BCP 201 - SESSION ONE
OVERVIEW OF PURCHASING
INTRODUCTION
There is no definition that can wholly incorporate the demands placed on purchasing teams set of
skills. Situational diversities, such as strategic importance, amount spent, contribution to
profitability, supplier relationship and the recognition given to purchasing in a particular
organisation.
All organisations invariably need input of goods and services from external suppliers or
providers and to this extent therefore, purchasing function plays an integral part in ensuring the
goods/services are provided to the company.
The role and contribution of purchasing has increased quite steadily over the second half of 20 th
century with interest in the activity taking place in the last few years. The reasons behind this
paradigm shift are based on importance and recognition of purchasing entail:
New management systems/concepts/philosophies
Advanced technology: IT – internet, EDI (processing of electronic transactions e.g.
e-suppliers, e-procurement, sharing information)
Government policies – issues of environment
Fewer but larger suppliers
Competition hence the need for quality
Globalization – the integration of world economies
DEFINITION OF TERMS
PURCHASING
Purchasing is defined as a process of acquiring goods, services and works in return for a price.
It’s the acquisition of goods or services in return for a monetary or equivalent.
1. Acquisition of inputs of goods and services from external suppliers or providers.
2. Comprises the essential activities associated with the acquisition of materials, services and
equipment used in the operation of an organization.
We need to have an understanding of:
The perspective on purchasing
The stages of purchasing development and future trends in purchasing
Factors influencing internal and external status of purchasing
The study of purchasing can be approached from several perspectives. Such perspective include
those of Function, process, link in the supply chain or value, relationship, discipline and
profession.
1|Page
,Purchasing as a function
In management studies,’ function’ is often defined as a unit or a department in which people use
specialized knowledge skills and resources to perform specialized tasks. A function is also what
a resource is designed to do so e.g. the function of a pen is to make a mark.
Purchasing as a function involves: the acquiring raw materials, components, goods and services,
for conversation, consumption or resale.
Purchasing as a process
A process is a set of sub processes or stages directed at achieving an output, the processes
include:
1. Receive requisition
2. Solicit quotations
3. Negotiate with suppliers
4. Place order
5. Receive supplies
6. Make payment
Purchasing as a link in the supply chain
Purchasing a long with other activities such as production, warehousing, transportation, is one of
the links in the supply chain or a sequence of processes by which supplies are converted in to
finished products and delivered to customers.
Purchasing as a relationship
Purchasing relationship may be both internal or external short term and long term. Internal
relationship includes buyers, users, cross functional teams, and team work. External relationship
with suppliers and other service providers.
Purchasing as a discipline
A discipline is a branch of knowledge, an area of study, the academic content of purchasing lacks
the clearly defined focus associated with other field of study, such as mathematics, economics
and law and it draws a lot from other disciplines
The major types of activities in Purchasing are:
1. Coordination with user departments to identify purchase needs.
2. Discussion with sales representatives.
3. Identification of potential suppliers.
4. Conducting market studies for important materials.
5. Negotiation with potential suppliers.
6. Analysis of proposals
7. Selection of suppliers
8. Issuing of purchase orders.
9. Administration of contracts and resolution of related problems
10. Maintenance of a variety of purchasing records.
2|Page
,Firms that have seen the strategic potential inherent in the purchasing function have tended to
enhance its basic activities by expanding them and developing procurement or supply
management operations.
Procurement
Procurement process or concept encompasses a wider range of supply activities than those
included in the purchasing function. There is more buyer participation in related materials
activities. Procurement is the process of obtaining goods or services in any way including
borrowing, leasing and even force or pillage.
Procurement management is the process of identifying the organisational needs which can be
met by procuring products or services outside the organisation. It involves knowing what to
procure, how much to procure, and when to procure
Specific activities in Procurement process:
1. Participation in the development of material and service requirements and their specifications.
2. Conducting materials studies and management of value analysis activities.
3. Conducting more extensive material market studies.
4. Conducting all purchasing function activities.
5. Management of supplier quality
6. Purchase of inbound transportation.
7. Management of investment recovery activities.
Hence, procurement tends to be broader and more proactive, with some focus on strategic
matters. The value adding benefits of procurement function include:
Maintaining defect-free quality of purchased materials.
Reducing the total cost throughout the supply chain
Reducing the time required to bring a new product into the market
Ensuring that the firm’s supply base provides appropriate technology affecting the firm’s
core competencies is carefully controlled when dealing with outside suppliers.
Continuity of supply – must take all measures required to reduce the risk of supply
disruptions.
Management
Refers to the establishment and attainment of objectives. Material resources and mans’ talent are
supposed to be available. The basic material resource known as the 6 Ms include Men, Money,
Materials, Machinery, Methods and Markets are brought together to achieve the stated goals.
These resources are processed, planned, organized, co-ordinated, harmoniously related and
controlled with a view to achieving the end results.
Management is also defined as getting things done through people. It’s a process of executive
control and organising forces, it is about employing capital efficiency so as to yield the
maximum results. It is the utilization of human talents and resources to achieve a desired result.
3|Page
, Supply Management
Supply management is a process responsible for the development and management of a firm’s
total supply system – both the internal and external components. The major characteristic that
differentiates it from purchasing and procurement activities is that it focuses heavily on the
strategic aspects of the key elements of a firm’s supply system.
Specific activities of supply management
1. Early purchasing involvement (EPI) and early supplier involvement (ESI) in product design
and subsequent development of important items, typically through the use of cross-functional
teams.
2. Conducting all purchasing functions and procurement process activities.
3. Heavy use of cross-functional teams in supplier qualification and selection.
4. Heavy use of purchasing partnering arrangements and strategic alliances with suppliers, to
develop close and mutually beneficial linkages with key suppliers in the value chain to control
quality costs.
5. Continuous identification of threats and opportunities in a firm’s supply environment.
6. Development of strategic, long-term acquisition plans for all major materials.
7. Monitoring of continuous improvement in the supply chain.
8. Active participation in the corporate strategic planning process.
Materials management
The grouping of management functions supporting the complete cycle of material flow, from the
purchase and internal control of production material to the planning and control of work-in-
process, warehousing, shipping and distribution of finished product.
Specific activities of materials management:
1. Purchasing and Supply management activities.
2. Inventory management.
3. Receiving activities.
4. Stores and Warehousing.
5. In-plant materials handling
6. Production planning, scheduling and control.
6. Transport and transportation.
Logistics Management
This refers to the process of strategically managing the acquisition, movement and storage of
material, parts and finished inventory through an organization and its marketing channels to fulfil
orders most cost-effectively.
Logistics does add value and can play a vital role in the organization’s profitability. However,
only by linking all logistics activities directly to the organizations strategic plan can it be useful
in supporting the organization’s strategy for achieving competitive advantage.
Procurement is thus a supporting activity in logistics which should be properly handled to enable
firm’s improve cash flow, open new territories, introduce new products etc.
4|Page
OVERVIEW OF PURCHASING
INTRODUCTION
There is no definition that can wholly incorporate the demands placed on purchasing teams set of
skills. Situational diversities, such as strategic importance, amount spent, contribution to
profitability, supplier relationship and the recognition given to purchasing in a particular
organisation.
All organisations invariably need input of goods and services from external suppliers or
providers and to this extent therefore, purchasing function plays an integral part in ensuring the
goods/services are provided to the company.
The role and contribution of purchasing has increased quite steadily over the second half of 20 th
century with interest in the activity taking place in the last few years. The reasons behind this
paradigm shift are based on importance and recognition of purchasing entail:
New management systems/concepts/philosophies
Advanced technology: IT – internet, EDI (processing of electronic transactions e.g.
e-suppliers, e-procurement, sharing information)
Government policies – issues of environment
Fewer but larger suppliers
Competition hence the need for quality
Globalization – the integration of world economies
DEFINITION OF TERMS
PURCHASING
Purchasing is defined as a process of acquiring goods, services and works in return for a price.
It’s the acquisition of goods or services in return for a monetary or equivalent.
1. Acquisition of inputs of goods and services from external suppliers or providers.
2. Comprises the essential activities associated with the acquisition of materials, services and
equipment used in the operation of an organization.
We need to have an understanding of:
The perspective on purchasing
The stages of purchasing development and future trends in purchasing
Factors influencing internal and external status of purchasing
The study of purchasing can be approached from several perspectives. Such perspective include
those of Function, process, link in the supply chain or value, relationship, discipline and
profession.
1|Page
,Purchasing as a function
In management studies,’ function’ is often defined as a unit or a department in which people use
specialized knowledge skills and resources to perform specialized tasks. A function is also what
a resource is designed to do so e.g. the function of a pen is to make a mark.
Purchasing as a function involves: the acquiring raw materials, components, goods and services,
for conversation, consumption or resale.
Purchasing as a process
A process is a set of sub processes or stages directed at achieving an output, the processes
include:
1. Receive requisition
2. Solicit quotations
3. Negotiate with suppliers
4. Place order
5. Receive supplies
6. Make payment
Purchasing as a link in the supply chain
Purchasing a long with other activities such as production, warehousing, transportation, is one of
the links in the supply chain or a sequence of processes by which supplies are converted in to
finished products and delivered to customers.
Purchasing as a relationship
Purchasing relationship may be both internal or external short term and long term. Internal
relationship includes buyers, users, cross functional teams, and team work. External relationship
with suppliers and other service providers.
Purchasing as a discipline
A discipline is a branch of knowledge, an area of study, the academic content of purchasing lacks
the clearly defined focus associated with other field of study, such as mathematics, economics
and law and it draws a lot from other disciplines
The major types of activities in Purchasing are:
1. Coordination with user departments to identify purchase needs.
2. Discussion with sales representatives.
3. Identification of potential suppliers.
4. Conducting market studies for important materials.
5. Negotiation with potential suppliers.
6. Analysis of proposals
7. Selection of suppliers
8. Issuing of purchase orders.
9. Administration of contracts and resolution of related problems
10. Maintenance of a variety of purchasing records.
2|Page
,Firms that have seen the strategic potential inherent in the purchasing function have tended to
enhance its basic activities by expanding them and developing procurement or supply
management operations.
Procurement
Procurement process or concept encompasses a wider range of supply activities than those
included in the purchasing function. There is more buyer participation in related materials
activities. Procurement is the process of obtaining goods or services in any way including
borrowing, leasing and even force or pillage.
Procurement management is the process of identifying the organisational needs which can be
met by procuring products or services outside the organisation. It involves knowing what to
procure, how much to procure, and when to procure
Specific activities in Procurement process:
1. Participation in the development of material and service requirements and their specifications.
2. Conducting materials studies and management of value analysis activities.
3. Conducting more extensive material market studies.
4. Conducting all purchasing function activities.
5. Management of supplier quality
6. Purchase of inbound transportation.
7. Management of investment recovery activities.
Hence, procurement tends to be broader and more proactive, with some focus on strategic
matters. The value adding benefits of procurement function include:
Maintaining defect-free quality of purchased materials.
Reducing the total cost throughout the supply chain
Reducing the time required to bring a new product into the market
Ensuring that the firm’s supply base provides appropriate technology affecting the firm’s
core competencies is carefully controlled when dealing with outside suppliers.
Continuity of supply – must take all measures required to reduce the risk of supply
disruptions.
Management
Refers to the establishment and attainment of objectives. Material resources and mans’ talent are
supposed to be available. The basic material resource known as the 6 Ms include Men, Money,
Materials, Machinery, Methods and Markets are brought together to achieve the stated goals.
These resources are processed, planned, organized, co-ordinated, harmoniously related and
controlled with a view to achieving the end results.
Management is also defined as getting things done through people. It’s a process of executive
control and organising forces, it is about employing capital efficiency so as to yield the
maximum results. It is the utilization of human talents and resources to achieve a desired result.
3|Page
, Supply Management
Supply management is a process responsible for the development and management of a firm’s
total supply system – both the internal and external components. The major characteristic that
differentiates it from purchasing and procurement activities is that it focuses heavily on the
strategic aspects of the key elements of a firm’s supply system.
Specific activities of supply management
1. Early purchasing involvement (EPI) and early supplier involvement (ESI) in product design
and subsequent development of important items, typically through the use of cross-functional
teams.
2. Conducting all purchasing functions and procurement process activities.
3. Heavy use of cross-functional teams in supplier qualification and selection.
4. Heavy use of purchasing partnering arrangements and strategic alliances with suppliers, to
develop close and mutually beneficial linkages with key suppliers in the value chain to control
quality costs.
5. Continuous identification of threats and opportunities in a firm’s supply environment.
6. Development of strategic, long-term acquisition plans for all major materials.
7. Monitoring of continuous improvement in the supply chain.
8. Active participation in the corporate strategic planning process.
Materials management
The grouping of management functions supporting the complete cycle of material flow, from the
purchase and internal control of production material to the planning and control of work-in-
process, warehousing, shipping and distribution of finished product.
Specific activities of materials management:
1. Purchasing and Supply management activities.
2. Inventory management.
3. Receiving activities.
4. Stores and Warehousing.
5. In-plant materials handling
6. Production planning, scheduling and control.
6. Transport and transportation.
Logistics Management
This refers to the process of strategically managing the acquisition, movement and storage of
material, parts and finished inventory through an organization and its marketing channels to fulfil
orders most cost-effectively.
Logistics does add value and can play a vital role in the organization’s profitability. However,
only by linking all logistics activities directly to the organizations strategic plan can it be useful
in supporting the organization’s strategy for achieving competitive advantage.
Procurement is thus a supporting activity in logistics which should be properly handled to enable
firm’s improve cash flow, open new territories, introduce new products etc.
4|Page
