systems to optimize the production and inventory
control.
Staff Training and Development:
Train staff on new processes, systems, and tools to ensure they are utilized effectively.
Develop a culture of continuous improvement and accountability among employees.
Quality Control and Compliance:
Implement stricter controls to ensure materials are used as per the established bills of material.
Regularly audit inventory to keep records accurate and up-to-date.
Performance Measurement and Vendor Rating:
Establish key performance indicators (KPIs) to measure the success of the materials department
in meeting the new business objectives.
Develop a vendor rating system to assess and choose suppliers based on performance, quality,
delivery, and cost.
5. Case 2.2 - Sabor Inc
The case study centers around Sabor Inc., a company based in Cleveland, Ohio, that produces air-
conditioning and heating units, including air filtration systems. Sabor has experienced significant
growth in its air filtration sales due to the use of a new high-tech raw material called marconil,
which is integral to their filtration technology. Ray Soles, the vice president of supply chain
management at Sabor, is faced with decisions regarding the supply of marconil amid concerns
about potential shortages and pressure from suppliers to sign long-term contracts.

Key Points of the Case:

Sabor Inc.'s Business: Sabor has a strong presence in the North American market for air-
conditioning and heating systems, with sales totaling $800 million last year.
Importance of Marconil: The company's air filtration sales, which used to be a minor part of the
business, surged with the introduction of marconil. This material has unique properties ideal for
air filtration, making Sabor’s filters increasingly popular, especially for customers with air quality
concerns.
Sales Growth and Marketing Forecasting: Sales of marconil filters have consistently exceeded
marketing's forecasts by a large margin over the past three years. Despite this, the marketing
department expects sales growth to stabilize at 20 percent annually over the next three years.
Marconil Suppliers: Sabor initially sourced marconil from Bilt Chemical, later adding Warton Inc.
and G. K. Specialties to diversify suppliers. All three suppliers offer marconil at the same price but
have recently proposed different terms for long-term contracts.
Long-term Contract Proposals: The suppliers have proposed varying long-term contracts to
guarantee supply, each with different terms and price escalations. Bilt Chemical's proposal is for a
five-year commitment with increasing volumes and quarterly price escalations. Warton Inc. offers
a two-year contract with fixed volumes and similar price provisions. G. K. Specialties suggests a
flexible agreement pegged to a percentage of Sabor’s annual requirements with a higher
starting price and semiannual price adjustments.
Supply Strategy and Market Rumors: Ray is hesitant to deviate from Sabor’s current practice of
shorter-term contracts. He is aware of the potential development of a cheaper marconil
substitute in the future and suspects that suppliers are trying to lock in long-term commitments
before this happens.
Urgency: With a warning that marconil supply could not be guaranteed after August 1 without a
commitment, Ray faces an urgent need to make a decision. Bilt Chemical has requested a
meeting to discuss their proposal further.
Ray Soles must assess the risk of marconil shortages against the flexibility of current
procurement practices, the potential for future cost savings with a new substitute, and the
company's need for a reliable marconil supply to support the growing air filtration sales.

Recommendation
Risk Assessment: Conduct a thorough risk assessment of the marconil supply chain to
understand the potential impact of a shortage. This should include the likelihood of a shortage
occurring, the potential duration of the shortage, and the impact on Sabor Inc.'s operations and
profitability.
Market Analysis: Perform a market analysis to understand the dynamics affecting marconil
supply and demand. This may include research into the production process, the stability of raw
materials required for marconil, and the exploration of rumors regarding a lower-cost substitute.
Supplier Negotiations: Engage in discussions with current suppliers to better understand their
capacity constraints and the reasons behind their push for long-term contracts. Ray should
negotiate for the best possible terms, including price protections and clauses that allow for
adjustments should a cheaper alternative become available.
Diversification of Supply Sources: Continue efforts to diversify suppliers beyond the current three
to mitigate risks associated with reliance on a small supplier base. This may involve looking for
additional marconil producers or exploring global options.
Strategic Sourcing: Evaluate the feasibility of signing a mixture of contract lengths. For example,
a longer-term contract with one supplier for a portion of the supply to secure pricing and
availability, combined with shorter-term contracts with others to maintain flexibility.
Contingency Planning: Develop a contingency plan to handle potential shortages, which could
include stockpiling marconil, identifying alternative materials, or adjusting production schedules
to prioritize products with the highest margins or strategic importance.
Investment in Innovation: Invest in research and development to either develop an alternative to
marconil or improve the existing marconil filter technology to be less dependent on the material.
Contract Flexibility: For any long-term contract signed, ensure there are clauses that allow for re-
negotiation or termination if certain conditions are met, such as the introduction of a lower-cost
substitute or significant changes in the market demand.
Financial Analysis: Conduct a cost-benefit analysis of the different contract proposals in the
context of current and projected market conditions. This should include modeling different
scenarios to understand the financial impact of each option.
Stakeholder Consultation: Before finalizing any decision, consult with key stakeholders, including
the finance, sales, and marketing departments, to ensure that the procurement strategy aligns
with the company's broader goals and market expectations.
Legal Review: Have all contract proposals reviewed by a legal team to ensure that Sabor Inc. is
protected and that the contracts are in compliance with all regulatory requirements.
Ray Soles must balance the need for securing a reliable supply of marconil with the flexibility to
adapt to market changes and potential new innovations. Any long-term commitments should be
approached with caution, given the possibility of a market shift with the introduction of a lower-
cost alternative.
CHAP 3:
1. Material requirement planning (MRP). Explain each component and give an example
- Master production schedule: Specifies which end items or finished products a firm is to
produce, how many are needed, and when they are needed. The master production
schedule works within the constraints of the aggregate production plan but produces a
more specific schedule by individual products. An MPS is usually expressed in days or
weeks and may extend over several months to cover the complete manufacture of the
items contained in the MPS. The master production schedule drives the MRP process.
The schedule of finished products provided by the master schedule is needed before the
MRP system can do its job of generating production schedules for component items.

- Once the MPS is set, the MRP system accesses the product structure file to
determine which component items need to be scheduled. The product structure file
contains a bill of material (BOM) for every item produced. The bill of material for a
product lists the items that go into the product, includes a brief description of each item,
and specifies when and in what quantity each item is needed in the assembly process.
Several specialized bills of material have been designed to simplify information
requirements, clarify relationships, and reduce computer processing time. They include
phantom bills, K-bills, and modular bills.

- The item master file, or inventory file, contains an extensive amount of information on
every item that is produced, ordered, or inventoried in the system. It includes such data
as on-hand quantities, on-order quantities, lot sizes, safety stock, lead time, and past
usage figures. It provides a detailed description of the item, specifies the inventory policy,
updates the physical inventory count, summarizes the item’s year-to-date or month-to-
date usage, and provides internal codes to link this file with other related information in
the MRP database. The item master file is updated whenever items are withdrawn from
or added to inventory or whenever an order is released, revised, or completed. Accuracy
of inventory transactions is essential to MRP’s ability to keep inventory levels at a
minimum.

- The planned order releases are the output of the MRP system that specifies the timing
and quantity of items to be produced or purchased. This is one of the key outputs of the
MRP process and serves as the operational plan for purchasing and manufacturing
activities. They include work orders, purchase orders, and rescheduling notices:
+ Work Orders: These are internal documents issued to initiate the production
process. A work order will typically specify what product to produce, the quantity
required, the timeline for completion, and the location where production should
occur. It acts as an authorization for the manufacturing department to produce a
certain number of units of a particular item. The work order is based on the
master production schedule and the product structure file, which details the
components and subassemblies required to produce the finished product.
 + Purchase Orders: These are formal requests sent to vendors to supply a specified
quantity of materials by a certain date. Purchase orders are generated when the
MRP system determines that additional raw materials or components are
required to meet the production schedule but are not available in the current
inventory. The timing and quantity of purchase orders are based on lead times,
existing inventory levels, and future requirements as determined by the MRP
system, using information from the item master file, which includes data on
every item or assembly required for production.
+ Rescheduling Notices: These are communications that adjust the timing of
previously planned orders. They can either push back or bring forward the
production or delivery of items based on changes in the master production
schedule, inventory levels, or production capacity. Rescheduling notices can
apply to both work orders and purchase orders. They are critical for responding to
demand changes, avoiding overstocking or stockouts, and ensuring optimal
inventory levels are maintained.

2. Review EOQ, ROP, Quantity discount exercise

3. Why make? Why buy
- Reasons for Make instead of Buy: There are many reasons that may lead an
organization to produce in-house rather than purchase. Competitive, political, social, or
environmental reasons may force an organization to make even when it might have
preferred to buy. When a competitor acquires ownership of a key source of raw material,
it may force similar action. Many countries insist that a certain amount of processing of
raw materials be done within national boundaries. A company located in a high-
unemployment area may decide to make certain items to help alleviate this situation. A
company may have to further process certain by-products to make them
environmentally acceptable. In each of these instances, cost may not be the overriding
concern.

1. The quantities are too small and/or no supplier is interested or available in providing
the goods.
2. Quality requirements may be so exacting or so unusual as to require special
processing methods that suppliers cannot be expected to provide.
3. Greater assurance of supply or a closer coordination of supply with the demand.
4. To preserve technological secrets.
5. To obtain a lower cost.
6. To take advantage of or avoid idle equipment and/or labor.
7. To ensure steady running of the corporation’s own facilities, leaving suppliers to bear
the burden of fluctuations in demand.
8. To avoid sole-source dependency.
9. To reduce risk.
10. The purchase option is too expensive.
11. The distance from the closest available supplier is too great.
12. A significant customer required it.
13. Future market potential for the product or service is expanding rapidly.
14. Forecasts of future shortages in the market or rising prices.
15. Management takes pride in size.

Reasons for Buying Outside

There are many reasons why an organization may prefer to purchase goods or services
outside. Competitive, political, social, or environmental reasons may force an organization to
buy instead of make. Government contracts may require a specified percentage of the
organization’s spend to go to minority suppliers. A process may require a large amount
of water that is scarce locally, or create difficult disposal issues in a particular location.
Frequently, certain suppliers have built such a reputation for themselves that they have
been able to build a real preference for their component as part of the finished product.
Normally, these are branded items that can be used to make the total piece of equipment more
acceptable to the final user. The manufacturers of transportation construction or mining
equipment frequently let the customer specify the power plant brand and see this option as
advantageous in selling their equipment.

1. The organization may lack managerial or technical expertise in the production of the
items or services in question.
2. Lack of production capacity. This may affect relations with other suppliers or
customers as well.
3. To reduce risk.
4. The challenges of maintaining long-term technological and economic viability for a
noncore activity.
5. A decision to make, once made, is often difficult to reverse. Union pressures and
management inertia combine to preserve the status quo. Thus, buying outside is seen
as providing greater flexibility.
6. To assure cost accuracy.
7. There are more options in potential sources and substitute items.
8. There may not be sufficient volume to justify in-house production.
9. Future forecasts show great demand or technological uncertainty, and the firm is
unable or unwilling to undertake the risk of manufacture.
10. The availability of a highly capable supplier nearby.
11. The desire to stay lean.
12. Buying outside may open up markets for the firm’s products or services.
13. The ability to bring a product or service to market faster.
14. A significant customer may demand it.
15. Superior supply management expertise.

CHAP 4:
Based on the acquisition process chart, what is the importance of need identification and
specification (advantages and disadvantages)
- Need Identification
Advantages:
+ Maximizes Value: Identifying needs early maximizes the opportunity to create value by
ensuring that procurement aligns with the strategic goals of the organization.
+ Cost Savings: Early need identification can lead to more cost-effective procurement, as
there is sufficient time to explore all purchasing options, including bulk buying or
negotiating better terms.
+ Quality Control: It allows for a thorough assessment of the quality requirements, ensuring
that the procurement meets the necessary standards.
+ Risk Management: Early identification helps in predicting and mitigating risks associated
with supply chain disruptions or vendor reliability.
Disadvantages:
+ Complexity in Defining Needs: It may be difficult to accurately identify needs, especially
for complex or new products.
+ Time-Consuming: The process of identifying and agreeing upon needs can be time-
consuming, which may delay the procurement process.

Specification/Description
Advantages:
+ Clarity: Clear specifications help suppliers understand exactly what is required, reducing
the risk of receiving incorrect or subpar goods or services.
+ Competitive Bidding: Well-defined specifications allow for more accurate and
competitive bidding from suppliers.
 + Performance Measurement: Specifications provide a basis for measuring supplier
performance and compliance.

Disadvantages:
+ Inflexibility: Overly specific requirements can limit the number of potential suppliers and
may prevent the consideration of alternative solutions that could offer better value or
innovation.
+ Resource Intensive: Developing detailed specifications can require significant time and
resources, particularly if specialist knowledge is required.
+
Counter-Sample (Mẫu Đối Chứng):
A counter-sample in the procurement context would be the outcome or experience of a
procurement process where need identification and specification were either poorly executed or
omitted. For instance, a company might proceed with purchasing an expensive piece of
equipment without properly identifying the need and creating detailed specifications. The result
could be an equipment purchase that is not fully utilized or does not meet the actual operational
requirements, leading to a waste of resources and a decrease in value.

CHAP 5: QUALITY
1. Definition of quality
Quality, in the simplest sense, refers to the ability of the supplier to provide goods and services in
conformance with specifications. Quality also may refer to whether the item performs in actual
use to the expectations of the original requisitioner, regardless of conformance with
specifications. Thus, it is often said an item is “no good” or of “bad quality” when it fails in use,
even though the original requisition or specification may be at fault. The ideal, of course, is
achieved when all inputs acquired pass this use test satisfactorily

2. List down and explain 5 dimensions of quality

All dimensions of quality:
1. Performance. The primary function of the product or service, is how well a car handles or its gas
mileage
2. Features: “extra” items added to basic features: the bells and whistles.
3. Reliability. The probability of failure within a specified period. the probability that a product will
operate properly within an expected time frame. TV will work without repair for about seven
years
4. Durability. The life expectancy. L.L.Bean boots may last a lifetime
5. Conformance. The meeting of specifications.
6. Serviceability. The maintainability and ease of fixing. Ease of getting repairs, speed of repairs,
courtesy and competence of repair person
7. Aesthetics. The look, smell, feel, and sound.
8. Perceived quality. The image in the eyes of the customer. subjective perceptions based on
brand name, advertising
9. Procurability”—the short- and long-term availability on the market at reasonable prices and
subject to continuing improvement.
10. Safety: assurance that customer will not suffer injury or harm from a product; an essential
consideration for automobiles

3. Quality planning process

1) Who are the customers: Identification of customer is very vital for understanding the need and
expectation of cutomer. There are two types of customers- External customer and Internal
customer.

● External Customer: These are the one who are outside the organization- Ultimate user,
Purchaser, Supplier, Retailer etc.
 ● Internal Cutomer: The one inside the organization- It requires some analysis to find out
the customer inside the organization. Satisfying the needs of internal customer can
majorly affect the external customers.
● Identify Quality Objectives: In this step, you define the quality goals and objectives for
your project or product. These objectives should be specific, measurable, achievable,
relevant, and time-bound (SMART).
● Determine Quality Standards: Establish the quality standards and specifications that
need to be met. These standards could be industry-specific or based on customer
requirements.
● Develop Quality Plans: Create a detailed plan outlining how you'll achieve the defined
quality objectives and standards. This plan should include tasks, responsibilities,
timelines, and resources.
● Risk Assessment: Identify potential risks that could affect the quality of your project or
product. Develop strategies to mitigate these risks to ensure quality is maintained.

2)What are the Customer's needs: It is a difficult task. Organization can be aware by customer's
survey, market research, tracking customer's complains and identify issue, communication with
customers. While identifying the need of customers, their safety must be keep in mind and
product should be user friendly.

3) Develop Product: After identifying the customer and understanding their needs, it's time to
design the final product that meet the customer requirement. Organization must not
compromise with quality of the product at any cost. In the process of product development, need
of customers should be group together for best design and product. Organization should
highlight the features and specification of the product. Product features should be optimal,
measureable and understandable.

4) Develop System and Process: Developing a process is the set of activities for defining the
specific means to be used by operating person for meeting product quality goals. Understanding
of process by the customer is very important. Participation between the product and process
development team will lead to many alternative of design of the product.

5) Deploy the plan to operational level: Transeferring the plan to operations is vital for it's
execution. At the time of transferring the plan goals, facilities, procedures, instructions, cautions
etc should be mention for it's successful execution. This should be accompanied by a formal
document of transfer of responsibility.