Purchasing Management

A Class Report in
Operations Management (PA 204)
Presented to the School of Public Affairs and Governance (SPAG)
Silliman University, Dumaguete City,
Negros Oriental, Philippines

In Partial Fulfillment of the Requirements for the Degree

Masters of Public Administration
JL Chiu, Ph.D., MBA, CPA, CIA
Faculty

By

Mark Ronald C. Genove, RND

SY: Summer 2015

I.

Definition of Purchasing Management

Purchasing is a functional group and is part of the organizational

chart as well as a functional activity, which is the buying of goods and
services. The purchasing group performs many activities to ensure it
delivers maximum value to the organization. Purchasing has been
referred to as doing the five rights: getting the right quality, in the
right quantity, at the right time, for the right price, from the right
source. Another definition would state that purchasing management is
the same as strategic purchasing which is defined as when purchasing
activities are linked to the corporate strategic planning process or it is
the process of planning, implementing, evaluating, and controlling
strategic and operating purchasing decisions for directing all activities
of the purchasing function toward opportunities consistent with the
firm's capabilities to achieve its long-term goals. Purchasing
Management can then be defined as the concept of managing
strategic purchasing.
II.

Purchasing Operation and Structure

Purchasing management works with the purchasing
process. This is the process used to identify user requirements,
evaluate the need effectively and efficiently, identify suppliers,
ensure payment occurs promptly, ascertain that the need was
effectively met, and drive continuous improvement. This is a
challenge to all the organizations to perfect this process or their
will continually be a delay in implementing other important
strategic activities that help their organization become more
competitive. The following topics and ideas associated with
purchasing in multiple industries:
Purchasing objectives
Purchasing responsibilities
Procure to pay process
Types of purchases
Purchasing process improvements
A. Purchasing Objectives
1. Purchasing Objective 1: Supply Continuity
Purchasing perform a number of activities to satisfy
the operational requirements of internal customers.
Purchasing supports the needs of operations through the
purchase of raw materials, components, subassemblies,
repair and maintenance items, and services. Purchasing
may also support the requirements of physical distribution

centers responsible for storing and delivering replacement

parts or finished products to end customers. Purchasing
also supports engineering and technical groups, particularly
during new-product development and outsourcing of key
processes.
Increase in outsourcing, enterprises is relying
increasingly on external suppliers to provide not just
materials and products, but information technology,
services, and design activities. As a greater proportion of
the responsibility for managing key business processes
shifts to suppliers, purchasing must support this strategy by
providing an uninterrupted flow of high-quality goods and
services that internal customers require. Supporting this
flow requires purchasing to do the following:
a. Buy products and services at the right price
b. Buy them from the right source
c. Buy them at the right specification that meets users
needs
d. Buy them in the right quantity
e. Arrange for delivery at the right time
f. Require delivery to the right internal customer
Purchasing must be responsive to the materials and
support needs of its internal users (sometimes also called
internal customers). Failing to respond to the needs of
internal customers will diminish the confidence these users
have in purchasing, and they may try to negotiate contracts
themselves (a practice known as backdoor buying).
2. Purchasing Objective 2: Manage the Purchasing Process
Efficiently and Effectively
Purchasing must manage its internal operations
efficiently and effectively, by performing the following:
Determining staffing levels
Developing and adhering to administrative budgets
Providing professional training and growth opportunities
for employees
Introducing procure to pay systems that lead to
improved spending visibility, efficient invoicing and
payment, and user satisfaction
Purchasing management has limited resources
available to manage the purchasing process and must
continuously work toward improved utilization of these

resources. Limited resources include employees working

within the department, budgeted funds, time, information,
and knowledge. Organizations are therefore constantly
looking for people who have developed the skills necessary
to deal with the wide variety of tasks faced by purchasing.
Procurement people must be focused on continuously
improving transactional-level work through efficient
purchasing systems that keep suppliers satisfied, which
makes life easier for internal users.
3. Purchasing Objective 3: Develop Supply Base Management
One of the most important objectives of the
purchasing function is the selection, development, and
maintenance of supply, a process that is sometimes
described as supply base management. Purchasing must
keep abreast of current conditions in supply markets to
ensure that purchasing selects
a. Suppliers that are competitive,
b. Identifies new suppliers that have the potential for
excellent performance and develops closer relationships
with these suppliers,
c. Improves existing suppliers, and
d. Develops new suppliers that are not competitive.
In so doing, purchasing can select and manage a
supply base capable of providing performance advantages
in product cost, quality, technology, delivery, and newproduct development.
Supply base management requires that purchasing
pursue better relationships with external suppliers and
develop reliable, high-quality supply sources. This objective
also requires that purchasing work directly with suppliers to
improve existing capabilities and develop new capabilities.
4. Purchasing Objective 4: Develop Aligned Goals with Internal
Functional Stakeholders
Purchasing must communicate closely with other
functional groups, which are purchasings internal
customers or stakeholders, in that they have a significant
stake in the effectiveness of purchasing performance. If a
suppliers components are defective and causing problems
for manufacturing, then purchasing must work closely with
the supplier to improve its quality. Similarly, marketing may
spend a great deal on advertising and promotion, so
purchasing must ensure that the pricing is competitive and
that service-level agreements are being met. In order to
achieve this objective, purchasing must develop positive

relationships and interact closely with other functional

groups, including marketing, manufacturing, engineering,
technology, and finance.
5. Purchasing Objective 5: Support Organizational Goals and
Objectives
Single most important purchasing objective is to
support organizational goals and objectives because it is
not always the case that purchasing goals match
organizational goals. This objective implies that purchasing
can directly affect total performance and that purchasing
must concern themselves with organizational directives. For
example, lets assume an organization has an objective of
reducing the amount of inventory across its supply chain.
Purchasing can work with suppliers to deliver smaller
quantities more frequently, leading to inventory reductions.
Such policies will show up as improved performance on the
firms balance sheet and income statements. In so doing,
purchasing can be recognized as a strategic asset that
provides a powerful competitive advantage in the
marketplace.
6. Purchasing Objective 6: Develop Integrated Purchasing
Strategies That Support Organizational Strategies
Far too often the purchasing function fails to develop
strategies and plans that align with or support
organizational strategies or the plans of other business
functions. There are a number of reasons why purchasing
may fail to integrate their plans with company plans. First,
purchasing personnel have not historically participated in
senior-level corporate planning meetings, because they
were often viewed as providing a tactical support function.
Second, executive management has often been slow to
recognize the benefits that a world-class purchasing
function can provide. As these two conditions are rapidly
changing, purchasing is being integrated within the
strategic planning process in multiple industries. A
purchasing department actively involved within the
corporate planning process can provide supply market
intelligence that contributes to strategic planning. Effective
supply market intelligence involves the following:
Monitoring supply markets and trends (e.g., material
price increases, short- ages, changes in suppliers)
and interpreting the impact of these trends on
company strategies

 Identifying the critical materials and services required

to support company strategies in key performance
areas, particularly during new-product development
Developing supply options and contingency plans
that support company plans
Supporting the organizations need for a diverse and
globally competitive supply base
B. Purchasing Responsibilities
Functional groups carry out certain duties on behalf of the
organization. These are functions responsibility or span of
control. Purchasing must have the legitimate authority to make
decisions that fall within their span of control. Span of control is
established through senior management policies and support.
Although internal customers influence many important decisions,
final authority for certain matters must ultimately be assigned to
the purchasing department. Here are the details of those
decision areas that are rightfully part of purchasings operating
authority in most organizations.
Evaluate and Select Suppliers
o The most important duty of purchasing is the right to
evaluate and select suppliers. It is important to retain
this right to avoid maverick buying and sellinga
situation that occurs when sellers contact and attempt to
sell directly to end users (purchasings internal
customers). Of course, this right does not mean that
purchasing should not request assistance when
identifying or evaluating potential suppliers. The right to
evaluate and select suppliers also does not mean that
sales representatives are not allowed to talk with nonpurchasing
personnel.
However,
non-purchasing
personnel cannot make commitments to the seller or
enter into contractual agreements without purchasings
involvement. A trend that is affecting purchasings right
to select suppliers is the use of sourcing teams with
purchasing and non-purchasing representation. The
selection decision in sourcing teams requires that the
members reach a consensus in selecting suppliers.
Review Specifications
o The authority to review material specifications is also
within purchasings span of control, although engineering
sometimes disputes this right. Purchasing personnel
work hard to develop knowledge and expertise about a
wide variety of materials but must also make this
knowledge work to an organizations benefit. The right to

question allows purchasing to review specifications

where required. The right to question material
specifications also helps avoid developing material
specifications that only a users favorite supplier can
satisfy. A review of different requisitions may also reveal
that different users actually require the same material.
By combining purchase requirements, purchasing can
often achieve a lower total cost.
Act as the Primary Contact with Suppliers
o Purchasing departments historically have maintained a
policy that suppliers have contact only with purchasing
personnel. It recognized that purchasing must act as the
primary contact with suppliers, but that other functions
should be able to interact directly with suppliers as
needed. Involving multiple people enables the
communication process between internal customers,
purchasing, sales, and the suppliers internal functions to
be more efficient and accurate.
Determine the Method of Awarding Purchase Contracts
o An important area of control is that purchasing has the
right to determine how to award purchase contracts. It
could be based on competitive bidding, negotiation, or a
combination of the two approaches. Purchasing should
also lead or coordinate negotiations with suppliers. They
should use personnel from other functions to support the
negotiation process so that purchasing retains the right
to control the overall process, act as an agent to commit
an organization to a legal agreement, and negotiate a
purchase price.

C. Procure to Pay Process

The purchasing process includes all the steps that must
be completed when the organization requires some product,
material, or service. It is a process made up of all activities
associated with identifying needs, locating and selecting
suppliers, negotiating terms, and following up to ensure supplier
performance. These activities, or steps, are often referred to as
the procure to pay cycle. This term includes all of the steps
required, from the initial identification of requirements, to the
procurement /purchasing of the item, through the receipt of the
goods, and finally, to the payment of the supplier once the goods
are received.
There are two things to keep in mind when you think of
the purchasing process. First, how much effort a company spends

on these activities will differ greatly from one situation to the

next.
Second, as you look at the steps in the procure to pay
cycle recognize that companies can often gain a competitive
advantage by performing these activities better than their
competitors. Many organizations use information systems to
automate routine purchase order preparation, whereas others
use sourcing management teams to improve the outcome of
supplier evaluation and selection efforts.
This section presents the purchasing process as a cycle
consisting of six major stages:
a. Forecast and plan requirement
The purchasing cycle begins with the identification of a
need (a requirement). Procurement personnel have an
annual or biannual planning process to review the spending
pattern for the organization and prepare a forecast of what
will be purchased. In some cases, there may be a whole set
of new requirements that have not been planned for (such
as for new product introductions). When creating a forecast
for a needed product or service, internal customers may
not always be able to express exactly what it is they will
need at a single point in time.
b. Need clarification (requisition)
Internal customers identify their need for a product or
service and communicate to purchasing exactly what it is
they need and when it is required. Internal users
communicate their needs to purchasing in a variety of ways
including purchase requisitions from internal users,
forecasts and customer orders, routine reordering systems,
stock checks, and material requirements identified during
new- product development.
Purchase Requisitions/Statement of Work
The most common method of informing purchasing of
material needs is through a purchase requisition. Users
may also transmit their needs by phone, by word of mouth,
or through a computer-generated method. Although there
are a variety of purchase requisition formats, every
requisition should contain the following:
Description of required material or service
Quantity and date required
Estimated unit cost
Operating account to be charged
Date of requisition (this starts the tracking cycle)
Date required

Authorized signature

Although varieties of formats exist, at a minimum a

purchase requisition should include a detailed description
of the material or service, the quantity, date required,
estimated cost, and authorization. This form of
communication for a specific need is called a requisition. A
requisition is an electronic or paper form that provides
some critical information about the need or sometimes a
service is required where the user will complete a
statement of work (SOW) that specifies the work that is to
be completed, when it is needed, and what type of service
provider is required.
Contract/purchase order generation
Material needs are also communicated through a traveling
purchase requisitiona form consisting of a printed card or
a bar code with information about whom the item is
purchased from. This method is used primarily for very
small companies that have not automated their purchasing
or inventory management processes. Information on the
card or the database entry associated with the bar code
can include the following:
Description of item
List of approved supplier
Prices paid to suppliers
Reorder point
Record of usage
A traveling requisition can conserve time when reordering
routine materials and supplies. When stock levels reach a
specified reorder point, an employee notifies purchasing by
forwarding the traveling requisition maintained with the
inventory, or by electronically scanning the bar code into
the ordering system. The employee notes the current stock
level and desired delivery date. To eliminate the need to
research information, the traveling requisition includes
information required by a buyer to process an order. This
system saves time because it provides in- formation for the
item on the card (or in the database) that otherwise would
require research by a buyer. For example, the traveling
requisition can include a list of approved suppliers, prices,
a history of usage and ordering, and lead-time information.
Historical ordering information is noted directly on the
record over a period of time. As inventory systems continue
to become computerized (even at smaller companies),

traveling requisitions are used less frequently. With an

automated system, clerks simply enter the order
requirement and the system generates a purchase
requisition or automatically places an order.
Forecasts and Customer Orders
Customer orders can trigger a need for material
requirements, particularly when changes to existing
products require new components. Customer orders can
also signal the need to obtain existing materials. As
companies increasingly customize products to meet the
needs of individual customers, purchasing must be ready to
support new material requirements. Market forecasts can
also signal the need for material. An increasing product
forecast may signal the need for additional or new
material. If a supplier is already selected to provide that
material, then an automated ordering system such as a
material requirements planning (MRP) system may forward
the material request to suppliers automatically.
Reorder Point System
A reorder point system is used to identify purchase needs.
It uses information regarding order quantity and demand
forecasts unique to each item or part number maintained in
inventory. Each item in a reorder point system has a
predetermined order point and order quantity. When
inventory is depleted to a given level, the system notifies
the materials control department to issue a request to a
supplier for inventory replenishment. Most reorder point
systems are automated using predetermined ordering
parameters such as an economic order quantity. Reorder
point systems are used for production and nonproduction
items.
Stock Checks
Stock checks or cycle counts involve the physical checking
of inventory to verify that system records also called the
record on hand, match actual on-hand inventory levels
also called the physical on-hand levels. If the physical
inventory for an item is below the system amount, an
adjustment to that parts record can trigger a reorder
request for additional inventory. Physical inventory can be
less than what the computerized system indicates should
be on hand as this can be placed in an incorrect location,
damaged and is not properly recorded, stolen, and short

shipments from the supplier that receiving was not notice

all can contribute to the POH being less than the ROH.
Smaller firms that rely on standard, easy-to-obtain items
often use stock checks to determine material ordering
requirements. In this environment, the stock check consists
of physically visiting a part location to determine if there is
enough inventory to satisfy user requirements. No
purchase reorder is necessary if there is enough inventory
to cover expected requirements.
Cross-Functional New-Product Development Teams
Purchasing can begin to identify potential suppliers for
expected requirements rather than reacting to an
engineering requirement at a later date. This can
contribute to faster product development cycle times and
better supplier evaluation and selection. As firms continue
to be forced to reduce the time required to develop new
products, cross-functional interaction will increasingly be
the means through which organizations identify, and
hopefully anticipate, material requirements in the
purchasing process cycle.
A requisition document is completed by a requisitioner. A
requisitioner is someone who is authorized by purchasing
to complete the needs clarification process.
Description
Within the requisitioning process, it is important to include
a description of what is to be sourced. There are a variety
of methods for communicating the users requirements.
Description by market grade or industry standard might be
the best choice for standard items, where the requirements
are well understood and there is common agreement
between supply chain partners about what certain terms
mean. Description by brand is used when a product or
service is proprietary, or when there is a perceived
advantage to using a particular suppliers products or
services. Brand names, market grades, and industry
standards provide purchasing with an effective and
accurate shortcut for relaying the users needs to potential
suppliers.
There are three common methods include description by
specification, description by performance characteristics,
and proto- types or samples. Specifications can cover such
characteristics as the materials used, the manufacturing or
service steps required, and even the physical dimensions of
the product.

In contrast, description by performance characteristics

focuses attention on the outcomes the customer wants, not
on the precise configuration of the product or service. The
assumption is that the supplier will know the best way to
meet the customers needs.
c. Supplier Identification and Selection
Once the need and the description of the need are
identified, one of two things can happen: (1) The need is
fulfilled by a supplier that has an existing contractual
relationship with the buying company. (2) The need is
fulfilled by a new supplier that is not currently qualified to
provide products and services to the firm.
Through the need forecasting process, purchasing
personnel have already identified which suppliers will be
used to source the need, and they have already taken
steps to evaluate and prequalify the supplier. Qualification
is important, as the purchasing firm must ascertain that the
supplier meets several criteria and evaluate whether it is
qualified to do business and meet the needs of their
internal customers in a satisfactory manner.
When a supplier is not identified, or when the internal
customer requests that the need be fulfilled by a specific
supplier of their choosing, purchasing face a more difficult
challenge. Because there is no existing contract with the
supplier, they may balk at approving the need fulfillment
from this supplier. When internal customers purchase
directly from nonqualified suppliers and try to bypass
purchasing in the process, this is known as maverick
spending. That is, customers are acting as a maverick, in
that they do not wish to use suppliers already deemed by
purchasing as qualified to fulfill the need.
Maverick spending is acceptable when there is little risk
associated with the purchase. However, when high levels of
maverick spending occur repeatedly throughout the
company, it can result in major lost opportunities to control
cost and also expose the firm to undue risk and loss of
control over the purchasing process.
A qualified supplier is able to provide the product or
service, and that the supplier has been through the
evaluation process. Firms may also maintain a list of
preferred suppliers that receive the first opportunity for
new business. A preferred supplier has demonstrated its
performance capabilities through previous purchase
contracts and therefore receives preference during the
supplier selection process. By maintaining a preferred

supplier list, purchasing personnel can quickly identify

suppliers with proven performance capabilities.
In cases when there is not a preferred supplier available,
purchasing must get involved in selecting a supplier to
fulfill that need.
Final supplier selection occurs once purchasing completes
the activities required during the supplier evaluation
process. Selecting suppliers is perhaps one of the most
important activities performed by companies. Errors made
during this part of the purchasing cycle can be damaging
and long-lasting. Competitive bidding and negotiation are
two methods commonly used for final supplier selection
when there is not a preferred supplier.
Bidding / Negotiating
Competitive bidding and negotiation are two methods used
when selecting a supplier. Competitive bidding involves a
request for bids from suppliers with whom the buyer is
willing to do business. Purchasers often evaluate the bids
based on price.
If a preferred supplier exists, the buyer may simply
choose to negotiate the final details of the purchase
contract with that supplier. Buyers use competitive bidding
when price is a dominant criterion and the required item
has straightforward material specifications. If major
nonprice variables exist, then the buyer and seller usually
enter into direct negotiation. Competitive bidding can also
be used to narrow the list of suppliers before entering
contract negotiation. Negotiation is logical when
competitive bidding is not an appropriate method for
supplier selection. This often makes estimating purchase
costs on the part of the supplier difficult. As firms continue
to develop closer relationships with selected suppliers, the
negotiation process becomes one of reaching agreement
on items in a cooperative mode. One thing is certain: The
process that buyers use to select suppliers can vary widely
depending on the required item and the relationship that a
buyer has with its suppliers. For some items, a buyer may
know which supplier to use before the development of final
material specifications. For standard items, the competitive
bid process will remain an efficient method to purchase
relatively straightforward requirements. The bid process
can also reduce the list of potential suppliers before a
buyer begins time-consuming and costly negotiation. After
bids have been received or the negotiation has taken
place, the sourcing team will select a supplier and then

move on to authorize the purchase through the purchase

approval process.
Approval, Contract, and Purchase Order Preparation
After the supplier is selected or a requisition for a standard
item is received, purchasing grant an approval to purchase
the product or service. This is accomplished through
several different approaches, depending on the type of
system in place.
Purchase Order
The drafting of a purchase order, sometimes called a
purchase agreement, takes place after supplier selection is
complete. Purchasing must take great care when wording a
purchase agreement because it is a legally binding
document. Almost all purchase orders include on the
reverse side of the agreement the standard legal conditions
that the order (i.e., the contract) is subject to. The
purchase order details critical information about the
purchase:
quantity,
material
specification,
quality
requirements, price, delivery date, method of delivery,
ship-to address, purchase order number, and order due
date. This information, plus the name and address of the
purchasing company, appears on the front side of the
order.
Blanket Purchase Order
A blanket purchase orderan open order, usually effective
for one year, covering repeated purchases of an item or
family of items. Blanket orders eliminate the need to issue
a purchase order whenever there is a need for material.
Material Purchase Release
Buyers use material purchase releases to order items
covered by blanket purchase orders. Purchasing specifies
the required part number(s), quantity, unit price, required
receipt date, using department, ship-to address, and
method of shipment and forwards this to the supplier.
Purchasing forwards copies of this form to the supplier,
accounting, receiving, and traffic. Purchasing retains
several copies for its records. The copy to the supplier
serves as a notification of a required item or items.
Accounting receives a copy so it can match the quantity
received against the quantity ordered for payment
purposes. Receiving must have visibility of incoming orders
so it can compare ordered quantities with received

quantities. As with other forms, this part of the process is

increasingly becoming electronic.
In other cases, a more detailed contract is required
above and beyond a simple purchase order. A contract is
typically required if the size of the purchase exceeds a
predetermined monetary value, or if there are risks
associated with doing business with a supplier where the
potential for conflict and problems is not negotiated prior to
the purchase.
There can be different types of contract the most
common being Firm Fixed Price. This is the most basic
contractual pricing mechanism. In this type of purchase
contract, the price stated in the agreement does not
change, regard- less of fluctuations in general overall
economic conditions, industry competition, levels of supply,
market prices, or other environmental changes. Another
one is the Cost-Based Contracts which are appropriate for
situations in which there is a risk that a large contingency
fee might be included using a fixed-price contract. Costbased contracts typically represent a lower level of risk of
economic loss for suppliers, but they can also result in
lower overall costs to the purchaser through careful
contract management.
d. Receipt of material or service and documents
Receipt and Inspection
This phase of the purchasing cycle involves the physical
transmittal of purchase. This is a routine, but not
necessarily the most efficient, part of the purchasing cycle.
Purchasing or materials planning must minimize the time
required to release and receive material. Electronic data
interchange (EDI), which involves the electronic transfer of
purchase documents between the buyer and seller, can
help shorten order cycle time. Also, better relationships
with suppliers can support a just-in-time (JIT) ordering
system.
Purchasing or a materials control group must monitor the
status of open purchase orders. A buyer can minimize order
follow-up by selecting only the best suppliers and
developing stable forecasting and efficient ordering
systems. The receiving process should also be made as
efficient as possible by using bar code technology to
receive and place supplier deliveries in inventory.
Receiving process can include:
Material Packing Slip

Bill of Lading
Receiving Discrepancy Report
Just-in-Time Purchasing

e. Settlement, payment, and measurement of performance

Invoice Settlement and Payment
Once the item or service is delivered, the buying firm will
issue an authorization for payment to the supplier. Payment
is then made through the organizations ac- counts payable
department. This is increasingly being accomplished
through electronic means. Suppliers are more often being
paid through electronic funds transfer (EFT), which is the
automatic transfer of payment from the buyers bank
account to the suppliers bank account. More and more
organizations are moving to integrated systems where all
purchase orders, receipts, and payments are made
electronically.
Records Maintenance
The supplier performance database accumulates critical
performance data over an extended period, helping
purchasing identify trends or patterns in supplier
performance. This can be used when the firm must identify
opportunities for savings through a process known as a
spend analysis. Spend analysis becomes a critical input
into building sourcing strategies.
Continuously Measure and Manage Supplier Performance
Supplier measurement and management is a key part of
the purchasing cycle. Buyers should not assume that the
purchasing cycle ends with the receipt of an ordered item
or the selection of a supplier. Continuous measurement is
necessary to identify improvement opportunities or
supplier nonperformance. If no formal evaluation takes
place, a buyer has little insight into supplier performance
over time, and tracking any performance improvement that
results from supplier development efforts is not possible.
Without a measurement and evaluation system, a buyer
lacks the quantitative data necessary to support future
purchase decisions.
D. Types of purchases

Organizations buy many different goods and services. The

challenge is deciding which suppliers offer the best opportunity
for items an organization must purchase externally and how
organizations should establish measures that track the amount
of goods in physical inventory.
Raw Materials
The raw materials purchase category includes items such as
petroleum, coal, and lumber, and metals such as copper and
zinc. It can also include agricultural raw materials such as
soybeans and cotton. A key characteristic of a raw material is a
lack of processing by the supplier into a newly formed product.
Any processing that occurs makes the raw material saleable. For
example, copper requires refining to remove impurities from the
metal. Another key characteristic is that raw materials are not of
equal quality. Different types of coal, for example, can differ by
sulfur content. Raw materials often receive a grade indicating the
quality level. This allows raw materials purchases based on the
required grade.
Semi-finished Products and Components
Semi-finished products and components include all the items
purchased from suppliers required to support an organizations
final production. This includes single-part number components,
subassemblies, assemblies, subsystems, and systems. Semifinished products and components purchased by an automobile
producer include tires, seat assemblies, wheel bearings, and car
frames. Managing the purchase of semi-finished components is a
critical purchasing responsibility because components affect
product quality and cost. Outsourcing product requirements
increases the burden on purchasing to select qualified suppliers,
not only for basic components, but also for complex assemblies
and systems.
Finished Products
All organizations purchase finished items from external suppliers
for internal use. This category also includes purchased items that
require no major processing before resale to the end customers.
An organization may market under its own brand name an item
produced by another manufacturer. The purchase of finished
products also allows a company to offer a full range of products.
Purchasing must work closely with the producer of a finished
product to develop material specifications.

Maintenance, Repair, and Operating Items

Maintenance, repair, and operating (MRO) items include anything
that does not go directly into an organizations product.
However, these items are essential for running a business. This
includes spare machine parts, office and computer supplies, and
cleaning supplies. The way these items are typically dispersed
throughout an organization makes monitoring MRO inventory
difficult. The only way that most purchasing departments know
when to order MRO inventory is when a user forwards a purchase
requisition. Because all departments and locations use MRO
items, a typical
purchasing department can receive thousands of small-volume
purchase requisitions. Some purchasers refer to MRO items as
nuisance items.
Historically, most organizations have paid minimal attention to
MRO items. Consequently, (1) they have not tracked their MRO
inventory investment with the same concern with which they
track production buying, (2) they have too many MRO suppliers,
and (3) they commit a disproportionate amount of time to small
orders. With the development of computerized inventory systems
and the realization that MRO purchase dollar volume is often
quite high, firms have begun to take an active interest in controlling MRO inventory. At FedEx, an agreement with Staples allows
purchasing to be free of the burden of tracking office supply
requests. Instead, Staples provides a website listing all supplies
with prices; users can point and click on the items they need,
and the supplier will deliver to the users location the next
business day.
Production Support Items
Production support items directly support an organizations
production operation.
Services
All firms rely on external contractors for certain activities or
services. An organization may hire a lawn care service to
maintain the grounds around a facility or a heating and cooling
specialist to handle repairs that the maintenance staff cannot
perform. Other common services include machine repair, snow
removal, data entry, consultants, and the management of
cafeteria services. Like MRO items, the purchase of services
occurs throughout an organization. Therefore, there has been a
tendency to pay limited attention to them and to manage the
service purchases at the facility or department level. As with any
purchase category, careful and specialized attention can result in
achieving the best service at the lowest total cost.

Capital Equipment
Capital equipment purchasing involves buying assets intended
for use over one year. There are several categories of capital
equipment purchases. The first includes standard general
equipment that involves no special design requirements, which
include general-purpose material-handling equipment, computer
systems, and furniture. A second category includes capital
equipment designed specifically to meet the requirements of the
purchaser, which can include specialized production machinery,
new manufacturing plants, specialized machine tools, and powergenerating equip- ment. The purchase of these latter items
requires close technical involvement be- tween the buyer and
seller.
E. Purchasing process improvements
Most companies spend too much time and too many resources
managing the ordering of goods and service, particularly lowervalue items. Some purchasing departments spend 80% of their
time managing 20% of their total purchases. These are some of
the improvements that the organizations can apply.
Online Requisitioning Systems from Users to Purchasing
Online requisitioning systems are internal systems designed
primarily to save time through efficient and rapid
communication. Users should use these systems only if they
require purchasing involvement to support a material or service
need. If users do not require assistance, they should have access
to other low-dollar systems that do not require purchasing
involvement. A longer-term focus should be to create systems
and processes that empower users to obtain low-value items
directly from suppliers rather than involving purchasing.
Procurement Cards Issued to Users
One tool or system that most organizations agree is central to
improving the purchasing process is the use of the procurement
card, which is essentially a credit card provided to internal users.
When users have a lower-value requirement, they simply contact
a supplier and use the card to make the purchase. Cards work
well for items that do not have established suppliers or are not
covered by some other purchasing system. The primary benefits
from using cards include faster response to user needs, reduced
transaction costs, and reduced total transaction time. In most
organizations, purchasing is responsible for introducing and
maintaining the card program.

Electronic Purchasing Commerce through the Internet

Electronic purchasing commerce through the Internet refers to a
broad and diverse set of activities. Using the Internet to conduct
purchasing business is not extensive today, although commercial
Internet usage by purchasers should increase dramatically over
the next several years. The highest expected growth areas in ecommerce purchasing include the following:
Transmitting purchase orders to suppliers
Following up on the status of orders
Submitting requests for quotes to suppliers
Placing orders with suppliers
Making electronic funds transfer payments
Establishing electronic data interchange capability
Longer-Term Purchase Agreements
Longer-term purchase agreements usually cover a period of one
to five years, with renewal based on a suppliers ability to satisfy
performance expectations. These agreements can reduce the
transactions costs associated with lower-value purchases by
eliminating the need for time-consuming annual renewal.
Furthermore, once a purchaser and a supplier reach agreement,
material-releasing responsibility should shift to user groups.
Ideally, material releasing becomes electronic rather than
manual, even for lower-value items. However, blanket purchase
orders are typically used more often for lower-value items than
for longer-term agreements. Longer-term agreements are usually
more detailed in the contractual areas they address compared
with blanket purchase orders.
Online Ordering Systems to Suppliers
Online ordering systems involve direct electronic links from a
purchasers system to a suppliers system, often through a
modem or other web-enabled technologies. A major feature of
online ordering systems is that suppliers often bear the
responsibility for developing the software required to link with a
customers system. Online ordering is a logical approach once an
organization has established a blanket purchase agreement or
longer-term contract with a supplier. The strategic part of the
sourcing process involves identifying, evaluating, and selecting
suppliers. Online ordering systems allow purchasing or users to
place orders directly into a suppliers order-entry system.
Advantages of online ordering systems include the following:
Immediate visibility to back-ordered items

Faster order input time, which contributes to reduced order

cycle
Reduced ordering errors
Order tracking capabilities
Order acknowledgment from the supplier, often with shipping
commitment dates
Ability to batch multiple items from multiple users on a single
online order
Faster order cycle time from input to delivery
Suppliers establish online ordering systems so purchasers can
have dedicated access to the suppliers order-entry system. The
system creates a seamless tie-in or linkage between
organizations.
Purchasing Process Redesign
Most organizations recognize that purchasing process redesign
efforts often precede the development of low-dollar purchase
systems. Properly executed redesign efforts should lead to faster
cycle times and simplified processes that result in reduced
transactions costs.
The purchasing process is composed of many sub processes,
which means it can benefit from process mapping and redesign.
The low-value purchase process affects hundreds or even
thousands of individuals throughout a typical organizationusers
in every department, office, plant, and facility; accounts payable;
receiving and handling; purchasing; systems; and of course,
suppliers. Anyone with a need for low- value goods or services is
part of the low-value purchase process.
Electronic Data Interchange
Electronic data interchange involves a communications standard
that supports inter-organizational electronic exchange of
common business documents and information. It is a cooperative
effort between a buyer and seller to become more efficient by
streamlining communication processes. When used by buyers
and suppliers, EDI can help eliminate some steps involved in
traditional communication flows, which reduces time and cost.
Part of this shortfall is due to the introduction of auto fax
technology. For many organizations, especially smaller
organizations, auto fax is a quicker and less expensive method of
communicating with suppliers. Auto fax systems automatically
fax requirements to suppliers once the buyer knows those
requirements. The Internet also captures electronic volume that
formerly would have passed through third- party EDI providers.

Online Ordering through Electronic Catalogs

Purchasers are increasingly using this approach in conjunction
with other low-dollar purchase systems. The key benefit of using
electronic catalogs is their powerful low-cost search capability
and, if users order directly instead of relying on purchasing,
reduced total cycle time and ordering costs.
Allowing Users to Contact Suppliers Directly
This general method or approach involves different kinds of lowdollar systems. Procurement cards technically qualify as a
system that allows users to contact suppliers directly. Online
ordering systems also allow users to contact suppliers directly, or
the system may involve nothing more than a multiple part form,
such as a limited purchase order, that users complete as they
initiate an order.
Approaches that allow users to contact suppliers directly shift
responsibility for the transaction from purchasing to the user.
Even for items with no established supplier, purchasing still may
have limited or no involvement unless the requirement reaches a
predetermined dollar or activity level. If an item becomes a
repetitive purchase, then purchasing may determine if the item
warrants a blanket purchase order. Blanket purchase orders
usually allow users to contact suppliers directly when a need
arises for material.

III.

Reference
Monczka, R., et al (2009). Purchasing and Supply Chain
Management (4th
ed.). Ohio: South-Western Cengage
Learning.
Bedey, L., et al (2008). Purchasing Management. Gothenberg:
Chalmers.
Monczka, R., et al (2009). Purchasing and Supply Chain
Management (4th
ed.). Ohio: South-Western Cengage
Learning.