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purchasing and supply chain management Eighth Eighth Edition
Edition
The publication of Purchasing & Supply Chain Management, Eighth Edition marks the 28th anniversary
since the first edition was published, and it continues its claim to be the most comprehensive textbook on
purchasing and

chain management
purchasing and supply
purchasing and supply chain management currently available. It is also of value to professionals and those

supply chain
specialists in other fields who need an understanding of the role and influence of this vital area of business
performance.

The authors have used extensive knowledge of real-life events to bring the subject matter to life and to

management
provide a truly international focus on purchasing and supply chain. The economic climate is a massive
influence on the need for effective purchasing and supply chain management. Similarly, natural events
such as the Japanese earthquakes present the profession with unique challenges. The content of the book
will help focus attention in the appropriate risk areas of business. This new edition has been fully revised,
covering new developments in the purchasing and supply chain field. There is an increased emphasis on
key decisions, supplier relationships, pricing control and negotiation.

This new edition contains: Kenneth Lysons

• Clarity on strategy and policy making
• Key facets of public and private sector practices
• E-procurement, RFID, value for money and relevant skills
Brian Farrington
• Source material to facilitate further reading and study
• New case studies
• Past CIPS examination questions and discussion questions
• A comprehensive bibliography, index and glossary
• New teaching resources, including an Instructors Manual and comprehensive PowerPoint
slides available from www.pearsoned.co.uk/farrington

Purchasing & Supply Chain Management strives to be of great value to those aspiring to be leaders in
the profession and who are engaged in professional studies for the Chartered Institute of Purchasing and
Supply examinations. It will also provide valuable source information for practising professionals. The
content covers a great deal of the syllabus of the Chartered Institute of Purchasing and Supply at both the
Foundation and Professional stages.

Dr Brian Farrington is the Managing Director of his specialist company, Brian Farrington Limited. They
provide training and consultancy support to the public and private sectors of business. They work on major
projects and high-value, high-profile procurements. He has extensive experience in the USA, Canada,
Southern Africa, Hong Kong and Europe.

Lysons
and
Front cover image:
© Getty Images

Farrington
Purchasing and Supply Chain Management is published in association with the
Chartered Institute of Purchasing and Supply (CIPS), which is the central reference
point for the purchasing and supply profession. Details about courses, conferences www.pearson-books.com
and other services are available at www.cips.org
 Contents

Preface xvi
Acknowledgements xvii
Publisher’s acknowledgements xviii
Plan of the book xix

Part 1 Introduction and strategy 1

1 What is purchasing? 3
Learning outcomes 3
Key ideas 3
Introduction 3
1.1 Perspectives on purchasing 4
1.2 Definitions 5
1.3 The evolution of purchasing 9
1.4 Purchasing and change 16
1.5 World class purchasing 17
1.6 The status of purchasing and supply management (PSM) 19
Case study 26
Discussion questions 27
Past examination questions 27
References 28

2 Strategy and strategic procurement 30

Learning outcomes 30
Key ideas 30
Introduction 31
2.1 Strategic thinking 31
2.2 What is strategy? 32
2.3 Strategy development 34
2.4 Levels of organisational strategy 37
2.5 Corporate strategy 38
2.6 Growth strategies 38
2.7 Business-level strategy 41
2.8 Strategic management 44
2.9 Strategic analysis 44
2.10 Important environmental factors 45
2.11 Internal scrutiny 49
2.12 Strategy formulation 51
2.13 The evaluation of alternative strategies 56
2.14 Strategy implementation 67
2.15 Post-implementation evaluation, control and review 71
2.16 Strategic purchasing and supply chain process models 73

vii
Contents

Case study 76
Discussion questions 77
Past examination questions 78
References 79

3 Logistics and supply chains 81

Learning outcomes 81
Key ideas 81
Introduction 82
3.1 What is logistics? 82
3.2 Materials, logistics and distribution management 83
3.3 Reverse logistics 88
3.4 Supply chains 89
3.5 Supply chain management (SCM) 92
3.6 Supply chain vulnerability 97
3.7 SCM and logistics 98
3.8 Value chains 98
3.9 Value chain analysis 103
3.10 Supply chain optimisation 106
3.11 Supply chains and purchasing 109
Case study 112
Discussion questions 113
Past examination questions 114
References 114

4 Structure and supply chains 117

Learning outcomes 117
Key ideas 117
Introduction 118
4.1 Organisational structures 118
4.2 New type organisations 125
4.3 Networks 126
4.4 Factors in configurations 134
4.5 Lean organisations 138
4.6 Agile organisations and production 140
4.7 Supply and value chain mapping 144
Case study 148
Discussion questions 149
Past examination questions 150
References 150

5 Purchasing structure and design 153

Learning outcomes 153
Key ideas 153
Introduction 154
5.1 Business environmental factors and purchasing structures 154
5.2 Purchasing as a functional department 156

viii
 Contents

5.3 Horizontal organisations and processes 157

5.4 Teams 159
5.5 Cross-functional purchasing 160
5.6 Some problems of cross-functional teams 161
5.7 Cross-organisational teams 162
5.8 Divisional purchasing structures 162
5.9 Centralised purchasing 164
5.10 Decentralised purchasing 165
5.11 Purchasing in multi-plant organisations 166
5.12 Evolving purchasing structures 169
5.13 Organisational change 170
Case study 174
Discussion questions 175
Past examination questions 176
References 176

6 Purchasing procedures and supporting tools 178

Learning outcomes 178
Key ideas 178
Introduction 178
6.1 The sequence and impact of purchasing procedures 179
6.2 Analysing a procurement process 180
6.3 E-commerce, e-business, e-SCM and e-procurement 181
6.4 The evolution of e-procurement models 184
6.5 Electronic data interchange (EDI) 185
6.6 E-hubs, exchanges, portals and marketplaces 189
6.7 E-catalogues 192
6.8 E-auctions 195
6.9 Reverse auctions 196
6.10 E-payment 200
6.11 Low-value purchases 202
6.12 Purchasing manuals 203
6.13 Supplier manuals 205
6.14 Legal aspects of purchasing 206
Case study 210
Discussion questions 211
Past examination questions 212
References 212

Part 2 Strategy, tactics and operations 1: purchasing factors 215

7 Supplier relationships 217

Learning outcomes 217
Key ideas 217
Introduction 217
7.1 Relationship purchasing and purchasing relationships 218
7.2 The contrast between transactional and relationship purchasing,
taking account of contractual requirements 218

ix
Contents

7.3 Collaborative business relationships 218

7.4 Relationship formation 221
7.5 Models of supplier relationships 223
7.6 Practical considerations of supplier relationship management 229
7.7 The termination of relationships 232
7.8 Further aspects of relationships 234
Case study 235
Discussion questions 236
Past examination questions 236
References 237

8 Purchasing: product innovation, supplier involvement and development 238

Learning outcomes 238
Key ideas 238
8.1 Innovation and kaizen 240
8.2 Environmentally sensitive design 243
8.3 Purchasing and new product development 246
8.4 Early supplier involvement (ESI) 248
8.5 Advantages and problems of ESI 250
8.6 Supplier development 251
8.7 Supplier associations (SA) 254
Case study 256
Discussion questions 257
Past examination questions 258
References 258

9 Specifying and managing product quality 260

Learning outcomes 260
Key ideas 260
9.1 What is quality? 261
9.2 Quality systems 263
9.3 The importance of TQM 263
9.4 Specifications 268
9.5 Alternatives to individual specifications 272
9.6 Standardisation 275
9.7 Variety reduction 279
9.8 Quality assurance and quality control 280
9.9 Tests for quality control and reliability 280
9.10 The cost of quality 293
9.11 Value management, engineering and analysis 293
Case study 305
Discussion questions 305
Past examination questions 307
References 308

10 Matching supply with demand 309

Learning outcomes 309
Key ideas 309
10.1 Inventory, logistics and supply chain management 309

x
 Contents

10.2 Reasons for keeping inventory 310

10.3 Inventory classifications 310
10.4 Scope and aims of inventory management 311
10.5 Some tools of inventory management 312
10.6 The economics of inventory 317
10.7 Inventory performance measures 318
10.8 Safety stocks and service levels 319
10.9 The right quantity 322
10.10 The nature of demand 323
10.11 Forecasting demand 324
10.12 ‘Push’ and ‘pull’ inventories 329
10.13 Independent demand 330
10.14 Dependent demand 334
10.15 Just-in-time (JIT) 334
10.16 Materials and requirements planning (MRP) 341
10.17 Manufacturing resource planning (MRP II) 345
10.18 Enterprise resource planning (ERP) 347
10.19 Supply chain management systems 349
10.20 Distribution requirements planning (DRP) 349
10.21 Vendor-managed inventory (VMI) 351
10.22 Purchasing and inventory 354
Case study 354
Discussion questions 355
Past examination questions 356
References 357

11 Sourcing and the management of suppliers 358

Learning outcomes 358

Key ideas 358
11.1 What is sourcing? 359
11.2 The sourcing process 360
11.3 Sourcing information 361
11.4 Analysis of market conditions 361
11.5 Directives 363
11.6 E-sourcing 365
11.7 Locating suppliers 365
11.8 Supplier assessment 366
11.9 Supplier approval 374
11.10 Evaluating supplier performance 375
11.11 Policy issues in sourcing 378
11.12 The supplier base 379
11.13 Outsourcing 380
11.14 Outsourcing manufacturing 381
11.15 Outsourcing services 386
11.16 Drivers of outsourcing 388
11.17 Types of outsourcing 388
11.18 Benefits of outsourcing 388
11.19 Problems of outsourcing 389

xi
Contents

11.20 Handling an outsourcing project 390

11.21 Sub-contracting 392
11.22 Partnering 393
11.23 Intellectual property rights and secrecy 403
11.24 Support for marketing 404
11.25 Intra-company trading 405
11.26 Local suppliers 406
11.27 Purchasing consortia 406
11.28 Sustainability 407
11.29 Sourcing decisions 408
11.30 Factors in deciding where to buy 410
Case study 412
Discussion questions 413
Past examination questions 414
References 415

12 Managing purchase prices 417

Learning outcomes 417
Key ideas 417
12.1 What is price? 418
12.2 The buyer’s role in managing purchase prices 418
12.3 Supplier pricing decisions 426
12.4 The supplier’s choice of pricing strategy 428
12.5 Price and cost analysis 430
12.6 Competition legislation 433
12.7 Collusive tendering 435
12.8 Price variation formulae 436
Case study 438
Discussion questions 440
Past examination questions 441
References 442

Part 3 Strategy, tactics and operations 2: buying situations 443

13 Contrasting approaches to supply 445

Learning outcomes 445
Key ideas 445
Introduction 446
13.1 Industrial products 446
13.2 Capital investment items 446
13.3 Capital expenditure 447
13.4 Factors to be considered when buying capital equipment 448
13.5 Controlling the acquisition of capital equipment 449
13.6 New or used equipment 450
13.7 Financing the acquisition of capital equipment 452
13.8 Selecting suppliers of capital equipment 456
13.9 Evaluating capital investments 458
13.10 The buyer and capital investment purchases 461

xii
 Contents

13.11 Production materials 462

13.12 Raw materials 462
13.13 Futures dealing 464
13.14 Methods of commodity dealing 467
13.15 Purchasing non-domestic gas and electricity 470
13.16 Energy regulation 470
13.17 Energy supply chains in the UK 470
13.18 Markets 471
13.19 Pricing 472
13.20 Procuring energy contracts 473
13.21 Energy consultants and management 476
13.22 Component parts and assemblies 476
13.23 Consumables 477
13.24 Construction supplies and bills of quantities 478
13.25 Purchasing services 480
Case study 487
Discussion questions 489
Past examination questions 490
References 492

14 Buying from overseas 493

Learning outcomes 493
Key ideas 493
14.1 Terminology 494
14.2 Motives for buying from overseas 494
14.3 Sources of information for overseas suppliers 495
14.4 Overcoming challenges when sourcing overseas 496
14.5 Incoterms 500
14.6 Ocean shipping terminology 505
14.7 Customs and excise 506
14.8 Transport systems, costs and considerations 507
14.9 Freight agents 509
14.10 Methods of payment 512
14.11 Countertrade 514
14.12 The true cost of overseas buying 517
14.13 Buying capital equipment overseas 517
14.14 Factors in successful overseas buying 519
Case study 520
Discussion questions 520
Past examination questions 521
References 522

Part 4 Strategy, tactics and operations 3: negotiation, support

tools and performance 523

15 Negotiation 525
Learning outcomes 525
Key ideas 525

xiii
Contents

Introduction 526
15.1 Approaches to negotiation 529
15.2 The content of negotiation 529
15.3 Factors in negotiation 533
15.4 The negotiation process 537
15.5 Pre-negotiation 538
15.6 The actual negotiation 543
15.7 Post negotiation 549
15.8 What is effective negotiation? 550
15.9 Negotiation and relationships 550
15.10 Negotiation ethics 552
Case study 556
Discussion questions 557
Past examination questions 558
References 559

16 Support tools 560

Learning outcomes 560
Key ideas 560
16.1 Tendering 561
16.2 Debriefing unsuccessful tenderers 564
16.3 Post-tender negotiation (PTN) 565
16.4 Application of costing techniques 566
16.5 Lifecycle costing 566
16.6 Target costing 571
16.7 Absorption costing 573
16.8 Activity-based costing (ABC) and management 577
16.9 Standard costing 582
16.10 Budgets and budgetary control 584
16.11 Learning curves 584
16.12 Project management 589
16.13 Scheduling 591
16.14 Operational research (OR) 599
Case study 602
Discussion questions 602
Past examination questions 604
References 605

17 Purchasing research, performance and ethics 606

Learning outcomes 606
Key ideas 606
17.1 Purchasing research 606
17.2 Purchasing performance evaluation 611
17.3 Accounting approaches 613
17.4 The purchasing management audit approach 616
17.5 Benchmarking and ratios 621
17.6 Integrated benchmarking 628
17.7 Management by objectives (MBO) 631

xiv
 Contents

17.8 Miscellaneous approaches applicable to measuring purchasing

performance 632
17.9 Purchasing ethics 632
17.10 Some ethical issues relating to suppliers 633
17.11 Ethical codes and training 636
17.12 Ethical decisions 640
17.13 Purchasing and fraud 640
17.14 Environmental aspects of purchasing 647
Case study 657
Discussion questions 657
Past examination questions 659
References 659

Appendix 1: Code of professional ethics – Chartered Institute of

Purchasing and Supply (CIPS) (Approved by the CIPS Council,
11 March 2009) 662
Appendix 2: Principles and standards of ethical supply management
conduct (ISM) (Adopted May 2008) 664

Definitions, acronyms and foreign words and phrases 665

Index of names and organisations 670
Subject index 675

Supporting resources
Visit www.pearsoned.co.uk/farrington to find valuable online resources

For Instructors:
n Comprehensive Instructor’s Manual containing teaching tips and notes on case
studies for each chapter
n Downloadable PowerPoint slides containing figures from the book

For more information please contact your local Pearson Education sales
representative or visit www.pearsoned.co.uk/farrington

xv
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 Preface

Within a short time of the seventh edition being published, Dr Kenneth Lysons sadly
passed away. He had dedicated his professional life to influencing the role and impact
of purchasing. The fact that this book is now in its eighth edition is testimony to his
foresight, diligence and ability to explain complex matters in such a way that all levels
of the purchasing profession can identify with.
Dr Brian Farrington has accepted the role of lead author for the eighth edition. In
this regard there are some important points to make.
1 The publisher’s research showed that, broadly, the content of the book should
remain the same. The book’s intended purposes of providing a comprehensive input
supporting those engaged in professional studies and providing practitioners with
reference materials, meets defined needs.
2 Dr Farrington has used the resources of Steve Ashcroft and Ray Gambell to assist in
the considerable research that was undertaken. Both are professional colleagues
in Brian Farrington Ltd, a specialist consultancy and training company.
3 The eighth edition remains true to the principles and rigour of Dr Lysons, although
much of the content has been refreshed and brought up to date, taking due account
of developments in purchasing and supply chain management.
4 A greater balance of private and public sector practices has been included. There are
practices that are transferable.
5 As a textbook, coverage is provided of the syllabus of the Chartered Institute of
Purchasing and Supply at both the Foundation and Professional stages. The book
should be useful to students taking the examinations of the Institute of Logistics
and Transport and first and higher degrees in Business Strategies and Management,
which contain Purchasing and Supply Management Elements.
There are countless opportunities for the purchasing profession. There are unpre­
cedented challenges even as this edition was being finalised. The world economy is in
a serious downturn, there are supplier financial failures, energy costs are spiralling,
environmental considerations are paramount, the public sector is in a funding crisis and
the consequences of the world banking and financial crisis are still being played out.
Purchasing needs to have a strategic role in which it influences long­term business
decisions. Without question, purchasing is rapidly becoming a profession requiring an
extensive range of skills and knowledge, embracing technical, financial, contractual,
logistics, psychology, negotiations and strategic business inputs.
The names of people and organisations used in the case studies are, and are intended
to be, fictitious and any similarity to real people and organisations is entirely accidental.

xvi
 Acknowledgements

Dr Farrington is indebted to many organisations and people who gave their valuable
time sharing real life experiences. There are too many to name, but the support of David
Stanley (University of Manchester), Stephen Barnes (Chief Executive, Pendle Borough
Council), Doug Bridson (ex­Scottish Power), Brian Gibson (Sefton MBC), Sandy
Duckett (Standard Life) and Julie Muscroft (Walker Morris) deserve special mention.
The Chartered Institute of Purchasing and Supply kindly gave permission to use
questions set at the Foundation and Diploma Stage examinations and to quote from
publications written for the Institute by Kenneth Lysons.
Brian Farrington places on record the assistance and support given by Steve Ashcroft
and Ray Gambell. They are business colleagues and personal friends. Inevitably,
authors have to sacrifice some family life when producing books of this magnitude.
Brian’s wife, Joyce, has displayed patience, support and the ultimate belief that the
book’s success is a family achievement. She is right!
Sandra Small has project managed the production of the manuscript with impeccable
diligence. She has coped with the stress of meeting deadlines in an admirable way.
Thank you!
Without the encouragement, drive and enthusiasm of Rufus Curnow and Mary Lince
at Pearson it is unlikely that the book would have come to fruition. To them, a very
personal thanks.

xvii
 Publisher’s acknowledgements

We are grateful to the following for permission to reproduce copyright material:

Figures
Figures 1.4, 1.5 from Improving Purchase Performance, Pitman (Syson, R. 1992)
pp. 254–5; Figure 2.12 adapted from Purchasing must become supply management,
Harvard Business Review, Sept/Oct, pp. 109–17 (Kraljic, P. 1983); Figure 2.16 from
Rob Atkins and Bracknell Forest (UK) Borough Council; Figure 2.18 adapted from
http://www.cips.org/Documents/Resources/PSM_model_Feb03.pdf; Figures 3.14, 3.15
adapted from Integrated materials management: the value chain redefined, International
Journal of Logistics Management, 4(1), pp. 13–22 (Hines, P. 1993); Figures 3.16, 3.17
from Bourton Group, Half delivered: a survey of strategies and tactics in managing the
supply chain in manufacturing businesses, 1997, pp. 26–7; Figure 4.7 from Industrial
Technological Development: A Network Approach, Croom Helm (Hakansson, H.
1987); Figure 4.9 from New organizational forms for competing in highly dynamic
environments, British Journal of Management, 7, 203–18 (Craven, D.W., Piercy, N.F.
and Shipp, S.H. 1996); Figure 6.10 from The CIPS E-procurement guidelines: measur-
ing the benefits, CIPS; Figure 12.8 from Review of the UK’s Competition Landscape
(National Audit Office); Figure 15.4 adapted from Marketing by Agreement: A Cross-
cultural Approach to Business Negotiations, Wiley (McCall, J.M., and Norrington, M.B.
1986); Figure 15.5 adapted from Effect of delivery systems on collaborative negotia­
tions for large­scale infrastructure projects, Journal of Management in Engineering,
April 2001, 105–21 (Pena­Mora, F., and Tamaki, T.).

Tables
Table 4.2 from An initial classification of supply networks, International Journal of
Operations and Production Management, 20(6) (Lamming, R., Johnsen, T., Zheng, J.
and Harland, C. 2000); Table 4.4 from New organizational forms for competing in
highly dynamic environments, British Journal of Management, 7, 203–18 (Craven,
D.W., Piercy, N.F. and Shipp, S.H. 1996).

In some instances we have been unable to trace the owners of copyright material, and
we would appreciate any information that would enable us to do so.

xviii
 Plan of the book

Part 1 Introduction and strategy

Chapter 6
Chapter 2 Chapter 5 Purchasing
Chapter 1 Chapter 3 Chapter 4
Strategy and Purchasing procedures
What is Logistics and Structure and
strategic structure and and
purchasing? supply chains supply chains
procurement design supporting
tools

Part 2 Strategy, tactics and operations 1: purchasing factors

Chapter 8
Purchasing:
Chapter 9 Chapter 11
product Chapter 10 Chapter 12
Chapter 7 Specifying and Sourcing and
innovation, Matching Managing
Supplier managing the
supplier supply with purchase
relationships product management
involvement demand prices
quality of suppliers
and
development

Part 3 Strategy, tactics and operations 2: buying situations

Chapter 13 Chapter 14
Contrasting approaches to supply Buying from overseas

Part 4 Strategy, tactics and operations 3: negotiation, support tools and performance

Chapter 17
Chapter 15 Chapter 16
Purchasing research,
Negotiation Support tools
performance and ethics

xix
Part 1

Introduction and strategy

 Chapter 1

What is purchasing?

Learning outcomes
This chapter aims to provide an understanding of:
n the scope and influence of purchasing
n the stages of purchasing development and future trends in purchasing
development
n factors influencing the internal and external status of purchasing.

Key ideas
n Purchasing as a function, process, supply or value chain link, a relationship,
discipline and profession.
n Definitions of purchasing and procurement.
n The evolution of purchasing and supply management (PSM) from a reactive
transactional to a proactive strategic activity.
n Globalisation, information technology, changing production and management
philosophies as factors in the evolution of purchasing.
n Characteristics of purchasing in the future and world class purchasing.
n Leverage, focus and professionalism as factors contributing to the status of
purchasing within a particular organisation.
n Purchasing as a change agent.

Introduction
There is no one definition of Purchasing as will be shown later in this chapter. Neither
is there a term to describe the activity of committing expenditure. It is variously referred
to as Purchasing, Buying, Procurement, Materials Management, Supply Chain
Management, Purchasing and Supply Chain Management and Sourcing Management.
For consistency, the term Purchasing is used throughout the book. Where other terms
are used they will be defined.
The thrust of this book is to advance the view that purchasing applied at world class
standards has a focus on strategy, risk management, decision making, innovative supply

3
Part 1 · Introduction and strategy

chain creation, financial prudence, high ethical standards and finding sustainable
solutions for long-term supply needs.

1.1 Perspectives on purchasing

The study of purchasing can be approached from several perspectives. Such perspec-
tives include those of function, process, link in the supply or value chain, relationship,
discipline and profession.

1.1.1 Purchasing as a function

In management studies, a ‘function’ is often defined as a unit or department in which
people use specialised knowledge, skills and resources to perform specialised tasks.
A function is also what a resource is designed to do, so, for example, the function of a pen
is to make a mark. A distinction can therefore be made between the purchasing function
and the purchasing department. The former, in a business context, involves acquiring
raw materials, components, goods and services for conversion, consumption or resale.
The latter is the organisational unit responsible for carrying out this function. In too
many organisations, purchasing remains an inconsequential clerical function that has
little influence on third-party expenditure. In contrast, other organisations have created
integrated structures to cope with design, source selection, purchasing, logistics and
long-term product support.

1.1.2 Purchasing as a process

A process is a set of sub-processes or stages directed at achieving an output. The various
tasks or stages can be depicted as a process chain. Thus, as with Figure 1.1, purchasing
can be depicted as a process chain leading to the acquisition of supplies.
The link in the purchasing process chain is information. The challenge for purchasing
is to manage information at all phases of the process chain and ensure every stakeholder
is informed on the current status. A comprehensive knowledge management system is
essential.

1.1.3 Purchasing as a link in the supply or value chain

Supply and value chains are discussed in Chapter 3, where it is shown that, in his value
chain model, Porter1 regards procurement as one of four support activities that contribute
to the competitive advantage of a business. Purchasing within a manufacturing business
will link with production, warehousing and transportation. This may be contrasted

Figure 1.1 The purchasing process chain

4
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