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Summary CH15 Purchasing and Supply Management
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- University Of South Africa (Unisa)
A summary of Purchasing and Supply Management
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Chapter 15: Purchasing and Supply Management:The importance of the purchasing and supply function:
The purchasing and supply function should:
– Select suppliers
– Purchase and arrange for the transport of materials to the business
– Decide what prices to accept
– Determine quantity and quality of materials or services
– Expedite and receive materials
– Control warehousing and inventory-holding
– Determine the timing of purchases.
Greatest expenditure for the business:
Purchasing costs are the business’s biggest expense – represent an area where cost savings can
make a vital contribution to the business profits
Stock is held to prevent disruptions when there is interruption in the flow of material to a business
– aim to keep inventory levels low without risking an interruption in the operational process.
Profit-leverage means that purchasing costs constitute a major portion of total cost, and saving on
these costs has greater profit potential than similar increase in sales
Purchasing materials of the right quality and price at the right time can make final products
available in the right quantities at a competitive price at the right time to its customers.
The management task of the purchasing and supply manager:
Purchasing and supply planning:
– Purchasing and supply planning is subject
to overall business planning – should be conducted in consultation with other functional areas of
the business
– Planning takes place at the following levels:
Strategic level: Long-term business needs, and is aimed at safeguarding materials
provision, developing supplier sources and maintaining the competitive position of the
business. Strategic planning elements include: supplier alliances, supplier development,
supply-chain integration, availability forecasting and purchasing and supply policy.
Tactical or middle-management level: Medium-term business needs including budgeting,
the purchasing and supply system and organization, purchasing and supply methods,
negotiation, development of human resources (HR), interface development with other
functions (through cross-functional teams), contracting and employing cost-reduction
techniques.
Operations level: Daily needs the business faces to function efficiently (short-term), and
to ensure smooth operation of the purchasing and supply function. This benefits the
entire business, as well as other functions serviced by the purchasing and supply
function. Tasks that fall under this level include: planning the tasks of expending, keeping
records, maintaining the purchasing and supply system, invoice clearance, handling of
requisitions, enquiries and quotations, and pricing decisions.
– Formulation of objectives is one of the most important planning tasks.
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, Organising the purchasing and supply function: Four main issues need to be addressed in organising the
purchasing and supply function:
i. The place of the purchasing and supply function in the organisational structure
ii. The internal organisation of the purchasing and supply department
iii. Coordination with other functional management areas
iv. Cross-functional teams (organizing the purchasing and supply function according to the supply-
chain management approach).
Place of purchasing and supply function in organizational structure: Place of the purchasing and supply
function in the business is affected by two elements:
1. Centralization - There is one main unit where the purchase and supply function operate or
Decentralization - Having a head office with different units, branches or plants.
2. The hierarchical level of the purchasing and supply function in the organizational structure. This is
determined by the importance of the purchasing and supply function to the business. The
importance of the function is determined by the following:
The value of the purchased materials in relation to the total expenditure of the
business i.e. the greater the purchasing’s share of the total expenditure, the more
important the function is.
The situation in the supplier market. If the supply market is a monopoly (one supplier),
or an oligopoly (few suppliers), negotiation should take place at a high level to negotiate
the best value for the business. Purchasing and supply is important here, and the head of
the function should put forward proposals and operate at a high level in the business.
The size of the business. In larger businesses, the purchasing and supply manager is
placed on the same level as other functional managers (HR, Marketing, Finance etc.). In
smaller businesses, the purchasing and supply function often falls under the financial
manager or marketing manager.
The nature of the materials purchased and the specialized knowledge and skills of
buyers. This determines the status of buyers and the purchasing and supply manager in
the business.
Top management’s perception. The managers perception of the importance of the
purchasing and supply function will determine its status in the organization.
Coordination with other functional management areas: Coordination occurs at three levels:
1. Various purchasing and supply activities must be coordinated internally in the purchasing and
supply function
2. The purchasing environment must be coordinated with purchasing and supply activities
3. The purchasing and supply function must be coordinated with other functional management
areas, as well as the needs of the final consumer.
Cross-functional sourcing teams: Tasks of cross-functional sourcing teams include:
Supplier selection
Negotiating corporate-wide purchasing agreements
Developing cost-reduction strategies
Developing sourcing strategies
Developing suppliers and the evaluation of suppliers’ performance.
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