Chapter 1
The role of Purchasing in the
Value Chain
Program
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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
The role of purchasing in the value chain
Primary activities can be divided in five generic
categories:
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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.
The role of purchasing in the value chain
firm infrastructure
human resource management
Support
activities
technology development
procurement
inbound
logistics
operations outbound marketing
logistics
& sales
service
Primary activities
Drawn from Porter, 1985
The role of purchasing in the value chain
Support activities can be divided in four generic
categories:
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Procurement
Technology development
Human resources management
Firm infrastructure
Procurement activities may be also related to supplying
products and services for the other support functions.
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
Very large
Limited
Very Large
Small
Limited, forecast-related or
project-related planning
Fragmented, varies with
product or service
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.
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.
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…
Definition of concepts
purchasing function
ordering/ operational
tactical / initial
Internal
customer
Specification
Expediting Follow
Selecting Contracting Ordering
and
up/
evaluation evaluation
Sourcing
Supply
Buying
Procurement
Supplier
Importance of purchasing to business
60-85
60-80
50-70
60-80
25-50
Retailers
Computers
Consumer Automotive
electronics
Pharma
10-40
Service
industry
5
12
Admin.
18
Capex
3
12
Spares
50
Services
Tradeitems
Produ
ction
parts
Typical
structure
adapted from Kluge, 1996
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…
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…
DuPont analysis:
Capital turnover ratio
2.1 x
RONA
9.9 %
Sales
105 mio
/
×
Interest free
liabilities
95 mio
-
Other costs
40 mio
Total costs
100 mio
/
Sales
105 mio
Amounts in Euro mio
-
Sales
105 mio
Income
before tax
5 mio
Margin
4.7 %
Net assets
50 mio
Total assets
145 mio
+
Purchased
mat. & serv.
60 mio
DuPont analysis:
Capital turnover ratio
2.1 x
Sales
105 mio
/
Net assets
50 mio
Total assets
145 mio
Interest free
liabilities
95 mio
RONA
12.4 ---9.9 %
×
Sales
105 mio
+ 25 % !!
Margin
4.7 %
5.9 ---
Income
before tax
6.2 --5 mio
Other costs
40 mio
Total costs
98.8 ---100 mio
/
Sales
105 mio
Amounts in Euro mio
+
Purchased
mat.& serv.
58.8 --60 mio
-2%
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:
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Raw materials; materials which have undergone no transformation or
a minimal transformation and which serve as the basis materials for a
production process
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Supplementary materials; materials that are not absorbed
physically in the end product
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Semi-manufactured products; products that have already been
processed once or more times and that will be processed further at a
later stage
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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
Classification of purchasing goods (2)
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Finished products; all products which are purchased to be sold, after
negligible added value, either together with other finished products and/or
manufactured goods
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Investment goods or capital equipment; products that are not
consumed immediately, but which purchasing value is depreciated over a
period of time
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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
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Services; labor intensive, non material activities that are executed by third
parties on a contract basis
New developments in purchasing
1. Seller’s market
Buyer’s market
2. Increasing pressure on sales prices and margins leads to:
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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
Conclusions
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In short, purchasing represents a business area which is
being confronted with many changes and challenges.
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Without doubt these challenges will put purchasing and
supply chain management more in the spot light in
business.