Chapter TWO
Purchasing Management
Learning outcomes
• Understand the nature of purchasing in organisations and the
supply chain
• Recognise the important role of purchasing in the supply chain
• Describe the purchasing activities performed in the supply chain
• Discuss the most important tasks of purchasing in the supply chain
• Discuss the important task of the evaluation, selection and
management of suppliers
• Discuss the important task of quality assurance of purchased
materials
• Discuss the important task of the determination of purchased
quantities
• Recognise the factors influencing purchasing prices
• Recognise the value-adding role of purchasing
• Discuss sustainable purchasing
2.2 Purpose of the Purchasing function
• the right materials, services
The and equipment
purpose of • at a reasonable price
the • to satisfy quality
requirements
purchasing • in the correct quantities
function is • at the right place
to provide: • at right time
2.3 The Important role of purchasing
Greatest expenditure for the business
Inventory-holding
Contribution to profit
Contributions to the marketing of
products
2.4 Purchasing activities
Development and description of a need
Research on prices and availability
Choice of suppliers
Issuing the order and concluding a contract
Follow-up and expediting
Keep updated with receipts, inspection and distribution
Handling errors and discrepancies
Figure 2.1: Purchasing cycle
1. Identify
need
7. Manage 2. Develop
contract specification
3. Identify
6. Award
suppliers
contract
5. Evaluation 4. Tendering
process process
2.5 The important tasks of purchasing
management
• The most important decisions include:
• where (supplier),
• what (items and quality),
• how many (inventory),
• how much (price) and
• when (time),
• There will be a trade-off between all these factors.
2.5.1 Selection & management of suppliers
The importance of selecting the right suppliers
• one of the most vital tasks of the purchasing supply function
• supply of strategic materials or services.
• essential to proceed systematically and objectively.
• Consider long-term relationship with suppliers of strategic products or
services
• Important elements of such a relationship are honesty, fairness and frankness
The selection process (depending on scope of transaction,
availability, standard/custom-made, strategic)
• compilation of a list of suppliers
• reduce to a short list (requested to give a quote or negotiations)
• final choice of a supplier
• evaluation of supplier performance
2.6 Developing suppliers
Consider broad-based black economic
empowerment (BBBEE)
Improve performance as a result of
performance appraisals
When materials or services do not
exist in the (local) market
2.8 Pricing decisions
• Methods to determine purchasing prices
• (depend on the nature of the materials and the value of
the transaction).
• Published price lists
• catalogues, brochures and advertisements in trade journals
• most suitable for the purchase of standard materials and
orders of a low monetary value (for example, when
purchasing screws and stationery).
• Quotations
• Tenders (open or closed)
• Negotiations
2.9 Timing of purchases
• The aims of buying at the right time
• to ensure that the business is supplied on an ongoing basis
with the materials and services required for it to operate
without interruptions
• to keep inventory-holding at an optimal level.
• Nature of business
• Clothing - seasons
• Assembly – forecasting and system
• Lead time
• Reliability of suppliers
2.10 Purchasing and supply quantities
• Decision made at the same time as decisions about
prices and delivery time
• Closely intertwined with inventory holding
• Objective of purchasing quantities – to keep inventory at
optimum level
• Integrated systems (determined by final consumer sales
and/or forecasted demand)
• activate the system (JIT, MRP, ERP, AR, QR)
• indicating how much should be purchased
• Purchasing quantities determined by final consumer sales
and/or forecasted demand
2.11 Purchasing the right quality
• Different perspectives on quality
• Description
• Specifications
• Standardisation
• Market grades, SABS, engineering drawings, samples
• Control of quality
• Inspection
• Certifications
• SABS certification
2.12 The value-adding role in SCM
• Purchasing traditionally concentrated on best deal for
organisation
• SCM – strategic vision, considering long-term advantage for
upstream suppliers and organisation (and customers)
• Previously concentrated on hard issues (price, delivery, cost,
profit) now also softer issues (total quality culture and socio-
economic and environmental issues)
• New concepts: supply management, sourcing, strategic sourcing
• Additional responsibilities
• Spend analysis
• Demand management and specifications
• Category management and supplier evaluation and selection
• Contract management
• Supplier relationship management
• Establishing a supply management strategy
2.13 Sustainable purchasing
• Economic (financial responsibility)
• Legal obligations
• Ethical responsibility
• Supporting local suppliers and local community
development
• Ensuring broad-empowerment by influencing suppliers
• Contributing to environment protection
• Respecting human rights
• Promoting safety at the workplace
