1. Chapter 1 The role of Purchasing in the Value Chain

2. Program The role of purchasing in the value chain
Definition of concepts
Importance of purchasing to business
Classification of purchasing goods
New developments in purchasing
Conclusions

3. The role of purchasing in the value chain
Primary activities can be divided in five generic
categories:
Inbound Logistics
Operations
Outbound logistics
Marketing and sales
Services
The procurement function should be able to meet
the material requirements related to inbound
and outbound logistics, and to operations.

4. The role of purchasing in the value chain
inbound
logistics
operations
outbound
marketing
& sales
Margin
Support
activities
Primary activities
p r o c u r e m e n t
technology development
firm infrastructure
human resource management
service
Drawn from Porter, 1985

5. The role of purchasing in the value chain
Support activities can be divided in four generic
categories:
Procurement
Technology development
Human resources management
Firm infrastructure
Procurement activities may be also related to supplying
products and services for the other support functions.

6. 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
Limited
Very Large
Small
Limited, forecast-related or project-related planning
Fragmented, varies with product or service

7. 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.

8. 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.

9. Definition of concepts
Different definitions...
Ordering…
Buying…
Purchasing…
Procurement…
Sourcing…
Supply Chain Management…
Value chain management….
Operational, short
term, deal and
margin
oriented
Strategic, long
term, performance and
value
oriented
Purchasing: relates to every activity the company receives an invoice for…

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

11. Importance of purchasing to business5
Admin. 12
Services 18
Capex 3
Spares
60-85
60-80
50-70
60-80 12
Trade-
items
Production parts
25-50 50
10-40
Retailers
Computers Consumer
electronics
Automotive Pharma Service
Typical
structure
industry
adapted from Kluge, 1996

12. Importance of purchasing to business
GITP International BV
19/04/2017
Importance of purchasing to business
Challenge for managers: how to manage our EXTENDED ENTERPRISE ?
Sales:
100%
Profit 1,5 %
Value added: 20 %
Question: what should
managers do?
Purchased materials
And services: 78,5 %
Purchased materials and
services have a large impact
on company profitability…
[vul documentcode in] 12

13. Definition of concepts
GITP International BV
19/04/2017
Definition of concepts
Challenge: how to manage our EXTENDED ENTERPRISE ?
Sales:
100%
Profit 1,5 %
Value added: 20 %
Question: what should
managers do?
Purchased materials
And services: 78,5 %
Suppliers determine 78,5%
of total cost, innovation,
carbon footprint and
customer value…
[vul documentcode in] 13

14. DuPont analysis: × / - - / + Amounts in Euro mio Sales 105 mio 105 mio
Total assets
Capital turn-over ratio /
145 mio
2.1 x
Net assets -
50 mio
Interest free liabilities
95 mio
RONA ×
9.9 %
Sales
105 mio
Income before tax -
Other costs
5 mio
40 mio
Margin /
Total costs +
4.7 %
100 mio
Sales
Purchased mat. & serv.
60 mio
105 mio
Amounts in Euro mio

15. DuPont analysis: × / - 12.4 ---- + 25 % !! - 6.2 -- / + 5.9 ---
Sales
105 mio
105 mio
Total assets
Capital turn-over ratio /
145 mio
2.1 x
Net assets -
50 mio
Interest free liabilities
95 mio
RONA ×
9.9 %
Sales
105 mio
+ 25 % !!
Income before tax -
Other costs
5 mio
40 mio
Margin /
Total costs +
4.7 %
100 mio
Sales
Purchased mat.& serv.
60 mio
105 mio
Amounts in Euro mio
- 2 %

16. Classification of purchasing 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. Classification of purchasing 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 organization running in general and for the support activities in particular
Services; labor intensive, non material activities that are executed by third parties on a contract basis

18. 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
Corporate Social Responsibility and business integrity

19. 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.