Purchasing & Supply

Management

Dr. Usman Khalid

Learning Objectives
 By the end of this lecture, you will be able to
 Understand the factors driving modern supply chains
 Appreciate importance of purchasing in today’s competitive business
world
 Appreciate strategic role of purchasing and supply/supplier management

Dr. Usman Khalid 2

Activity
 Take 5 minutes and enlist the factors driving modern supply chains
e.g.
 Advancements in communication technologies making possible supply
chain actors in different geographical regions to exchange information
at low cost

Dr. Usman Khalid 3

Factors Driving SCM
 Low cost and wide availability of information
 More closely linked members of a supply chain
 Higher levels of competition in domestic and international
markets
 Requires greater responsiveness, agility and flexibility
 Customer expectations and requirements
 Constantly changing and more demanding

Dr. Usman Khalid 4

Activity
 Why purchasing is important?

 Because of cutthroat competition at the front end of supply chains,

firms have learned that it is far easier to gain competitive advantage
by efficiently managing and building competencies at the back
end/supply side.

Dr. Usman Khalid 5

Purchasing
 A functional group (i.e., a formal entity on the organization chart) as
well as a functional activity (i.e., buying goods and services)

Dr. Usman Khalid 6

Increasing Value and Savings
 Suppliers have substantial impact on a firm’s total cost
 Many product features originate from suppliers
 In manufacturing, purchased content is more than 55% of revenues
 Avoiding costs through early involvement in product design stage
 Include suppliers early in product design process to take advantage of
their expertise
 Early supplier involvement can lead to an average of 20%
improvement on material costs, material quality, and product
development times

Dr. Usman Khalid 7

Traditional vs Newer Approach of Procurement
 Traditional approach is to bargain hard for price reductions

 Newer approach is to build long term trustworthy relationships with

suppliers for the benefit of both buyers and suppliers
 Joint cost reduction with suppliers
 Suppliers can contribute innovative ideas

Dr. Usman Khalid 8

Activity
 How you see contemporary approach of procurement different from
more traditional perspective. Enlist the differences.

Dr. Usman Khalid 10

Supply Management
 A strategic approach to planning for and acquiring the organization’s
current and future needs through effectively managing the supply
base, utilizing a process orientation in conjunction with cross-
functional teams to achieve the organizational mission

 Sometimes also referred to as procurement

Dr. Usman Khalid 11

Defining Supply Management

Dr. Usman Khalid 12

Supply Management
 Strategic orientation
 Must align with overall mission and strategies of the firm
 Move beyond maintaining arm’s length relationships with
suppliers
 Process driven approach
 Identifying, evaluating, selecting, managing, and developing
suppliers to improve performance

Dr. Usman Khalid 13

Supply Management
 Managing the supply base
 Work directly with suppliers to provide world-class
performance
 Select competitive suppliers
 Identify new suppliers with high potential and develop closer
relationships
 Improve performance of existing suppliers

Dr. Usman Khalid 14

Supply Management
 Cross-functional
 It involves purchasing, engineering, supplier quality
assurance, the supplier, and other related functions working
together as one team
 Collaborative instead of adversarial relationships
 Suppliers seen as an extension of the buying company

Dr. Usman Khalid 15

Activity
 What are the roles and responsibilities of purchasing department in
an organization?

Dr. Usman Khalid 16

Strategic Supply Management Roles &
Responsibilities
 Spend analysis
 The process of collecting historical data by commodity, relative to
demand from lines of business, with the exception of personnel expenses
and other corporate spend
 Requires one to associate all spend to a UNIT of consumption and a RATE
of consumption.
 Demand management and specifications
 Is the process of using UNIT and RATE consumption levels to forecast and
estimate future consumption in an internal functional customer, and
 Providing guidance and input on how to optimize usage and educating the
user on the tradeoffs.

Dr. Usman Khalid 17

Strategic Supply Management Roles &
Responsibilities
 Category Management
 Is the process of developing insights into groups of related
products/services, comparing these to external industry intelligence,
evaluating supply base capabilities and operational risks, and developing a
strategy to align internal requirements with external supply market
conditions.
 Output of category management is
 Plan for negotiating a contract
A supplier scorecard use to monitor the relationships
A sourcing workplan developed for communication of the strategy to the
internal user

Dr. Usman Khalid 18

Strategic Supply Management Roles &
Responsibilities
 Contract management
 To determine how to award contracts, competitive bidding or negotiation
or a combination of both?
 Cost management
 Once the contract has been awarded, purchasing shall continuously work
for cost improvements
 It involves
 Unbundling the price paid
 Understanding the total cost of ownership over life cycle of a product
 Determine if the product/service is priced competitively in marketplace

Dr. Usman Khalid 19

Strategic Supply Management Process

Dr. Usman Khalid 20

The Purchasing Process
 Firms may gain competitive advantage by managing these activities
better than their competitors

Dr. Usman Khalid 21

Purchasing: Product/Service Description
 It is important to specify what is required. Otherwise???

 By market grade or industry standard (for standard items)

 Well-understood specifications for standard items
 Common agreement on what terms mean
 By brand
 Proprietary or unique products
 Brand provides perceived advantage to user

Dr. Usman Khalid 22

Activity
 When do firms need to provide detailed specifications for
the required products/services?

Dr. Usman Khalid 23

Purchasing: Product/Service Description
 For complex items firms might need to provide detailed
specifications of
 Materials used (e.g., when purchasing laptops/PCs) OR
 Manufacturing or service steps required (for purchasing services) OR
 Physical dimensions

Dr. Usman Khalid 24

Purchasing: Product/Service Description
 By performance characteristics
 Focus on customer’s desired outcomes and not on the product
configuration
 Assumption is that the supplier will know best how to meet the demand
A company purchasing hundreds of PCs from Dell Computer might demand: (1)
24-hour support available by computer or phone and (2) 48-hour turn-around
time on defective units

 Firms often develop prototypes or samples to be shared with suppliers

 Prototypes are limited to physical products, what do you think?

Dr. Usman Khalid 25

Maverick Spending
 Internal user selects different supplier than supply management has
approved
 May be acceptable when there is small chance of risk
 Loss of opportunity to control cost and/or leverage purchase
volume
 Exposes firm to greater risk

Dr. Usman Khalid 26

Activity
 Interwood (a national level furniture manufacture and retail chain)
works with a centralized purchasing system, will you allow its retail
stores to get printing papers on their own?

Dr. Usman Khalid 27

Supplier Identification and Selection
 Two methods commonly used for selecting a supplier
1. Bidding
2. Negotiating

 Supplier selection process is initiated when a request for quotation is

send by purchasing manager to supplier

Dr. Usman Khalid 28

Request for Quotation (RFQ)
 If requisition requests an expensive item with no existing supplier,
then
 Purchasing may obtain bids or quotes from potential suppliers
 Consists of necessary information to allow supplier to accurately
respond
 Includes due date of bid submission
 Normal practice is to request at least three quotations/bids

Dr. Usman Khalid 29

When to Use Competitive Bidding
 Volume is sufficiently high
 Specifications or requirements are clear to supplier
 Marketplace is competitive (i.e., adequate number of suppliers)
 Buyers solicit bids only from technically qualified suppliers who want
contract
 Adequate time is available for suppliers to evaluate request for
quotation (RFQ)
 Buyer does not have preferred supplier for the item

Dr. Usman Khalid 30

Request for Proposal (RFP)
 If the purchase contract requires negotiation between the buyer
and seller (rather than the competitive bidding), then
 Purchasing department sends RFP to a supplier
 RFP is relatively detailed document, used when a number of other
issues need to addressed besides price

Dr. Usman Khalid 31

When to Use Negotiation
 Any criteria for competitive bidding are missing
 Product is technically complex with vague specifications
 Purchase requires agreement on wide range of performance factors
other than price
 Buyer requires early supplier involvement
 Supplier cannot determine risks and costs before contract is awarded
 Supplier requires substantial lead time to develop and produce
requested item(s)

Dr. Usman Khalid 32

Reverse Auctions (e-auctions)
 Reverse auctions (or e-auctions)
 Buyer identifies potential qualified suppliers to bid to get the
business on a specific website
 Lowest bid will often occur as suppliers see that other suppliers are
bidding

Dr. Usman Khalid 33

Typical Purchase Order Form

Dr. Usman Khalid 34

Homework
 Define various stages of public sector procurement life cycle.
 Differentiate between different methods of public sector procurement
 Differentiate between direct contracting and negotiated tendering

Dr. Usman Khalid 35

Thank You

37
Dr. Usman Khalid