"Module 2 Workbook2 Purchasing, Procurement, Strategic SourcingThis page should take about 10 minutes to completePurchasing, procurement, and strategic sourcing are receiving considerable attention asorganisations try to improve the overall efficiency and effectiveness of their supply chains.Therefore, it is important to understand what we mean by these terms:Purchasing: The transactional function of buying products and services. In a businesssetting, this commonly involves the placement and processing of a purchase order.Procurement: The process of managing a broad range of processes associated with afirm’s need to acquire goods and services required to manufacture a product (direct) orto operate the organisation (indirect).Strategic Sourcing: The strategic sourcing process takes the procurement processfurther by focusing more on supply chain impacts of procurement and purchasingdecisions, and works cross-functionally within the business firm to help achieve theorganisation’s overall business goals.Merchant and industrial buyersPurchasing can be broadly classified into two categories: merchant and industrial buyers.Merchant buyers include the wholesalers and retailers who primarily purchase for resalepurposes. Generally, merchants purchase their merchandise in volume to take advantage ofquantity discounts and other incentives such as transportation economy and storageefficiency. They create value by consolidating merchandise, breaking bulk, and providing theessential logistical services. Industrial buyers mainly purchase raw materials for conversionpurposes. Industrial buyers also purchase services, capital equipment, and MRO(maintenance, repair, and operating) supplies. The typical industrial buyers are themanufacturers, although some service firms such as restaurants, landscape gardeners, andflorists also purchase raw materials for conversion purposes.3 Kraljic's matrix[This page should take about 40 minutes to complete] (Adapted from Kraljic,P. 1983. Purchasing must become supply management.Harvard Business Review, 61(5):109-117.)Kraljic’s matrix (see Figure ) enables the procurement manager to assess the importance ofeach product or service being purchased. This tool utilises a two-by-two matrix to determinea procured item’s relative importance on the basis of profit impact and supply risk. Therefore,the criteria used to delineate importance are profit impact and supply risk.Profit impact is high when the item adds significant value to the organisation's output. Thiscould be because it makes up a high proportion of the output (for example, raw fruit for afruit juice maker) or because it has a high impact on quality (for example, the cloth used by ahigh-end clothing manufacturer).Supply risk is high when the item is a scarce raw material, when its availability could beaffected by government instability or natural disasters, when delivery logistics are difficultand could easily be disrupted, or when there are few suppliers. "