Analysis
1. The role of Purchasing in the Supply Chain
Programme
Changes in the business context and its impact on strategies and structures
The role of purchasing in the Supply Chain
Definition of concepts
Importance of the purchasing function
Classification of purchasing goods
The changing landscape in purchasing and supply
Conclusions
Changes in the business context
1. Globalisation of trade
Resulting from:
Deregulation in many industries
Intercultural homogenisation and the resulting homogenisation of consumer
preferences
The forming of trade blocks (NAFTA, GATT, EEC)
Improved transportation facilities
More sophisticated information and communications technology
Changes in the business context
2. The information society
Growing economic value from generating, using and selling information
Advanced retail and manufacturing information systems; improved capabilities for tracking
and tracing
Xerox: ‘pay for production’
3. Changing consumer patterns
Customers increasingly demand convenience of purchase, after-sales service, relaibility,
uniqueness, quality etc.
Customers take charge; they tell the manufacturers what they want, when, how and what they are
willing to pay
This leads to constant innovation and service offerings
Impact on strategies & structures
1. Value Chain Management
Every firm can be considered basically as a collection of primary and supporting value
activities that are performed to design, produce, market, deliver and support products that are valuable
for customers (Porter).
Competitive advantage depends primarily on the art of positioning a company in the right place
of the value chain vis-à-vis its:
Customers
Competitiors
Suppliers
Companies should focus on their core competencies
Impact on strategies & structures
2. Process orientation
Shift from functional organisation to process organisation
Process means in this case the set of activities that produce a value to a customer
3. Outsourcing and managing best-in-class supplier networks
Often specialist suppliers can perform the outsourced activities at lower cost and with
higher value-added than the buyer
Best-in-class suppliers are then needed
The role of Purchasing
The role of Purchasing
Definition of concepts
Definition of concepts
Purchasing:
All activities for which the company receives an invoice from outside parties.
Differentiation between:
Purchasing function
Purchasing department
Procurement:
All activities that are required in order to get the product from the supplier to its final
destination.
Sourcing:
Finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources
of supply and gathering knowledge of procurable resources.
Definition of concepts
Purchasing Management
All activities that are required to manage supplier relationships.
Supply Chain Management
The management of all activities, information, knowledge and financial resources
associated with the flow and transformation of goods and services up from the raw materials suppliers,
component suppliers and other suppliers in such a way that the expectations of the end users of the company
are being met or surpassed
Importance of the purchasing function
Classification of Purchasing goods
Raw materials; materials which have undergone no transformation or a minimal transformation
and which serve as the basis materials for a production process
Supplementary materials; materials that are not absorbed physically in the end product
Semi-manufactured products; products that have already been processed once or more times and
that will be processed further at a later stage
Components; manufactured goods that will not undergo additional physical changes, but which
will be incorporated in a system with which there is a functional relationship by joining it with
other components
Classification of Purchasing goods
Finished products; all products which are purchased to be sold, after negligible added value,
either together with other finished products and/or manufactured goods
Investment goods or capital equipment; products that are not consumed immediately, but which
purchasing value is depreciated over a period of time
Maintenance, repair and operating materials (MRO items); materials, which are necessary for
keeping the organisation running in general and for the support activities in particular
Services; labour intensive, non material activities that are executed by third parties on a
contract basis
The changing landscape in purchasing and supply
Co-ordination of purchasing requirements
Integration of purchasing and logistics
Integration of purchasing in engineering and production planning
Make or buy
Reciprocity agreements and compensation agreements
Total quality control and just-in-time production
Environmental issues
Conclusions
The scope of the purchasing function extends from the purchasing market to inside the company
gate
The purchasing function is a very important link in the production chain of organisations
The purchasing function is concerned with obtaining all goods necessary for running,
maintaining and managing the company
A distinction should be made between the purchasing function and the purchasing
department
Purchasing management is the activity aimed at systematising the purchasing process and
achieving specific improvements through the management of supplier relationships
The purchasing function is subject to many changes
12
/t
inbound
logistics
operations
outbound
logistics
marketing
& sales
Margin
Margin
Support
activities
Primary activities
p r o c u r e m e n t
technology development
firm infrastructure
human resource management
service
Very large
Very large
Limited
Very Large
Small
Limited, forecast-related or project-related planning
Fragmented, varies with product or service
Limited to large
Limited, transparent
Very large, considerable
Considerable
High
Depends on type of production planning
Engineering, manufacturing
specialists dominant
Product assortment
Number of suppliers
Purchasing turnover
Number of Purchase orders
Average order size
Control
Decision-making unit
Buying for support activities
Buying for primary activities
Aspects
purchasing function
tactical / initial
ordering/ operational
Sourcing
Supply
Buying
Procurement
Internal
customer
Supplier
Ordering
Follow
up/
evaluation
Expediting
and
evaluation
Speci-
fication
Contracting
Selecting
60-85
60-80
50-70
60-80
25-50
5
12
18
3
12
50
Admin.
Services
Capex
Spares
Trade-
items
Retailers
Computers Consumer
electronics
Automotive Pharma Service
industry
Typical
structure
10-40
Production parts
DuPont analysis:
RONA
Capital turn-over ratio
Margin
×
Amounts in mln Euro
Other costs
Purchased mat. & serv.
+
Total costs
Sales
-
Total assets
Interest free liabilities
-
Sales
Net assets
/
Income before tax
Sales
/
105 mio
105 mio
105 mio
145 mio
95 mio
50 mio
2.1 x
105 mio
40 mio
60 mio
100 mio
5 mio
4.7 %
9.9 %
DuPont analysis:
RONA
Capital turn-over ratio
Margin
×
EC million
Other costs
Purchased mat.& serv.
+
Total costs
Sales
-
Total assets
Interest free liabilities
-
Sales
Net assets
/
Income before tax
Sales
/
105 mio
105 mio
105 mio
145 mio
95 mio
50 mio
2.1 x
105 mio
40 mio
60 mio
100 mio
5 mio
4.7 %
9.9 %
- 2 %
58.8 --
98.8 ---
6.2 --
5.9 ---
12.4 ----
+ 25 % !!
1. Seller’s market Buyer’s market
2. Increasing pressure on sales prices and margins leads to: