Analysis

1. The role of Purchasing in the Supply Chain

© Cengage Learning – Purchasing & Supply Chain Management 4th 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 © 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 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

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, 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 © 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 © 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.

© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

The role of purchasing in the value chain

Support activities

firm infrastructure human resource management technology development p r o c u r e m e n t inbound logistics operations outbound logistics marketing & sales service

Primary activities

© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

The role of purchasing in the value chain

Aspects

Product assortment Number of suppliers Purchasing turnover Number of Purchase orders Average order size Control Decision-making unit

Buying for primary activities Limited to large Limited, transparent Very large, considerable Considerable High Depends on type of production planning Engineering, manufacturing specialists dominant Buying for support activities Very large Very large Limited Very Large Small Limited, forecast-related or project-related planning Fragmented, varies with product or service

© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Definition of concepts

Internal customer tactical / initial purchasing function ordering/ operational Speci fication Selecting Contracting Sourcing Buying Procurement Expediting Ordering and evaluation Follow up/ evaluation Supply Supplier © 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.

© 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. © 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 10-40 5 12 Admin.

Services 18 3 12 Capex Spares Trade items 50 Produc tion parts Retailers Computers Consumer electronics Automotive Pharma Service

© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

industry Typical structure

DuPont analysis: Capital turn-over ratio 2.1 x / Sales Total assets 145 mio Net assets 50 mio Interest free liabilities 95 mio RONA 9.9 % × Income before tax 5 mio Margin 4.7 % / Sales 105 mio Amounts in Euro mio © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Sales 105 mio Other costs 40 mio Total costs 100 mio + Purchased mat. & serv.

60 mio

DuPont analysis: Capital turn-over ratio 2.1 x / Sales Total assets 145 mio Net assets 50 mio Interest free liabilities 95 mio RONA ×

+ 25 % !!

Margin / Income before tax 6.2 - 5 mio Sales 105 mio Amounts in Euro mio © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Sales 105 mio Other costs 40 mio Total costs + Purchased mat.& serv.

58.8 --

- 2 %

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). © 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;

in the end product materials that are not absorbed physically 

Semi-manufactured products

later stage

;

products that have already been processed once or more times and that will be processed further at a 

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 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Classification goods (2)



Finished products;

negligible added value, either together with other finished products and/or manufactured goods all products which are purchased to be sold, after 

Investment goods or capital equipment;

immediately, but which purchasing value is depreciated over a period of time products that are not consumed 

Maintenance, repair and operating materials (MRO items);

which are necessary for keeping the organisation running in general and for the support activities in particular materials, 

Services;

labour intensive, non material activities that are executed by third parties on a contract basis © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

New developments in purchasing

1. Seller’s market Buyer’s market 2. Increasing pressure on sales prices and margins leads to:       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 © 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. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)