Chapter 2

PURCHASING MANAGEMENT

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 The Role of Supply Management in an
Organization, Part 1
The primary goals of purchasing are:
• Ensure uninterrupted flows of raw materials at the lowest total cost,
• Improve quality of the finished goods produced, and
• Maximize customer satisfaction.
Purchasing contributes to these objectives by:
• Actively seeking better materials and reliable suppliers,
• Working closely with and exploiting the expertise of strategic suppliers to
improve the quality of raw materials, and
• Involving suppliers and purchasing personnel in product design and
development efforts.
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 The Role of Supply Management in an
Organization, Part 2
The Financial Significance of Supply Management
Profit-Leverage Effect: Measures the impact of a change in purchase spend on a firm’s
profits before taxes (assuming gross sales and other expenses remain unchanged)

Return on Assets (ROA) Effect (also known as Return on Investment): Indicates how
efficiently management is using its total assets to generate profits. A high ROA suggests
that management is capable of generating large profits with relatively small investments.

Inventory Turnover Effect: Increased inventory turnover indicates optimal utilization of

space and inventory levels, increased sales, and avoidance of inventory obsolescence.

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 The Role of Supply Management in an
Organization, Part 3
The Financial Significance of Supply Management
Profit-Leverage Effect

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Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4
 Sourcing Decisions: The Make-or-Buy
Decision, Part 1
Outsourcing – Buying materials and components from suppliers instead of
making them in-house. The trend has moved toward outsourcing.

Backward vertical integration – Acquiring sources of supply

Forward vertical integration – Acquiring customers

The Make-or-Buy decision is a strategic decision

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 Sourcing Decisions: The Make-or-Buy
Decision, Part 2
Reasons for Buying or Outsourcing:
• Cost advantage – Especially for components that are nonvital to the
organization’s operations, suppliers may have economies of scale
• Insufficient capacity – A firm may be at or near capacity and subcontracting
from a supplier may make better sense
• Lack of expertise – Firm may not have the necessary technology and
expertise
• Quality – Suppliers have better technology, process, skilled labor, and the
advantage of economy of scale

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Sourcing Decisions: The Make-or-Buy
Decision, Part 3
Reasons for Making:
• Protect proprietary technology
• No competent supplier
• Better quality control
• Use existing idle capacity
• Control of lead time, transportation, and warehousing costs
• Lower cost

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Sourcing Decisions: The Make-or-Buy
Decision, Part 6
The Make-or-Buy Break-Even Analysis

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 Roles of Supply Base
Supply Base – list of suppliers a firm uses to acquire its materials, services,
supplies, and equipment
Emphasis on long-term strategic supplier alliances, consolidating volume into
one or a few suppliers, resulting in a smaller supply base
Preferred suppliers provide:
• Product and process technology & expertise to support buyer’s operations
• Information on latest trends in materials, processes, or designs
• Information on the supply market
• Capacity for meeting unexpected demand

Cost savings
Wisnerdue to economies
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Principles of Supply Chain scale A Balanced Approach, 6 th
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 Supplier Selection, Part 1
The process of selecting suppliers, is complex and should be based on
multiple criteria:

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Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10
 Supplier Selection, Part 2
Total cost of ownership concept

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 How Many Suppliers to Use

Single sourcing – a risky proposition. Current trends favor a few sources.

Reasons Favoring a Reasons Favoring Two or

Single Supplier More Suppliers
 To establish a good relationship  Need capacity
 Less quality variability  Spread risk of supply interruption
 Lower cost  Create competition
 Transportation economies  Information
 Proprietary product or process  Supplier diversity
purchases
 Volume too small to split

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 Global Sourcing, Part 1
Import Broker – Sales agent who performs transactions for a fee that do not take
title to the goods
Import Merchant – Buys and takes title to the goods and resells them to a buyer
Tariff – An official list showing the duties, taxes, or customs imposed by the host
country on imports or exports
Non-tariff barriers – import quotas, licensing agreements, embargoes, laws and
other regulations imposed on imports and exports

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 Global Sourcing, Part 2

Reasons for Global Sourcing –

Opportunity to improve quality, cost, and delivery performance

Potential Challenges –
Requires additional skills and knowledge to deal with international suppliers,
logistics, communication, political environment, and other issues

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 Global Sourcing, Part 3
Issues for Global Purchasers
• United Nations: Contracts for the International Sale of Goods (CISG)

Terms of acceptance cannot be modified

• Incoterms: commonly used term referring to the International Commercial
Terms – uniform rules that simplify international transactions of goods with
respect to shipping costs, risks, and responsibilities of buyer, seller, and
shipper

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 Global Sourcing, Part 4
Countertrade – goods and/or services of domestic firms are exchanged for
goods and/or services of equal value or in combination with currency from foreign
firms
Countertrade can include:
• Barter – complete exchange of goods or services of equal value without the
exchange of currency
• Offset – exchange agreement for industrial goods or services as a
condition of military-related export

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 Global Sourcing, Part 5
Countertrade can include:
• Direct Offset – involves coproduction, or a joint venture and exchange of
related goods or services
• Indirect Offset – involves exchange of goods or services unrelated to the
initial purchase.
• Counterpurchase – the original exporter agrees to sell goods or services
to a foreign importer and simultaneously agrees to buy specific goods or
services from the foreign importer

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 Procurement in Government &
Non-Profit Agencies, Part 1
Public Procurement or Public Purchasing – purchasing and supply function for
government and non-profit sector that is characterized by:
• Competitive bidding – contract is usually awarded to lowest priced responsive
& responsible bidder
• Sealed Bids are used to satisfy the Invitation for Bid (IFB) and are opened in
public display
• Bid Bonds – incentive to fulfill contract
• Bid or Surety Bonds – successful bidder will accept contract
• Performance Bonds – work will be on time and meet specifications
• Payment Bonds – protection against 3rd party liens not fulfilled by bidder

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Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18
 End of Chapter 2

Wisner | Tan | Leong, Principles of Supply Chain Management: A Balanced Approach, 6 th Edition. © 2023 Cengage. All Rights
Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19