PP M Pp01 Lecture 1 Scope of Purchasing 19-9-2011

Slide 1.
Scope of Purchasing
Lecture 1 Chapter 1 in Textbook Based on Baily et al. (2008)
Baily, Procurement Principles and Management, 10th Edition, Baily, Farmer, Crocker, Jessop and Jones 2008
Slide 1.2
Learning Objectives
Traditional Objectives of Purchasing Scope of Purchasing
To identify the purchasing cycle concept

To discuss the changing role of purchasing and supply To identify the internal and external influences which have affected the evolution of purchasing
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Traditional objectives of Purchasing
. to acquire the right quality of material, at the right time, in the right quantity, from the right source, at the right price.
Traditional view is now seen as too simplistic and does not emphasize the strategic role of purchasing.
Slide 1.4
The scope of purchasing

Todays purchasing function involves the following; To supply the organization with a flow of materials and services to meet its needs. To ensure continuity of supply by maintaining effective relationships with existing sources and by developing other sources of supply either as alternatives or to meet emerging or planned needs.
To buy efficiently and wisely, obtaining by ethical means the best value for every pound/Dirham spent.
Slide 1.5
The scope of purchasing
cont!
To maintain sound co-operative relationships with other departments, providing information and advice as necessary to ensure the effective operation of the organisation as a whole.
To develop staff, policies, procedures and organisation to ensure the achievement of these objectives.
Slide 1.6
Mini case study Hertz

Buyers have been urged to remember their businesss overall strategy when trying to transform their procurement.
If procurement cannot align itself with what the organisation wants to achieve, it will not get the support for what it wants.
Slide 1.7
More specific objectives of Purchasing;
To select the best suppliers in the market. To help generate the effective development of new products. To protect the companys cost structure. To maintain the correct quality/value balance. To monitor supply market trends. To negotiate effectively in order to work with suppliers who will seek mutual benefit through economically superior performance. To adopt environmentally responsible supply management.
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Case study Ford

Purchasing and supply management for many is now directly linked into their companies business strategies and they recognize that it has a real impact on competitive advantage.
Ford Motor Company believes that procurement controls the ultimate profitability of the company.
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Slide 1.10
The Purchasing Cycle

Recognition of need Specification Make-or-buy decision Source identification Source selection Contracting Contract management Receipt, possibly inspection Payment Fulfilment of need
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Is Purchasing a service activity?

In the past, purchasing was seen as a service function, often subordinated to production or engineering in manufacturing sector, or to finance in service or public sectors.
The above thinking has given way to realization that purchasing might contribute more effectively at a strategic as well as at an operational level. Recently, Purchasing has been transformed from a service function whose aims were expressed in the price, quality and delivery equation to one which makes a contribution to sustainable competitive advantage by reducing cost of ownership, cycle time reduction, and improving time to market. Purchasing must focus on its relationship to end-market performance.
Slide 1.12
The Changing role of purchasing and supply

Purchasing is becoming more of a Strategic Importance due to external and internal organizational factors. External factors include; Leading-edge concepts: organizations employing leading-edge approaches based on strategic & integrated role of purchasing (i.e., best practice benchmarking, just-in-time philosophies and lean production, relationship management, tiering & empowerment of suppliers, etc) Increasing environmental awareness recognition that being green is good business (i.e., specification of renewable raw materials, effect of waste & by-products). Competitors activity pressure to match competitors performance levels (stimulate other companies to improve the function & profile of the purchasing function).
Slide 1.13

Customer demand important to delight your customer (i.e., exceeding customer expectation; satisfying is silent while delighting is noisy)
Advancing technology most businesses specialize in a narrower range of activities and compelled to buy greater portions of their requirements.
Innovation pace of change/innovation has quickened over time. Requires improvement of internal interface between purchasing and other internal departments (i.e., production, marketing, finance, etc) on one hand, and external suppliers/customers on the other. Increased importance of time-to-market.
Slide 1.14

Purchasing is becoming more of a Strategic Importance due to internal organizational factors; Increased portion of expenditure as percentage of total expenditure spent on external purchases (i.e., percentage of bought-out materials and services expenditure in relation to sales income runs close to between 60-90%). See Table 1.1 & Figure 1.1 below. Performance measurement Increased emphasis by top management on measuring the contribution of purchasing and supply to cost reduction and strategic capabilities. This emphasis has raised its profile.
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Table 1.1 Some reasons for the increased importance and recognition of purchasing
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Figure 1.1 The increasing importance of purchasing and supply in the manufacturing sector
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Proactive Purchasing
As the profile of purchasing has increased, its role has changed from; Administrative and clerical activities; ordering and replenishing routines
to;
Strategic activities; Negotiating longer-term relationships
Supplier development
Total cost reduction
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Table 1.2 Changing purchasing roles: reactive and proactive buying

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The changing nature of relationships between buyer and supplier

Movement away from the Transactional view; Based on idea that purchasing is concerned with simple exchange (i.e., merely buying), where buyer and seller interact with each other on an arms-length basis.
Movement towards development of mutual supplier-buyer relationships, where the benefits of doing business together arise from ideas of sharing as well as exchanging; Based on building a satisfactory outcome together. Confidence and support are invested by both sides with intention of adding value.
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Figure 1.2 Traditional relationship between buyer and sellers - The transactional relationship
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Figure 1.3 The mutual relationship

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Procurement positioning
No buyer can form long-term relationship with all suppliers
Pareto principle applies (80/20 rule); In general, 80% of expenditure will be with 20% of suppliers. Close relationships likely to be with suppliers with whom large sums of money are spent with.
Procurement positioning tool can be used to determine which supplier to form close relationship with (see Figure 1.4); Risk concerned with degree of difficulty associated with sourcing a product or service, or vulnerability of the client organization to failure of the supplier to provide on time. Profit potential extent of the potential of the supply to contribute to profitability (or efficiency) of the buying concern.
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Figure 1.4 The Procurement Positioning tool

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Procurement Positioning tool

No single best approach to relationship with all suppliers for all products
Transactional approach might be appropriate for routine purchases. Strategic approach will be of obvious benefit to a mutual relationship in the critical sector. A buyer may be uncomfortable with supplies of services or goods in the Bottleneck sector, and may wish to move the requirement to the Routine sector perhaps by developing additional suppliers. Where supplies and suppliers are in the leverage category, buyers are likely to be comfortable, but vendors might be keen to see their product repositioned as critical
Slide 1.25
Total acquisition cost and total ownership

Buying price most associated with purchasing/procurement responsibility. In todays environment, procurement has to work with suppliers and colleagues to eradicate unnecessary costs. Unnecessary cost could be due to; Over-specification Purchasing a non-standard item when a standard alternative is acceptable. Unnecessary packaging Transport costs (i.e., IKEA?)
Slide 1.26
Total acquisition cost and total ownership

Total acquisition cost more than simply price.
Includes; Duty paid Inventory-carrying costs Inspection costs Remedy or rectification costs
Low price might lead to high total acquisition costs (i.e., printers vs catridges). Most organizations prefer the expression Total Cost of Ownership when buying capital goods or materials that will last for some time. Looks at hidden costs as well.
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Figure 1.5
The price/cost iceberg

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Case study Siemens

Siemens believes that with supplier partnerships, to take cost out of a supply chain is only one element of the partnership approach. Innovation, in the sense of developing new products and services and doing so quicker or better than competitors, is what differentiates successful companies from the rest.
The reason is that, these days, much of the innovation is likely to come from the supply base (i.e., from suppliers).
Slide 1.29
Purchasing development frameworks

Reck & Long (1988) developed the four-stage purchasing development model, comprising of (Figure 1.7); Passive stage Independent stage Supportive stage Integrative stage Jones (1997), from his PhD thesis, developed a five stage purchasing development matrix (Figure 1.9); Infant Awakening Developing Mature Advanced
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Figure 1.7 A four-stage purchasing development model

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Figure 1.7 A four-stage purchasing development model (Continued)

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Figure 1.9
The purchasing development matrix

Source: Jones, 1997
Slide 1.33
Best practice in strategic supply management

The following list includes many of the ideas taught to students of purchasing at all levels. Clearly, this good practice will not be practicable in an organisation with a less than fully developed purchasing function. Identify and work with key suppliers Develop openness and transparency Align systems with strategic initiatives Articulate mutual goals Forge partnerships where appropriate Use complementary competencies Employ appropriate technology Use appropriate e-technology/systems Share competencies and resources
Slide 1.34
Best practice in strategic supply management (Continued)

Establish common language Emphasise mutual benefits Implement Kaizen Empower individuals Empower suppliers Focus on customer needs Pursue and eliminate waste Consider core/non-core questions Build knowledge base Use knowledge base Be responsive, and ready to change

PP M Pp01 Lecture 1 Scope of Purchasing 19-9-2011

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Slide 1.

Lecture 1 Chapter 1 in Textbook Based on Baily et al. (2008)

To identify the purchasing cycle concept

Traditional objectives of Purchasing

The scope of purchasing

The scope of purchasing

Mini case study Hertz

More specific objectives of Purchasing;

Case study Ford

The Purchasing Cycle

Is Purchasing a service activity?

The Changing role of purchasing and supply

The Changing role of purchasing and supply

The Changing role of purchasing and supply

Table 1.2 Changing purchasing roles: reactive and proactive buying

The changing nature of relationships between buyer and supplier

Figure 1.3 The mutual relationship

Figure 1.4 The Procurement Positioning tool

Procurement Positioning tool

Total acquisition cost and total ownership

Total acquisition cost and total ownership

The price/cost iceberg

Case study Siemens

Purchasing development frameworks

Figure 1.7 A four-stage purchasing development model

Figure 1.7 A four-stage purchasing development model (Continued)

The purchasing development matrix

Source: Jones, 1997

Best practice in strategic supply management

Best practice in strategic supply management (Continued)

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