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  • All those activities associated with identifying needs, locating & selecting suppliers, negotiating terms & following up and assessment, to ensure supplier performance and developing suppliers.

  • The functions, processes and department that source material and services, negotiates terms and availability agreements, responds to requests for material by user departments and communicates order status and actual or potential supply disruptions.

“A product well bought is half sold”

  • Purchases represent largest single expense of doing business:

    • Value of purchases average 60% of sales in manufacturing industries

    • Value of purchases average 90% of sales in retail and wholesale companies

  • Profit Impact:

    • $20 Sales = $1 Purchase Saving (for average profit on sales= 5%)

    • $10 Sales = $1 Purchase Saving (for average profit on sales= 10%)

  • Early part of 20 century: Purely Clerical Function

  • 1960’s-1970’s: Expense Control

    • Buyers focused on purchase price and prevention of line shutdowns.

    • Manual systems used to manage inventory

    • Inventory management was a secondary concern

  • 1980’s: Technology & Integration with Inventory Management

    • Marketplace had become more international

    • Technology

    • Inventory management became critical

  • Late 1980’s

    • Japanese Approach

      • Kaban – pull system - led to JIT

      • Kaizen – continuous improvement

    • Realization of need for two types of purchasing personnel

      • Managers of operational and tactical issues Manger of Outside Manufacturing

      • Broad, Strategic focused supply managers

  1. Provide an uninterrupted flow of materials, supplies & services required to operate the organization

  2. Keep inventory investment & loss at a minimum

  3. Maintain adequate quality standards

  4. Find or develop competent suppliers

  5. Standardize, where possible, the items bought

  6. Purchase required items and services at lowest ultimate price.

The right Quality the right Quantity at the right Time at the right Price from the Right Source

  1. Selection of the Supply Source

  2. All the Contacts with vendors and their reps.

  3. Check the Purchasing Requests against the need & suggest modifications to be more economical, or procured in time

  4. Define the Lot size and selecting one or more suppliers: weighted with quantity discount, carrying charges, market conditions..

  5. Commercial aspects of the purchase (Price, delivery, guaranties, terms and conditions of the contract, adjustment as to over- and under-shipment)

  6. Watch purchasing expenditure & determine Wasteful Duplication

  7. Identify Possible error in description or estimation

  8. Identify Misuse of requisition privilege

  9. Revise Spec. In terms of formula or analysis, accepted commercial standards, blueprints and dimensional tolerances, the intended purpose to:

  • Avoid special details that would restrict sources

  • Entail extra costs for deviation form commercial standards

  • Ensure that Specs. should be clear enough to define acceptability of the purchased item.

  1. Material Need Identification
  2. Evaluate potential Supply Source
  3. Source selection
  4. Release & receipt of material
  5. Supplier performance measurement & continuous supplier Management





Supply Management


  • Coordinating requirements

  • Working with sales reps

  • Identifying suppliers

  • Market studies

  • Negotiations

  • Proposal analysis

  • Supplier selection

  • Issue P O’sAdminister

  • contracts

  • Maintain records

  • Conduct purchasing activities +

  • Participation in requirements & specs.

  • Material, material/market studies

  • Manage value-added activities

  • Conduct purchasing function

  • Manager supplier quality

  • Purchase inbound transportation

  • Manage investment recovery

  • Surplus

  • Scrap

  • Conduct  Purchasing and Procurement activities

  • Participation in corporate strategy

  • Development of strategic, long-term acquisition plans

  • CQI monitoring within supply chain

  • Continual risk assessment in supply environment

  • Conduct cross functional teams:

    • Supplier Qualification

    • Supplier Selection

    • Supplier Performance evaluation

    • Supplier Certification teams

    • New product Development

    • Commodity Procurement

    • Sourcing teams

  • Involvement in supplier development

  • EPI and ESI (early purchasing /supplier involvement)

  • Develop linkages:

    • Partnering arrangements

    • Strategic alliances


8.1 Purchase Requisition

  • A purchase, or material requisition, is issued by the requesting department and sent to purchasing. This document is a request to buy an item and this requisition would include:

    • Identification of the item to be purchased.

    • Quantity to be purchased.

    • Delivery date or schedule when it is needed.

    • Account to which purchase order is to be charged.

    • Delivery location.

8.2 Request for Quotation

  • Purchasing, with the aid of production, prepares a request for quotation (RFQ) which is a document

  • defining the item for prospective suppliers. This RFQ would include:

    • Description of the item to be purchased.

    • Detailed specification such as the materials to be used, composition, operating temperatures of the material, etc.

    • Drawing or blue Prints (if needed) of the item showing dimensions

8.3 Out-for-bidding

  • The RFQ would be sent out to several vendors, or suppliers for quotations, which would include price and delivery time, if this is not specified by the buying company. This is competitive bidding and very often firms would select three suppliers for quotations.

  • Depending on the size of the order, purchasing personnel may go out and visit the prospective suppliers.

8.4 Reception of quotations

  • Proposals are sent from the prospective suppliers to the buying company. Suppliers may deliver their quotation personally to the buying company in order to explain in detail their quotation and be able to directly answer any questions.

  • However, the buying company might insist that first the quotation is first delivered by mail before any meetings with the supplier are conducted.

8.5 Vendor Selection

  • Purchasing, with the aid of production, and say perhaps R&D, or other technical departments would review the proposal documents from the vendors (suppliers). Then, purchasing, and may be production personnel might visit the vendors to review the proposal in more detail.

  • The best supplier would be selected based on such criteria as, price (or global cost), delivery time, quality, availability of spares, after-sales service, etc.

8.6 Purchase Order

  • The purchasing department sends out a purchase order to the selected vendor that may include the terms and conditions for payment from the client firm to the supplier.

8.7 Supplier manufactures

  • The selected vendor sets in motion the production of the required components.

8.8 Shipping

  • Goods are shipped to the buyer with invoice.

8.9 Inspection

  • The buying company inspects all, or a sample, of the goods to verify they are according to specifications

8.10 Payment

  • The timing when payment is made for a purchased item depends on the terms offered by the supplier of the goods, those expected or proposed by the buyer. These are often a function of the size of the order and agreed financial terms. For example, a supplier firm might offer the credit terms 2/10, net 30. This means that the customer is able to deduct 2% from the bill when paying within the first ten days. If the discount is not taken, the customer must make full payment within 30 days.

9.1 Identifying Requirements

  • 101: Establish procurement plans and make decisions necessary to purchase products or services in congruence with organizational objectives and sourcing strategies

  • 102: Review purchase requisitions in accordance with organizational requirements and/or budgetary constraints

  • 103: Determine appropriate methods of procurement

  • 104: Perform cost/benefit analyses on planned acquisitions.

  • 105: Review supplier samples and/or demonstrations with the buying organization management and/or user departments 

9.2 Preparation Of Solicitations

  • 106: Develop/review specifications, statements of work, performance terms, and/or acceptance criteria

  • 107: Locate and select potential sources of materials or services

  • 108: Prepare and solicit competitive bids, quotations, and proposals with pertinent specifications, terms, and conditions.

  • 109:  Manage and develop lists of recommended sources 

9.3 Supplier Analysis

  • 110: Evaluate competitive offerings to determine the overall best offer for a product/service

  • 111: Conduct supplier visits/evaluations to determine suitability

  • 112: Measure supplier performance using rating systems and/or predetermined standards

9.3 Contract Execution, Implementation And Administration

  • 113:  Prepare and/or issue contracts/purchase orders

  • 114: Obtain legal review and approval of a contract when required.

  • 115: Administer contracts/ purchase orders from award to completion

  • 116: Expedite deliveries and conduct follow-up procedures when necessary

  • 117: Resolve contract/purchase order differences with suppliers

  • 118: Resolve payment problems with suppliers and user departments

  • 119: Review and revise purchasing practices to ensure their conformance with established laws, policies, and ethical principles

  • 120: Manage files of agreements, equipment records, and/or specifications

Procurement Map

6 Business Functions

Carried out by 6 departments

5 M’s - Manufacturing

Supply (Purchasing)

Human Resources
Supply Management




12.1 Purchasing and Engineering

  • Integration with Engineering results are:

    • Achieve Design Criteria: the most cost/effective solution

    • Take into consideration Time & Availability of materials

    • Facilitate ESI Early Supplier Involvement to enhance the company competitive advantage

    • Standardize of materials and dimensions in product design phase

    • Identify value enhancement opportunities

  • Organization Units Concerned are:

    • Technical Planning Unit

    • Procurement Engineering

    • Value Engineering

  • Objective:

    • Reducing the number of stock items

    • Consolidation of requirements

    • increasing the purchasing quantities

    • reducing inventory investment

12.2 Purchasing and Operation

  • Information needed form Operations

    • Work schedule and production rate

    • Special projects, contracts or new products

    • Change in Specifications

    • Significant change in the rate of production

  • Objective

    • Avoid possible shortage or excessive inventory

    • Planned program of procurement

    • Reasonable Lead time for purchasing cycle including finding the best source

  • Purchasing Feedback Information

    • The status of PO

    • Any delay affecting the delivery schedule

12.3 Purchasing and Operation

  • Information needed form Marketing

    • Sales Quotas and expectations

    • New contracts or new products

    • Changes in customer needs

  • Purchasing Feedback Marketing

    • Estimates of the cost of materials for sales quotations

    • Quality or quantity of materials within a stated cost limitation, potential suppliers, substitutes or equivalents.

    • Means of cost reduction or quality improvement (enhance the competitive advantage)

    • Feedback on recent sales techniques

12.4 Purchasing and Operation

  • Information needed form Marketing

    • Sales Quotas and expectations

    • New contracts or new products

    • Changes in customer needs

  • Purchasing Feedback Marketing

    • Estimates of the cost of materials for sales quotations

    • Quality or quantity of materials within a stated cost limitation, potential suppliers, substitutes or equivalents.

    • Means of cost reduction or quality improvement (enhance the competitive advantage)

    • Feedback on recent sales techniques

12.5 Purchasing and Finance

  • Achieve Goals of Finance

  • Finance will be involved with every large purchase

  • Determining the “right” time to buy

  • Finance plays large role in development of supplier relationships

12.6 Purchasing and Logistics

  • Achieve Goals of Finance

  • Finance will be involved with every large purchase

  • Determining the “right” time to buy

  • Finance plays large role in development of supplier relationships

  • Requirements Review

  • Spec. Development

  • Make/Buy Analysis

  • Material Standards

  • Inventory Levels

  • Quality Requirements

  • Negotiation of terms

  • Supplier Selection

  • Joint Problem-Solving

  • Supplier monitoring

  • Change Management

  • CQI (Continuous Quality Improvement)

  • Sourcing Strategy

  • Market Analysis

  • Price Forecasting

  • Purchasing Planning

  • Purchasing Policy

  • Value Analysis

  1. Interpersonal communications

  2. Customer focus

  3. Decision making

  4. Teaming abilities

  5. Negotiation

  6. Analytical understanding

  7. Influencing and persuasion

  8. Problem Solving

  9. Understanding Business conditions

  10. Conflict resolution

  11. Managing change

  12. Computer Literacy

  13. Strategic Thinking

  14. Leadership

  15. Structuring Supplier Relationships

  1. Supply Chain Management

  2. Supplier Development

  3. Lowest Total Cost

  4. Price/ Cost Analysis

  5. Market Analysis

  6. Understanding Markets & Industries

  7. E-commerce

  8. TQM (Total Quality Management)

  9. Commodity Expertise

  10. Cost of Poor Quality

  11. Inventory Management

  12. Legal Issues

  13. Logistics

  14. International Sourcing

  15. Outsourcing

  • Customer Perspective

  • Internal Business Process Perspective

  • Learning and Growth Perspective

  • Financial Perspective

17.1 Control purchasing process

  • Ensure that purchased products meet requirements

  • Ensure that suppliers meet requirements.

17.2 Document product purchases

  • Describe the products being purchased.

  • Specify the requirements that must be met.

17.3 Document product purchases

  • Verify purchased products at your own premises.

  • Verify purchased products at suppliers' premises (when required)

By Office of Procurement & Assistance Management, Department of Energy DOE.

This page contains links to a great deal of information on the subject of the Balanced Scorecard (BSC) by Office of Procurement & Assistance Management, Department of Energy DOE. It is intended to assist DOE employees, contractors and anyone who is interested in BSC methodology.

This training material was created by a Government-Industry Partnership with Federal funds.  Hundreds of Federal employees and Government contractor staff across the United States have been provided the training to improve and streamline their processes.  The material is available for use ONLY for the purposes of Government and Government contractor training, and the material is not intended for commercial application without prior approval.  

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