How To Improve Purchasing Cost Business Essay

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As the development of the model of enterprise management, the existence and the development of modern manufacturing industry can not get away from its related environment of supply/demand chain. While purchase cost is one of the most important item in the total cost of manufacturing enterprise. Thus, purchase cost management should be carried out from the angle of supply/demand chain. Suppliers are the members who are directly related to manufacturing enterprise in supply/demand chain, so the problems of evaluating and choosing strategic cooperation partners together with managing the relationship are significant. The neglect of other factors in supply/demand chain, nevertheless, would take negative influence on purchase cost management.

On the basis of other research, the dissertation proposes to broaden the scope of purchase cost management from suppliers to internal and exterior supply/demand chain, and then focus on purchasing from strategic angle. That is cooperation colleagues should be established with suppliers and customers in exterior supply/demand chain, while communication should be kept with all the other departments which join in one of the phases for the whole life cycle of production in internal supply/demand chain, like design department or production deportment. Thus, manufacturing enterprise would manage the purchase cost from both internal and exterior supply/demand chain.

Fundamentals of Supply chain &Purchasing

The underlying concept of the supply chain is simple, a linear sequence of operations organized around the flow of materials from source of supply to their final distribution as finished products to ultimate users. Traditionally it includes sources of material resources, and the organization of processors, distributors, and users. It also involves supporting enterprises to provide transport, communications, and other specialized functions. Together, they become a single coordinated entity that transcends organizational boundaries. ( Scott-Larsen, Tage; Schary, Philip B.; Mikkola, Juliana H.. Managing the Global Supply Chain. Frederiksberg, Copenhagen, DNK: Copenhagen Business School Press, 2007. p 17.Copyright © 2007. Copenhagen Business School Press. All rights reserved.)

Supply chain management (SCM) is the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain.[2] Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.( Harland, C.M. (1996) Supply Chain Management, Purchasing and Supply Management, Logistics, Vertical Integration, Materials Management and Supply Chain Dynamics. In: Slack, N (ed.) Blackwell Encyclopedic Dictionary of Operations Management. UK: Blackwell.)

Purchasing is one of the core activities of any economy. All types of organizations, whether merchandising, manufacturing or even non-profit, are continuously engaged in purchasing certain goods or services. In the business world purchasing is broadly classified into two groups: mercantile purchasing and industrial purchasing. Mercantile purchasing refers to the commercial activities wherein the buying of items is intended to their resale at a profit. Industrial purchasing involves the procurement of items for the purpose of consumption or conversion. Industrial purchasing encompasses a wider area and opens the avenues for their microscopic studies. (Materials and Purchasing Management,Chunawalla, S.A. Pages: 367 Publisher: Global Media Location: Mumbai, IND Date Published: 2008)

Purchasing cost is the value of money or something else that has been used up to get what corporation need to keep going.


Recently, lack of cooperation is what China's manufacturing industry need urgently improving, including internal department and exterior supplier, the root cause of it is Excessive pursuit of economic interests and setting reducing procurement cost as the ultimate goal, which lead to serious Waste of resources, unsustainable Low cost and poorer production quality.

As shown in figure, longitudinal dotted box is the external supply chain which made up of supplier, manufacture and client.

Horizontal dotted box is the internal supply chain consists of design department and manufacture department, etc. From the manufacturing enterprise external environment, we can see that Logistics and cash flow coupling the supply chain in all related enterprises and customers, with the information flow in among members. Enriching the relationship between each other, Thus constitute the external supply chain relationship.

In manufacturing enterprise¼ŒBased on the materials and information demand and supply relationships¼ŒDesign, procurement, production and sales department have formed internal supply chain restricted by the corporation itself.For purchasing activities or for purchasing department. No one of Procurement efficiency and purchasing cost control should be neglected, or there will be mistakes in management and competent purchasing cost advantage in the competition will not be reflected.

Hence, the scope of purchase cost management which based on the supply chain need to be broadened to both internal and external. In other word, centering manufacturing enterprise,

Consider its external supply chain environment in the beginning, then focusing on purchasing department; bring the internal environment into consideration. With the continuous development to enterprise Management mode. No task can't be well done just by one side. No matter which side it is. In conclusion¼Œpurchasing cost management include the cost to realize advantage of purchasing and the cost to maintain something internal.


1. The establishment and operation of external supply chain

1.1 Building database of supply chain

Database is the infrastructure of the management of purchasing cost; members of supply chain can't communicate without it.

1.2 Set up collaborative supply chain team

Supply chain cooperation team is a cross-enterprise, cross-functional team, leading this kind of team is a unique challenge for procurement enterprises. One of the main reasons that cause huge losses is the poor management of the supply and demand chain business management partners, the failure of a large number of supply chain alliance can be interpreted as a lack of professional competence in the key areas. From a long-term perspective, with the supply chain, either win-win or total death. So, Ability to form an excellent team of supply chain cooperation and mutual cooperation for the common benefits and risks is critical to businesses of any one member.

1.3 Henrick and Ellram Has pointed out in a study of the purchaser-supplier relationships¼ŒThe main reason for the reduced procurement costs is

: Long-term purchase agreements、United cost reduction plan、Suppliers early intervention and commitments of purchasing all of production.


To win in the future competition, we can not put aside the procurement practices in isolation from the environment of the supply chain; Cooperation is the inevitable way out.