© Cengage Learning – Purchasing & Supply Chain Management 4th ed ( ) Analysis 1. The role of Purchasing in the Supply Chain

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Program Changes in the business context Impact on business strategies and structures The role of purchasing in the value chain Definition of concepts Importance of purchasing to business Purchasing, cost reduction and technological innovation Classification of purchasing goods New developments in purchasing Conclusions

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Changes in the business context 1. Globalization of trade Resulting from: Deregulation in many industries Intercultural homogenization and the resulting homogenization of consumer preferences The forming of trade blocks (NAFTA, GATT, EEC) Improved transportation facilities More sophisticated information and communications technology

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) 2. The information society Growing economic value from generating, using and selling information Advanced retail and manufacturing information systems; improved capabilities for tracking and tracing, direct availability of detailed information Xerox: ‘pay for production’ Electronic networks, electronic market places (e.g. Chemdex) 3. Changing consumer patterns Today’s customers use an expanded concept of value that includes convenience of purchase, after-sales service, reliability, uniqueness, and so on. Customers take charge; they tell the manufacturers what they want, when, how and what they are willing to pay This leads to constant innovation and service offerings Changes in the business context

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Impact on strategies & structures Value Chain Management Every firm can be considered basically as a collection of primary and supporting value activities that are performed to design, produce, market, deliver and support products that are valuable for customers (Porter). Competitive advantage depends primarily on the art of positioning a company in the right place of the value chain vis-à-vis its:  Customers  Competitiors  Suppliers

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Impact on strategies & structures Value Chain Management (2) In order to improve their competitive position, companies need to focus their core activities on the needs and requirements of their customers. Non-core activities are increasingly outsourced to specialist suppliers (e.g. Nike, Dell, Cisco). Often specialist suppliers can perform the outsourced activities at lower cost and with higher value-added than the buyer. Supplier management is becoming more and more important issue in corporate strategies.

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) The role of purchasing in the value chain inbound logistics operations outbound logistics marketing & sales Margin Supportactivities Primary activities p r o c u r e m e n t technology development firm infrastructure human resource management service

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) The role of purchasing in the value chain AspectsBuying 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

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Definition of concepts purchasing function tactical / initial ordering/ operational Sourcing Supply Buying Procurement Internal customer Supplier Ordering Follow up/ evaluation Expediting and evaluation Speci- fication Contracting Selecting

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) 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.

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) 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.

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Importance of purchasing to business Admin. Services Capex Spares Trade- items RetailersComputers Consumer electronics Automotive Pharma Service industry Typical structure Produc tion parts

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) DuPont analysis: RONA Capital turn-over ratio Margin × Amounts in Euro mio Other costs Purchased mat. & serv. + Total costs Sales - Total assets Interest free liabilities - Sales Net assets / Income before tax Sales / 105 mio 145 mio 95 mio 50 mio 2.1 x 105 mio 40 mio 60 mio 100 mio 5 mio 4.7 % 9.9 %

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) DuPont analysis: RONA Capital turn-over ratio Margin × Amounts in Euro mio Other costs Purchased mat.& serv. + Total costs Sales - Total assets Interest free liabilities - Sales Net assets / Income before tax Sales / 105 mio 145 mio 95 mio 50 mio 2.1 x 105 mio 40 mio 60 mio 100 mio 5 mio 4.7 % 9.9 % - 2 % % !!

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Purchasing, cost reduction and technological innovation Apart from immediate savings on purchasing prices, there are many other opportunities through which purchasing can contribute to the company’s success. For example:  reduction of quality costs  product standardization  contribution to product design and innovation  stock reduction  increasing flexibility  fostering purchasing synergy In general these improvement measures require a better collaboration and harmonization between the different functional domains within the company (internal integration), but also with the suppliers (external integration).

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Classification of 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

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Classification 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 organisation running in general and for the support activities in particular Services; labour intensive, non material activities that are executed by third parties on a contract basis

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) New developments in purchasing Leveraged purchasing and supply strategies Global sourcing Supplier integration Early supplier involvement in new product development Reciprocity agreements and compensation agreements Environmental issues and business integrity 1. Seller’s marketBuyer’s market 2. Increasing pressure on sales prices and margins leads to:

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) 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.