Unit-2

Purchasing

Topic-1. What is Purchasing.

What is Purchasing?

Purchasing, also known as procurement, is the process of acquiring goods, services, or works from an
external source, often through a tendering or competitive bidding process. It involves identifying,
evaluating, and selecting suppliers, negotiating prices and terms, and ensuring that the purchased
items meet the organization's quality, quantity, and delivery requirements.

Objectives of Purchasing:

The primary objectives of purchasing are:

Cost Savings: To acquire goods and services at the lowest possible cost without compromising
quality.

Quality Assurance: To ensure that the purchased items meet the required quality standards.

Timely Delivery: To ensure that goods and services are delivered on time to meet the organization's
operational needs.

Risk Management: To minimize risks associated with purchasing, such as supply chain disruptions,
price volatility, and supplier insolvency.

Supplier Management: To develop and maintain relationships with suppliers to ensure a stable and
reliable supply chain.

Compliance: To ensure that purchasing activities comply with organizational policies, laws, and
regulations.

Importance of Purchasing:

Cost Control: Purchasing helps organizations control costs by negotiating better prices, reducing
waste, and improving efficiency.

Quality Improvement: Purchasing ensures that goods and services meet the required quality
standards, which improves overall product quality and customer satisfaction.

Supply Chain Efficiency: Purchasing helps streamline the supply chain by identifying and mitigating
risks, improving delivery times, and reducing inventory levels.

Competitive Advantage: Effective purchasing can provide a competitive advantage by securing better
prices, terms, and delivery schedules than competitors.

Risk Management: Purchasing helps organizations manage risks associated with supply chain
disruptions, price volatility, and supplier insolvency.

Innovation: Purchasing can drive innovation by identifying new suppliers, products, and services that
can improve organizational performance.

Sustainability: Purchasing can contribute to sustainability by promoting environmentally friendly and

socially responsible practices throughout the supply chain.
Topic-2. What is Purchasing Planning?

Purchasing planning is the process of determining the organization's purchasing needs and
developing a strategy to acquire the required goods, services, or works. It involves forecasting
demand, identifying potential suppliers, and developing a plan to procure the necessary items at the
right price, quality, and time.

Why is Purchasing Planning Important?

Ensures Availability of Materials: Purchasing planning ensures that the necessary materials are
available when needed, reducing the risk of stockouts and production delays.

Optimizes Inventory Levels: By accurately forecasting demand, purchasing planning helps maintain
optimal inventory levels, reducing waste and minimizing inventory costs.

Improves Quality: Purchasing planning enables organizations to select high-quality suppliers,

ensuring that the purchased items meet the required standards.

Reduces Costs: Purchasing planning helps negotiate better prices, reduces waste, and improves
efficiency, leading to cost savings.

Enhances Supplier Relationships: Purchasing planning fosters strong relationships with suppliers,
ensuring a stable and reliable supply chain.

How is Purchasing Planning Done?

The purchasing planning process typically involves the following steps:

Demand Forecasting: Analyze historical data, market trends, and sales forecasts to predict future
demand.

Material Requirements Planning (MRP): Use MRP software to calculate the required quantities of
materials and components based on demand forecasts.

Supplier Identification: Research and identify potential suppliers that can meet the organization's
quality, price, and delivery requirements.

Supplier Evaluation: Evaluate potential suppliers based on factors such as quality, price, delivery
performance, and financial stability.

Purchasing Strategy Development: Develop a purchasing strategy that outlines the procurement
approach, including the type of contract, pricing, and delivery terms.

Budgeting and Cost Estimation: Establish a budget and estimate costs for the procurement process.

Sourcing and Procurement: Execute the purchasing plan by issuing tenders, negotiating contracts,
and placing orders with selected suppliers.

Performance Monitoring: Monitor supplier performance and adjust the purchasing plan as needed to
ensure that it remains effective and efficient.

Tools and Techniques Used in Purchasing Planning:

ERP Systems: Enterprise resource planning (ERP) systems, such as SAP or Oracle, are used to manage
purchasing planning, inventory management, and supplier relationships.
MRP Software: Material requirements planning (MRP) software, such as Microsoft Dynamics or Infor,
is used to calculate material requirements and optimize inventory levels.

Supplier Relationship Management (SRM) Tools: SRM tools, such as SAP SRM or Oracle Procurement
Cloud, are used to manage supplier relationships, track performance, and negotiate contracts.

Spreadsheets and Analytics: Spreadsheets, such as Microsoft Excel, and analytics tools, such as
Tableau or Power BI, are used to analyze data, forecast demand, and optimize purchasing plans.

Topic-3. Methods of Purchasing-

1. Centralized Purchasing:

In centralized purchasing, a single purchasing department or team is responsible for procuring all
goods and services for the entire organization. This approach is often used in large organizations with
multiple locations or departments.

Advantages:

Better negotiation power with suppliers

Improved consistency in purchasing decisions

Reduced administrative costs

Enhanced control over purchasing activities

Disadvantages:

May not be responsive to local needs

Can be bureaucratic and slow

May not take into account unique requirements of different departments or locations

2. Decentralized Purchasing:

In decentralized purchasing, each department or location is responsible for procuring its own goods
and services. This approach is often used in organizations with diverse operations or multiple
locations.

Advantages:

Faster response to local needs

Better understanding of local requirements

Increased autonomy for departments or locations

Improved customer service

Disadvantages:

May lead to duplication of effort and inefficiencies

Can result in higher costs due to lack of economies of scale

May not take advantage of organizational-wide contracts or agreements

3. Industrial Purchasing:

Industrial purchasing involves the procurement of goods and services for production or
manufacturing purposes. This approach is often used in industries such as manufacturing,
construction, or oil and gas.

Characteristics:

Focus on procurement of raw materials, components, or equipment

Emphasis on quality, reliability, and performance

Often involves complex specifications and technical requirements

May involve long-term contracts or partnerships with suppliers

4. Dynamic Purchasing:

Dynamic purchasing involves the use of technology and data analytics to optimize purchasing
decisions in real-time. This approach is often used in organizations with complex or rapidly changing
supply chains.

Characteristics:

Use of data analytics and machine learning to optimize purchasing decisions

Real-time monitoring of market trends and supplier performance

Ability to respond quickly to changes in demand or supply

Often involves the use of cloud-based procurement platforms or software

Other Methods of Purchasing:

Consolidated Purchasing: Involves combining purchasing requirements from multiple departments or

locations to negotiate better prices with suppliers.

Cooperative Purchasing: Involves collaboration with other organizations or entities to pool

purchasing power and negotiate better prices with suppliers.

E-Procurement: Involves the use of electronic platforms or systems to facilitate purchasing activities,
such as online marketplaces or procurement software.

Strategic Sourcing: Involves a structured approach to purchasing, including market research, supplier
evaluation, and contract negotiation.

Topic-4. Organization of Purchase Management-

Organization of Purchase Management:

The organization of purchase management refers to the structure and arrangement of personnel,
roles, and responsibilities within an organization to manage the purchasing function effectively. The
goal is to ensure that purchasing activities are coordinated, efficient, and aligned with the
organization's overall objectives.

Typical Organizational Structure:

Procurement Department: Responsible for overall procurement strategy, policy, and procedures.
Purchasing Manager: Oversees the purchasing function, including procurement planning, supplier
selection, and contract management.

Buyers: Responsible for purchasing specific categories of goods or services, such as raw materials,
equipment, or services.

Procurement Analysts: Analyze data, identify trends, and provide insights to support purchasing
decisions.

Supply Chain Managers: Oversee the entire supply chain, including logistics, transportation, and
inventory management.

Quality Control: Ensures that purchased goods and services meet quality standards.

Inventory Management: Manages inventory levels, storage, and distribution.

How Purchase Management is Done:

The purchase management process typically involves the following steps:

Procurement Planning: Identify procurement needs, develop procurement plans, and establish
budgets.

Supplier Selection: Identify, evaluate, and select suppliers based on criteria such as price, quality,
delivery, and service.

Contract Management: Negotiate and manage contracts with suppliers, including pricing, terms, and
conditions.

Purchase Order Management: Create, manage, and track purchase orders, including order
placement, tracking, and receipt.

Inventory Management: Manage inventory levels, storage, and distribution to ensure adequate stock
levels and minimize stockouts.

Quality Control: Inspect and test purchased goods and services to ensure they meet quality
standards.

Payment and Invoicing: Process payments to suppliers and manage invoicing and accounting
functions.

Performance Monitoring: Track and analyze supplier performance, including delivery, quality, and
price.

Continuous Improvement: Identify areas for improvement and implement changes to optimize the
purchasing process.

Topic-5. Vendor Evaluation and performance rating-

Vendor evaluation and performance rating are critical components of a successful procurement
process. They help organizations assess the capabilities, performance, and reliability of their vendors,
ensuring that they meet the required standards and expectations.

Why Vendor Evaluation and Performance Rating are Important:

Improved Quality: Evaluating vendors helps ensure that they meet the required quality standards,
reducing the risk of defects, rework, and customer dissatisfaction.
Cost Savings: Performance rating helps identify areas for cost reduction, enabling organizations to
negotiate better prices and terms with vendors.

Risk Management: Vendor evaluation and performance rating help identify potential risks, such as
supply chain disruptions, and enable organizations to develop mitigation strategies.

Compliance: Evaluating vendors ensures compliance with regulatory requirements, industry

standards, and organizational policies.

Strategic Partnerships: Performance rating helps build strong, collaborative relationships with
vendors, leading to strategic partnerships and mutual benefits.

Vendor Evaluation Criteria:

Quality: Product or service quality, including performance, reliability, and durability.

Price: Cost of goods or services, including pricing structures, discounts, and payment terms.

Delivery: Timeliness, reliability, and flexibility of delivery, including lead times and shipping methods.

Service: Level of customer service, including responsiveness, communication, and support.

Innovation: Vendor's ability to innovate, improve, and adapt to changing requirements.

Financial Stability: Vendor's financial health, including creditworthiness, solvency, and stability.

Reputation: Vendor's reputation, including industry recognition, certifications, and customer

references.

Compliance: Vendor's compliance with regulatory requirements, industry standards, and

organizational policies.

Sustainability: Vendor's commitment to sustainability, including environmental, social, and

governance practices.

Innovation and R&D: Vendor's investment in research and development, including new product or
service development.

Performance Rating Methods:

Performance rating methods are used to evaluate and quantify a vendor's performance based on
predetermined criteria. These methods help organizations assess vendor performance, identify areas
for improvement, and make informed decisions about future business relationships. Here are some
common performance rating methods:

1. Scorecard Method:

The scorecard method involves assigning weights to each evaluation criterion and calculating a total
score based on vendor performance. This method provides a comprehensive view of vendor
performance and helps identify areas for improvement.

How it works:

Assign weights to each evaluation criterion (e.g., quality, price, delivery, service) based on their
importance.

Evaluate vendor performance for each criterion using a rating scale (e.g., 1-5).
Calculate the weighted score for each criterion by multiplying the rating by the weight.

Calculate the total score by adding the weighted scores for all criteria.

2. Ranking Method:

The ranking method involves ranking vendors based on their performance in each evaluation
criterion. This method helps identify the top-performing vendors and areas for improvement.

How it works:

Evaluate vendor performance for each criterion using a rating scale (e.g., 1-5).

Rank vendors based on their performance in each criterion.

Calculate an overall ranking by averaging the rankings for all criteria.

3. Threshold Method:

The threshold method involves setting minimum thresholds for each evaluation criterion. Vendors
must meet or exceed these thresholds to be considered.

How it works:

Set minimum thresholds for each criterion (e.g., quality ≥ 3, price ≤ $100).

Evaluate vendor performance for each criterion.

Determine if the vendor meets or exceeds the threshold for each criterion.

Calculate an overall score based on the number of thresholds met.

4. Balanced Scorecard Method:

The balanced scorecard method evaluates vendors based on four perspectives: financial, customer,
internal processes, and learning and growth.

How it works:

Evaluate vendor performance for each perspective using a rating scale (e.g., 1-5).

Calculate a score for each perspective.

Calculate an overall score by averaging the scores for all perspectives.

5. Weighted Average Method:

The weighted average method involves assigning weights to each evaluation criterion and calculating
a weighted average score.

How it works:

Assign weights to each criterion based on their importance.

Evaluate vendor performance for each criterion using a rating scale (e.g., 1-5).

Calculate the weighted average score by multiplying the rating by the weight and summing the
results.

Vendor Evaluation Process:

The vendor evaluation process is a systematic approach to assessing the capabilities, performance,
and suitability of vendors to meet an organization's requirements. The process involves several
stages, which are outlined below:

Stage 1: Define Evaluation Criteria (Weeks 1-2)

Identify Requirements: Determine the organization's needs and requirements from the vendor.

Establish Evaluation Criteria: Develop a set of criteria to evaluate vendors, including quality, price,
delivery, service, and other relevant factors.

Assign Weights: Assign weights to each criterion based on its importance to the organization.

Stage 2: Gather Information (Weeks 3-6)

Request for Information (RFI): Send an RFI to potential vendors to gather general information about
their products or services.

Request for Proposal (RFP): Send an RFP to shortlisted vendors, outlining the organization's
requirements and evaluation criteria.

Vendor Presentations: Invite vendors to present their proposals and answer questions.

Stage 3: Evaluate Vendors (Weeks 7-12)

Initial Screening: Review vendor responses to the RFP and eliminate those that do not meet the
minimum requirements.

Detailed Evaluation: Evaluate the remaining vendors based on the established criteria, using a scoring
system or other evaluation method.

Site Visits: Conduct site visits or audits to verify vendor claims and assess their capabilities.

Stage 4: Shortlist Vendors (Weeks 13-14)

Shortlist: Select the top-scoring vendors based on the evaluation results.

Reference Checks: Verify vendor references and assess their performance with other customers.

Stage 5: Negotiate and Finalize (Weeks 15-18)

Negotiate Terms: Negotiate the terms and conditions of the contract with the selected vendor.

Finalize Contract: Finalize the contract and ensure that all parties agree to the terms.

Stage 6: Implement and Monitor (After Week 18)

Implement Contract: Implement the contract and ensure a smooth transition.

Monitor Performance: Monitor the vendor's performance and ensure that they meet the agreed-
upon terms and conditions.

Continuous Improvement: Continuously evaluate and improve the vendor relationship to ensure
ongoing performance and quality.

Topic-6. Evaluating Purchasing Performance of an Organization:

Evaluating the purchasing performance of an organization is crucial to ensure that the procurement
function is aligned with the organization's overall goals and objectives. The evaluation process helps
to identify areas of improvement, optimize procurement processes, and maximize value from
procurement activities. Here are the key aspects to evaluate:

1. Cost Savings:

Spend Analysis: Analyze the organization's spend data to identify areas of high expenditure and
opportunities for cost reduction.

Cost Savings Initiatives: Evaluate the effectiveness of cost-saving initiatives, such as negotiations,
auctions, and contracts.

Cost Avoidance: Assess the organization's ability to avoid unnecessary costs through efficient
procurement practices.

2. Supplier Performance:

Supplier Evaluation: Assess supplier performance based on criteria such as quality, delivery, price,
and service.

Supplier Relationship Management: Evaluate the effectiveness of supplier relationships and identify
opportunities for improvement.

Supplier Diversity: Assess the organization's efforts to promote supplier diversity and inclusion.

3. Procurement Process Efficiency:

Procurement Cycle Time: Evaluate the time taken to complete procurement transactions, from
requisition to payment.

Procurement Process Automation: Assess the level of automation in procurement processes, such as
e-procurement and procurement software.

Procurement Staff Productivity: Evaluate the productivity of procurement staff, including their
workload, training, and development.

4. Inventory Management:

Inventory Turnover: Evaluate the organization's inventory turnover ratio to identify opportunities for
improvement.

Inventory Accuracy: Assess the accuracy of inventory records and identify areas for improvement.

Inventory Optimization: Evaluate the organization's efforts to optimize inventory levels and reduce
stockouts or overstocking.

5. Quality and Risk Management:

Quality of Goods and Services: Evaluate the quality of goods and services procured, including their
conformance to specifications and standards.

Risk Management: Assess the organization's risk management practices, including supply chain risk,
contract risk, and compliance risk.

Compliance: Evaluate the organization's compliance with regulatory requirements, industry

standards, and internal policies.
6. Stakeholder Satisfaction:

Internal Customer Satisfaction: Evaluate the satisfaction of internal customers, including

departments and end-users.

External Customer Satisfaction: Assess the satisfaction of external customers, including suppliers and
partners.

Procurement Team Satisfaction: Evaluate the satisfaction of the procurement team, including their
job satisfaction and engagement.

7. Innovation and Technology:

Procurement Technology: Evaluate the organization's use of procurement technology, including e-

procurement, procurement software, and analytics.

Innovation: Assess the organization's efforts to innovate and improve procurement processes,
including the adoption of new technologies and practices.

8. Sustainability and Social Responsibility:

Sustainable Procurement: Evaluate the organization's efforts to incorporate sustainability into

procurement practices, including environmental and social considerations.

Social Responsibility: Assess the organization's efforts to promote social responsibility, including
diversity, equity, and inclusion.

Performance Metrics:

Cost Savings Ratio: The ratio of cost savings to total spend.

Supplier Performance Index: A weighted score of supplier performance metrics, such as quality,
delivery, and price.

Procurement Cycle Time Reduction: The percentage reduction in procurement cycle time.

Inventory Turnover Ratio: The ratio of cost of goods sold to average inventory.

Quality Rating: A weighted score of quality metrics, such as defect rate and customer satisfaction.

Topic-7. Just in time purchasing-

Just-In-Time (JIT) purchasing is a procurement strategy that involves ordering and receiving inventory
just in time to meet customer demand. This approach aims to minimize inventory levels and reduce
waste by avoiding overstocking and stockouts. JIT purchasing is often used in conjunction with lean
manufacturing and total quality management (TQM) principles.

How JIT Purchasing is Done:

Accurate Demand Forecasting: Accurately forecast demand to determine the required inventory
levels.

Supplier Partnerships: Develop close relationships with suppliers to ensure timely delivery and high-
quality products.
Inventory Management: Implement a robust inventory management system to track inventory levels
and trigger orders when necessary.

Ordering and Receiving: Place orders with suppliers just in time to meet customer demand, and
receive inventory in small, frequent batches.

Quality Control: Inspect and test products upon receipt to ensure quality standards are met.

Advantages of JIT Purchasing:

Reduced Inventory Costs: Minimize inventory holding costs, such as storage, handling, and
maintenance.

Lower Capital Requirements: Reduce the need for large upfront investments in inventory.

Improved Cash Flow: Free up working capital by reducing inventory levels and minimizing the need
for inventory financing.

Increased Efficiency: Streamline procurement processes and reduce administrative costs.

Enhanced Customer Satisfaction: Meet customer demand more effectively by ensuring timely
delivery of products.

Reduced Obsolescence: Minimize the risk of inventory becoming obsolete or outdated.

Improved Quality: Focus on quality control and inspection to ensure high-quality products.

Disadvantages of JIT Purchasing:

Higher Transportation Costs: Increase transportation costs due to more frequent, smaller shipments.

Supplier Dependence: Rely heavily on suppliers to meet delivery deadlines and quality standards.

Risk of Stockouts: Risk stockouts if demand exceeds forecasted levels or suppliers fail to deliver on
time.

Limited Flexibility: JIT purchasing can be inflexible, making it difficult to respond to changes in
demand or supplier disruptions.

Quality Control Challenges: Inspecting and testing products in small batches can be time-consuming
and costly.

Dependence on Technology: JIT purchasing relies heavily on technology, such as inventory

management systems and supplier communication tools.

Training and Education: Require specialized training and education for procurement staff to manage
JIT purchasing effectively.

Topic-8. Purchasing negotiating skills-

Purchasing Negotiating Skills:

1. Preparation:
Research the supplier, their products, and the market.

Set clear goals and objectives for the negotiation.

Gather data and information to support your negotiation position.

2. Communication:

Active listening: Pay attention to the supplier's needs and concerns.

Clear and concise communication: Avoid misunderstandings and ensure that both parties are on the
same page.

Non-confrontational language: Use "I" statements instead of "you" statements to avoid blame and
defensiveness.

3. Relationship Building:

Build trust and rapport with the supplier.

Establish a positive and respectful tone for the negotiation.

Look for mutually beneficial solutions.

4. Creative Problem-Solving:

Think outside the box and explore alternative solutions.

Be open to compromise and finding creative ways to meet both parties' needs.

Use objective criteria to support your negotiation position.

5. Time Management:

Plan and manage your time effectively to ensure that the negotiation stays on track.

Use time pressure to your advantage, but avoid rushing into a decision.

Take breaks to regroup and reassess your negotiation strategy.

6. Power and Leverage:

Understand the supplier's motivations and constraints.

Use your organization's purchasing power and volume to negotiate better deals.

Be willing to walk away if the negotiation is not meeting your goals.

7. Flexibility:

Be flexible and willing to compromise.

Look for areas where you can concede and find mutually beneficial solutions.

Avoid taking a rigid or inflexible stance.

8. Data Analysis:

Use data and analytics to support your negotiation position.

Analyze the supplier's pricing, quality, and delivery performance.

Use benchmarking data to compare the supplier's performance to industry standards.

9. Emotional Intelligence:

Recognize and manage your emotions during the negotiation.

Empathize with the supplier's perspective and concerns.

Stay calm and composed under pressure.

10. Closing and Follow-up:

Clearly summarize the agreement and ensure that both parties understand the terms.

Follow up to ensure that the agreement is implemented and that both parties are meeting their
commitments.

Review and evaluate the negotiation outcome to identify areas for improvement.

Negotiation Strategies:

Distributive Bargaining: Focus on dividing a fixed pie, where one party's gain is the other party's loss.

Integrative Bargaining: Focus on finding mutually beneficial solutions that expand the pie.

Principled Negotiation: Focus on finding a fair and reasonable solution based on objective criteria.

Negotiation Tactics:

Anchoring: Start with an extreme offer to set the tone for the negotiation.

Concessions: Make strategic concessions to build trust and create a sense of reciprocity.

Good Guy/Bad Guy: Use a team approach to negotiate, with one person playing the "good guy" and
the other playing the "bad guy".