purchase and supply chain management

1. © Cengage Learning – Purchasing & Supply Chain Management 4th ed (1-84480-024-5)
Analysis
1. The role of Purchasing in the
Supply Chain

2. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Program
 Changes in the business context
 Impact on business strategies and structures
 The role of purchasing in the value chain
 Definition of concepts
 Importance of purchasing to business
 Purchasing, cost reduction and technological innovation
 Classification of purchasing goods
 New developments in purchasing
 Conclusions

3. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Changes in the business context
1. Globalization of trade
Resulting from:
 Deregulation in many industries
 Intercultural homogenization and the resulting homogenization of consumer
preferences
 The forming of trade blocks (NAFTA, GATT, EEC)
 Improved transportation facilities
 More sophisticated information and communications technology

4. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
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, direct availability of detailed information
 Xerox: ‘pay for production’
 Electronic networks, electronic market places (e.g. Chemdex)
3. Changing consumer patterns
 Today’s customers use an expanded concept of value that includes
convenience of purchase, after-sales service, reliability, uniqueness, and so
on.
 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
Changes in the business context

5. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Impact on strategies & structures
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

6. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Impact on strategies & structures
Value Chain Management (2)
 In order to improve their competitive position, companies need to
focus their core activities on the needs and requirements of their
customers.
 Non-core activities are increasingly outsourced to specialist
suppliers (e.g. Nike, Dell, Cisco).
 Often specialist suppliers can perform the outsourced activities at
lower cost and with higher value-added than the buyer.
 Supplier management is becoming more and more important issue
in corporate strategies.

7. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
The role of purchasing in the value chain
inbound
logistics
operations outbound
logistics
marketing
& sales
Support
activities
Primary activities
p r o c u r e m e n t
technology development
firm infrastructure
human resource management
service

8. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
The role of purchasing in the value chain
Aspects Buying for primary
activities
Buying for support
activities
Product assortment
Number of suppliers
Purchasing turnover
Number of Purchase orders
Average order size
Control
Decision-making unit
Limited to large
Limited, transparent
Very large, considerable
Considerable
High
Depends on type of
production planning
Engineering,
manufacturing
specialists dominant
Very large
Very large
Limited
Very Large
Small
Limited, forecast-related or
project-related planning
Fragmented, varies with
product or service

9. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Definition of concepts
purchasing function
tactical / initial ordering/ operational
Sourcing Supply
Buying
Procurement
Internal
customer
Supplier
Ordering
Follow
up/
evaluation
Expediting
and
evaluation
Speci-
fication
Contracting
Selecting

10. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Definition of concepts
Purchasing:
All activities for which the company receives an invoice from outside parties.
Differentiation between:
 Purchasing function
 Purchasing department
Definition:
“Managing the company’s external resources in such a way that the supply of
all goods, services, capabilities and knowledge which are necessary for
running, maintaining and managing the company’s primary and support
activities is secured at the most favorable conditions”.
Procurement:
All activities that are required in order to get the product from the supplier to its final
destination.

11. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Definition of concepts
Sourcing:
Finding sources of supply, guaranteeing continuity in supply, ensuring alternative
sources of supply and gathering knowledge of procurable resources.
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
Value Chain Management
Challenging suppliers to improve the value proposition to the end-customers of the value
chain. Usually the supplier works closely together with the customer’s technical and
marketing staff to reduce the product’s overall costs and add new designs or features to
the product which increase the value for the end-customer.

12. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Importance of purchasing to business
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
Produc
tion
parts

13. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
DuPont analysis:
RONA
Capital
turn-over
ratio
Margin
×
Amounts in Euro mio
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 %

14. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
DuPont analysis:
RONA
Capital
turn-over
ratio
Margin
×
Amounts in Euro mio
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 % !!

15. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Purchasing, cost reduction and
technological innovation
 Apart from immediate savings on purchasing prices, there are many
other opportunities through which purchasing can contribute to the
company’s success. For example:
 reduction of quality costs
 product standardization
 contribution to product design and innovation
 stock reduction
 increasing flexibility
 fostering purchasing synergy
 In general these improvement measures require a better
collaboration and harmonization between the different functional
domains within the company (internal integration), but also with the
suppliers (external integration).

16. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Classification of goods (1)
 The purchasing process may concern a large variety of goods and
services. In general, purchased materials and services can be
grouped into the following categories:
 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

17. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Classification goods (2)
 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

18. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
New developments in purchasing
 Leveraged purchasing and supply strategies
 Global sourcing
 Supplier integration
 Early supplier involvement in new product development
 Reciprocity agreements and compensation agreements
 Environmental issues and business integrity
1. Seller’s market Buyer’s market
2. Increasing pressure on sales prices and margins leads to:

19. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Conclusions
 In short, purchasing represents a business area which is
being confronted with many changes and challenges.
 Without doubt these challenges will put purchasing and
supply chain management more in the spot light in
business.