THE EVOLUTION AND ORGANIZATION OF PURCHASING AND SUPPLIES MANAGEMEN

THE EVOLUTION AND ORGANIZATION OF PURCHASING AND SUPPLIES MANAGEMENT NOTES

Introduction

Purchasing describes the process of buying: learning of need, locating
and selecting suppliers negotiating prices and other pertinent terms,
and follow up to ensure delivery. It entails the following activities:

Purchase needs identification through liaison with user departments.
Identification of potential suppliers and negotiation.
Selection of suppliers.
Market research for important materials.
Analysis of proposals.
Issuance of purchase orders.
Administration of contracts and resolutions of related problems
Maintenance of purchasing records.
Procurement is a broader term and includes purchasing stores,
traffic, receiving, incoming inspection and salvage. Procurement and
purchasing are used interchangeably, this is however somewhat
imprecise. Procurements process or concept encompasses a
wider range of supply activities than those included in the
purchasing functions .it includes the traditional role, with more
buyer participation is related material activities.

These activities include;

Development of material and service requirements and other
specifications.
Materials research and value analysis activities.
Extensive market research.
Conduct of all purchasing functions.
Suppliers quality management
Management of investments recovery activities (salvage of surplus
and scrap)

Essentially therefore procurement tends to be broader and more
proactive, focusing on strategic matters, rather than mere
implementation of purchasing concept. Supply management is a system
management concept employed by some organizations designed to optimize
the factors of materials costs, quality and services. It is a process
responsible for the development and management of a firm’s material
management of a firm total supply system. It includes and expands the
activities of the purchasing function and the procurement process. The
other activities in supply management are:

Early Purchasing Involvement (EPI) and Early Supplier Involvement
(ESI) in product design and subsequent specification development for
crucial items.
Heavy use of cross–functional teams in supplier qualification and
selection.
It depicts effect to develop better, more responsive supplies than
the term purchasing.
Purchasing partnering and strategic alliances with supplies.
Strengths Weaknesses Opportunities and Threats (SWOT) analysis.
Continuous monitoring and improvement in the supply chain.
Participation in strategic planning process.

Materials Management is the integration of related materials functions
to provide cost effective delivery of material and services to an
organization. It is an organizational concept from a managerial
perspective designed to enhance coordination and control of
the various materials activities. Since action or decision taken at any
point in the materials chain, usually impacts on a number of other
activities or decision point in the chain, it is imperative to enhance
reporting, communication and control procedures designed to enhance a
coordinated decision making among the involved groups or departments.
Materials management includes the following activities:

Purchasing and supply management activities.
Inventory management
Receiving activities
Stores and warehousing
In-plant material movement
Production planning, scheduling and control
Traffic and transportation
Scrap and surplus disposal.

Supply chain management is a system approach to managing the entire flow
of information, materials and services from raw materials, supplier
through factories, warehouses to end customers

1.2 The Evolution of Purchasing

Purchasing can be traced as far back as 2800 BC in cuneiform clay
tablets purchasing orders. Curiously only during the past two countries
has purchasing been addressed in trade books and text books. In 1832
Charles Babbage addressed purchasing in his book “On the Economy,
Machinery and Manufacturing” The first book devoted specifically to
purchasing, “The Handling of Railway Supplies: The Purchase and
Disposition” published in 1887 was authored by Marshall M. Kirkman. The
first college textbook on purchasing was authorized by Howard T. Lewis
of Harvard University in 1933. Although interest of purchasing and
supply function has been a phenomenon in the 20th, it was recognized as
independent and importing function well before 1900. Growth of interest
and attention to purchasing was rather uneven in the early 1900’s but by
1915, several books on purchase had appeared and several articles had
been published in trade press primarily in the engineering journals.

Yet prior to World War I (1914-1918) most firms regarded the purchase
function primarily as a clerical activity. However during the world war,
the ability to obtain raw materials supplies ad services needed to keep
the factories and mines operating were the key determinates of
organizational success. Attention was given to the organization policies
and procedures for purchase functions, and so it emerged as a recognized
management activity. Historically since management interest has focused
on research and development,
marketing, finance and operations, purchasing has frequently been
subordinated to these functions. Mangers are however becoming aware
impact on the bottom line that does any other functions. It is with such
insights the purchasing has evolved and evolves through
the following four stages.

Passive stage– Purchasing function has no strategic direction and
primarily reacts to the requests of other functions,
This stage is characterized by:

High proportion and individual communications due to purchasing low
visibility
Supplier selections based on price and availability.

Independent stage– Purchasing functions adopts the latest purchasing
techniques and processes, but its strategic direction is independent of
the firms competitive strategic.
In this stage;

Performance is based primary on cost reduction and efficiency measures.
Coordination links are established between purchasing and technical
discipline.
Top management recognizes the importance of professional development.
Top management recognizes the opportunities in purchasing for
contribution to profitability

Supportive– Purchasing function support the firm’s competitive
strategy by adoption purchasing techniques and products which
strengthens the firm’s competitive position
In this stage;

Purchase is included in sales proposal teams.
Suppliers are considered a resource with emphases on experience
motivation and attitude.
Market product and suppliers are continuously monitored and analyzed.

Integrative stage- Purchasing strategy is fully integrated into the
firm’s competitive strategy and constitutes part of an integrated effort
among peers to formulate and implement a strategic plan. In this stage;

Cross-functional training of purchasing professionals executive is
made available
Permanent lines of communication are established among other
functional areas.
Professional development focuses on strategic elements of the
competitive strategy
Purchasing performance is measures in terms of contributions to the
firm’s success

1.3 The Role of the Purchasing Department
The purchasing department is expected by the management to fulfill the
following five rights.

Right Quality
Right Suppliers
Right Quantity
Right Time
Right Price

These rights are also referred to as the principles of purchasing. In
order to undertake these rights the purchasing department delineates the
following as in roles;

To support company operations with an uninterrupted flow of
materials and services.
To buy competitively- Keep abreast of the forces of demand and
supply that regulate prices and material availability on the market;
understanding suppliers cost structure and ability to help reduce it
further; price negotiation to help reach a fair price.
To buy wisely- Continual search for better vales that yield the best
combination of quality service and price; reconciling users needs
with suppliers capabilities by use of cross functional teams;
To keep inventory investment and inventory losses at a practical
minimum.
To develop effective and reliable sources of supply- “buy suppliers”
not “products” e.g. co-operatives.
To develop good relationship with suppliers community and good
Continuing relationship with active suppliers- good relationship
with potential suppliers is invaluable.
To achieve maximum integration with other departments of the firm
Understanding major needs of user departments and provide such
support as; standardization of programmes, future price forecasting,
make or buy analysis and providing a repository of information and
data from suppliers.
To handle the purchasing and supply management function proactively
and in a professional cost effective manner- Continual analysis of
activities to eliminate those that only marginally contribute to the
effectiveness of the organization and establishing policies and
procedures that achieve departments objectives in the most cost
effective manner

1.4 The Contribution of Purchasing Department to the Overall Firm’s Performance

As a function, purchasing is common to all types of business operations.
The purchasing department however is an organizational unit of a firm
whose duties may include responsibility for part or all of the
purchasing function and additional activities as well. As a matter of
fact, the purchasing function is usually performed most effectively and
efficiently by a centralized unit made of buying specialist who a time
may work in conjunction with a more comprehensive cross-functional team
of specialists.

Prior to the 1950, the purchasing department was a clerically oriented
order placing unit. In the ensuing years however, managerial emphasis
has focused on specialization of individual buying activities,
professionalism and contribution to the firm’s profit. This emphasis by
the management on the purchasing department has been borne out to of the
realization of the profit potential of purchasing as a function. Every
shilling saved in purchasing is equivalent to a new shilling in profit.

Since firm’s profit margins reflect ability to control cost relative to
revenue. The assets turnover rate reflects management’s ability to
effectively utilize the firm’s productive assets. Therefore, a firm’s
management can improve ROI (managerial performance) by:

Reducing costs relative to sales.
Producing more sales from available assets (or increasing sales
relatively faster than investment)
By some combination of the two

Purchasing as such contribute to ROI by both increasing profit margins
and by increasing the assets turnover rate.

1.5 The Relationship between Purchasing Department and other Departments

Purchasing and Design/Engineering

Preparation of specifications for purchased material and components.
Quality assurance or defect prevention
Value analysis1 and Value engineering2
Information to design departments regarding availability of
materials, suppliers and costs.
Agreement of alternatives when specified materials are not available.
Issues arising from the increasing importance of buying rather that
making, i.e. reduction of vertical integration.
Importance of buying completer systems rather than individual
components.
evaluation of cheaper alternate materials;
Building co-makership/designership relationship.
Creation of a library of books, catalogues, journals and
specifications for joint use by the design and purchasing departments.

Purchasing and Production or “User” Departments

Preparation of material schedules to meet Just–In-Time (JIT)
requirements.
Ensuring that delivery schedules are maintained.
Control of inventory to meet production requirements.
Disposal of scrap and obsolete items
Quality control or defect detection and correction
Approval of “first off “samples.
Make or buy decisions
Sub-contracting decisions
Suppliers development
General involvement in such techniques and systems as production
technology, computer integrated technology and MRP3 and MRPII4

Purchasing and Marketing

Provision of sales forecasts on which purchasing can base its
forwarded planning of materials and components.
Ensuring that, by efficient buying, purchasing contributes to the
maintenance of competitive prices.
Obtaining materials on time to ensure that marketing and production meets the promised delivery
dates.
Exchange of information regarding customers and suppliers.
Marketing implications of partnerships sourcing.
Liaison with respect to reciprocal trading.

Purchasing and Finance

Provision of accurate forecasts of purchase schedules since they
have an impact on working capital and cash flow positions of the firm.
Evaluation of potential income from unexpected buying opportunities
against the potential income from other alternative uses of the
firm’s capital.
Co-ordination to arrive are at the right time to buy for the firm
(purchasing department’s right time may not be the finance
department’s right time)
A co-operative relationship between purchasing and finance clearly
impacts on the development of good supplier relationship e.g.
through prompt payments.

Factors Considered When Establishing Purchasing Liaison5

Expert knowledge required by the department concerned.
Departmental objectives of all the department
Responsibility held to every department and how they contribute to
the effectiveness within the purchasing function.
Materials requirements of various departments.
The channel of communication –free flow of information

Limitations to development of purchasing liaison

Department conflict due to differences in objects.
Time is wasted due to slow decision making.
Any failure in one department could lead to failure in other department.

Focuses in Purchasing and Supply

Historically purchasing focused on internal processes and tactics. In
recent years however there has been progression from these focuses to;

Value Adding Benefits
Today many world–class organizations expect their purchasing and supply
management function to focus on the following value-adding outputs of
proactive purchasing.

Quality- purchased materials and services should be virtually
defect-free.
Cost- strategic cost management through reduction total cost of
acquiring, moving, holding, converting and supporting products
containing purchased materials and services through out the supply
chain.
Time- the time required to bring a new product to the market can be
reduced by 20-40% through the establishment of a world-class
strategic supply management system.
Technology- ensuring the supply base of the firm provides
appropriate technology in a timely manner and ensuring that the
technology which affects the firm’s core competences is carefully
controlled when dealing with outside supplier.
Continuity of supply- monitoring supply trends, developing
appropriate supplier alliances and taking such other actions as
required in reducing the risk of supply disruptions.

Strategic focus

Integration- the firm’s strategy must be integrated with the firms
marketing, conversion and finance strategies and that of the
corporation.
Business environment- purchasing must address the identifications of
threat and opportunities in the supply environment.
Technology- technology is often used as a strategic tool. Its
control is therefore critical in order to insulate it from access
from competitors.
Component and commodity strategies- development of formalized market
driven supply plans for critical purchased materials and services.
Management Information System- ensuring a cost effective, timely and
comprehensive information system to provide data necessary to make
optimal supply decisions
Supply base strategy- the supply base that the firm belongs to must
be carefully developed and managed to ensure that the firm belongs
to a successful value chain in an increasingly competitive market place.
Centralization of development and management- while low-value adding
activities are decentralized the development and management of the
firms supply strategy is centralized.
Use of senior procurement professional- the key supply relationships
or alliance is assigned to senior procurement professional.
Use of professional personnel- the purchasing department is manned
by fewer but far more professional personnel.

1.6 Purchasing and Supply Organization Structure

In any given time there are several factors that determine whether
purchasing and supply is a top level function reporting to the C.E.O or
a Sub function reporting a top level executive such as the head of
manufacturing. These factors are;

Availability of materials- when materials are brought in volatile
markets suggest to price instability and periodic shortages then it
is wise t have purchasing as a top level function.
Absolute shilling volume of purchase- where the magnitude of
expenditure is high top level purchasing can produce significant
profit through nit savings which add in thousand when large purchase
are made.
Percent of product cost represented by materials- if the material
costs are 40% or more of its products cost small reductions in
material costs increase profit significantly, as such top-level
purchasing pays off.
Types of materials purchased- Most large firms use a wide range of
materials, many of whose prices and service arrangement can be
influenced by creative purchasing performance. However in firms
whose materials are standard top level purchasing can produce little
profit.

Types of Organization Structures

Organization theory identifies three types that represent distinct forms
of organizational structures, namely: functional, divisional, and matrix.

Functional Organizational Structures
These are based on specializations required to perform the primary tasks
of the organization. The specializations include; Research and
Development (R and D), Production, Purchasing, Marketing, Finance, Human
resource management. An illustration of a functional organizational
structure is shown below:

Advantages of a Functional Organizational Structure

The CEO is in touch with all primary functions.
It gives status to major functional areas.
Communication and decision making within the function is made easy.
It simplifies training of functional specialists
It preserves strategic control at top management level.

Disadvantages of a Functional Organizational Structure

Co-ordination with other functional areas may be unsatisfactory.
Emphasis can be on narrow functional rather than wider
organizational objectives.
Tasks are entities in themselves, unrelated to a wider process.
Many activities do not “add value.”
Wasteful interdepartmental conflict and rivalry may be encouraged.
Development of broadly trained managers is limited
Satisfaction of external and internal customers and suppliers may be
low.

Divisional Organizational Structures

These are based on the outputs of the organization i.e. products or
services. Other bases for divisionalization include geographical areas
or processes. It is the organizational pattern for large, highly
diversified organizations, often operating in several regions or
countries. At some level, a divisionalized structure will be split into
functionally based departments each responsible for a particular
function or process. As shown in the illustration below;

Advantages of a Divisional Organizational Structure

It concentrates on a product, services, geographical area, etc
It allows units to adapt to local circumstances.
It adapts to local legal, political and cultural factors.
It allows general managers to attend to strategies.
It provides a training ground for general management development.

Disadvantages of a Divisional Organizational Structure

There is a possible confusion over whether authority and
responsibility is centrally or divisionally located.
There is a possible conflict between divisions.
There is duplication of functional activities.
It requires a number of general managers.
It is expensive (high cost).
Co-ordination may be complex where there are two many divisions.

Matrix Organizational Structures

These are based on two forms of departmentalization: Functional and
divisional members of matrix organizations are therefore simultaneously
members of two sources of authority. A functional structure is shown below

Advantages of a Matrix Organizational Structure

It establishes one person as the focal point for all matters of the
organization.
It makes it possible to respond to the needs of several projects
simultaneously.
It makes maximum use of a limited pool of function specialists.
It ensures that functional expertise is equally available to all
projects
It provides excellent training for running a diversified organization.

Disadvantages of a Matrix Organizational Structure

Unity of command is lost (members report to more than one head).
Authority and responsibilities of managers overlap causing conflicts
and gaps in efforts across units and respect of priorities.
Places a premium on teamwork
Slows down decision making
It is difficult to explain to team members

Purchasing and Supply Department Internal Organization in a Single Plant Firm

Purchasing and supply work naturally divides into five district
classifications. This permits a high degree of specialization without
creating motivational problems for the purchasing personnel. These
classifications are;

Management- emphasizes in development of policies procedures control
and the mechanic of co-ordination of the purchasing depth
Buying- includes working with users to come up with specifications
investigating suppliers studying costs negotiations analysis bids
and selecting suppliers
Follow-up and expediting- includes supplier lesson work such as
reviewing the stats of orders writing and phoning suppliers and
occasionally visiting supplier plants.
Strategic planning and research work- activities in this area
include supply market studies, development of materials buying
strategic development of supply base and partnering players, product
research and vale analysis work and operating and information system
analysis.
Clerical activities- writing purchase order, main training fuels,
catalogue and library materials, records for commodities supplies,
prices and so on.

Purchasing and Supply Department Internal Organization in a Multi-Plant Firm

A Multi-plant firm faces an additional organizational questions not
faced by single-plant firms. This is the determination of the extent to
which purchasing and supply should be centralized at the corporate level
or decentralize the function to individual plants giving them full
authority to conduct all of their purchasing activities.

Advantages of Multi-plant Centralization

Greater buyer specialization- permit greater technical
specialization leading to development to more knowledgeable and more
highly skilled buying personnel
Economics of scale- by consolidating requirement large purchases are
made leading to quantity discounts, rebates and favorable prices.
Easier purchasing, coordination and control- this permits control
and administration of important policies and consistency of
purchasing ethics, budgets compliance, supplier relations and
consistency of purchasing practices.
Effective planning and research work- centralization of firm wide purchasing requirements provide the staff with know-how to improve purchasing and supply research work. This allows greater strategic materials planning with more depth and greeter efficiency.
Lower administration cost- since less staffing is required in a
centralized structure is less costly than the decentralized structure.
Holding and ordering costs will be lower

Advantages of Multi-plant Decentralization

Easier co-ordination with operating departments- decentralization
allows the buyer to be close to the user thus, coordination becomes
easier. It becomes easier to form buyer-user teams.
Speed of operation- transmittal of information from plant to
headquarters makes the purchasing procedure long than when the
purchasing department is located a the plant.
Effective use of local sources- with the plants geographically
dispersed it is difficult for a centralized purchasing department to
locate and develop potentially good supplier near each plant.
Plant autonomy- fundamental principal of management holds that the
delegation of responsibility must be accompanied by delegation of
adequate authority to carry out that responsibility. This is crucial
especially where plant contribution to a company’s bottom-line is
the responsibility of the plant manager.
Allows integrated problem solving instead of functional specialization.
Note: advantages of each are the disadvantages of the other

Factors affecting Feasibility and Desirability of Centralization

Similarity of materials usage
Plant department size
Geographical dispersion of plants
Volume to be materials used
Availability of storage space
Urgency of material requirements

THE EVOLUTION AND ORGANIZATION OF PURCHASING AND SUPPLIES MANAGEMEN