PURCHASING & SUPPLY

MANAGEMENT

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT 1

 By

PHIDELIS EBLEDZI
Accredited CILT Lecturer
(HND P/S, MISM, MILT, MBA Logistics)

Managing Partner
(Integrity Logistics and Educational Consult)

0240999639/0267300177

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EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT
 Rules

You are expected to behave in a professional manner.

All mobile phones should be off/silent.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

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 Learning Outcomes
The overall aim of this course is:

To identify and discuss some drivers that are influencing changes in purchasing philosophies,
processes and procedures.

To appraise the linkage between business strategy and purchasing strategy.

To critically evaluate how purchasing and supply management can contribute to competitive
advantage.

To provide an in-depth knowledge of purchasing and supply management

To appreciate how the concepts may be applied both strategically and practically in an industrial
organisational context.

Assess and evaluate advance concepts and future trends in purchasing and supply
management. EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT 4
 Outline of Presentation
This presentation covers:
Background and Introduction to Purchasing and Supply Management (PSM)

Definition of Purchasing and Purchasing management

Relationship between Purchasing and Procurement

Importance of PSM

Changing views of Purchasing Function

Contribution of Purchasing to Profitability

The Scope of PSM Activities

Organisation for Effective PSM

Organising the Purchasing Function

PSM Process (Purchasing Cycle)

Fundamental Objectives of Purchasing Function

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT 5
 Instructional Strategies

A combination of lectures, class discussions, class exercise

and assignment will be used throughout this course.

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EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT
 Background to Purchasing & Supply Management (PSM)
Historically, the roots of purchasing goes back as far as to the early civilizations of
Mesopotamia and Greece, with evidence that humans during those periods have been
buying and selling long before large organisation with its functionally specialized
departments. Examples:

The development of the silk trade between China and a Greek colony in 800B.C

And there passes by Midianites, merchantmen; and they drew and lifted up Joseph out
of the pit, and sold him to the Ishmaelites for twenty pieces of silver (Gen. 37:28)

It is bad, it is bad, says the buyer; but when it goes away, then he boast (Prov. 20:14).

The first purchase order dates were written in red clay tablet in Syria between 2400 and
2800 B. C. for 50 jars of fragrant smooth oil for 600 small weights in grain (Coe, 1987).
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT 7
 Evolution of PSM

Global Era
The Early World War II (Late
Years (During & Post 1970 - 1999)
Growth of Purchasing
1940 Mid
(Pre 1939) Purchasing Strategy 2000 and
60s)
Fundamentals (Mid 1960s beyond
(19001939) Late 70s)

Integrating into Integration with

Awareness in A reactive clerical Managerial activity Organisations faced Corporate Strategy
manufacturing and international - Integration of PSM supply networks and
function prior to success of firms no
railway industry. shortage of almost all information
World War I. Basic longer depend on with total business
Customer orders technology
purchasing ideas what it could sell but the basic raw process. Long range
Supplier relationships
transformed to and procedures on how to required materials required to planning, predicting are shifting from an
purchase orders. developed- and scarce resources. support operations, availability, policy adversarial
Purchasing process requisition handling, Cost reduction and unusual rate of determination. The approach to a more
and its contribution enquiries/quotations techniques, staff price increases. rate and scope of cooperative approach,
to profitability , price determination Buying methods, technology use of cross functional
development.
gained early etc. Purchasing Purchasing was negotiation, interface applications change teams, performance
PSM process and
recognition. gained importance relegated to the development. measurement of
functions purchasing,
during WWI. background after the Increased recognition strategically and
for purchasing implementation of good
WW II. operationally. information system
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT function. 8
 Introduction to PSM
Generally, almost every organisation regardless of the sector (private or public), nature
of the organisation (profit or non-profit organisations), and size of the organisation
(small, medium or large multinational company) performs purchasing functions although
not all of them may have purchasing department.

The acquisition of materials of materials, services and equipment of the right qualities, in
the right quantities, at the right prices, at the right time, and on a continuing basis has
long occupied the attention of many managers in both public and private sectors.

The challenge of global competition has led many organisations to replace segmented
departmentalised structure with integrated structures in which purchasing is part of a
larger grouping, for example, Materials or Logistics Management. This enhances cross
functional decision making.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT 9

 Definition of Purchasing
Purchasing is buying/obtaining/the acquisition of goods or services in return for monetary or
equivalent payment.

Purchasing is generally defined from its objectives as to obtain materials of the right quality in the
right quantity delivered to the right place at the right time at the right price

This is usually called five rights (5Rs) and were often used to describe the activities of the
purchasing function. These five rights were often thought of in the context of a static environment.

The term right is situational each organisation will definitely define right differently but it should
be consistent with the corporate goals and objectives from which the functional objectives are
derived.

These five rights cannot be achieved without the right supplier (source). Apart from the traditional
objectives, purchasing function also involves three main elements in the supply chain - flow of
materials into the organisation, through the organisation and out of the organization (purchasing,
storage and distribution).
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 Definition of Purchasing

The composite definition of purchasing is the process undertaken by the organisational unit
(responsibility centre) which, either as a function or as part of an integrated supply chain,
is responsible both for procuring supplies of the right quality, quantity, time and price and
the management of the suppliers, thereby contributing to the competitive advantages of the
enterprise and the achievement of corporate strategy (Lysons and Gillingham, 2003) .

Purchasing function is responsible for procuring supplies and it is common to all types of
organisations whereas purchasing department is the organisational unit of an undertaking
that performs the purchasing function. Its duties of may vary according to the nature of the
business and management orientation.

The basic objective of the purchasing function is too achieve value for money spent.
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 Definition of Purchasing Management

Purchasing management has been defined as obtaining from external sources all goods, services,
capabilities and knowledge which are necessary for running, maintaining and managing a firm or
business entitys primary and support activities at the most favourable conditions. (Van Weele,
1994).

Purchasing management is therefore a dedicated position created within a corporation to manage

the acquisition of goods and services.

The purchasing function in this definition covers activities aimed at:

determining the specification (in terms of required quality and quantities) of the goods and services;
selection of the most suitable supplier;
preparation and conduct of negotiations with supplier in order to establish an agreement;
order placement with the selected supplier;
monitoring and control of the order (expediting); and
follow up and evaluation (settling claims, keeping product and supplier files up-to-date, supplier rating
and supplier ranking).
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 Organisational Purchasing

Organisational purchasing function is defined as that function which is responsible for obtaining
goods and services on behalf of the organisation, either through outright purchase, lease or
hire.

Purchasing is not restricted to outright buying or owing an item because one can make use
of an item or equipment without necessarily having title (owning) to it.

Organisational buyers obtain materials, equipment, parts and services for the specific purpose
of industrial or agricultural production, or production or for use in the operation or conduct of a
plant, business, institution, profession or service.

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 The Relationship between Purchasing and Procurement
Purchasing describes the process of buying: learning of need, locating and selecting a supplier,
negotiating price and other pertinent obtaining or acquiring goods or services in return for
monetary or equivalent payment. It consists of activities such as ordering, expediting, receipting
and payment.

Purchasing is just one component of the wider function of procurement.

The term procurement is often used interchangeable with purchasing. Procurement is much
broader concept than purchasing process of obtaining goods or services in any way including
hiring, leasing, borrowing; and taking account of whole life costs.

It covers the totality of acquisition; starting from the identification of a requirement through to its
disposal at the end of the product life cycle. Its relates to goods works and service(s)
requirement.

Procurement therefore goes beyond just acquisition.

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 The Changing Views of PSM
Today, the emphasis is on the total supply management process in the context of organisational
goals and management of supply chains rather than on the transactions associated with
purchasing. The following are some of the factors that account for the greater recognition of
purchasing and supply management:

Baily, Farmer, Jessop & Jones, 1994 EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT 1
 The Role of PSM
The role of purchasing has changed from being reactive to proactive, static to dynamic.

The purchasing function today aimed at better quality, in more suitable quantities, just-in-
time for requirements from better suppliers at prices which continue to improve.

Generally, purchasing role would be strategic, or otherwise depending on:

type of goods or services

frequency of purchase

size of organisation

level of experience.

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 Purchasing Activities and Responsibilities
Purchasing functions operate in a very wide range of environments as such the tasks and
responsibilities of the function might differ from one organisation to the other.

Regardless of company size, Croell (1977) suggests the following responsibilities:

a. Provide all materials and services that the company decides not to make internally. In order to
achieve this, purchasing must perform the following tasks:

Select and develop as required, vendors capable of meeting company needs;

Prepare and design all purchase orders/contracts, so that the needs of the company and all
pertinent terms and conditions related to the purchase are clearly understood by the supplier
and documented accordingly;

Monitor supplier performance and related company activities during the course of the contract
to assure that performance is accomplished by both parties in accordance with that originally
intended;
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 Purchasing Activities and Responsibilities contd
Renegotiate or terminate purchase orders/contracts as required when changes occur, or as other
conditions develop that warrant such action.

b. Provide information to and participate in management planning when changes occur, or as

other conditions develop;

c. Review purchase specifications and assist operating departments in selection of required

materials and services for standardization purposes, and to assure their availability from
competent suppliers at reasonable prices;

d. Protect the company from all unnecessary or unauthorized commitments which may result
from inappropriate contracts or discussions with suppliers;

e. Dispose of all obsolete materials, equipment, or scrap that is no longer required for company
operations.
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 Purchasing Activities and Responsibilities
Todays supply management organisation has a great many more responsibilities than the traditional
buying activities that were associated with the function previously.
Regardless of company size, the following activities are common to most supply organisations:

AREA OF RESPONSIBILITY ACTIVITIES

Purchasing/Buying
Purchasing Research
Inventory Control
Transportation
Environmental and Investment
Recovery/Disposal
Creating contracts and supply agreements for materials, services, and capital items. Managing
key purchasing processes related to supplier selection, supplier evaluation, negotiation, and
contract management.
Identifying better techniques and approaches to supply management, including benchmarking
processes and systems. Identifying medium- and long-term changes in the markets, and
developing appropriate commodity plans to meet future needs. Identifying supply chain trends
and opportunities for better materials and services.
Managing inventories and expediting material delivery. Establishing and monitoring vendor-
managed inventory systems.
Managing inbound and outbound transportation services, including carrier selection.
Managing supply chain related activities to assure compliance with legal and regulatory
requirements and with company environmental policies. Managing disposal of surplus
materials and equipment.

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 Setting Objectives for Purchasing Function

To ensure that the roles and responsibilities of the purchasing function are carried out
satisfactorily, the work should be undertaken in line with agreed objectives and the overall
organisational strategy.
The process of purchasing management is illustrated below:
Establish purchasing
objectives

Identify, evaluate and select

Purchasing research
strategies

Prepare detailed plans

Implement plans

Evaluate outcomes

Van Weele, 1994

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 Objectives of the Purchasing Function

The objectives that may be identified for purchasing function are varied. The may include any or
all of the following:

To identify and select suppliers, and manage relations with them in a constructive and profitable
manner;

To protect the organisations cost structure;

To ensure availability of required materials without undue stockholding costs;

To maintain constructive relationships with other organisational functions;

Review purchasing procedures, techniques, supply, storage, distribution and transport chain;

To ensure that value for money is obtained in managing the purchasing function.
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 Purchasing in Different Sectors and Organisations
The basic objective of the purchasing function (achieving value for money spent) remains
the same regardless of the sector, the type of organisation and/or institution, size of the
organisation.

But the purchasing function is carried out differently in the various sectors and organisation,
thus the procedures and control mechanisms put in place.

The responsibilities of the purchasing manager/supply officer in Ghana is regulated by the

Public Procurement Act 2003 (Act 663).

In the private sector, the buying/purchasing is not different from that of the public sector but the
difference lies in the amount of control and interest shown by the public.

Private companies and institutions are not bound by the Public Procurement Act 2003 but they
their own internal mechanisms to check and ensure efficiency.
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 IMPORTANCE OF PSM
It helps to achieve value for money spent. For instance, good purchasing and supply chain
management ensures efficient utilization of resources.

Promote infrastructural development to meet the needs of user departments.

Efficient management of supply eliminates waste along the supply chain thereby delighting
customers, example, lower cost of operation leads to lower selling price to the final customer.

Ensure standardisation of products or emphasize on differentiation.

Effective purchasing and supply management avoids discrimination and ensures transparency and
fairness.

Maintain close links with other functional areas within the organisation.

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 Contribution of Purchasing to Profitability
The greatest scope for saving lies in the areas of greatest expenditure. The greatest areas
of greatest are purchasing and payments to personnel in most organisation.

In most manufacturing firms, their greatest expenditure lies in the bought-out materials,
supplies, and services.

An analysis of organisational expenditure in a typical manufacturing firm indicates that

materials cost constitutes about 65% - 75% of the total organisational cost or expenditure.

Purchasing and supply can make direct contribution through cost cutting/savings to the
company's bottom line (before tax) account on its profit and loss (P&L) statement.

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 Contribution of Purchasing to Profitability contd
ILLUSTRATION:
A company has annual sales of GHC5,000, with variable material costs equal to 60% of sales
and internal costs of GHC1,500. Profit is therefore GHCm [5000 (3, 000+ 1,500)] = GHC500.
Now, what will happen when?

a. Sales volumes increase by 5%; or alternatively

b. Materials costs decrease by 5%.

SOLUTION
Annual sales = GHC 5,000
Therefore 60% costs of materials acquisition of 50m = (60/100 5000), i.e. GHC 3,000 (mats costs)
If: 60% mats cost = GHC 3,000
Then X% internal cost = GHC 1,500
This implies X% = 30% (cross multiplication)
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 Contribution of Purchasing to Profitability contd
a. If @ GHC 50m sale profit is = GHC 5, 000
Then 5% increment in sales = GHC 5, 000 + (5/100 GHC 5, 000), thus GHC 5,250

60% of material cost based on new sales value is = 60/100(GHC 5,250) , thus GHC 3, 150

Assuming all other internal costs remain constant:

This implies total internal cost is: = 30% (GHC 5, 000), thus GHC 1, 500

Therefore, total cost of operation = GHCm [3, 150 + 1, 500]

= GHC 4, 650

Gross (total) profit after 5% of increase in sales = GHCm [5, 250 4, 650]

= 600
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 Contribution of Purchasing to Profitability contd
b. If @ GHC 50m sales, marginal operating profit is 10% (5m), thus 100% [60 + 30]%

60% of mats cost (GHC 50m) = GHC 3000

Therefore, 5% decrease (savings) on mats cost = 5/100 GHC3000

= GHC 150

Therefore, total profit is = GHC [500 + 150], thus GHC 650

NOTE: i. The profit increase achieved by increasing sales volume is not as great as that achieved
by reducing (saving) costs.

ii. It is easy to reduce overall purchasing cost by 5% than to increase sales by 5%. This is
termed as the profit leverage effect.

iii. Profit leverage effect in purchasing and supply management means the power of purchasing to
enhance profitability (particularly long-term benefits accruing to the organisation).
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 Organisation for Effective Purchasing and Supply Management
COSHH is a UK statutory Instrument that states general requirement on employers to
protect employees and other persons from the hazards of substance, including
hazardous chemicals used at work by risk assessment, control of exposure, health
surveillance and incident planning.

Hazardous chemicals refer to any chemical for which evaluation is performed by the
chemical for which evaluation is performed by the manufacturer/importer, as listed on
the Materials Safety Data Sheet (MSDS), indicates it is hazardous.

Hazardous Chemicals also refer those chemicals that have import restrictions, where
licenses and permits are needed before they are imported, transported, stored,
managed and controlled.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT 28

 Organising Purchasing Function
COSHH is a

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Quotes from health and safety leaders in the public and private sectors

Health and safety is

integral to success. Board level
Board members who involvement is an
do not show essential part of the
leadership in this 21st Century trading
area are failing in ethic. Attitudes to
their duty as health and safety
directors and their are determined by
moral duty, and are the bosses, not the
damaging their organisations size.
organisation.

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EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT
 Group Exercise
Discuss in detail the implications of health and safety legislation on an
organisation.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT 31

 REFERENCES
Annan J.S., (2013). Occupational & industrial safety & health in Ghana. Retrieved August 7, 2014,
from
http://www.ghanaweb.com/GhanaHomePage/NewsArchive/artikel.php?ID=197916.

Health and Safety Commission (2006). Health and safety statistics 2005/06. Sudbury: HSE Books,
UK.

Health and Safety at Work etc. Act 1974, s.18

ILO (2012). Occupational safety and health. Retrieved August 7, 2014, from
http://www.ilo.org/global/standards/subjects-covered-by-international-labour-standards/occupational-
safety-and-health/lang--en/index.htm.

Health and Safety Executive, (2005). Retrieved August 7, 2014, from

www.hse.gov.uk/puns/indg401.pdf.

Control of substances hazardous to health in the production of pottery Approved Code of Practice L60
HSE Books 1995.
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 Thank you

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 QUESTIONS

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