1. 1 Outline  Purchasing and Procurement  The Role of Purchasing in the Supply Chain  Purchasing Activities  Purchasing Cost Management  Price change management  Managing Supplier Relationships

2. 2 Purchasing and Procurement  Purchasing once looked at as simply a service function responsible for meeting the needs of manufacturing or other internal functions for which it was buying  Was not its responsibility to question those needs or to forge long term relationships with suppliers or to understand the needs of the end customer  Purchasing was expected to contribute in a very restrictive way with its scope defined by other internal functions

3. 3 Purchasing and Procurement  Purchasing role has evolved over recent decades  More outsourcing is taking place and there is a need for more sophisticated relationships and approaches  The term procurement describes the expansion of the purchasing role into a more strategic and process oriented role  Now includes selection of sources of supply, complex material management, timing of purchase, price determination and quality control

4. 4 Role of Purchasing in Supply Chain Fig4.1, [A], p95

5. Major Purchasing activities The role of purchasing in total customer satisfaction The strategic role of purchasing & procurement Supplier selection & evaluation Quality management Just-In-Time (JIT) 5

6. Purchasing and Customer Satisfaction 6

7. Strategic Role Is to perform sourcing-related activities in a way that supports strategic objectives Procurement can make many contributions Access to external markets Supplier development and relationship management Internal relationships with other functions Supplier selection and evaluation 7

8. Access to External Markets By understanding external supply market, purchasing can gain important information about: New technologies New materials and services New sources of supply Changing market conditions Purchasing can help reshape the organisation to take advantage of this ‘competitive intelligence’ 8

9. Supplier Development A key strategic role is constantly identifying and developing new and existing suppliers Getting suppliers involved early in the development of new products or enhancement of existing products can reduce development and to-market times This can be critical to success of new ideas and position as market leader / innovator Other key activities of strategic importance Supplier selection Evaluation and ongoing management of suppliers Managing supplier quality Purchasing planning and research 9

10. Internal Relationships with Other Functions Virtually every other department relies on purchasing for information and operational support As a key functional area, purchasing will be involved in important decisions that cross functional boundaries In particular, purchasing needs to work very closely with logistics / SCM to co-ordinate in-bound material flows in a way that supports the overall effectiveness of the supply chain It can contribute at strategic, tactical and operational levels 10

11. Internal Relationships / Information Flows from Purchasing 11

12. Supplier Selection and Evaluation Getting the best suppliers from those available is key The selections process needs to be objective, consistent and transparent Purchasing can touch on many other functions (see previous slide) and a cross-department, cross- functional team is commonly used to make decisions Purchasing decisions may relate to the following categories Component parts Raw materials Operating supplies Equipment Services 12

13. Supplier Selection and Management A Basic 5-Step Process 13 Fig4.4, [A], p103

14. Evaluation of Suppliers in Manufacturing A Formal Decision Making Matrix 14 Factor Rating of supplier (1=worst rating; 5=highest rating) 1 2 3 4 5 X Importance of factor to Your firm ( 0 = no Importance; 5 = Highest importance) 0 1 2 3 4 5 = Weighted Composite rating ( 0 = minimum; 25 = maximum) Supplier A Product reliability Price Ordering convenience After-sale service Total for supplier A X= Total : Supplier B Product reliability Price Ordering convenience After-sale service Total for supplier B X= Total : Supplier C Product reliability Price Ordering convenience After-sale service Total for supplier C X= Total :

15. Role of Purchasing in Quality Management Cost is just one element in purchasing E.g. some materials may be easier to work with, have longer life span, result in higher quality products with higher prices A balance needs to be struck between price, cost and overall value accruing to the company Purchasing’s job is to source components / materials to the specification set by manufacturing The supplier giving the best quality / cost trade-off in meeting the specification should be chosen Traditionally, quality was checked using inspection Now considered too expensive and purchasing managers have increasingly turned to supplier certification In the certification process, suppliers processes and quality levels are closely evaluated and monitored on an ongoing basis by buying firm This is increasingly important if using JIT 15

16. JIT A philosophy rather than a technique Focus on identification and elimination of waste Implements a ‘Pull’ system of manufacturing Contributes significantly to quality JIT scope will include suppliers so purchasing is a key contributor Reduction / elimination of inventory reduces cost base significantly JIT is difficult to implement and will make many demands of suppliers e.g. changes in technology / IT, changes in quality systems, changes in batch / lot sizes and making more frequent smaller deliveries 16

17. Traditional Vs JIT Purchasing 17 Purchasing activityTraditional approachJIT approach Supplier selectionMinimum of two suppliers; Price is central Often one local supplier; Frequent deliveries Placing the orderOrder specifies delivery time and quality Annual order; deliveries made as needed Change of ordersDelivery time and quality often changed at the last moment Delivery time and quality fixed, quantities are adjusted within predetermined margins if necessary Follow-up of ordersMany phone calls to solve delivery problems Few delivery problems thanks to sound agreements; quality and delivery problems are not tolerated Incoming inspectionInspection of quality and quantities of nearly every delivered order Initial sample inspections; later, no inspections necessary Supplier assessmentQualitative assessment; delivery deviations of up to 10% are tolerated Deviations are not accepted InvoicingPayment per orderInvoices are collected and settled on a monthly basis Table4.2, [A], p108

18. Purchasing Role in Managing Costs Given the amount of the company’s money that purchasing spends, it has a vital role in managing and reducing costs Effective cost-reduction programmes require: Support of top management Agreed cost-reduction objectives Measurement of savings Reporting on the results Linking cost reduction to performance and associated pay and bonus of purchasing employees 18

19. Cost Reduction Activities Supplier development Development of competition Early supplier involvement in new product design and design changes Substitution of materials Standardisation Make-or-buy analysis The reduction of scrap A change in tolerances Improvement of payment terms and conditions Volume buying Process changes 19

20. Price Change Management Supplier price increases must be challenged and not accepted lightly Purchasing must work with suppliers to restrict price increases to a reasonable level A systematic method of handling all price increase requests should be established and at a minimum, should include the following : Determination of the reason for the price change request Justification of the price change by suppliers Review of the price change by management Strategies to deal with price increases Alternatives for reducing other price elements or improving processes to offset the price increase 20

21. Price Change Management Techniques Forward buying Speculative buying Volume contracts Stockless purchasing Integrated supply Framework agreement 21

22. Forward buying & Speculative Buying To counteract inflationary pressures or restrictive supply, or to take account of bulk discounts or special offers, more product is purchased than is required for current consumption Forward buying Serves to protect the organisation from anticipated shortages or to delay the impact of rising prices Key trade-off is inventory carrying costs Speculative buying Refers to purchases made not for internal consumption but for reselling at a later date for profit Typical example is diversion of retail goods Special discounts may only be available in parts of the country and goods purchased will be shipped and sold to other regions thus obtaining higher profits 22

23. Volume contracts A way to leverage purchase requirements over time, between various business units or locations in the company and on different items Buyers have more power when negotiating prices and administrative costs Cumulative volume discounts allows a buyer to combine purchase volume over time getting lower prices with successive orders This is an important technique to support purchasing JIT where objective is to buy smaller lots more frequently 23

24. Stockless Purchasing (Blanket Orders) A means of reducing materials-related costs such as unit purchase price, transportation, inventory and administration Contracts are arranged for a given volume of purchases over a specified period of time The supplier provides products to individual plant locations as ordered, and payment is arranged through purchasing Logistics is involved in the actual order release, which simplifies repetitive ordering considerably and lowers transaction costs 24

25. Objectives of Stockless Purchasing Lower inventory levels Reduce the supplier base Reduce administrative cost and paperwork Reduce the number of purchases of small euro value and requisitions that purchasers have to handle, freeing up time for more important activities Achieve volume leverage with suppliers, lowering costs and improving service Provide for timely delivery of material directly to the user Standardise purchase items where possible Have suppliers manage inventory and, in some cases, place orders 25

26. Integrated Supply Integrated supply concept involves the purchaser buying all like items from a single supplier Added leverage can lead to further reductions in prices and administrative costs Examples of suitable products are office supplies, lab supplies, small tools, nuts and bolts Usually, the length of the contract for purchasing agreements varies from one to five years and includes price-protection clauses The purchaser should have the right to research the market to ensure that suppliers’ unit prices are reasonable – to keep them honest 26

27. EU Utilities Directive Framework Agreements It is an agreement with public sector suppliers Purpose is to establish the terms of contracts to be awarded during a given period, in particular with regard to price and quantity Framework agreement is a general term for agreements with suppliers that set out terms and conditions under which specific purchases (call-offs) can be made throughout the term of the agreement Framework agreements can be concluded with a single supplier or with several suppliers, for the same goods, works or services The length of call-offs is not specifically limited by the directives. 27

28. Example of a Framework Agreement Dept. of Foreign Affairs (DFA) DFA has a recurring ongoing requirement for furniture removals for workers transferring abroad Previously, individuals had to get “three quotes” in each case Framework established in 2006 on regional basis i.e. Brussels, UK/Rest of EEA, Europe, North America, and Rest of World SMEs had capacity to service Brussels, UK and Eastern Europe Larger multinationals had capacity for global reach – Africa, rest of World 7 suppliers in all were included in framework agreement Individual contracts awarded by mini-tender in line with terms of framework Competition among framework members is delivering better prices and service and will do so for the 4 year period of framework Administration time / cost reduced considerably 28

29. Managing Supplier Relationships Currently a very hot topic Complexity of business is forcing close and critical relationships with suppliers Partnerships are an emerging trend and are characterised by: Mutual trust Openness Shared risks and rewards Yields competitive advantage through better performance 29

30. Types of partnership Type I - The organisations involved recognise each other as partners and, on a limited basis, coordinate activities and planning Type II - The organisations involved progress beyond coordination of activities to integration of activities Type III - The organisations share a significant level of integration Partnership is not the same as joint venture or vertical integration 30 Fig4.5, [A], p118

31. Partnering Model 31 Fig4.5, [A], p119

32. Drivers Include: Asset / Cost efficiencies Customer service improvements Marketing advantage Profit suitability / growth Presence of drivers does not ensure success Benefits must be sustainable over long haul Drivers must exist for each party 32

33. Facilitators Corporate compatibility Incl. culture, business objectives, strategic plans Management philosophy and techniques Incl. organisational structure, quality ethos (TQM), HR policies, employee empowerment Mutuality Degree to which both parties have the skills and commitment to mutual relationship building incl. willingness in sharing risk / reward, confidential data, IT systems, in for the long haul? Symmetry Are parties similar enough in terms of size, market share, brand, financial strength, productivity, adoption of technology? 33

34. Components Planning Joint operating controls Communications Risk / reward sharing Trust and commitment to each other’s success Contract style Scope Investment 34

35. Outcomes and Feedback Effectiveness must be evaluated and corrected if necessary Measurement and metrics must be explicit An assessment framework must be established Periodic reporting is a must Continuous improvement through mutual corrective actions is required 35