PURCHASING & SUPPLY

MANAGEMENT
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

By

PHIDELIS EBLEDZI
Accredited CILT Lecturer
(HND P/S, MISM, MILT, MBA Logistics)
Managing Partner
(Integrity Logistics and Educational Consult)
0240999639/0267300177
lifeide76@gmail.com
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

Rules
You
All

are expected to behave in a professional manner.

mobile phones should be off/silent.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

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

Outline of
This presentation covers:
Presentation

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

Instructional
Strategies
A combination of lectures, class discussions, class exercise
and assignment will be used throughout this course.

6
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

Background to Purchasing & Supply

(PSM)
Historically, the roots ofManagement
purchasing goes back as
far as to the early civilizations

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).

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:

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

Evolution of PSM

The Early Years

(Pre 1939)

Awareness in
manufacturing and
railway industry.
Customer orders
transformed to
purchase orders.
Purchasing process
and its contribution
to profitability
gained early
recognition.

Growth of
Purchasing
Fundamentals
(19001939)

A reactive clerical
function prior to
World War I. Basic
purchasing ideas
and procedures
developedrequisition handling,
enquiries/quotations
, price determination
etc. Purchasing
gained importance
during WWI.

World War II
(During & Post
1940 Mid
60s)

Managerial activity
success of firms no
longer depend on
what it could sell but
on how to required
and scarce resources.
Cost reduction
techniques, staff
development.
Purchasing was
relegated to the
background after the
WW II.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

Purchasing
Strategy
(Mid 1960s
Late 70s)

Global Era
(Late
1970 - 1999)
2000 and
beyond
Integrating into

Organisations faced Corporate Strategy

international - Integration of PSM
shortage of almost all
with total business
the basic raw process. Long range
materials required to planning, predicting
availability, policy
support operations,
determination. The
and unusual rate of
rate and scope of
price increases.
technology
Buying methods,
negotiation, interface applications change
PSM process and
development.
functions
Increased recognition
strategically and
for purchasing
operationally.
function.

Integration with
supply networks and
information
technology
Supplier relationships
are shifting from an
adversarial
approach to a more
cooperative approach,
use of cross functional
teams, performance
measurement of
purchasing,
implementation of good
information system

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

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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11

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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12

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

Purchasing describes the processProcurement
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.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

The Changing Views of

Today, the emphasis is on the total supply
management process in the context of organisational
PSM

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

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-intime 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.
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

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

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.

Purchasing Research

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.

Inventory Control

Managing inventories and expediting material delivery. Establishing and monitoring vendormanaged inventory systems.

Transportation

Managing inbound and outbound transportation services, including carrier selection.

Environmental and Investment

Recovery/Disposal

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.
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

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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
Purchasing research

Identify, evaluate and select

strategies
Prepare detailed plans
Implement plans
Evaluate outcomes

Van Weele, 1994

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

20

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.
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

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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.
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

22

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.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

23

Contribution of Purchasing to

The greatest scope for saving lies inProfitability

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.

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

2
4

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)

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

2
5

Contribution of Purchasing to Profitability

a. If @ GHC 50m sale profit is
Then 5% increment in sales

contd
= GHC 5, 000
= 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

b. If @ GHC 50m sales, marginal operating profit
is 10% (5m), thus 100% [60 + 30]%
contd
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).
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

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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.

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 COSHH is a

Organising Purchasing
Function

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29

Quotes from health and safety leaders in the public and

private sectors
Board level
Health and safety
involvement is an
is
integral
to
essential part of
success.
Board
the
members who do
21st
Century
not
show
trading
ethic.
leadership in this
Attitudes
to
area are failing in
health and safety
their
duty
as
directors and their
are
determined
moral duty, and
by the bosses,
are
damaging
not the
their
organisations
organisation.
size.
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30

Group
Exercise
Discuss in detail the implications of health and safety legislation on an
organisation.

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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/occupationalsafety-and-health/lang--en/index.htm.
Health
and
Safety
Executive,
www.hse.gov.uk/puns/indg401.pdf.

(2005).

Retrieved

August

7,

2014,

from

Control of substances hazardous to health in the production of pottery Approved Code of Practice
L60 HSE Books 1995.
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

3
2

Thank
you

EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT

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QUESTIONS

34
EVERY POUND SAVED ON PURCHASING IS A POUND OF PROFIT