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

2. 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 ( )

3. 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 ( )

4. 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 ( )

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 ( )

6. 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 ( )

7. 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 ( )

8. 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 ( )

9. 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 ( )

10. 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 ( )

11. 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 ( )

12. 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 ( )

13. 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 ( )

14. 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 ( )

15. 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 ( )

16. 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 ( )

17. 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 ( )

18. 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 ( )