20.3.2014
Strategic procurement
BLAŽENKA KNEŽEVIĆ, PHD
 Management philososphy in general is shifting
towards more holistic views concerning the
integration of material and information flows

Procurement therefore is becoming proactive business
function!
 Reduces
wastes and costs
(adding) value
throughout managing supplier involvement
 Has integrative role in business strategy
 Increasing
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20.3.2014
Management
Philosophy
EOQ
Time
line
1915
MRP
1965
MRP II
1970
JIT
1975
TQM
1980
TOC
1985
TBC
1990
SCM
1995
Advantage
Disadvantage
Minimisation of inventory cost
for independent demand
Minimisation of inventory costs
for dependent demand
Not suited for independent
demand
Required precise information
Very difficult to implement
Integrated financial and
marketing planning with
production planning
Elimination of waste by
reducing inventory levels and
improving process
Required extensive hardware,
software and computer expertise
Focus on quality and
continuous improvement of
process
Focus on constraints to improve
throughput
Efforts to shorten supply chain
Focus on time as competitive
advantage variable
Expansion of focus to include
suppliers and customers
Primarily cost reduction strategy
and within factory focus ; Heavy
dependence on timely supplier
deliveries
Within factory focus; lack of focus
on external process improvement
Limited focus on constraints
within the factory
Limit to how much chain can be
shortened; Competitors rapidly
adopt similar strategy
EOQ - economic order quantity; MRP- materials requirement planning; MRP II - manufacturing resource planning, JIT - just-in-time
TQM - total quality management; TOC - theory of constraints; TBC - time-based competition; SCM - supply chain management
Scope of the purchase function
Strategic level
• Purchasing
research
• Long-range
planning
• Policy
determination
• Supplier
relationship
development
• etc.
Tactical level
(Managerial level)
Operational level
• Buying methods
selection
• Negotiation
• Budgeting
• Interface
development
• Staff development
• Contracting
• Cost reduction
techniques
implementation
• etc.
• Enquiries/ RFQs
• Requisition
• Requisition
handling
• Records and
systems
maitenance
• Invoice clearing
• Expediting
• Price
determination
• etc.
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Traditional organizations
Modern organizations
 Allocate resources and
 Process (streamline)
organize work on a
functional basis
 Each function attempt
attempt to achieve its
objectives regardless of
the others
 Leads to suboptimization
approach
 (Multifunctional) team
approach to a problem
solving – getting the job
done
 Integrated management
approach
Porter’s 5 forces and barganing power in
purchasing processes
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The supplier has high power if
 there is concentration of suppliers (oligopoly or
monopoly)
 the “switching costs” from one supplier to another
are high
 there is a possibility of suppliers to integrate forward
 the supplier’s customers and their long-term future
are of little importance to supplier
The buyer has a high power if
 there is a concentration of buyers (high volume of
purchases)
 there are alternative sources of supply
 if the component or material cost is a high
percentage of their total costs (they are likely to
“shop around” and “squeeze” the suppliers)
 there is a threat of backward integration by the buyer
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Discuss in pairs: Who has the power?
 Cheese producer has to purchase:
 Milk
 Emulgators and additives
 Packaging paper
 1 Pasteurisateur
 3 Refrigerators
 4 PC-s (standard office configuration)
 Discuss in pairs for which purchasing object the cheese
producer can anticipate


the highest negotiation power
the lowest negotiation power
 explain your answer in detail!
15 min + 10 min
Developing purchasing strategy
 First: DRAW IDEA(S) HOW TO REACH A GOAL!!!
 The goal is: Increase profit by reducing purchasing
costs!
 suggest 4 options to reduce purchasing costs
(10 min)
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This is just one example…
Increase profits
-> Reduce
purchasing costs
Pay less for
purchasing
objects
Reduce costs of
purchasing
process
Merge order
quantities
Improve
negotiation with
suppliers
Buy more
(increase
quantities)
Reduce supplier
base (fewer
suppliers)
Improve ordering
and inventory
management
systems
Increase straff
efficiency
Offer long-term
contracts
Share information
on inventories/
demand
Adopt joint
approach to
customers
TQM
JIT
Electronic data
exchange (EDI or
sth simmilar)
The book, page 52, Figure 2.15 (structure of cost reduction sources), short
comment (5 min)
 Second: EVALUATE IDEAS (OPTIONS)!!!
 Suitability – is the idea suitable under current (or future)
circumstances in operation at your company
 Feasibility – can strategy be operative within organizational
culture and environment; detailed examination of resources
and strategic capabilities; ranking against agreed criteria;
decision tree
 Acceptability – expectation of performance vs. expectation of
stakeholders; tools: funds flow analysis; break-even analysis;
resources deployment analysis
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20.3.2014
 Third: SELECT AND IMPLEMENT!!!
What influences the choice of a purchasing
strategy?
 Position of a company in its supply chain


Is company closer to raw materials or to consumers?
Are there many competitors at the same level in supply chain
 Number of effective sources in the supply market
 The pace of technological development
 The volatility (change, dynamics, unstability) of the
supply and/or end market
 The degree of government involvement in the
marketplace
 The quality of staff available to control and manage
assessments
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20.3.2014
Types of organizations and purchasing strategic
potentials
 Extractive industry
 No raw material purchases
 High capital expenditures (equipement)
 Important maitenance and spares needs
 Often in remote locations
Examples:
mining, oil extraction,
lumbering, hunting,
farming, fishing…
 Process industry
 High volume of raw material purchased
 Continuity of supply is vital
(or ensuring continuous process at least)
 Buying worldwide
 Category specialists
Examples:
chemicals, pharmaceuticals, petroleum,
ceramics, base metals, plastics, rubber, textiles…
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20.3.2014
 Major manufacturing
 Materials are high proportion of cost
 Continuity of supply is important
 Strong professional approach is needed
 Head of procurement will be at board level
 Well structured department with experts in particular field
Examples: production of
aircraft, household appliances,
automobiles, computers, clothes, shoes,
food…
 Retail industry
 Goods are bought to be sold; Customer-related
 Buying around 80% of total expense
 Choice and control of stock extremely important
 Net profit margins below 5% - buying expertise is vital
 Purchasing is represented
at high management levels
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Centralized vs. Decentralized procurement
 Advantages of decentralization:
 The unit will develop closer relationship with local suppliers
 The unit will be more responsive – shorter lines of
communication, awareness of local circumstances; quicker
response to emergency requirements
 The unit has better control because it is usually operating as a
profit center- If local manager has no control over sources,
how can he be responsible for outputs?
 Advantages of centralization:
 Ecnonomy of scales – purchasing power increases due to large
quantities ordered
 Avoiding price anomalities between units
 Better overall stock management and material utilization
 Economy of staffing and administrative costs reduction
 Uniformity od procedures, forms, standards and specifications
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 Usually companies combine cenralization and
decentralization to obtain optimal results
 However, at past 30 years the percentage of
companies utilizing centralized purchasing is
growing
EFFICIENT COMBINE = EFFICIENT HARVESTING! 
Discuss purchasing characteristics
LEFT SIDE
(choose one)





Hotel
Restaurant chain
(5 restaurant)
Hair dresser chain
(10 salons)
Car repair workshop (a certified
part of a multinational network)
Bank
RIGHT SIDE
(choose one)





Hospital
School
Ministry of science
Major’s office
Parliament
(1) Aim of purchasing; (2) purchasing objects - goods; products; services to be purchased (give at least 4
examples) together with (a) cruitial characteristic to be extra monitored when coosing supplier and (b)
wanted dinamics of delivery; (3) isolate at one purchasing object for which you will have high negotiation
power, explain why!; (4) explain would you centralise or decentralise purchasing in particular organization
(give arguments to support your statement)
Also, discuss important characteristics regarding purchasing issues at:
• SMEs
• Multinationals
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