Page 158 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Unit 8: Supply Chain Management

8.2 Purchasing Notes

Purchases represent about 55 percent of the cost of the finished product. This figure is typical for
manufacturing firms. Labour constitutes about 10 percent, with the remainder being overhead
expenses. Because materials comprise such a large component of the sales, companies can reap
large profits with a small percentage reduction in the cost of materials. That is one reason why
purchasing is a major component in supply-chain management as a key competitive weapon.

Though purchasing is a major constituent of the supply chain, it is also important that an
organization have an integrated view of the elements within the supply chain. Are the policies
and procedures used in purchasing consistent with those used in inventory control? Are the
proper material-handling and control devices available for the type and quantity of material
ordered and for the way the material is packaged? These are basic questions that have to be dealt
by most organizations.
This is especially important as many organizations do not have an integrated supply chain
function. The manager of purchasing, the materials manager, and the logistics manager, etc.
may all report to different supervisors. This makes the co-ordination of policies and procedures
and the integration of decisions difficult. Successful organizations devise innovative ways to
integrate the elements of material management into the supply chain.

Did u know? Purchasing can be both from the internal supply chain and the external supply
chain, however, the purchasing department normally is associated with the external supply
chain.
Purchasing identifies, selects and evaluates potential suppliers, develops detailed specifications
for the products or services needed by a firm, certifies the quality of supplier’s goods and
services, negotiates contractual terms and conditions, and develops long-term relationships
with key suppliers. Sourcing activities ensure that the company has suitable sources for the
goods and services it needs. In effect, purchasing activities link a firm with its upstream suppliers.
Purchasing has a dual role, one is that of a buyer and the other is a facilitator and an external
liaison with suppliers. The primary functions of purchasing are in the following areas:
1. Defining specifications for the purchased good or service
2. Developing criteria for supplier selection

3. Classifying suppliers according to performance
4. Evaluating the make or buy decision
5. Expediting and follow-up.

8.2.1 Defining Specifications

Specifications for goods specify the physical dimensions of the part, tolerances that will allow
the part to fit with other parts, strength and durability, size and shape and the required
performance levels. Though setting these standards begins in design, purchasing should carry
through to ensure that the acquired services or goods will do the job. The drawings and tolerances
should be clearly defined and not subject to different interpretations.
In some cases, designers may specify tolerances that cannot be met or that can be met only with
a significant increase in purchase price. The purchaser may have firsthand knowledge about

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