pp m pp01 lecture 1 scope of purchasing 19-9-2011

8/3/2019 PP M Pp01 Lecture 1 Scope of Purchasing 19-9-2011

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Baily, Procurement Principles and Management, 10th Edition, Baily, Farmer, Crocker, Jessop and Jones 2008

Scope of Purchasing

Lecture 1 Chapter 1 in Textbook

Based on Baily et al. (2008)


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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 ofmaterial, at the right time, in the right

quantity, from the right source, at theright price.

Traditional view is now seen as toosimplistic and does not emphasize thestrategic role of purchasing.


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Todays purchasing function involves the following;

To supply the organization with a flow of materials andservices to meet its needs.

To ensure continuity of supply by maintaining effectiverelationships with existing sources and by developingother sources of supply either as alternatives or to meet

emerging or planned needs.

To buy efficiently and wisely, obtaining by ethical meansthe best value for every pound/Dirham spent.

The scope of purchasing


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The scope of purchasing cont!

To maintain sound co-operative relationships withother departments, providing information and adviceas necessary to ensure the effective operation of the

organisation as a whole.

To develop staff, policies, procedures andorganisation to ensure the achievement of theseobjectives.


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Buyers have been urged to remember their businesssoverall strategy when trying to transform their procurement.

If procurement cannot align itself with what the organisationwants to achieve, it will not get the support for what it wants.

Mini case study Hertz


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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 whowill seek mutual benefit through economically superior

performance.

To adopt environmentally responsible supply management.

More specific objectives of Purchasing;


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Purchasing and supply management for many is nowdirectly linked into their companies business strategiesand they recognize that it has a real impact on competitiveadvantage.

Ford Motor Company believes that procurement controlsthe ultimate profitability of the company.

Case study Ford


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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

Slid


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Is Purchasing a service activity?

In the past, purchasing was seen as a service function, oftensubordinated to production or engineering in manufacturingsector, 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 anoperational 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 tosustainable competitive advantage by reducing cost ofownership, cycle time reduction, and improving time to market.

Purchasing must focus on its relationship to end-market

performance.

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The Changing role of purchasing and supply

Purchasing is becoming more of a Strategic Importance due to

external and internal organizational factors. External factorsinclude;

Leading-edge concepts: organizations employing leading-edgeapproaches based on strategic & integrated role of purchasing(i.e., best practice benchmarking, just-in-time philosophies andlean production, relationship management, tiering &empowerment of suppliers, etc)

Increasing environmental awareness recognition that beinggreen is good business (i.e., specification of renewable raw

materials, effect of waste & by-products).

Competitors activity pressure to match competitorsperformance levels (stimulate other companies to improve thefunction & profile of the purchasing function).

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Customer demand important to delight your customer (i.e.,exceeding customer expectation; satisfying is silent whiledelighting is noisy)

Advancing technology most businesses specialize in a narrowerrange of activities and compelled to buy greater portions of theirrequirements.

Innovation pace of change/innovation has quickened over time.

Requires improvement of internal interface between purchasingand other internal departments (i.e., production, marketing,finance, etc) on one hand, and external suppliers/customers on theother. Increased importance of time-to-market.

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Purchasing is becoming more of a Strategic Importance due tointernal organizational factors;

Increased portion of expenditure as percentage of total

expenditure spent on external purchases (i.e., percentage ofbought-out materials and services expenditure in relation to salesincome runs close to between 60-90%). See Table 1.1 & Figure 1.1

below.

Performance measurement Increased emphasis by topmanagement on measuring the contribution of purchasing andsupply to cost reduction and strategic capabilities. This emphasishas raised its profile.


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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 simpleexchange (i.e., merely buying), where buyer and seller

interact with each other on an arms-length basis.

Movement towards development of mutual supplier-buyerrelationships, where the benefits of doing business togetherarise from ideas of sharing as well as exchanging;

Based on building a satisfactory outcome together.

Confidence and support are invested by both sides withintention 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 largesums of money are spent with.

Procurement positioning tool can be used to determine whichsupplier to form close relationship with (see Figure 1.4);

Risk concerned with degree of difficulty associated withsourcing a product or service, or vulnerability of the clientorganization to failure of the supplier to provide on time.

Profit potential extent of the potential of the supply tocontribute 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 theBottleneck sector, and may wish to move the requirement to theRoutine sector perhaps by developing additional suppliers.

Where supplies and suppliers are in the leverage category, buyers arelikely to be comfortable, but vendors might be keen to see their productrepositioned as critical

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Total acquisition cost and total ownership

Buying price most associated with purchasing/procurementresponsibility.

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?)

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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 ofOwnership when buying capital goods or materials that will lastfor some time. Looks at hidden costs as well.

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Figure 1.5 The price/cost iceberg


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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 stagepurchasingdevelopment 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 matrixSource: Jones, 1997

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The following list includes many of the ideas taught to students ofpurchasing at all levels. Clearly, this good practice will not bepracticable in an organisation with a less than fully developedpurchasing function.

Identify and work with key suppliersDevelop openness and transparencyAlign systems with strategic initiativesArticulate mutual goalsForge partnerships where appropriate

Use complementary competenciesEmploy appropriate technologyUse appropriate e-technology/systemsShare competencies and resources

Best practice in strategic supplymanagement

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Establish common languageEmphasise mutual benefitsImplement KaizenEmpower individualsEmpower suppliersFocus on customer needsPursue and eliminate wasteConsider core/non-core questionsBuild knowledge base

Use knowledge baseBe responsive, and ready to change

Best practice in strategic supplymanagement (Continued)

pp m pp01 lecture 1 scope of purchasing 19-9-2011

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