MNP2601 May/ June 2013 – Purchasing and supply management
Question 1
1.1 Give three advantages and three disadvantages of a centralised organisational structure for purchasing
and supply management. (6) [TB PG 31]
Advantages Disadvantages
Materials and products are standardised. Staff structure is top heavy
Control is improved There is slow response times to regional plants
Supplier relations are enhanced There is a tendency to bypass the central buying
Duplication of effort is eliminated office
There is less integration with user departments
ADVANTAGES OF CENTRALISED STRUCTURE DISADVANTAGES OF CENTRALISED STRUCTURE
Materials and products are standardised There is a slow response time to regional
plants
Supplier relations are enhanced Staff structure is top heavy
Duplication of effort is eliminated There is a tendency to bypass the central
buying office
Control is improved There is less integration with user
departments
Administrative costs are reduced There is lack of insight into the
requirements of dispersed plan units
1.2 Briefly explain the seven steps of the supplier selection process. (7) [TB PG 82 – 84]
Step 1: Identification of potential suppliers: sources of information for initial selection and assessment
Step 2: Pre-screening to reject unsuitable suppliers
Step 3: Conduct Research on potentially suitable suppliers
Step 4: Choose the assessment method and analyse the suppliers
Step 5: Select the supplier or suppliers
Step 6: On-going measurement of supplier performance
Step 7: Supplier accreditation
STEP 1: IDENTIFICATION OF POTENTIAL SUPPLIERS: SOURCES OF INFORMATION FOR
INITIAL SELECTION AND ASSESSMENT
o There are a variety of sources available to identify suppliers eg.
Internet search engines
Chambers of commerce
Embassies and consular general officers
Credit bureaus
Reputation
STEP 2: PRE-SCREENING TO REJECT UNSUITABLE SUPPLIERS
o The actual process of supplier selection can be long and drawn out and thus a costly
exercise.
o There are many grounds for elimination eg.
Suppliers that do not meet the organisation’s quality requirements
Suppliers that are in a poor financial situation
Suppliers that the organisation has previously rejected
STEP 3: CONDUCT RESEARCH ON POTENTIALLY SUITABLE SUPPLIERS
, o The depth of the investigation and the criteria used can vary widely depending on
the product or service being purchased.
o Information sources for supplier research includes:
Supplier visits – time consuming and very costly
Supplier surveys or questionnaires
STEP 4: CHOOSE THE ASSESSMENT METHOD AND ANALYSE THE SUPPLIERS
o Assessment methods range from the informal to the formal
o Informal techniques would include the purchasing manager’s judgement for low-
value, non-critical purchases to panel consensus where a group would discuss the
relative merits of each supplier
o Formal method is the weighted –point supplier performance rating where all
pertinent criteria are weighted according to their importance and each potential
supplier is then scored against them
STEP 5: SELECT THE SUPPLIER OR SUPPLIERS
o After studying the assessment in relation to the criteria, the purchasing manager or
the cross-functional team will be in a position to approve the supplier(s).
STEP 6: ONGOING MEASUREMENT OF SUPPLIER PERFORMANCE
o Supplier performance measurement ca be done by using the weighted-point
evaluation method with a rating sheet
STEP 7: SUPPLIER ACCREDITATION
o Suppliers which have gone through the assessment selection and evaluation process
successfully can be classified in three groups:
Approved suppliers – they have met the requirements of the supplier
selection process
Preferred suppliers – they have shown that their past performance
consistently meets and exceeds the organisation’s required levels for criteria
such as quality, cost reduction, delivery & service
Certified suppliers – certification of suppliers is the ultimate supplier
accolade and many organisations hold functions to make such awards.
1.3 Define a “revenue pricing model” in your own words and identify two reasons for suppliers to make use of
this strategy (4). [TB PG 140]
The emphasis in this model is on obtaining sufficient client revenue to pay for operating costs rather than
on profit. The idea is to generate sufficient revenue through sales to keep the firm going. Suppliers use
this strategy to retain skilled labour and improve capacity utilisation in times when there is a downturn in
markets due to a decline in the economic cycle.
1.4 Discuss three characteristics of services which distinguish services from buying goods (3) [TB PG 272]
Services are intangible – experienced, not delivered, perception is reality
Services are heterogeneous – quality varies, difficult to compare
Service production – production and consumption simultaneous
Perishability – cannot be stored for later
Entry to the market – easy, large capital seldom required
INTANGIBILITY OF SERVICES
o Services are experienced by the customer, not delivered to the customer in the sense
that a tangible item is
, HETEROGENEITY OF SERVICES
o The variety of services available makes it difficult for the purchasing function to compare
the different services to identify the most suitable supplier.
PERISHIBAILITY OF SERVICES
o Since the production and consumption of services are simultaneous, services cannot be
stored for later consumption
Question 2
2.1 When an order has been placed in the purchasing process, the order from serves as a source document for
all activities to be performed. To which functions or groups should the order form, or copies thereof, be
distributed and for what reasons? (10)
The supplier receives the original
The financial function receives a copy, verification of invoice and for payment purposes.
The receiving function, to expect the delivery
The inspection function, with detailed information to plan the inspection efficiently
The purchasing function for follow-up, expediting and control measures
The last copy remains in the order book, as permanent receipt of transaction
PG52
THE SUPPLIER
o Receives the original order, this is a legal binding step that product/services are to be
rendered
THE FINANCIAL FUNCTION
o Receives a copy for verifying the invoice and for payment
THE RECEIVING FUNCTION
o Receives a copy notifying it to expect a delivery. It is also used for the receiving and
inspection of the goods
THE INSPECTION FUNCTION
o Receives a copy with detailed information on the specifications, enabling it to plan the
inspection task efficiently
THE PURCHASING FUNCTION
o Keeps a copy for follow-up and expediting
2.2 Identify six disadvantages that the decision to outsource may hold for an organisation (6) [TB PG 63-64]
loss of control and skills
loss of service provider focus
lack of clarity
lack of cost control
Ineffective Management
Loss of confidentiality
Double outsourcing
Bring about cost savings if a service provider can offer the product at a lower cost
Specialization by smaller, more streamlined enterprises
Outsourcing contractors can enlarge production capacity, thereby saving large
amounts of capital for additional production facilities
Limit or completely eliminate the inventory (stockpiling) of raw materials
The organisation may benefit by reacting quickly to changes in market demand
Question 1
1.1 Give three advantages and three disadvantages of a centralised organisational structure for purchasing
and supply management. (6) [TB PG 31]
Advantages Disadvantages
Materials and products are standardised. Staff structure is top heavy
Control is improved There is slow response times to regional plants
Supplier relations are enhanced There is a tendency to bypass the central buying
Duplication of effort is eliminated office
There is less integration with user departments
ADVANTAGES OF CENTRALISED STRUCTURE DISADVANTAGES OF CENTRALISED STRUCTURE
Materials and products are standardised There is a slow response time to regional
plants
Supplier relations are enhanced Staff structure is top heavy
Duplication of effort is eliminated There is a tendency to bypass the central
buying office
Control is improved There is less integration with user
departments
Administrative costs are reduced There is lack of insight into the
requirements of dispersed plan units
1.2 Briefly explain the seven steps of the supplier selection process. (7) [TB PG 82 – 84]
Step 1: Identification of potential suppliers: sources of information for initial selection and assessment
Step 2: Pre-screening to reject unsuitable suppliers
Step 3: Conduct Research on potentially suitable suppliers
Step 4: Choose the assessment method and analyse the suppliers
Step 5: Select the supplier or suppliers
Step 6: On-going measurement of supplier performance
Step 7: Supplier accreditation
STEP 1: IDENTIFICATION OF POTENTIAL SUPPLIERS: SOURCES OF INFORMATION FOR
INITIAL SELECTION AND ASSESSMENT
o There are a variety of sources available to identify suppliers eg.
Internet search engines
Chambers of commerce
Embassies and consular general officers
Credit bureaus
Reputation
STEP 2: PRE-SCREENING TO REJECT UNSUITABLE SUPPLIERS
o The actual process of supplier selection can be long and drawn out and thus a costly
exercise.
o There are many grounds for elimination eg.
Suppliers that do not meet the organisation’s quality requirements
Suppliers that are in a poor financial situation
Suppliers that the organisation has previously rejected
STEP 3: CONDUCT RESEARCH ON POTENTIALLY SUITABLE SUPPLIERS
, o The depth of the investigation and the criteria used can vary widely depending on
the product or service being purchased.
o Information sources for supplier research includes:
Supplier visits – time consuming and very costly
Supplier surveys or questionnaires
STEP 4: CHOOSE THE ASSESSMENT METHOD AND ANALYSE THE SUPPLIERS
o Assessment methods range from the informal to the formal
o Informal techniques would include the purchasing manager’s judgement for low-
value, non-critical purchases to panel consensus where a group would discuss the
relative merits of each supplier
o Formal method is the weighted –point supplier performance rating where all
pertinent criteria are weighted according to their importance and each potential
supplier is then scored against them
STEP 5: SELECT THE SUPPLIER OR SUPPLIERS
o After studying the assessment in relation to the criteria, the purchasing manager or
the cross-functional team will be in a position to approve the supplier(s).
STEP 6: ONGOING MEASUREMENT OF SUPPLIER PERFORMANCE
o Supplier performance measurement ca be done by using the weighted-point
evaluation method with a rating sheet
STEP 7: SUPPLIER ACCREDITATION
o Suppliers which have gone through the assessment selection and evaluation process
successfully can be classified in three groups:
Approved suppliers – they have met the requirements of the supplier
selection process
Preferred suppliers – they have shown that their past performance
consistently meets and exceeds the organisation’s required levels for criteria
such as quality, cost reduction, delivery & service
Certified suppliers – certification of suppliers is the ultimate supplier
accolade and many organisations hold functions to make such awards.
1.3 Define a “revenue pricing model” in your own words and identify two reasons for suppliers to make use of
this strategy (4). [TB PG 140]
The emphasis in this model is on obtaining sufficient client revenue to pay for operating costs rather than
on profit. The idea is to generate sufficient revenue through sales to keep the firm going. Suppliers use
this strategy to retain skilled labour and improve capacity utilisation in times when there is a downturn in
markets due to a decline in the economic cycle.
1.4 Discuss three characteristics of services which distinguish services from buying goods (3) [TB PG 272]
Services are intangible – experienced, not delivered, perception is reality
Services are heterogeneous – quality varies, difficult to compare
Service production – production and consumption simultaneous
Perishability – cannot be stored for later
Entry to the market – easy, large capital seldom required
INTANGIBILITY OF SERVICES
o Services are experienced by the customer, not delivered to the customer in the sense
that a tangible item is
, HETEROGENEITY OF SERVICES
o The variety of services available makes it difficult for the purchasing function to compare
the different services to identify the most suitable supplier.
PERISHIBAILITY OF SERVICES
o Since the production and consumption of services are simultaneous, services cannot be
stored for later consumption
Question 2
2.1 When an order has been placed in the purchasing process, the order from serves as a source document for
all activities to be performed. To which functions or groups should the order form, or copies thereof, be
distributed and for what reasons? (10)
The supplier receives the original
The financial function receives a copy, verification of invoice and for payment purposes.
The receiving function, to expect the delivery
The inspection function, with detailed information to plan the inspection efficiently
The purchasing function for follow-up, expediting and control measures
The last copy remains in the order book, as permanent receipt of transaction
PG52
THE SUPPLIER
o Receives the original order, this is a legal binding step that product/services are to be
rendered
THE FINANCIAL FUNCTION
o Receives a copy for verifying the invoice and for payment
THE RECEIVING FUNCTION
o Receives a copy notifying it to expect a delivery. It is also used for the receiving and
inspection of the goods
THE INSPECTION FUNCTION
o Receives a copy with detailed information on the specifications, enabling it to plan the
inspection task efficiently
THE PURCHASING FUNCTION
o Keeps a copy for follow-up and expediting
2.2 Identify six disadvantages that the decision to outsource may hold for an organisation (6) [TB PG 63-64]
loss of control and skills
loss of service provider focus
lack of clarity
lack of cost control
Ineffective Management
Loss of confidentiality
Double outsourcing
Bring about cost savings if a service provider can offer the product at a lower cost
Specialization by smaller, more streamlined enterprises
Outsourcing contractors can enlarge production capacity, thereby saving large
amounts of capital for additional production facilities
Limit or completely eliminate the inventory (stockpiling) of raw materials
The organisation may benefit by reacting quickly to changes in market demand
