INTRODUCTION TO PURCHASING

Purchasing can be defined as the integrated activities that focuses on the

buying of materials and services needed to achieve organisational goals or
objectives.

It is the function responsible for obtaining by any legal means, materials

equipment, and other supplies services required by an organisation for
production and / or use. It can be known as buying, procurement, supply
management. However, there are differences among these terms. The
differences lie in the scope of each of the said terms thus:

(1) Buying – is reactive and is clerical in nature. Is the first stage in the
evolutionary process of the purchasing and supply function.

(2) Purchasing – the second stage in the evolutionary process and is broader
in scope than buying, but includes the buying activities. It involves determining
the need, selecting the right supplier, agreeing on an appropriate price, terms
and conditions, issuing the order/contract, and following up to ensure timely
delivery.

Activities in the purchasing stage include, but are not limited to:
 Co-ordination with user departments to identify purchase needs.
 Identification of potential suppliers
 Negotiation with potential suppliers
 Analysis of proposals/ bids/quotations
 Selection of suppliers
 Issuing purchase orders
 Administration of contracts
 Maintenance of purchase records

(3) Procurement – is proactive- and is broader in scope than the above two,
but includes activities in both. It is a broadened view of the traditional buying/
purchasing role, with more buyer participation in material related activities.
Activities included in procurement are:
 Conduct of all purchasing activities
 Participation in the development of material and service requirements and
their specifications
 Management of supplier quality, through in-process inspection, supplier
certification programs etc
 Conduct of all material studies and management of VA programs
 Management of investment recovery activities i.e. salvage of scrap, surplus,
obsolete and waste through beneficial disposal channels or methods

Procurement tends to be broader and more proactive with some focus on

strategic matters.

(4) Supply management – is the process responsible for the development and
management of the firm’s total supply chain, both internal and external. It
includes and expands on the activities of the purchasing and procurement
functions. Its major focus is strategic. Specific activities include:

 Conduct of all buying, purchasing and procurement activities

 Heavy use of cross- functional teams in supplier qualification and selection.
 Early Purchasing Involvement (EPI) and Early Supplier Involvement (ESI) in
product design and development of specifications.
 Continuous identification of opportunities and threats in the supply
environment
 Heavy use of purchasing partnering arrangements and strategic alliances
with suppliers – to develop close and mutually beneficial linkages with key
suppliers in the value chain
 Development of strategic long term acquisition plans for major materials.
 The supply chain concept represents the most advanced stage in the
evolutionary development of the purchasing/ procurement /supply
sphere of activity.
IMPORTANCE OF PURCHASING IN THE ORGANISATION
It is only recently that the importance of efficient purchasing has become
widespread. In the past, purchasing was regarded as a routine function, a
service function concerned with spending organisational money. This has
dramatically changed and now purchasing is regarded as an important
function, at par with other organisational activities such as HR, Marketing,
Finance, Production etc.

Purchasing profitability and purchasing professionalism have led many

organisations to recognise purchasing as a key activity in many companies. I.e.
how professional purchasing can contribute to the profitability of the
enterprise

CONTRIBUTIONS OF EFFICIENT PURCHASING TO PROFITABILITY

Some of the contributions that efficient purchasing can make to the

profitability of the organisation are as follows:

(a) Ensuring that the cost of bought out goods and services are
beneficial/advantageous to the organisation by:

 Negotiating price reductions

 Resisting price increases
 Consolidating purchases to obtain quantity discounts
 Obtaining cash discounts through prompt payment

(b) Enhancing the working capital of the company by:

 Disposing of unwanted materials or goods profitably

 Negotiating extended payment times for purchases
 Minimising the time stocks are held

Obtain value for money by:

(c)
 Having the right quality for a particular application
 Implementing a program of standardisation
 Initiating VA programs with designers and end users to reduce costs by
modifying components or substituting materials without detriment to the
quality of the product
(d) Expanding possible supply sources by:.
 Evaluating the performance of existing suppliers
 Discovering and appraising potential suppliers
 Developing the capacity of suppliers to meet the buyers requirements
 Investigating the possibility of sourcing from abroad
 Use of local rather than distant suppliers
 Scrutinizing the terms and conditions of contracts to ensure that they are
favourable to both buyer and supplier

(e) Improving the admin procedures of the purchasing function by:

 Installing machinery that enable purchasing to do its work efficiently e.g.
computers
 Determining the objectives to be met within a given period of time.
 Controlling and where possible reducing the expenditure on bought out
goods and services.
 Enhancing the standing of the function through fair dealings and adherence
to high ethical and professional standards.

OBJECTIVES OF THE PURCHASING FUNCTION.

The basic objective of the purchasing function is to obtain materials/products

of the right quality, in the right quantity, from the right source/supplier, at the
right time and at the right price. Price comes last, not because it is least in
importance, but because it usually depends on the other four rights. (The
purchasing mix elements),

However, some of these objectives may be conflicting e.g. it could be possible

to obtain the right quality, but not at the right price. The right suppliers are
usually the dearest. Each right therefore should be analysed in the light of the
requirements of the particular organisation under question or the particular
situation or circumstance.
Some of the specific purchasing objectives are:

 To make the maximum contribution to the competitiveness, profitability

and survival of the organisation
 To ensure continuity of supplies so that requirements of production and
other functions are met.
 To obtain industrial equipment, supplies and services at the lowest possible
cost commensurate with acceptable standards of quality.
 To ensure that investments in inventory is at the lowest practical levels
compatible with usage
 To buy wisely and competitively. This involves two distinct considerations:
To buy wisely involves a constant search for better values that yield the best
combination of price and quality and service. To buy competitively involves
keeping abreast of the forces of demand and supply that regulate prices
and availability of materials.
 To keep looses in stock arising from duplication, waste, deterioration,
obsolescence and pilferage at a minimum and to dispose of surplus and
other unwanted materials at the most profitable terms
 To build good long term relationships with chosen suppliers by such means
as fair dealings, cooperation and prompt payment
 Continually seek/search for other potential suppliers so as to assure
continuity of supplies
 To integrate the function with other organisational functions e.g.
production, stores etc so that the mgt of the organisation is both sound and
effective
 To keep under review purchasing policies, procedures and staff
development so that the above mentioned objectives can be achieved.

DUTIES AND RESPONSIBILITIES OF PURCHASING

The scope of the purchasing function depends on the Company’s
organisational structure, but the following are the most common duties or
responsibilities of purchasing:
Finding suppliers and approving –

 This is done through discussions with sales reps and examination of

catalogues and samples. Visits are also important as they allow the buyer
the opportunity to meet directly with those people he will be dealing with
and built a spirit of goodwill between them.

Purchasing at least total cost to the company – thus providing all materials
and services that the company elects not to provide internally.

 NB the lowest purchase price is not necessarily the most appropriate, since
it may attract other costs e.g. progressing, transport e.t.c. which ,increase
the total cost of the purchased item.

Ensuring delivery of goods at the right time

 The buyer contacts the supplier before the due date seeking assurance that
delivery dates will be met/ maintained.

Warning all concerned if delivery dates cannot be met –

 This allows the departments concerned to reschedule their programs if

necessary.

Verifying invoices presented by suppliers

 This is where checks are made to see whether the price quoted on the
invoice agree with that on the purchase order. A direct comparison of the
invoice, the purchase order and the GRN is done. Verification also checks on
quantities and product quality.

Organising all discussions with suppliers

 Both actual and potential. Discussions, be they technical or commercial

should not take place without the knowledge and participation of the
buyer. This is to avoid arrangements on price and deliveries being made
that are not beneficial to the company or against the buying policy.
Maintaining records regarding the operations of the function or department.

 These records contain such information as suppliers past performance,

current prices of materials/ supplies/ services, copies of orders, progress
chasing data, specs etc.

Acting as the window on the world.

 Thus bringing information about new products , prices etc into the
organisation and also communicating to the outside world the company’s
products and services

 Dispose of all obsolete, surplus and other unwanted materials through such
means as returning them to the supplier, donating, dumping selling
auctioning e.t.c.

PURCHASING AND ITS FUNCTIONAL RELATIONSHIPS

Historically, Purchasing was allied to Production since in a typical

manufacturing concern, the bulk of the purchased goods were used in the
production line. Historically too, the Purchasing officer was accountable to the
production manager or other functional executive.

Today, Purchasing has developed beyond the stage of subordinate

responsibility. It is now recognised as a separate, specialist function, equivalent
to and independent of production with responsibilities directly related to
purchasing. To achieve its goals, and to contribute to the survival of the
organisation as a whole, Purchasing must have good relationships with other
departments or functions in the firm. This relationship should be based on
mutual trust and two way communication between itself and other
departments.

Some areas in which consultation and co-operation take place between

purchasing and other functions are listed below:

a) Purchasing and Production

 The production department is the major internal customer of purchasing. It

transmits its manufacturing schedule or program and material requisitions
to purchasing. Purchasing in return translate these into procurement
 schedules, quantifying the amount of raw materials to meet the production
program
 The two departments agree on appropriate delivery dates for purchased
materials
 Purchasing advise production when deliveries are not going to be met so
that they can change their programs accordingly
 Production feedback information to purchasing concerning supplier
compliance to product specifications
 Purchasing advise production on expected delivery times and any changes
that may occur
 The two departments work together in make or buy decisions
 Together with Stores, the two departments work together in the disposal of
scrape, obsolete, surplus and other unwanted materials

b) Purchasing and Marketing

 The Marketing department provides the Sales forecast, which approximates

customer needs. This becomes the basis of the production program, which
in turn becomes the basis of the purchasing program that determines how
much raw materials are required to fulfil the sales forecast.
 Marketing communicates to production and purchasing the changes in the
sales forecast, which permit these departments to change their schedules
or programs accordingly.
 Purchasing communicates to marketing changes to material prices. This will
permit Sales and Marketing to evaluate the effect of the changes on selling
prices of finished products.
 Purchasing obtains materials in time to enable marketing to meet promised
delivery dates
 Purchasing must buy efficiently, thereby contributing to the maintenance of
competitive prices
 They work together in respect of reciprocity.
c) Purchasing and Finance/ Accounts
 The two departments work together in the preparation of budgets,
especially the materials budget. Thus purchasing must be allowed input in
the formulation its budget
 Good supplier relations can be sustained as a result of prompt payment for
goods delivered or services rendered/provided. Therefore purchasing
should impress upon Finance or Accounts the need to pay suppliers
promptly as this is a key contributor to good buyer- supplier relations
 Finance makes available funds to purchasing to take advantage of low
prices
 Purchasing certifies invoices presented by suppliers for payment by
Accounts
 Purchasing certifies progress payments
 They agree on price adjustments
 Purchasing advise on insurance in respect of inventory purchased and
stored
 Finance prepare cost data for use in negotiations with suppliers
 Together with Stores, Purchasing establish the value of inventory for use in
the preparation of final Accounts.

d) Purchasing and HRM

 HR provides HR policies, working conditions and appropriate remuneration
to purchasing personnel. In return, purchasing implements HR policies and
identifies any shortcomings of these policies to its own function.
 HR assist in the recruitment, interviewing and selection of purchasing
personnel
 Purchasing and HR work together on performance appraisal of purchasing
personnel and also in the promotion and regarding of the same
 HR assist purchasing in interpreting laws concerning employment and
settlement of disputes
 HR assists in wage negotiations and the implementation of disciplinary
measures
 HR provides personal details on purchasing employees which act as security
in the event of fraudulent activities by employees
e) Purchasing and Transport
 Transport can be an associate function of Purchasing as its work is closely
related with Purchasing.
 Purchasing acquires the vehicles and spares including servicing of vehicles
on behalf of Transport
 Transport provides shipping/transport services for Purchasing where this
service is not provided by the supplier. In this regard, purchasing provides
the collection schedule while Transport provide the vehicles
 Purchasing acquires transport consumables e.g. fuel and oils and makes
sure that there is a constant supply of these for effective transportation
 Purchasing helps in entering into leasing agreements where the outright
purchase of vehicles is not possible. Purchasing will be concerned with the
commercial aspects of the lease while transport will be concerned with the
technical aspects of the lease agreement.

f) Purchasing and Stores – see Stores notes

Organisational conflict

Arises where there is a divergence of interests between individuals (inter-

personal conflict), or groups (inter-group conflict). This can be as a result of
many factors, such as personality clashes, competition for scarce resources,
lack of trust and shared goals e.t.c. Though necessary to some extent, conflict
may be detrimental to an organisation.

Conflict can be avoided or reduced through:

 Opening lines of communication

 Building trust between and among individuals/groups
 Setting down clear, functional responsibilities between individuals /groups
 Regular meetings and appreciation of each other’s limitations
The Purchasing Manual

A manual is a medium of communication regarding policies, procedures, rules

and instructions. Therefore a purchasing manual communicates information
regarding purchasing policies, procedures, rules and regulations. It provides a
written form detailing approved policies and procedures relating to activities
undertaken and controlled by purchasing.

Symptoms of the need of a Manual

 Staff complains that they do not know what is going on, what is expected of
them, that communication is poor or non-existent.
 Staff complain that they receive too many instructions from different
supervisors, which is sometimes conflicting
 Systems fall down in the absence of key staff or suffer from teething
problems – a procedural manual would ensure that someone else knows or
can discover what ought to be done in a particular situation
 Each department does its own things in its own way with almost complete
disregard for the rest of the organisation
 Managers new to their jobs do not know precisely what their staff do
 Auditors or consultants ask the same procedural questions year after year
or complain of the same weaknesses in the system.
 Certain members of staff have built up a jealously guarded mystique about
their work (no one else can do it)

NB. If one or all of the above exist in an organisation, that may point to the
need for a manual that clarifies issues.

Components of a purchasing manual

The following may be found in a purchasing manual:

(a) Policies

These are statements which set out the broad guidelines within which the
purchasing function operates. General policies set out in broad terms the
objectives, responsibilities and authority of the purchasing function.
Consequential policies are derived from general policies and state how general
 policies are applied in specific situations of for specific activities. E.g policies
that deal with terms and conditions of purchase, policies in supplier selection,
to do with relationships with suppliers especially regarding gifts,
entertainment, policies to do with payment for purchases.

(b) Rules/regulations/ instructions

These are detailed rules or regulations regarding the conduct of purchasing

and associated staff in the various situations that arise in the course of their
duties. They may indicate what is to be done, how it should be done and
specify the parameters within which activities may be performed.

(c) Procedures

These prescribe the sequence of actions by which policies are implemented.

Procedures may indicate who does what, when, how, in what sequence and
even why it is done at all. E.g. descriptions, accompanied by flowcharts of
procedures relating to requisitioning, ordering, expediting, inspection,
procedures relating to the rejection of goods, procedures in relation to
disposal of unwanted materials, procedures in relation to evaluation of
suppliers, e.t.c.

The Manual Purchasing Procedure

Policies are expressed in procedures and rules. Procedures are the formal
arrangements by which policies are implemented.

The following is the basic manual purchasing procedure:

Apart from pre- purchase activities e.g participation in design and budget
decisions, buying falls in three main phases i.e. notification phase, ordering
phase and post ordering phase.

i. Notification/Identification phase: this is where the need to buy is

communicated to the purchasing department in the form of a purchase
requisition which is issued by the user department or Stores. It can also be
in the form of a BoM issued by the Design or Production.
ii. Ordering phase: on receipt of the purchase requisition or BoM, e buyer will
check them for accuracy and conformity to any standard specifications and
with purchase records. This is to establish whether the needed items have
been bought previously and if so , in what quantities and from which
supplier/s.

If the item is standard and has been bought before from a satisfactory
supplier at an acceptable price, a repeat order may be issued (straight re-
buy situation).

If however the item is not standard and /or has not been bought before
(new task) or for some reason, a change of supplier is required (modified
re-buy situation), the following additional steps will be involved:

(1) Enquiries will be send to possible suppliers accompanied by BoM and .other
specifications which will enable them to quote.

(2) Quotations will be received in response to enquiries. Quotations will be

compared with respect to prices, quality, delivery terms and other terms of
business.

It may be necessary at this stage to negotiate with possible supplier and

also an evaluation of supplier’s to undertake the order.

(3) Based on the information obtained, a purchase order will be issued to the
supplier whose quotation was acceptable. A copy of the order will be
retained in the purchasing office and other copies may be forwarded to:

 stores
 progress depart.
 computer section (for data processing)
 the originating depart.

(4) An order acknowledgement will be received from the supplier. On receipt,

this document should be examined to ensure that the order has been
accepted on the same terms and conditions agreed upon.

iii. Post ordering phase - It may be necessary to chase the order to ensure
that delivery dates are met or to expedite the delivery of overdue orders.
 An advice note that notifies the buyer that the goods have been despatched
or are ready for collection will be received from the supplier.

 When delivered, the delivery note or consignment note will be signed by

the receiving department. Goods will be inspected or checked for quantity,
condition and quality by the Stores department. If the goods are
satisfactory, a GRN will be completed and copies sent to the purchasing
department. If not satisfactory, the purchasing department will be notified
so that the complaint can be communicated to the concerned supplier.

 An invoice for the value of the goods will be received from the supplier. This
will be compared against the purchase order and the GRN. If they tally, the
invoice will be passed to Accounts for payment.
 On completion, the order will be transferred to the ‘file of closed orders’.

STEPS IN THE BUYING PROCEDURE

 Recognise the need

 Describe the need
 Select suppliers
 Determination of prices and availability
 Place the order
 Follow up or expedite
 Receive and inspect materials
 Check or audit the invoice
 Payment and close of order

PURCHASE DOCUMENTATION

The basic purchase documents are:

-the purchase requisition/BoM/Travelling requisition, the purchase enquiry, or

the purchase order. In addition, special forms may be used to confirm
cancellations or amendments to orders.

(a) PURCHASE REQUSITION - An official purchase document that

communicates to the purchasing department the user’s needs or
requirements. Its purposes are:
 to notify purchasing that a material need exist
 to specify what is required to meet that need
 to authorise procurement
 to provide evidence as to what is required.

Entries/ information found on the Purchase requisition

 Title, ‘PURCHASE REQUISITION’ at the head of the form

 A formal instruction to purchasing e.g ‘Please order’
 Requisition number
 Date prepared
 Quantity of goods required
 Description of goods required
 Suggested supplier
 Date by which goods are required
 Location to which goods must be delivered ( if different from that at the
head of the form)
 Code number ( stores identification number)
 a/c to which goods should be charged
 special instructions, if any
 requestioned by
 authorised by
 space for the order number to be inserted.

BoM serves the same purpose as the PR in Engineering undertakings when

materials are bought specifically for each order or contract received. It is a list
showing all the raw materials required to make a final product.

(b) Purchase Enquiry - a document whose main purpose is to obtain

information from possible suppliers relating to prices, quality, delivery and
other terms of business for bought out goods.

 Two copies, one for retention and the other for return will be send to each
prospective supplier who is asked to quote. It should be accompanied by
specifications and the buyer’s terms and conditions.

Entries
 Title, ‘Purchase Enquiry’ at the Head of the form
 Name, address, and telephone number of the buyer
 Name, address, and telephone number of the supplier
 A formal request to the supplier e.g. Pliz quote
 Quantity required
 Short description of goods
 Delivery date required
 Place of delivery
 Date prepared
 Space for supplier to indicate price, delivery etc
 order number reference (for use if quotation is accepted)
 Signature of person preparing enquiry.
 Requisition reference.

(c) Purchase order - a formal document that is used to communicate to outside

suppliers particulars of the buyer’s requirements e.g price, delivery and other
terms of business. One copy will be sent to the supplier, the other retained in
the purchasing department and other copies to relevant departments e.g
Stores, Transport e.t.c.
Companies use purchase orders for several reasons:
 Purchase orders allow buyers to clearly and explicitly communicate their
intentions to sellers
 Sellers are protected in case of a buyer's refusal to pay for goods or services
 Purchase orders help a buyer to manage incoming orders and pending
orders
 Commercial lenders or financial institutions may provide financial
assistance on the basis of purchase orders. There are various trade finance
facilities that almost every financial institution allows to business people
against purchase orders such as:
1. Before Shipment credit facility
2. Post Shipment credit facility
3. Trade Finance facility
4. Foreign Bill Purchase credit facility
5. Bill retirement credit facility
6. Order Confirmation
7. Follow up

Entries
 Title, ‘PURCHASE ORDER’ at the head of the form
 A formal instruction to the Supplier e.g ‘Please Supply the following’
 Order number
 Date prepared
 Quantity of goods required
 Description of goods required
 Name, address and telephone number of the Supplier
 Date by which goods are required
 Location to which goods must be delivered ( if different from that at the
head of the form)
 Code number ( stores identification number)
 Requisition number
 special instructions, if any
 requestioned by
 authorised by

Terms and conditions at the back of the order form

ASSIGNMENT

Purchase records – are concerned with storage of information. Apart from files
of requisitions, purchase orders and other original documents, purchase
records may include:

 Supplier index or records, giving details of addresses, telephone numbers,

staff and items supplied. May also include supplier visits information
 Supplier performance rating file – giving details of specific supplier
performance relating to price, quality, delivery etc
 Contracts records – which identifies contracts entered into with particular
suppliers, for what products /services, duration of contracts, terms and
conditions applying to each contract.
 Order registers – providing a record of all orders placed each day and thus
number of orders placed during a particular period e.g. a month
 File of closed orders
 File of open orders

Simplifying procedures for small value purchases

Low value orders increase costs as well as hamper purchasing and accounting
productivity. A low-cost, by-pass system is required for the efficient handling of
low value purchases. Such systems include:

(a) Telephone orders – where requirements are telephoned to the supplier

who is provided with the order number. The agreed price is recorded on the
order form, but no order is sent. Goods are invoiced against the order form.

(b) Petty cash – items are paid for at once from petty cash. Thus potential users
are provided with a petty cash imprest out of which such payments are
made.

(c) Standing orders – these are placed for small, regularly required items e.g
food, newspapers etc. The supplier continues to deliver until the order is
countermanded and submits an invoice at agreed intervals.

(d) Blanket orders – all orders for a range of items e.g. electrical fittings are
placed with one supplier for a period of time e.g. one year.

Required items are then called off by users who transmit requirements
directly from the supplier in a fax, telephone or computer interface. The
amount due is summarised by the supplier as a single invoice. Discounts
may be due.

(e) Stockless purchasing – same as above, but the supplier in this case agrees
to maintain stocks of specified items.

(f) Placement of own orders – in respect of items for which the purchasing
function’s expertise is not really necessary, ways should be found of
enabling internal users to place their own orders.
(g) Travelling requisitions – used for repetitive purchases. They are kept in the
Stores department. When stock needs to be replenished, the card is
completed and sends to the purchasing depart which will enter the details
required. The card is send back to Stores for filing, to be used again when
the item needs to be replenished.

Advantage is that considerable writing time is obviated and inaccuracies in

product descriptions are eliminated.

(h) EDI (electronic data interchange) – denotes computer linkages for

information exchange for order placement, invoicing and payment,
between the buyer and the supplier.

(i) Self billing - where purchasing, trade electronically and receives goods from
the supplier, checks that the goods were indeed ordered and then simply
pays. The supplier does not need to raise an invoice.

Other methods could include combining the purchase order and the order
acknowledgement, combine the purchase order and the GRN, combine the
requisition and the purchase order e.t.c.

(d) Organisation –

This deals with the grouping of similar activities or tasks into departments and
establishing relationships both within and between departments.

This is facilitated by charts or organograms showing the place of purchasing

within the organisation. An organogram is the internal design of an
organisation, which has been described as “the pattern of relationships among
positions in the organisation and among members of the organisation. It is
concerned with such elements as:

 The definition and allocation of specific tasks or jobs i.e. who does what
 The grouping of related tasks or jobs into functional departments e.g
purchasing, marketing, production, finance
 The allocation of responsibilities within departments including their job
descriptions,e.g. purchasing manager, purchasing officer, buyer, buying
clerk
 The creation of systems that facilitate coordination of activities between
and among departments
 The distribution of formal authority across the organisation.

Approaches to organisational structures

The following are examples of forms of organisational structures:

Functional structure - which is based on the inputs required to perform the

primary tasks of the organisation? Such inputs are specialisms e.g .finance,
production, Hr, purchasing e.t.c. and they are grouped into departments each
controlled by a manager with defined authority and responsibility.

Advantages
 CEO is in touch with all primary functions
 Gives status to major functional areas
 Easy communication and decision making within the organisation
 Simplifies training of functional specialists
 Preserves strategic control at top management level

Disadvantages
 Coordination with other functional areas may be difficult or unsatisfactory
wasteful interdepartmental conflict may be encouraged
 Tasks may be viewed as entities in themselves, unrelated to the wider
‘processes. This may be detrimental to the organisation as a whole.

Divisional structure
Are based on the outputs of the organisation i.e. products or services. Other
basis of divisionalisation could be geographical areas or processes. Usually for
large, highly diversified organisations, often operating in several regions or
countries. At some level however, a divisionalised structure will be split into
functionally based departments, each responsible for a particular function or
process.

Advantages

 Concentrates on products, service or geographical area

 Allows units to adapt to local circumstances be they legal, political or
cultural.

Disadvantages
 it requires a number of general managers and this may be expensive
 Possible confusion may arise over whether authority and responsibility is
centrally or divisionally located.
 Duplication of functional activities
 Complex coordination is required for all the various divisions, regions or
countries and this may be very expensive.
 There may be conflicts between divisions.

Matrix structure

It is based on two forms of departmentalisation. Firstly, functional

departmentalisation and second on departmentalisation according to project.
Members are therefore simultaneously of a specific function e.g purchasing
and also of a project team. (There are two intersecting lines of authority).

Attachment to a team is for the duration of the project/contract.

NB There is no ideal structure for purchasing since each structure is

constructed to suit the unique needs of the organisation.

There are basically three forms of purchasing organisation orientation i.e.

complete centralisation, complete decentralisation and a combination of the
two.

There are basically three forms of orientation to purchasing organisation i.e.

(a) Complete centralisation – where authority and responsibility is vested at a

single point, location or individual. When an organisation is located at a
single site, purchasing will normally take place in one single office or depart.
However, when the company has many branches or subsidiaries spread
over a certain geographical area, responsibility and authority will be located
at a single plant/ branch or site.

(b) Complete decentralisation – explains the absence of any central control or

influence over purchasing arrangements. Where an organisation is located
 at a single site, each department does its own purchasing. Where the
activities are spread over many plants, each plant will undertake its own
purchasing.

(c) A combination of the two (hybrid structure) – this is a compromise or

combination of the two extremes where some purchasing activities are
undertaken centrally and others are undertaken at plant/branch level. This
is to obtain the advantages or benefits from the best features of each while
avoiding the weaknesses or disadvantages of both approaches.

In this instance, it would be necessary to determine:

 The functions to be undertaken centrally
 The functions to be undertaken at a decentralised plant
 How coordination between central and plant level purchasing shall be
achieved.

Centralised functions
 Determination of major purchasing policies, procedures, strategies for the
whole organisation. E.g. single sourcing, reciprocity, procedures to be
followed when buying e.t.c.
 Negotiation for bulk contracts especially for homogeneous items used by a
number of plants
 Purchase of stationery and office equipment
 Control of group inventory
 Staff training and development
 Preparation of standard specifications for the whole organisation
 Purchase research into supply market conditions e.t.c.

Decentralised functions
 Purchase of small value orders
 Purchase of items or materials used by that plant only
 Emergency purchase
 Local buying to (to save transport costs)
 Local buying for social reasons

Advantages of complete centralisation

 Economies of scale due to consolidation of requirements which will result in
reduced costs as well as quantity discounts
 Uniform purchasing records and organisation ( economies in admin)
 Better stock management and material utilisation
 Consistent buying policies and procedures
 Maximum purchasing power when conducting negotiations with suppliers
 Avoids differences in prices between group units and of competition btw
them for materials in short supply
 Transport savings are realised by the consolidation of orders and delivery
schedules
 There is development of purchasing specialists whose primary concern is
purchasing and this can lead to more efficient purchasing

 Lower administration costs will be incurred as fewer purchase orders are

placed through consolidation

Advantages of decentralisation

 Greater flexibility – thus speed of operation meaning purchasing will

respond quickly to user needs
 Effective use of local sources
 Responsibility and authority increases staff morale
 Easing of workload on central plant staff
 Improved internal communication with user departments
 Closer liaison – a local buyer will be in closer contact with his unit and will
therefore be able to give greater assistance
 Quicker decision making
 Can be beneficial where plants are located in places or regions with
different business cultures.
Coordination of central and plant level purchasing
Coordination may be defined as the task of harmonising and synchronising the
various elements of an organisation to ensure consistency.

Coordination of central and plant level purchasing can be achieved through

meetings, the manual as well as training of purchasing personnel.

Status of purchasing within an organisation.

Status can be defined as the position or standing of a person, group or function

within an organisation. Purchasing may be accorded a high or relatively low
status. The status of purchasing is important for at least three reasons:

 The status accorded by top management to the purchasing function

influences the esteem in which the function is held at lower organisational
levels
 The status accorded to purchasing affects the status of groups or individuals
within that function
 Status is a motivational factor. If the need for status, esteem and self
actualisation are not met, then performance may be adversely affected and
staff turnover increases.

Where purchasing has a high status:

 It will have strong support from top management in its effort to negotiate
economically and effectively
 There would be equality of standing between purchasing and other
organisational functions e.g. marketing, production e.t.c.
 Considerable autonomy/ freedom will be given to purchasing staff
 Purchasing will be consulted in the critical stages of product development
with regard to the preparation of specifications, price, quality and
availability of materials
 The contribution of purchasing to organisational profitability and
effectiveness will be evaluated from time to time
 The professionalism, expertise and morale of purchasing staff will be high.
Where purchasing has a low status:
 It may seek to gain status and authority by insisting that all contacts with
suppliers be channelled through the purchasing/ buying department
 Purchasing will not be consulted regarding the preparation of product
specifications, sources of supply or the procurement of capital goods and
equipment
 The buyer may not have a knowledge of use to which his purchases are to
be put, thus preventing him from buying economically from alternative
sources
 buyers tend to do what they are told to do by design and production
departments
 The ability of the buyer to provide a high level of efficiency and job
performance may be damaged (because they are not motivated).
 the professionalism, expertise and morale of buying staff will be low

Indicators of purchasing status

 Structural factors
 Influential factors

The Right Quality

 Fitness for use/purpose.( Juran)

 The totality of features and characteristics of a product that bears on its
ability to satisfy a given need. It can also be defined as conformance to
specifications i.e. targets or tolerances, measurements as determined by
product engineers. Fitness for use explains how well the product fulfils its
intended function or purpose.

Dimensions of Quality ( GAVIN)

For it to be a quality product, it must satisfy the following dimensions:

 Performance - the product must satisfy /perform to the user’s expectations

 Reliability – the probability of the product surviving or being available for
use over a specific period of time under stated conditions of use.
 Conformance – does the product meet the pre-determined standards
which may be measurements, tolerance, weight etc
 Durability – this measures the projected use available from the product
over its intended life before it deteriorates or breaks down.
 Serviceability – the speed and ease of repairing the product or having it
repaired
 Features – these are the secondary characteristics of the product which
supplement the its primary or basic function.
 Aesthetics – these are personal judgements of how the product looks feels,
sounds, tastes or smells.
 Perceived quality – related with the reputation of the product. It is a
personal evaluation

Other factors that may also determine the right quality include:

 Price may also a factor that determines the products’ quality i.e. is the price
of the product commensurate with its quality.
 Customer specifications

Quality is therefore determined by balancing the technical considerations such

as fitness of purpose, performance, safety etc against commercial
considerations of availability and price. Therefore it is not the highest quality
that must be sought, but the optimum /right quality.

What determines quality?

The major determinant of quality is the product specification.

A specification is a statement of the attributes of a product, process or service.

It is explained as the detailed description of a product or service required. They
have two basic functions i.e. communication and comparison.

 They communicate/ inform the supplier what is required by the purchaser

(when prepared by the buyer)
 When prepared by the supplier, they provide a prospective
buyer/purchaser with a description of the attributes of a product
 Specifications also provide a criteria or standard against which products
delivered or services rendered may be compared.
Methods of specifying
(a) Specification by sample – a sample is a representative or identical item of
what the user department need. This method is suitable for situations
where the requirement is too technical or artistic to adequately describe
using any other method; hence the buyer simply attaches a sample as his
way of describing the required items to the supplier.

The sample can be provided by the buyer or the supplier. Where goods are
sold by sample it is implied that:

 The bulk of the goods shall correspond with the sample in quality
 The buyer shall have a reasonable opportunity of comparing the bulk with
the sample
 The goods shall be free from defects

Advantage is that it can be used to describe any product. However, samples

cannot be useful if the product is too big. Also some samples may change e.g in
colour with time which makes it difficult to compare the sample with the bulk
of the goods on delivery.

(b) Engineering drawing or blue prints - an engineering drawing is a

diagrammatic illustration or drawing of the requirement whereby
dimensions are stated which assist in obtaining the right item. These
drawings can be drawn manually or using computer technology.

Blueprints are 3D pictures of requirements which show the exact shape,

colour, appearance of the exact requirement. Useful for technical products
such as machine parts and pieces of equipment and buildings, blue prints
are the most accurate way of describing products. They also allow for
accurate comparison of delivered products against specifications. However,
they are expensive and time consuming to produce. Also requires
specialised and skilled personnel to produce blueprints.

(c) Specifying by brand name/trade name - a brand name is a name that is

internationally recognised. There can never be another name that rhymes or
spelt like the recognised one since it will be officially registered. E.g. Nike
shoes, Bata shoes, Nokia, LG, a brand mane can be descriptive to the contents
inside the package e.g. Softex tissue that implies the quality of softness of the
product. Specifying using this method may be necessary when:

 The suppliers’ manufacturing process is secret or covered by a patent.

 When only small quantities are being bought so that the preparation of
specifications by the buyer is impracticable.
 When testing by the buyer is impracticable
 -When the product is so effectively advertised as to create a preference on
the part of the buyer

Disadvantage
 The disadvantage in the use of brand names is that the price of branded
goods is higher that unbranded ones.
 Also, undue dependence on brands reduces competition with a negative
impact on prices.

(d) Market grades – suitable for agricultural products and minerals, this
method of specifying is based on uniform specification of an item or product as
accepted within that particular market e.g. for such products as maize, cotton,
tobacco such grades as A, B, C are generally accepted. A market signifies a
collection of buyers and suppliers trading in a particular commodity. This
method is has the advantage of being the only practical method that can be
used when specifying for the said commodities.

(e) Specifying by commercial standard – these refer to uniform specifications

that are adopted at either industry level, national level or internationally. ISO
i.e. International Standards Organisation is one of the international
organisations that produce world- wide standards. By specifying using
commercial standards which are well known by those in the industry, trade or
internationally, the number of potential suppliers increase with a positive
impact on prices through competition.

(f) Specification by inherent characteristics or natural properties – This means

identifying the various features on a product which will help in differentiating it
from other items. If used to describe requirements of a chemical nature, such
properties or characteristics as viscosity are identified. This method is useful if
the organisation in a position to test the availability of the said properties.
Also, the buyer should be able to adequately define these properties using the
natural technical language that is understood by the supplier.

(g) By user or performance specifications – here , the buyer informs the

supplier of the use to which the purchased item is to be put. This method is
applicable when purchasing items about which the buyer has little or no
technical knowledge about. Goods will be deemed of the right quality if satisfy
the purpose which they were bought.

STANDARDISATION AND VARIETY REDUCTION

 Can be defined as the discipline of using the minimum number of parts for a
maximum number of purposes.
 Reducing a series of items all serving the same purpose to one or a few
items
 Is the process of adopting uniform specifications in the requirements that
are bought by the buying organisation. Variety reduction refers to the
reduction of different specifications on related requirements, hence the
process of standardisation results in variety reduction.
NB A standard differs from a specification in that while every standard is a
specification, not every specification is a standard. The distinction lies in the
fact that a standard is a specification intended for recurrent use.

Advantages of standardisation and VR

 Saving of money and time by eliminating the need to prepare Company
specifications
 Accurate comparison of quotations since all prospective suppliers are
quoting for the same thing
 Clear specifications and the removal of uncertainty as to what is required
on the part of both the buyer and the supplier.
 Reduction of errors and conflict thus increasing supplier goodwill.
 Facilitation of international sourcing by reference to ISO standards.
 Saving in inventory and cost through variety reduction
 Reduced cost of MH when standardisation is used
 Elimination of the need to purchase costly brand names
 Reduced investment in spares for capital equipment
QUALITY RELATED CONCEPTS
Quality Circles – a small group of volunteers, usually from the same work area,
who meet regularly under the leadership of their supervisor to analyse and
solve problems relating to their responsibilities and where appropriate,
implement solutions agreed with management.

Total Quality Management – this refers to the endeavour to come up with

right quality product or service the first time it is produced and all the
subsequent times it is going to be produced, hence the motto, “Right the first
time and always”

The concept also recognises that the right quality results from everyone within
the organisation doing his or her part in the various activities connected with
quality issues. The cost of under quality include wasted raw materials, the cost
of re-work, product recall, replacement costs, warranty claims etc

Quality Assurance – all those planned and systematic activities implemented

within the quality system and demonstrated as needed to provide adequate
confidence that an organisation will fulfil the requirements of quality. It is
concerned with defect prevention. It is therefore proactive.

Quality Control - the operational techniques and activities that are used to
fulfil requirements for quality. It is concerned with defect detection and
correction and relates to such activities as determining where, how, and at
what intervals inspection should take place, the collection and analysis of data
relating to defects and determining what corrective action should be taken. It
is reactive in nature.

NB. Therefore quality control is a subset of quality assurance.

Quality surveillance – this refers to the monitoring activity whereby items or

activities performed are checked so that any deviations are highlighted to
quality control. The reason behind quality surveillance is that if operatives are
aware that someone is monitoring their performance, they are unlikely to do
activities that lead to wrong quality.
Value Analysis and Value Engineering

Both are cost reduction and control techniques. Value Analysis was developed
by the General Electric Company (USA) at the end of World War 11. Pioneered
by Lawrence D Miles, it is a systematic procedure aimed at ensuring that
necessary functions are achieved at minimum cost without detriment to
quality, reliability and performance. It is a post production activity.

Miles described VA as an organised, creative approach which has for its

intended purpose the efficient identification of unnecessary cost i.e. cost that
which provide neither quality, nor use nor life nor appearance nor customer
features. The objective being to achieve equivalent performance at lower cost.

Value Engineering – this is the application of VA at the pre- production or

design stage.

The difference btw VA and VE is that VA is concerned with cost correction

while VE is concerned with cost avoidance.

The Right Quantity – see Stores Admin notes

The Right Supplier/Source

The term source signifies an origin that provides requirements to the buyer.
This can also be called a supplier or vendor though the term vendor/ supplier
can have some differences.

A supplier signifies an organisation that manufactures what it sells while a

vendor signify an organisation that sells what it does not make.

A buying organisation has two main sources of supply: the organisation itself or
an independent organisation.

The items bought from outside are usually called bought out or outsourced
items whereas those obtained from within the organisation are called bought
in parts in-sourced parts.
Sources of information about suppliers

 trade directories/journals –
 yellow pages
 catalogues
 databases
 salespersons
 exhibitions/ trade fairs
 internet
 informal exchange of information between buyers

Characteristics of a the right supplier

 delivers on time
 honest and reliable i.e. competent
 has a credible reputation
 easily adapts to changes in the market
 offers after sales service
 provides products that are not harmful to the environment
 co-operates with the buyer on identified areas
 charges reasonable prices
 allows reasonable payment terms such as credit facilities
 gives cash and quantity discounts

Make or Buy Decisions

Decisions taken by an organisation on whether to make or produce their

requirements in-house or to buy it from outside. This is usually done by
comparison of the cost of making the component internally with the cost of
buying the component from the external supplier. These decisions can be
made at a strategic level (macro) or a tactical level (micro).
Factors that favour the Make option

 when making the product is relatively cheaper than buying it from outside
suppliers
 When there is need to use unutilised capacity within the organisation i.e.
the organisation has the skill, time and technical capacity to produce/
chance to use idle capacity and resources.
 For strategic reasons, so that the buying organisation is not at a
disadvantage when the supplier is a monopoly
 when there is need to keep or preserve design secrecy in its products
 To maintain consistent quality in products. This may not be possible if the
organisation is buying inputs from different suppliers
 To supplement insufficient quantities those are being obtained from
outside suppliers.
 Quantities required are substantial
 To reduce lead times

Factors that favour the Buy option

 When it is cheaper to buy than to make

 When the organisation does not have the skill, technology or time to make
 Quantities required are small for economic production
 Items required are readily available
 The demand for the items might be temporary hence investing in
production machinery would be wastage of resources.
 The requirement is patented i.e. legally protected and therefore the
producer would have legally protected rights.

Single vs Multiple

Single sourcing is the deliberate buying of requirements from only supplier

among many on the market, whereas multiple sourcing is the use of many
suppliers for a particular requirement. A number of reasons support either of
each option:
Reasons for multiple sourcing

 To reduce over-dependence or reliance on a single supplier in order to

avoid being taken advantage of
 To room for choice
 In order to get the right quantity that might be too big for one supplier
 It can be a way of promoting Corporate Social Responsibility by giving a
number of suppliers the Company’s business.
 To safeguard against risk associated with a single source who fails to
deliver.

Reasons for Single sourcing

 The required item might be patented .ie. have legal protection or restriction
governing its production, hence the patent holder is the only supplier
 The quantities required by the organisation are so small that it is
uneconomic to split them among several suppliers
 The performance of the supplier might be better than any other supplier of
that requirement and this is applicable in repeat purchases where the
supplier performance would have been evaluated on the prior transaction.
 The buying organisation might be in a reciprocal agreement which entails
orders have to be exchanged btw the buyer and the supplier
 It might be cheaper to buy than to make
 The particular requirement or brand name might be so desirable that the
buyi ng organisation is forced to single source

NB. Buying from a supplier who is the only one on the market (monopoly) is
called sole sourcing.

Supplier evaluation

Explains the assessment of the supplier, be they actual or potential. The

assessment or evaluation of a potential supplier is called supplier appraisal and
the evaluation of actual supplier is called supplier rating.
Supplier appraisal

The assessment of a potential supplier before dealing with them. It can be

done through a combination of:

 Desk research – using published or unpublished data already in existence

e.g. Company reports, balance sheets, strike records e.t.c. useful when
evaluating the financial situation of a prospective supplier.
 Field research – whose purpose is to obtain further data regarding the
technical, production and managerial capacities of the prospective supplier
by visit to their Company.

NB. When visiting a prospective suppliers’ Company, a checklist should be

prepared which indicates areas that warrant particular attention such as:
 Adequacy and care of production equipment, also whether they are state-
of- the- art or antiquated, their capacity, whether well cared or neglected

 Means of controlling quality – inspection methods used will indicate their

adequacy to ensure the specified quality of the product, frequency of
inspection during production

 Competence of technical staff – through conversations with design,

research, or laboratory staff indicate their knowledge of latest materials,
tools and processes relating to their products and anticipated
developments in their industry

 Housekeeping- whether plant is orderly and clean in its general

appearance. This indicates careful and control by management, which may
inspire confidence that its products will be produced with the same care
and pride in their quality.

 Technical knowledge of supervisory personnel – this indicates their ability

to control and improve the operations/processes under their supervision

 Personal attitudes – attitudes of the suppliers’ employees towards their

work indicates the likely quality of their output and service dependability.

 Competence of management – all the above are a reflection of

management and therefore indicate its quality.
Supplier performance rating/vendor rating

Is the assessment of the supplier based on his actual performance. This is

usually in respect of one or more of the following factors, price, quality,
delivery time and service.

This enables the buyer to provide the supplier with an indication of his
performance rating and where improvements, if any, are required. Results also
provide buyer with objective information in which judgements relating to
source selection can be based.

International sourcing

Buying from outside the firms’ country of manufacture.

Reasons for buying from outside the country

 To access worldwide technology

 It may be cheaper to buy outside than within the country
 Because requirements are not available in the domestic market
 Quantities available within the domestic market are not sufficient to cover
the buyers’ requirements
 To obtain better quality goods/ required quality may not be available
domestically
 For insurance reasons i.e. buying abroad to maintain continued supply in
times of domestic shortages or strikes
 For countertrade reasons
 To avail variety to customers

Challenges/roadblocks to international sourcing/problems

 Contact with suppliers may be difficult or expensive due to distance
 The time required for negotiation is generally longer than with home
suppliers
 Currency difficulties – to be resolved are such issues as:
 In what currency is the price quoted and payment to be made
 How payment is to be made- LoC, cash, telegraphic transfers
 Legal difficulties to do with: what law shall govern the contract,
arrangements for dispute resolution, terms and conditions applicable
 Delays in delivery due to weather, dock strikes, Customs actions
 Import duties, quotas and insurance
 More documentation than in the home trade e.g. Bills of Lading, Certificates
of Origin, Customs entry forms
 Language difficulties
 Specifications especially where there are differences in units of
measurement
 Redress of complaints
 Cultural differences – ‘the way we do things here’ which may differ from
nationality to nationality.

Partnership sourcing

Defined as a commitment to both customers and suppliers, regardless of size

to a long term relationship based on clear, mutually agreed objectives to strive
for world class capability and competitiveness.

Reasons for seeking partnerships include improvements in :

 Quality
 Delivery and completion times
 Production costs
 Stock levels
 Skill and resource availability
 Design
Comparison of traditional and partnership sourcing

TRADITIONAL SOURCING PARTNERSHIP SOURCING

Emphasises competitiveness and self Emphasises cooperation and a
interest of both buyer and supplier community of interest btw buyer
and supplier
Emphasis on unit price with lowest price Emphasis on total acquisition cost
as buyers’ important consideration
Emphasis is on short term business Emphasis is on long term business
relationship relationship with ESI
Emphasis on quality checks with Emphasis on quality assurance
inspection of incoming supplies
Emphasis on multiple sourcing Emphasis on single sourcing or a
reduced supplier base
Emphasis on uncertainty regarding Emphasis on mutual trust between
supplier performance and integrity purchaser and supplier
Advantages of partnership sourcing

To the Purchaser To the supplier

-long term agreements thus ability to plan
Marketing advantage through
long term, assured supply, quality stability of long term agreements,
assurance larger share of orders placed, ability
to plan ahead
Lower costs through cooperative cost Lower costs through cooperative
reduction programs e.g. EDI, ESI cost reduction programs, lower
inventories through better customer
planning, customer payments on
time
Strategic advantage through access to Strategic advantage through access
suppliers’ technology, to customer’s technology.

Disadvantages of Partnership sourcing

 Termination of partnership – the aim should be to part amicably, preferably

through an agreed separation plan. This is not the case in most instances
 Possible domination or dependence of one party on the other
 Confidentiality problems especially where prospective supplier partner is
also supplier to buyers’ competitors
 Attitudes are difficult to change for traditional adversarial buyers and sellers
who require re-training for them to adjust to the new philosophy and
environment

RECIPROCAL TRADING – for research

Defined as the mutual or corresponding of concessions and privileges as
forming the basis of commercial relations. It is often referred as selling through
the order book when a policy is adopted of giving preference to suppliers who
are also customers of the buying organisation.

Reciprocity is influenced by the economic climate where pressure for

reciprocal agreements increase in times of depression and where both the
buyer and the supplier are producers of standard, highly competitive products.

Types of reciprocity

 Internal reciprocity – where buyer and supplier are both members of the
same group of companies.

 External reciprocity – where buyer and supplier have no relationship

 Multiple reciprocity – where there are more than two parties to the
arrangement.

Advantages of reciprocity

 Both buyer and supplier benefit from the exchange of orders

 Both obtain a greater understanding of mutual problems, thus increasing
goodwill
 More direct communication between buyer and supplier which eliminate or
reduce the need for intermediaries and the cost of marketing or
procurement operations.

Disadvantages of reciprocity
 Costs may increase due to the reduced competitive position of the buyer
 Selling through the order book uses purchasing to perform a marketing
function.
 Marketing effort may become slack
 Disputes may arise where the respective values of purchases and sales
become substantially different.
 The opportunity to buy cheaper, better quality alternatives may be denied
to the buyer who is tied by a reciprocal agreement
 Difficulties may arise in finding alternative suppliers in an emergency.
 In practice it is often difficult to terminate reciprocal relationships without
friction.
NB. Reciprocity is a top management decision.

The buying centre

This is the buying decision-making unit of an organisation and is defined as,” all
those individuals and groups who participate in the purchase decision making
process and who share common goals and the risks arising from the decisions.
It is often a temporary group which can change its composition from purchase
to purchase.

The composition of the buying centre can be:

 Individual participants or job holders e.g. purchasing manager, financial

director, engineer e.t.c.
 Organisational units e.g. departments or even individual organisations .
The buying centre may comprise members of the organisations ranging from 3-
12 who play any of the following five roles:
 Users – who will use the product or service and who often initiate the
purchase
 Influencers – e.g. technical staff who may directly or indirectly influence the
buying decision
 Buyers – who have formal authority to to select suppliers and arrange
terms of purchase.
 Deciders – who have formal or informal authority to select the ultimate
supplier. Buyers are often deciders in routine purchases of standard items,
but other officers of the organisation may also be deciders in complex
purchases.
 Gatekeepers – who control the flow of information to others.
OUTSOURCING

Is a wider term than make or buy decisions, though the two terms are often
used interchangeably. It is the buying in of components, sub assemblies,
finished products and services from outside suppliers rather than supplying
them internally. Thus organisations review their core activities and concentrate
on their core competencies rather than on ancillary or professional activities
where they do not have competencies.

Functions that are easily outsourced are those which are:

 resource intensive with high labour or capital costs

 specialist areas
 subject to quickly changing markets for which it is costly to recruit, train and
retrain staff
 subject to rapidly changing technology requiring investment

Examples of such activities may include:

Catering services, building repairs and maintenance, security, transport
management, waste disposal e.t.c.

Types of outsourcing
 body shop outsourcing – refers to a situation where management uses
outsourcing as a means of meeting short term requirements e.g. shortage
of in-house skills , to meet temporary demand
 project management outsourcing - is employed for all or part of a
particular project e.g. developing an IT project or a part of

 Total outsourcing – where the outsourcing supplier is given full

responsibility for a selected area e.g. catering, security

Benefits of outsourcing
 Frees management time to concentrate on core business operations
 Reduced staff costs
 Reduction in staff management problems
 Reduced capital requirements
 Increased flexibility
Problems of outsourcing

 Redundancy costs
 Quality may be difficult to manage
 Over dependence on the supplier
 Lack of management skills to control the supplier.

Purchasing may be outsourced if it is a peripheral rather than a core activity.

Peripheral activities are those characterised by the following:
 Low or generalised skills requirements
 Internally focussed responsibilities
 Well defined or limited tasks
 No supply restrictions

What is 'Subcontracting'
Subcontracting is the practice of assigning part of the obligations and tasks
under a contract to another party known as a subcontractor. Subcontracting is
especially prevalent in complex projects, such as construction and information
technology. Subcontractors are hired by the project's general/Main contractor,
who continues to have overall responsibility for project completion and
execution within its stipulated parameters and deadlines.
Subcontracting is very useful in situations where the range of required
capabilities for a project is too diverse to be possessed by a single general
contractor. In such cases, subcontracting parts of the project that do not form
the general contractor's core competencies may assist in keeping costs under
control and mitigate overall project risk.

The Right Price

Price can be defined as the value of a product or service measured in terms of

the standard monetary unit.

Sources of price information

 Price lists
 Catalogues – prices quoted may be ‘asking’ prices and may be subject to
trade, cash or quantity discounts.
 Trade journals – these provide useful information on prices applicable to
particular commodities and industries.
 Soliciting quotations obtained by sending enquiries to a number of suppliers
who are asked to quote.
 Tendering
 Price analysis – the breaking down of the quoted price into its constituent
elements in order to determine the reasonableness or otherwise of the
quoted price. This may highlight possible mistakes in quoting on the sellers’
part and also provides a basis for negotiations.

Price and economic theory

Economic theory shows that demand and supply are balanced by the influence
of price, the equilibrium price. This indicates the point at which demand and
supply are equal. This price is as a result of many buyers and sellers in the
supply market, none of who is individually able to influence the price charged
(there is perfect competition). The equilibrium price also represents minimum
intervention by the government in the market.

NB. It is important to note that prices that are determined this way can change
any time over a short period of time (price volatility).

Conditions for perfect competition

 There must be many buyers and sellers

 The item or product must be homogeneous so that the buyer is indifferent
regarding the seller from whom he makes his purchase
 Item or product must be easily transportable from one place to another
 Easy communication must exist between buyers and sellers so that
everyone is aware of what is happening in the market
 There must be absence of preferential treatment or discrimination of or
against certain buyers or sellers.

NB. Under perfect competition, there is only one price at which a certain
quantity can be sold.
Prices can also be determined through conditions of imperfect competition,
which may take the following forms:

 Monopoly – where only one supplier exists, and there is restriction to entry

 Oligopoly – where only a few large suppliers exist who usually agree to act
as a group with little or no difference in what they offer in the market.

 Monopolistic competition – where there are many suppliers with different

influences on the market due to their different sizes and trading
experiences. Different prices may be obtained in such markets.

NB. Any selling price is based on the cost of production including the cost of
materials used, the amount and cost of labour, and a portion of indirect
expenses (overheads) incurred. On top of that, a mark up or profit margin will
be added. Room for negotiation therefore may exist especially where huge
mark-up % are charged.

Price variations

Prices vary between suppliers because of the following considerations:

 Quantity considerations: where quantity discounts are given as an

incentive for the buyer to buy in large quantities.

 Payment considerations: where cash discounts are given to the buyer as

an incentive to prompt payment.

 Time considerations: where sellers offer discounts to encourage buying in

slack periods or buying ‘out of season’.

 Quality considerations: which reflects the cost of a higher standard of

accuracy or producing from more expensive materials or buying a brand
name

- Transport considerations:

- Distribution considerations: where trade discounts are given to

compensate buyers for undertaking distributive functions.

Factors that are considered when determining selling/buying prices

 Supplier considerations Buyer considerations

Their position in the market, whether The position of the buyer in the
monopoly or pure competition market
Nature of demand for the product The number of suppliers on the
elastic or inelastic i.e. demand is not market and the possibility of
affected by price alternative products on the market
The suppliers’ need for the business The period for which the price is to
be agreed.
Prices charged by competitors Price paid by competitors
hat the market can afford to pay Quantities involved
The order volume- larger quantities What is a reasonable price based on
allow for longer production runs and price analysis
lower prices
The stage of the product in its life Risk attached to the purchase and
cycle. The earlier a product is in its the method of pricing
life cycle, the higher will be the price

All of the above factors influence the price of a particular product.

Pricing agreements - in general, price agreements are of two types i.e. firm
and cost type

Firm price agreements - these are not subject to any provision for variation
and therefore offers the following advantages to the buyer:

 All risks are borne by the supplier and the buyer knows from the start what
is to be paid

 Suppliers have the maximum incentive to produce efficiently and complete

the work in time

o All cost savings below the price are kept by the supplier

o All costs incurred above the price are met by the supplier

 A minimum administration is involved

Cost price agreements - these are agreements in which a fixed % is added to
the production cost. These offer a number of disadvantages such as:

 All the financial risks accrue to the buyer

 Are difficult to administer since the supplier’s cost schedules need to be
checked by financial and management accountants.

The above two are just opposite ends of a continuum with a number of
intermediate pricing arrangements such as: firm fixed price, fixed price with
redetermination, cost + % of cost, cost + fixed fee, e.t.c.
Tendering

A purchasing procedure whereby potential suppliers are invited to make a firm

and unequivocal offer of the price and terms which on acceptance shall be the
basis of the subsequent contract.

To tender is to present anything for approval or acceptance. It is a method that

can be used by buyers to determine the right price or to choose a supplier with
the right price.

Types of tenders

Tenders can be:

(1) Open tenders – where prospective suppliers are invited to compete for a
contract advertised in the national press, the lowest tender generally being
accepted

(2) Restricted open tenders – prospective suppliers are invited to compete, the
advertisement of which is restricted to appropriate local newspapers or
journals

(3) Selective tenders – tenders are invited from suppliers on an approved list
who have been previously vetted regarding their competence and financial
standing

(4) Serial tenders – prospective suppliers are requested either on an open or

selective basis to tender for an initial scheme, on the basis that subject to
satisfactory performance, a program of work will be given to the successful
 contractor, the rates and prices for the first job being the basis of the rest of
the program.

(5) Negotiated tenders – a tender is negotiated with only one supplier so that
competition is eliminated. Very unusual.

The tendering procedure

In public purchasing, standing orders usually prescribe a cash limit above which
tenders must be invited. E.g. less than US$10000 competitive quotations,
US$10000 – US$300000 informal tenders/ US$1M for construction projects,
above US$300000 formal tender.

The procedure is as follows:

 the issue of a public advertisement inviting tenders

 Full and identical specifications being issued to each prospective supplier/

contractor, who is required to submit his tender in a sealed and identifiable
envelope by a prescribed date.

 On the date arranged for the opening of the tenders, appointed officers
from purchasing department and an external department e.g. finance
department may attend.

 Tenders will be initialled, listed and entered on an analysis sheet showing

details of prices, rates, carriage charges, delivery, settlement terms and
other information necessary for their evaluation

 Late tenders are not considered and are usually returned unopened.

 Standing orders frequently give delegated powers to chief officers from

purchasing to place orders against tenders up to a specified value. For
contracts exceeding this amount, delegated authority is given provided the
lowest tender to specification is accepted , where acceptance of the lowest
tender is not recommended.

 Standing orders may require the consent of a prescribed committee

chairperson .e.g. policy and finance before the tender is accepted.
Tendering has the following disadvantages

 Contractors may quote a price that is too low, leading to subsequent

disputes if goods supplied or services rendered are unsatisfactory
 Tendering may be unsuitable for certain contracts
 Procedure is too slow for emergencies
 Where tenders are accepted on the principle of the lowest price, credit may
not be given to suppliers for past performance.
 Expensive from the point of clerical, stationery and postage costs

NEGOTIATION
(A) The process whereby two or more parties decide what each will give and
take in an exchange between them.
(B) Any form of verbal communication in which the participants seek to exploit
their relative competitive advantages and need to achieve explicit or
implicit objectives within the overall purpose of seeking to resolve problems
which are barriers to agreement.

(C) An occasion where one or more representatives of two or more parties

interact in an explicit attempt to reach a jointly acceptable position on one
or more divisive issues about which they would like to agree.

N.B. All the above definitions clearly highlight:

1) The inter-personal nature of negotiation i.e. it takes place between two or

more parties

2) Involves communication i.e. exchange of information

3) Representatives of the parties i.e. representing themselves or in industrial

undertakings, the purchasing organisation and the supplier organisation

4) Each participant has implicit as well as explicit objectives which determine

their negotiating strategies e.g. supplier will explicitly wish to obtain the
best price but implicitly, will be seeking to keep his plant and labour force
employed.

5) Participants use their competitive advantage and perceived needs of the

other party to influence the outcome of the negotiation process.
NB: Although price looms large in any procurement negotiation, it is only but
one of many elements that is subject to discussion between the parties. Thus,
any procurement negotiation includes discussion of the quantity, quality, and
service elements of the transaction well as the price.

When to negotiate.

Not all purchases are subject to negotiations. Branded items that are part of
the shelf stock of the supplier and are catalogue priced are seldom subject to
negotiation.

Negotiation is and should be limited to cases where there are one or more
elements in the transaction which must be discussed and on which
compromise or change is possible, for example,

 If items being procured do not have fixed or standard specifications.

 if competition for the items appears to be lacking

 When the buyer anticipates that during the procurement there will be a
large number of design changes and modifications.
 When the purchase covers requirements for a long period of time.
 -when the price quoted seems to be unreasonable
 -when buyer suspects that truly competitive bidding did not take place
 -purchases that include a multiplicity of terms and conditions of sale
 -Purchase involving high tooling or set up costs
 High risk situations where the supplier may have included an excessive
factor for risk protection.

What to negotiate

Any element of the transaction on which discussion is needed and where

alternative choices exist is an appropriate issue for negotiation. Quality is a
subject for negotiation, where changes in product specification i.e. change in
composition, dimension or mere change in method of packing an item for
shipment is negotiable.
Quantity is also negotiable. Whether it is for quantity discounts, the guarantee
of future orders or the commitment for requirements for an extended period
of time may be subject to discussions and negotiated.

Service aspects are also negotiable. e.g. handling of rejects and defective
materials, pre and after sales service, transport e.t.c.

Price, thus the costs upon which a seller bases his price , which is composed of
the different cost elements, many of which are not precisely attributable to a
given unit of production must be negotiated. Thus any aspect of cost and to a
lesser extend profit margin is negotiable.

How to negotiate- strategies and tactics

Strategies and tactics are integral to negotiation.

Strategy concerns the planning and directing of the negotiations to achieve the
negotiator’s goals and objectives.

Tactics deals with the manoeuvres employed to implement a strategy. A tactic

is a position, manoeuvre or attitude to be taken or adopted at an appropriate
point in the negotiation process. Strategy therefore comprises the overall
tactics designed to achieve as nearly as possible the objectives of negotiations.
This comprise the how aspect of negotiation.

 The seller has limited strategic strength when the product is readily
available from many sources

 When the industry is composed of many sellers who are smaller and
financially weaker than buyers.

 When it is easy for new firms to enter the field and when there are few
artificial impediments to price bargaining e.g laws, trade associations

Conversely, the seller has more strategic strength and therefore can resist
downward pressures on price when:

 The industry is dominated by a few large sellers

 It is not easy to enter the field because of a large initial capital requirement
or specialised skill
 When there are strong impediments to free and open price negotiation.

Tactics to be adopted are based on developing as complete knowledge as

possible of all elements that are to be discussed between the parties. This may
include:

 Knowledge of one’s own needs.

 Knowledge of the supplier’s capabilities

 An understanding of the relationship of cost, value and price

 An understanding of the economic and institutional environment within

which both parties operate.

Also to be decided are:

 The order in which the issues to be negotiated shall be dealt with

 Whether to speak first or allow the opponent to open the negotiations.

 What concessions to make should the need arise.

 The timing of concessions

 What issues can be linked i.e. price and improved quality.

 What will be the likely reaction of the opponent to each tactic

 What tactic the opponent is likely to adopt and how these will be
countered.

APPROACHES TO NEGOTIATION

Negotiations can be classified as adversarial and partnership.

(a) ADVERSARIAL NEGOTIATION

Also referred to as distributive or win – lose negotiation, in which the focus

is on “positions” staked out by the participants. The assumption is that
every time one party wins, the other loses. The other party is regarded as
an adversary or enemy.
(b) PARTNERSHIP NEGOTIATION

Also referred to as integrative or win- win negotiation, in which the focus is

on the merits of the issues identified by the parties and the assumption is
that through creative problem solving, one or both parties can gain without
the other party having to lose. Therefore, the other party is regarded as a
partner and the parties share concerns, ideas and expectations.

Characteristics of adversarial and partnership negotiation

ADVERSARIAL NEGOTIATION PARTNERSHIP NEGOTIATION

-Emphasis is on competing goals to Emphasis is on common goals
be achieved at the adversary’s
expense
-strategy is based on secrecy, Strategy is based on openness, sharing
retention of information and low of infor. And high levels of trust
level of trust between parties between the parties
-key attitude is ‘we win , you lose’ Key attitude is ‘we win-you win’
-If an impasse occurs, the negotiation If impasse occurs, this is regarded as a
may be broken off further problem to be solved possibly
through a higher authority
intervention or an internal or external
mediator or arbitrator
-Parties use threats, bluffs and Parties refrain from threats etc which
ultimatums with the aim of keeping are seen as counter-productive
the adversary on the offensive
-Desired outcomes are often Desired outcomes are made known so
misrepresented so that the adversary that there are no hidden agendas and
does not know what the opponent issues are clearly underastood
requires the outcome of the
negotiations.
-Approach is basically hostile and Approach is friendly and non
aggressive i.e. ‘us’ against ‘them’ aggressive. i.e. we are in this together
-Strategies are unpredictable based Strategies are predictable.
on the various negotiating ploys
designed to outmanoeuvre the other
party
An adversarial approach may be appropriate where:

 -No ongoing relationship or potential for one exist or is desired e.g when it
is a one off deal

 -a quick and simple solution to the disagreement is required

A partnership approach, though more time consuming and difficult to achieve

have the following advantages:

 More stable and lead to long term relationships

 It lends itself to more creative solutions to mutual problems
 May be the only way available of obtaining agreement when both parties
have high aspirations and resist making concessions on these issues.

An adversarial approach/ attitude may be transformed into a partnership one

through five tactics thus:
(a) Separating the people from the problem – thus see the other party as a
partner rather than as an adversary, thus developing trust needed to
achieve integrative agreement

(b) Ascertain super ordinate goals – i.e. direct the attention of both parties to
goals and objectives that supersede the short term problems that they may
be encountering e.g. a long term partnership purchasing agreement is more
important than securing the lowest possible price.

(c) Focuses on interests, not positions – positions are demands the negotiator
makes. Interests are what underline demands and positions.

(d) Invent options for mutual gain – this means going beyond obvious issues
and looking for broader solutions. Thus parties must empathise with the
perspective of the other party and develop proposals to which they can
respond with the single word ‘yes’

(e) Use objective criteria – when interests appear incompatible, refocus on

what is fair. Deciding what is fair requires both parties to determine criteria
for judging fairness and to be fair and reasonable.
THE NEGOTIATION PROCESS

The process begins with the origin of the firm’s requirements for specific
products or services, but the actual negotiation begins with a buyer’s
request for bids or proposals from potential suppliers.

The process develops as the buyer/negotiator evaluates these proposals

and prepares for discussion of the important issues that may arise in the
negotiating conference.

The process ends with the resolution of all the issues that actually do arise
during the negotiation conference.

Thus the process consists of three major phases i.e. preparation, actual
negotiation and post negotiation.

(A) Preparation phase (pre-negotiation)

‘Cases are won in chambers ‘is the guiding principle in pre- negotiation. I.e.
Legal victories are often the outcome of the preceding research and planning
of strategy on the part of Counsel.

Matters to be determined at this stage are:

(1) Who is to negotiate - Where a determination is made whether to use the

individual approach .i.e. when negotiations are to be between 2 individuals
or to use the team approach (usually for new buys or capital purchases).
When a team approach is selected, it is important to :

 Allocate roles – i.e. the spokesperson, who presents the case and acts as
the leader of the team, the recorder (who takes notes) , the experts (legal
advisors, accountants)

 Avoid disagreements – no outward disagreements between team members

while negotiations are in progress.

(2)The Venue – the buyer normally expects the vendor to come to him unless
there are good reasons to the contrary. A neutral venue may also be
appropriate.
(3) Gathering intelligence – this involves:

 ascertaining the strength and weaknesses of the respective negotiating

positions

 assembling relevant data relating to costs, production, sales etc

 preparing data to present at the negotiating conference in the form of

charts, graphs, tables etc, so that it can be quickly understood.

(4) Determine objectives of the negotiation – one must be clear as to what the
negotiations are expected to achieve.

(5) Tactics and strategies – these must be determined in advance.

(6) The dummy run – before the actual negotiations, it is advisable to subject
all arguments, tactics and strategies to a critical scrutiny.

(B) The Actual negotiation

Stages:

(1) Introductions, agreement of an agenda and rules of procedure. In framing

the agenda, the more difficult issues appear later, thus enabling some
agreement to be reached on less controversial issues.

Also weigh up the personalities of one’s opponents and the drives that
motivates them e.g. achievement, fear etc

(2) Ascertainment of the ‘negotiating range’ – i.e. the issues which the
negotiations will attempt to resolve.

(3) Agreement on common goals which must be met if the negotiation is to

reach successful outcome. This will require some movement from both sides
from their original negotiating range. Concessions are a means of securing
agreement when negotiations are deadlocked. Concessions however should be
reciprocated ( concede less than has been obtained from the other party)

(4) Identification of and where possible removal of barriers that prevent the
achievement of agreed common goals. There will be problem solving,
consideration of solutions put forward by each, discernment of what
concessions can be made. This stage may also allow for a recess for each side
to reconsider its position and make proposals or concessions which may
enable further progress to be made.

If no progress can be made, it may be decided to:

 refer the issues to higher authority

 change negotiators
 abandon the negotiations with the least possible damage to the
relationship.

(5) Agreement and Closure – drafting of a statement setting out as clearly as

possible the agreement reached and circulating it to all parties for comment
and signatures.

(C) Post Negotiation Phase

This involves:
 Drafting a statement detailing the agreement reached and circulating it to
all parties for comment and signatures.
 Selling the agreement to the constituents of both parties. I.e. what has
been agreed, why it is the best possible agreement, what benefits will
accrue? etc

 Implementing the agreement e.g. placing contracts, setting up joint

implementation teams etc.

 Establishing procedures for monitoring the implementation of agreements

and dealing with any problems that may arise. (JOMIC – joint monitoring
and implementation committee).

Seller’s bargaining strength

 Depends on how badly he needs the contract, how certain he feels he will
get it and how much time is available to reach agreement. The less the
seller wants the contract, the more powerful is his bargaining strength.

 If sole source/ preferred source, the more is his bargaining strength. No

alternative source is available.
Buyer’s bargaining strength

 Depends on the extent of competition among potential suppliers, the

adequacy of cost or price analysis and the thoroughness of the buyer’s
preparation. Thus when there is intense supplier competition, the more is
the buyer’s bargaining strength.

 When there are alternative sources of supply, substitute products are

available and there are long lead times, the buyer’s position is
strengthened.

 When the buyer has the option of making the product in-house.

Universally applicable techniques to negotiations

(a) Murder boards and Mock sessions – a murder board consists of senior
purchasing and supply mgt, finance, quality control, engineering etc. The
negotiating team presents its agenda, objectives, strategies and tactics for
the forthcoming negotiations to this committee. Members of the Murder
board dissect the negotiating plan in an effort to identify weaknesses and
avoidable problems.

Mock sessions allow members of the negotiating team to prepare for the
negotiations through the simulation of what is likely to occur in the actual
negotiations. This enhance preparation.

(b) Use diversions – especially when tempers start to going out of hand. Divert
attention from the issue at hand by calling for a coffee break, a joke etc

(c) Being a good listener – generally, sales people enjoy talking. Buyers should
let them talk. While talking, they often talk themselves into concessions
that the buyer could never have gained by negotiation.

(d) Use questions effectively – also answer with tact. Decide when to answer,
when not to answer, when to answer clearly, when to answer vaguely. Not
all questions require an answer. Sometimes precise answers are the wrong
answers.
(e) Use positive statements – Machiavelli in his book ‘The Prince’ gave the
world some unusually sage advice concerning the use and misuse of
positive statements. ‘I hold it to be proof of great prudence for men to
abstain from threats and insulting words towards anyone, for neither
…….diminishes the strength of the enemy , but the one makes him more
cautious and the other increases his hatred of you, and makes him more
persevering in his efforts to injure you’

(f) Keep the initiative – buyer should carry the game to the supplier , keep him
on the defensive by asking questions and presenting point after point ,
making the supplier to justify his position

NB. Never give anything away but get a concession in exchange.

Characteristics of a successful negotiator.

 -should be skilful individuals with broad business experience

 -know the primary functions of the business and a general understanding of

accounting, human relations, economics, business law and quantitative
analysis.

 -know the products they buy

 -Team player

 -Good listener

 -well educated and experienced