Purchasing Management: Supplier Selection, Cost Analysis, and ICT

This article discusses the supplier selection criteria, purchasing cost analysis, and the use of ICT in purchasing management. It explores topics such as single vs. multiple sourcing, the Peter Kraljic model, and the cost-ratio and linear averaging methods. The article also highlights the benefits of using electronic data interchange (EDI) in purchasing operations.

Running head: PURCHASING MANGEMENT
PURCHASING MANAGEMENT
Name of Student
Name of the University
Author Note

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Table of Contents
Introduction......................................................................................................................................3
Supplier selection criteria and issues related to the same................................................................4
2.0 Supplier selection and evaluation..........................................................................................4
2.1 Single VS. Multiple sourcing................................................................................................7
2.2 Peter Kraljic model of Risk-value.........................................................................................8
2.3 Cost-ratio and linear averaging method.................................................................................9
3. Purchasing cost analysis............................................................................................................10
4. ICT for purchasing operations...................................................................................................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................14

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Introduction
Supermarkets retailers are the shops offering self-service to its customers for products
ranging from food, beverages, and many other products. For the purpose of this study the
supermarket selected is NTUC Fairprice of Singapore. This supermarket has its headquarters in
Singapore and its product range includes- bakery, clothing’s, alcoholic beverages, dairy, frozen
foods, meat and poultry, general merchandise and others. The Fairprice supermarket belongs to
the retail industry. It is the largest super market chain of Singapore. It has got more than 50
outlets and about 100 supermarkets across the country. The company’s slogan shows their desire
to become the personal brand of the Singapore citizens as it wishes to become the very own
brand of Singapore. The individual outlets of this supermarket includes- fairPrice express, fair
price finest, warehouse club and others. The company’s aims and goals can be understood from
their vision and mission statement. The company’s vision is to become global retailer and not
just limited to Singapore and with the presence of a heart. The company understands its
responsibility towards the society, the customers and the community at large as it can be
understood from its mission statement. The supermarkets missions is to become the most
preferred employers by the employees and others, its objective is to provide the best quality
goods such that the customers feel that they are getting value for their products. Its objective is
also to provide best services and meet the requirements of different stakeholders of the company
such as- members, community and others. The company’s competitors include Giant Sinagpore,
Cold Storage supermarket and Sheng Siong. The main purpose if the study is to understand the
production management concept relation to the chosen organization or supermarket. This paper

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will highlight the concepts of supplier selection criteria, ICT recommendation for the company
and the purchasing cost analysis.
Supplier selection criteria and issues related to the same
2.0 Supplier selection and evaluation
The companies goals of purchasing is included in the CSR strategy where it is clearly
mentioned they are focused on responsibly selling and buying1. Since the company wishes to
provide best quality goods to the customers so they conduct regular meeting with their suppliers
and have entered into different agreements with them such that they can procure the best quality
goods from the selected suppliers2. The company has implemented a new purchasing policy for
the purpose of helping the procurement of resources from the sources that are sustainable. The
main purpose of the purchasing team at the super market is to ensure that proper relationships is
maintained with the suppliers to ensure high quality of the goods. The purchasing department has
the objective of working with the suppliers such that house products can be improved and made
healthier through the material provided by the company3.
The supplier selection method will include linear averaging method to select the most
appropriate supplier4.
1 Luthra, Sunil, Kannan Govindan, Devika Kannan, Sachin Kumar Mangla, and Chandra Prakash Garg. "An
integrated framework for sustainable supplier selection and evaluation in supply chains." Journal of Cleaner
Production 140 (2017
2 Sharma, Sanjay. "Procurement Cost." In Inventory Parameters, pp. 111-130. Springer, Singapore, 2017.
3Govindan, Kannan, Sivakumar Rajendran, Joseph Sarkis, and Parasurama Murugesan. "Multi criteria decision
making approaches for green supplier evaluation and selection: a literature review." Journal of Cleaner Production
98 (2015): 66-83.
4 Galankashi, Masoud Rahiminezhad, Ali Chegeni, Amin Soleimanynanadegany, Ashkan Memari, Ali Anjomshoae,
Syed Ahmad Helmi, and Ahmad Dargi. "Prioritizing green supplier selection criteria using fuzzy analytical network
process." Procedia CIRP 26 (2015): 689-694.

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Supplier 1 Supplier 2
Quality rating (weight= 35%)
Total lots inspected 70 70
Total lots passed 55 64
Service rating (weight=40%)
Total lots received 70 70
Total lots late delivery 10 8
Price rating (weight= 25%)
Lowest price 85 90
Figure 2: Linear averaging method
Source: (created by author)
Supplier 1:
Quality Service Price Total
Row score 55/70 =0.79 60/70= 0.86 85(lowest)/85=1
Weight 0.35 0.40 0.25
Score 2.28 0.34 0.25 0.87
Figure 3: cost of suppler 1
Source: (created by author)
Supplier 2:

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Quality Service Price Total
Row score 64/70 =0.91 62/70= 0.89 85(lowest)90=
0.95
Weight 0.36 0.4 0.25
Score 0.32 0.36 0.24 0.92
Cost incurred Supplier ($)
Expedite the delivery of outstanding orders 2550
Inspection at the supplier plan 2080
Late delivery 1600
Rework 1500
Wrong items delivered or wrong quantity
delivered
2100
Incoming inspection 2200
Price opted by the supplier 190
Total value of purchase 90000
Cost incurred Supplier
Delivery cost Expedite
Late delivery
2550
1600

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Wrong items 2100
Total Delivery Cost 6250
Quality cost Plan inspection
Rework
Incoming inspection
2080
1500
2200
Total quality cost 5780
2.1 Single VS. Multiple sourcing
The process of using multiple sources includes procuring the goods, components,
services, the product groups and others from more than one suppliers5. The main advantages of
using multiple sourcing is that the company need not depend upon only one supplier so as a
result of that the goods are got from the suppliers at a lower cost and this leads to price
competition. Since the organization does not have to depend upon only one supplier, the
organization can reduce its risks of sudden shortage in supplies. On the other hand, single
sourcing refers to the concept of purchasing all the goods and components from only one
supplier6. This type of sourcing increases the risks of the company because they have to depend
upon only one supplier but there are many advantages of having only one supplier such as the
company can get the material at a low cost because of good relationship between the
organization and the suppliers and there is mutual trust between the two. The fairprice
supermarket needs to carry out multiple sourcing such that they can ensure that there is no
5 Heese, H. Sebastian. "Single versus multiple sourcing and the evolution of bargaining positions." Omega 54
(2015): 125-133
6 Kahelin, Juha. "Procurement Strategy for Oy Scantarp Ab." (2016)

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shortage of material in the company and therefore the company can carry out its operations
smoothly and efficiently.
2.2 Peter Kraljic model of Risk-value
Figure 3: Risk-Value model
The main purpose of the model is to reduce the cost of supplying and to maximize the security of
the supply chain7. The four main steps of the model includes- purchase classification, market
analysis, strategic positioning and action planning. In case if classification, the risk is high in
case the supply is affected by the government policies, or when there is scarcity of raw material.
The impact of this is that value is added to the output or there is an impact on the quality. The
matrix represents four main items- the strategic items, the leverage items, bottleneck items and
7Nas, Tevfik F. Cost-benefit analysis: Theory and application. Lexington Books, 2016.

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non-critical items. In case of the strategic items high risks of supply is there and the profit impact
is also high. Purchasing mangers need to give focus on these items because high impact of
profits and high risks. The leverage items are the ones where the supply risks are low and profit
impacts are higher. The purchasing manager needs to order these items in large quantity because
of the supply risk being low. Bottleneck items are the ones whose supply risks are high but profit
impact is low. The purchasing manager needs to order these items in excessive quantity when
these orders are available in large quantity. The non-critical items of the organization represents
those items whose profit impact is low and the risk of supply is also low. The purchasing
manager needs to look after the inventory levels for the purpose of optimizing the same.
2.3 Cost-ratio and linear averaging method
The evaluation system for selection of the supplier includes three main methods: the
categorical method, the cost-ration method and the linear averaging method8. The cost-ratio
method makes use of cost analysis methods for evaluating the supplier. The purchase cost is
equivalent to selling price added with the operating costs of quality, service and delivery9. The
calculations mainly include four steps. A hybrid model is also used called the cost of rating
ownership. The supplier is evaluated on the basis of five main factors and these are- quality,
technology, price, delivery and services. The hidden ownership cost is given some numerical
rating. The linear averaging method is the most easiest and commonly used method. Quantitative
performance methods are used to evaluate the performance of the supplier10. There are various
8 Jülch, Verena. "Comparison of electricity storage options using levelized cost of storage (LCOS) method." Applied
energy 183 (2016): 1594-1606.
9 Johansson, Per-Olov, and Bengt Kriström. Cost-benefit analysis. Cambridge University Press, 2018.
10 Anchidin, Liliana, Claudia-Alina Ilie, Stefania Bucuci, Razvan D. Tamas, and George Caruntu.
"A new insight on the distance averaging method: linear scanning versus matrix scanning."
In Advanced Topics in Optoelectronics, Microelectronics, and Nanotechnologies IX, vol. 10977,

9PURCHASING MANAGEMENT
factors such as the price, quality and others however one factor may be give more weight than
the others.
3. Purchasing cost analysis
The two main techniques of calculating the cost of purchase is the- TCO or the total cost of
ownership and the activity based costing or ABC11. TCO helps in identifying the costs whether
direct or indirect by the buyers and the sellers regarding the product. The concept of total cost
ownership is not only used for business that are be carried out in the same country but for
companies that are operating in the overseas also for such manufacturing concerns it include is
beyond the making cost and the time of manufacturing cycle12. It can help to find out the
economic value for investments such as the return on investment’s and therefore provide
information of the same. For calculating the TCO all the costs are considered such as the cost of
acquiring the products and the operating costs and others. ABC is another technique for
calculating the cost for organizations and includes the cost of the identifying the different
organizational activities and assigning with the same on the basis of the consumptions of
products and services13. This concept is based on the resource consumption in an organization
and the final cost is computed on the basis of that. The main objective of this costing method is
p. 109772W. International Society for Optics and Photonics, 2019.
11 Martin, Christopher J., Sean B. McAdams, Haidar Abdul-Muhsin, Victoria M. Lim, Rafael Nunez-Nateras, Mark
D. Tyson, and Mitchell R. Humphreys. "The economic implications of a reusable flexible digital ureteroscope: a
cost-benefit analysis." The Journal of urology 197, no. 3 (2017)
12 Ravinder, Handanhal V., and Ram B. Misra. "ABC analysis for inventory management: Bridging the gap between
research and classroom." American Journal of Business Education (AJBE) 9, no. 1 (2016): 39-48.
13 Araújo, J. B. C. N., A. N. Souza, M. S. Joaquim, L. M. Mattos, and IM Lustosa Junior. "Use of the activity-based
costing methodology (ABC) in the cost analysis of successional agroforestry systems." Agroforestry Systems (2019):
1-10.

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to identify and replace all those products which are unprofitable as compared to others14. The
activity based costing can be used by the organization for the purpose of better management of
cost, for carrying out performance measurement and budgeting activities. It helps in calculating
the costs of the organization more effectively and accurately. It ensures that the organizational
cost is being managed properly such that the profitability of the customers and the organization
increases. It helps in focusing in only those activities which are more profitable for the
organization and assigns weightage to these activities.
4. Purchasing IT
The EDI or the electronic data interchange is used for direct transfer of information and
orders with the use of computers. This technique helps in reducing the total cost, reduce wastage
of time and it is less prone to errors. EDI helps in transfer of orders, payment, invoices, and
delivery between the sellers and the buyers in purchasing activity of the organization. The major
components of the EDI are the hardware, software, compatibility of computers and other
activities between buyers and suppliers. It is a technique of exchanging documents from one
organization to another because with the help of computers. For this purpose it is important to
use structured messaging for proper transmission of information and data. It is used in different
types of industries such as retail, transportation and others. It is used to transfer documents such
as purchase orders and others. Various companies use EDI through supplier compliance. It helps
in easy and fast transfer of data, audit trails, reduce costs and various others benefits. A supplier
portal is used for the purpose of helping the suppliers in receiving orders and sending invoices
after creating them. Once a purchase order has been prepared, it will be sent to the supplier for
14 Aktunc, Esra Agca, Meltem Basaran, Gozde Ari, Mumin Irican, and Sahna Gungor. "Inventory Control Through
ABC/XYZ Analysis." In Industrial Engineering in the Big Data Era, pp. 175-187. Springer, Cham, 2019.

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the purpose of editing, printing, shipping and invoicing. Fairprice can use the technique of EDI
for the purpose of reducing the cost, easy transmission of data and others.
Conclusion
From the above discussion it can be concluded that the purchasing management activities
involve the study of supermarkets operations in a particular supplier market, has competitors
within the market, provides a wide range of products to satisfy the needs if the customers. this
study discusses about the supplier selection criteria and other related issues such as using single
sourcing technique or the technique of multiple sourcing and others. This study also highlights

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the purchasing cost of the organization such that the goods can be procured at the minimum
possible cost. This paper also discusses about the information communication technology for
improving the procurement procedure. The paper provides for the purchasing cost analysis and
gives an overview of how the procurement process takes place in a supermarket.

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References
Aktunc, Esra Agca, Meltem Basaran, Gozde Ari, Mumin Irican, and Sahna Gungor. "Inventory
Control Through ABC/XYZ Analysis." In Industrial Engineering in the Big Data Era,
pp. 175-187. Springer, Cham, 2019.
Anchidin, Liliana, Claudia-Alina Ilie, Stefania Bucuci, Razvan D. Tamas, and George Caruntu.
"A new insight on the distance averaging method: linear scanning versus matrix
scanning." In Advanced Topics in Optoelectronics, Microelectronics, and
Nanotechnologies IX, vol. 10977, p. 109772W. International Society for Optics and
Photonics, 2019.
Araújo, J. B. C. N., A. N. Souza, M. S. Joaquim, L. M. Mattos, and IM Lustosa Junior. "Use of
the activity-based costing methodology (ABC) in the cost analysis of successional
agroforestry systems." Agroforestry Systems (2019): 1-10.
Galankashi, Masoud Rahiminezhad, Ali Chegeni, Amin Soleimanynanadegany, Ashkan Memari,
Ali Anjomshoae, Syed Ahmad Helmi, and Ahmad Dargi. "Prioritizing green supplier
selection criteria using fuzzy analytical network process." Procedia CIRP 26 (2015):
689-694.
Gelderman, Cees J., Janjaap Semeijn, and Anton de Bruijn. "Dynamics of service definitions—
An explorative case study of the purchasing process of professional ICT-
services." Journal of Purchasing and Supply Management 21, no. 3 (2015): 220-227.

14PURCHASING MANAGEMENT
Govindan, Kannan, Sivakumar Rajendran, Joseph Sarkis, and Parasurama Murugesan. "Multi
criteria decision making approaches for green supplier evaluation and selection: a
literature review." Journal of Cleaner Production 98 (2015): 66-83.
Heese, H. Sebastian. "Single versus multiple sourcing and the evolution of bargaining
positions." Omega 54 (2015): 125-133.
Johansson, Per-Olov, and Bengt Kriström. Cost-benefit analysis. Cambridge University Press,
2018.
Jülch, Verena. "Comparison of electricity storage options using levelized cost of storage (LCOS)
method." Applied energy 183 (2016): 1594-1606.
Kahelin, Juha. "Procurement Strategy for Oy Scantarp Ab." (2016).
Luthra, Sunil, Kannan Govindan, Devika Kannan, Sachin Kumar Mangla, and Chandra Prakash
Garg. "An integrated framework for sustainable supplier selection and evaluation in
supply chains." Journal of Cleaner Production 140 (2017): 1686-1698.
Martin, Christopher J., Sean B. McAdams, Haidar Abdul-Muhsin, Victoria M. Lim, Rafael
Nunez-Nateras, Mark D. Tyson, and Mitchell R. Humphreys. "The economic
implications of a reusable flexible digital ureteroscope: a cost-benefit analysis." The
Journal of urology 197, no. 3 (2017): 730-735.
Nas, Tevfik F. Cost-benefit analysis: Theory and application. Lexington Books, 2016.
Ravinder, Handanhal V., and Ram B. Misra. "ABC analysis for inventory management: Bridging
the gap between research and classroom." American Journal of Business Education
(AJBE) 9, no. 1 (2016): 39-48.

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Sharma, Sanjay. "Procurement Cost." In Inventory Parameters, pp. 111-130. Springer,
Singapore, 2017.