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Rutgers University
Supply Chain Management

Chapter 2 Purchasing—act of obtaining merchandise, capital equipment, raw materials, services or MRO supplies in exchange for $ or its equivalent Merchants—wholesalers, retailers purchase for resale purposes Industrial Buyers—purchase raw materials for conversion purposes - Purchasing is the crucial link between the sources of supply and the organization itself Purchase Spend—$ a firm spends on goods/services Profit Leverage Effect—of purchasing measures the impact of change in purchase spend on a firm’s profit before taxes, assuming gross sales and other expenses remain unchanged show that: $ decrease in purchase spend = increase in profit before taxes Return on Assets/Investment (ROA/ROI)—firm’s net income/total assets Inventory Turnover—how many times a firm’s inventory is utilized & replaced over an accounting period [ex: 1 year] - System must have adequate operational/internal control to prevent abuse of purchasing funds - Firms focus more on core competencies and outsource noncore activities to suppliers - E-procurement system allows users to submit their purchase requisitions to the purchasing department electronically and enables buyers to transmit purchase orders to suppliers over the internet, fax or mail Advantages of E-Procurement System: 1. Time saving a. Maintain list of suppliers b. Process requests for quotation & purchase orders c. Repeat orders 2. Cost saving a. More suppliers can be contacted= lower price of goods b. Handle more purchases; no need to manually match bids to purchases c. Lower admin costs 3. Accuracy a. Eliminates double-key inputs (by materials buyers) b. Enhance communication between buyers & sellers 4. Real time a. Real time access to purchase requisition b. Instant bidding & responding 5. Mobility a. Geographical location and time of day doesn’t matter= highly flexible 6. Management a. Summary statistics and supplier performance reports can be generated for management to review, utilize & plan 7. Benefits to the supplier a. Lower barriers to entry & transaction costs 1 Chapter 2 b. Access to more buyers c. Ability to instantly adjust to market conditions - Larger orders reduce the purchase price & the unit transportation cost Backward Vertical Integration—acquiring upstream suppliers Forward Vertical Integration—acquiring downstream customers Reasons to Buy/Outsource: 1. Cost advantage a. Standard & generic supplies/components that are non-vital to organization’s operation & competitive advantage 2. Insufficient capacity a. Firm is running at full capacity so it’s unable to produce components in-house 3. Lack of expertise a. Firm doesn’t have necessary technology & expertise to manufacture the item 4. Quality a. Purchased components may be superior in quality because suppliers have better technologies, processes, skilled labor & advantage of economies of scale Reasons to Make: 1. Protect proprietary technology a.
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