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

Program Primary tasks and responsibilities Policy principles Purchasing management process How purchasing and supply management develops over time © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Purchasing’s primary tasks and responsibilities 1. Contribution to the continuity of the company’s primary activities It’s purchasing’s task to secure supply from reliable suppliers at consistent quality at reasonable (total) cost. 2. Control and reduction of all purchasing-related costs. Purchasing needs to make sure that goods and services are supplied at the lowest cost of ownership (TCO). TCO consist of three elements: Direct material cost All indirect cost related to the handling of materials (inspection, materials handling, administration, scrap etc.) All other costs to be made during the lifecycle of the product © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Primary tasks and responsibilities 3. Reduction of the company’s risk exposure in relation to its supply markets The company should try to avoid becoming to dependent on just a few suppliers. Type of risks to be minimized: Commercial risk Supply risk Technological risk 4. Contribution to product and process innovation Technology developments take place at such a rate that even large companies cannot generate all the investments needed. This leads to partnerships with suppliers in the R&D field. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Primary tasks and responsibilities The company’s image is not only determined by what it communicates to its customer markets and the financial community but is also influenced by what it communicates to its supply markets. It is therefore important that purchasing works according to a set of purchasing procedures which describe: how orders are placed who is authorized to make purchasing decisions how the purchasing process is structured © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Primary tasks and responsibilities Some observations: In order to be successful, an explicit (internal) customer orientation is necessary. The various purchasing tasks can be contradictory: single sourcing is often based on the objective to reduce costs (by placing all purchasing requirements with one supplier better conditions can be negotiated). However this can lead to increased supply risk and or/dependency on one supplier. The collaboration between purchasing and the R&D department can be frustrated because buyers lack the required technical background. Purchasing’s staff should be upgraded to bring it in line with the surrounding business areas. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Policy principles should be based on… Business orientation Developing a purchasing and supply strategy requires a thorough understanding of the company’s business policy. Questions like: What end user markets is the company targeting and what are the major developments in those markets? What is the company’s value offering and how can it be improved? What competition is the company suffering from? To what extent can materials price increases be passed on to the final customer? What changes in the company’s product(ion) and IT are happening? What investments will be made in new products and technology, which products will disappear? …must be understood because it will determine how purchasing and supply strategies must support the company’s objectives and strategies. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Policy principles should be based on… Integrated, cross-functional approach Purchasing decisions cannot be made in isolation and should not be aimed at optimization of purchasing performance only. Purchasing decisions should take into the effects on the other primary activities and therefore decisions should be be based on balancing TCO. Bottom-line orientation Experience with companies in which purchasing is recognized as a bottom-line-driven activity shows that this function contributes to a permanent reduction of the cost price of the end product, whilst stimulating innovation from suppliers at the same time. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Purchasing management process Similarities between marketing and purchasing: Primary focus of both activities is on the exchange of values between two or more parties, resulting in the sell/buy transaction Both activities are externally oriented, i.e. at outside parties. Neither activity can be done adequately without knowledge of markets, competition, prices, technology and products As a result of the amounts of money involved, both activities have great impact on the company’s bottom line. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Purchasing management process The following elements are part of purchasing’s management cycle: Purchasing and supply (market) research Determining purchasing and supply objectives Determining strategy Action planning Implementation Control and evaluation © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

The Purchasing management process Purchasing objectives Purchasing strategy Purchasing planning Purchasing (market) research Policy implementation logistics policy Quality policy Pricing policy Supplier Policy Communication Control/inspection and evaluation © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Purchasing management process Purchasing and supply (market) research Purchasing and supply (market) research refers to the systematic study of all relevant factors which may affect supply and demand of goods and services, for the purpose of securing the company’s current and future requirements. Purchasing and supply objectives, strategy and planning Based upon the company's overall objectives, purchasing objectives will relate to cost-reduction, improving product quality, lead time reduction etc. Through these objectives the company directs, manages and controls its purchasing activities and supplier strategies. Management can focus on different areas for action: © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Examples of areas for action in purchasing Sourcing policy - determining dependency on suppliers and designing plans to reduce this dependency. Direct versus indirect buying - determining the (possible) cost benefits of buying from importers and distributors, or buying directly from the manufacturer. Make-or-buy analysis - analysis of savings opportunities by eliminating particular production activities and buying the required products from third parties; buy or lease may be considered as an alternative. Integration between purchasing and other functional areas - plans aimed at removing interface problems between purchasing and materials management, pure engineering, and between purchasing and financial administration or treasury Setting up a purchasing information and control system - analysis of purchasing information needs and design of an automation plan; possibilities of linking this system with existing information systems in other functional areas. Centralized or decentralized purchasing - balancing cost benefits and strategic considerations related to a centralized or decentralized organization of purchasing Standardization - determining possibilities to achieve standardization in order to reduce product and supplier variety; balancing savings and risks. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Purchasing management process Implementation of purchasing policy: Tools Aspects Supply Policy Purchasing order processing. Materials and supply planning Product and supplier quality Early involvement in development Improving suppliers’ quality performance Materials cost policy Control of materials cost and prices Reduction of materials cost and prices Supplier policy Sourcing policy Improvement of supplier performance Communication policy Internal contacts External contacts © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Purchasing management process Control/inspection and evaluation Purchasing management must see to it that both results and activities, that have been planned, are realized within the available financial resources. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

How purchasing and supply management develops over time Six stage purchasing developmental model: ‘Transaction orientation; serve the factory’; ‘Commercial orientation; lowest unit price’; ‘Co-ordinated purchasing’ ‘Internal integration: cross-functional purchasing’; ‘External integration; supply-chain management’; ‘Value chain integration’ This model should be used carefully, for all stages may not be relevant for all types of commodities, companies and industries. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

CROSS-FUNCTIONAL FOCUS CENTRE-LED Effectiveness/ Cumulative savings DECENTREALIZED CROSS-FUNCTIONAL FOCUS Retailers FUNCTIONAL FOCUS automotive Consumer electronics telecommu- nication Food and beverages Computer/ PC’s Financial Services Public utilities Pharma Transactional orientation Commercial orientation Purchasing co-ordination Internal integration External Integration Value chain integration time focus ‘serve the factory’ ‘Reduce cost’ ‘Savings through synergy’ ‘Total Cost of ownership’ ‘Supply chain optimization’ ‘Total Customer Satisfaction’ Activities Clerical Order processing Commercial Tendering Negotiating Aprvd. supplier lists Cross functional buying teams Systems integration Vendor rating etc. Outsourcing EDI/Internet E-Commerce Cost models Customer driven activities Contact manufacturing Supplier development Global supplier network Commercial Contracting Global sourcing Dilemmas Initial purchasing Control of purchasing expenditure Supplier base management Contract management Ethics Communication and information infrastructure Social resistance Internationalization HRM © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Conclusion… Most companies have a large potential for improvement in the area of purchasing management. The systematic approach of the purchasing management process can help make this potential visible and accessible. However, it takes time to put all the elements of the purchasing management process in place. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)