[PURCHASING] IBA
PART 1
THE FUNDAMENTALS OF SUPPLY
1. THE SUPPLY CHALLENGE
Materials management: not only for manufacturing – many service operations use large quantities of
materials.
The concept purchasing is usually discussed as part of the input, transformation, output model, where it is
purchasing’s role to manage the inputs into the firm after being told what to purchase from the various
planning systems contained within the firm.
Supply needs to be thought about as a dynamic strategic process and not as a bureaucratic business function.
Important of purchasing
- Economics
- Strategic congruence
2. THE EVOLUTION OF PURCHASING AND SUPPLY MANAGEMENT
Evolution of purchasing
(1) The 1940-1960s: logistics
- Origins in military practice, Alexander the Great
- Logistics as a business discipline got attention in the 1950s.
Logistics is the entire process of material and products moving into, through, and out of the firm.
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Inbound logistics: movement of material, components and products received from suppliers.
Material management: movement of components and materials within the factory or firm.
Physical distribution: movement of finished goods outward from the end of the assembly line, and
through the shipping department to the end customer
(2) The 1970s: purchasing as an administrative function
- General level of recognition, despite the 1973-4 oil crisis and related raw materials shortages
- Passive role: to be a service provider to other functions within the enterprise, with the primary task
of buying the required goods and services from approved sources of supply, making sure that they
conformed to the required levels of quality and performance, delivery schedules and most
competitive price.
(3)
-
The 1980s: purchasing as supply chain management (SCM)
Porter emphasized importance in Five Forces Model
Enterprise Resource Planning (ERP): made supply chain optimization feasible
World Class Manufacturing (WCM) required that the entire supply chain be world-class, focusing on
JIT production and supported by Total Quality Management (TQM). Caused by intense Japanese
competition.
Supply chain focus is vital for the long-term well-being of any manufacturing firm.
(4) The 1990s: supply management and strategic decision making
- Firms start investing in SCM because of the realization that it could save money
- Purchasing strategy refers to specific actions of the function to achieve its coal.
- Purchasing operations deal with the day-to-day buying activities of the firm
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When the activities and strategies of the purchasing function are aligned with the overall strategies of the
firm can purchasing be a strategic function.
- Shaping firms and its boundaries; should we buy from multiple suppliers?
- Identify roles for suppliers within a supply base: mega, first-tier or tier-half
Drivers of purchasing evolution
Political
Development policies
Reduction focus in
public expenditure
Privatization
Regulation constraints
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Economic
Recession / depression
Global competition
New industrial alliances
Corporate mergers
Social
National labor rates
Quality of working life
Change role managers
Outsourcing: job losses
Environmental and
ethical issues
Technological
Global connectedness ↑
E-commerce, e-supply
Time-to-market
Shorter product
innovation cycles
Purchasing function implements competitive strategy
Purchasing function supports strategy of other functions and those of the firms as a whole
Purchasing function drives strategy of the firm
Strategic stages in development of a purchasing function
Stage 1: passive
Purchasing function has no strategic direction and primarily reacts to requests from other functions.
Stage 2: independent
Purchasing function adopts the latest purchasing techniques and practices, but its strategic direction is
independent of the firm’s competitive strategy.
Stage 3: supportive
Purchasing function supports the firm’s competitive strategy by adopting purchasing techniques and
products, which strengthen the firm’s competitive position.
Stage 4: integrative
Purchasing’s strategy is fully integrated into the firm’s competitive strategy and constitutes part of an
integrated effort among functional peers to formulate and implement a strategic plan.
Strategic purchasers
Heavily involved in decision making
Focused more on supply chain management
High level of integration with suppliers
Undeveloped purchaser
Akin to independent phase.
Laggards of purchasing functions.
Despite high skill and knowledge levels: low levels
of organizational status, less integration and little
involvement with strategic planning
Capable purchaser
High skilled
Moderate level of status, internal integration and
involvement in strategic matters
Celebrity purchasers
High level of status in the eyes of top managers, yet
lower skill levels, involvement in strategic planning
and internal integration than any other group.
Charismatic leader, focus on ‘hands-on’ issues
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3. THE MAKE-BUY DECISION: A THEORETICAL PERSPECTIVE
Link between make-buy decision, corporate strategy and supply strategy:
the decision determines the areas where the firm will compete and those it will leave to others.
The make-buy decision
The boundaries of the firm are the combined activities that an organization performs in-house rather than
using external suppliers.
Vertical integration and horizontal integration
Neoclassical economic theory
Focus on the determination of prices, outputs, and income distribution in markets through supply and
demand. Tells little about the make-buy decision. Raison d’être: maximize profits.
Transaction cost approach (TCE)
Based on the interaction of two behavioral assumptions, bounded rationally and opportunism,
and two transaction assumptions, asset specify and uncertainty.
* opportunism: achieving one’s goals through calculated efforts of guile, lying, stealing, cheating etc.
* asset specify: transferability of an asset within an exchange relationship
* environmental uncertainty: not being able to predict future states of technology, demand or supply.
* behavioral uncertainty: not being able to predict the behavior of exchange partners
TCE & make-buy decision
Hold-up problem: not everyone is opportunistically but due to the effects of bounded rationality and
uncertainty it is not possible to distinguish those who will cooperate from those who will be opportunistic.
High governance costs: buy
High asset specificity/uncertainty: make
TCE criticism
1. TCE offers a somewhat static and limited view of the production capabilities of the firm.
2. TCE is a theory of cost minimization, not of value maximization.
The capability approach / resource-based view (RBV)
The basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable
resources at the firm’s disposal.
- Inimitability, non-substitutable, immobile
RBV & make-buy decision
Reasons why it may be costly to develop
resources internally:
Historical context, path dependency, social
complexity, causal ambiguity
Acquisition costs that may help inform
managers during the decision-making process:
Legal constraints, knock-on effects on value,
technology tie-in, unwanted ‘baggage’.
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With rising levels of outsourcing and many firms seeking to focus on fewer core capabilities, the make-buy
decision is increasingly important to competitive advantage.
3.
4. SOURCING STRATEGIES AND SUPPLY CHAIN CONFIGURATIONS
Supply base rationalization/supply base reduction
Involves working more closely with fewer suppliers with main motivation: cost reduction.
- A firm has a limited amount of resources and by reducing the suppliers it can focus on its recourses.
 Intel has an n+1 rule-of-thumb in determining the number of suppliers needed.
The nature of the inter-firm relationship changes from relatively independent to relatively dependent.
This requires different measurement and management systems to enable the relationship to work
effectively. Often firms do not make these changes  over-reliance on suppliers that are not capable of
working in a more collaborative manner.
1.
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2.
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3.
Operational costs
(running day-to-day relationship)
Figure 4.1, page 45
Cost of producing the purchase order, invoicing and so on
Managerial costs
(managing relationship)
Problem solving, travelling to visit the supplier, quality workshop, supplier conferences
Strategic costs
(strategic risk, ability for supplier to act opportunistically)
Issues about the model (above):
1. The more subjective the costs, the more difficult they are to measure and therefore the less likely
they are to be considered by the firm.
2. Strategic costs post reduction increase as the buyer becomes more dependent on a smaller number
of suppliers, whereas operational costs decrease by a given proportion because the number of
transactions has decreased in proportion to the reduction of supplier numbers.
In short term this strategy appears to be very successful as it has achieved cost reduction and taken out
transaction costs. However, in the medium to long term it has changed the nature of the buyer-supplier
relationship (independentdependent) which means that the buyer needs to consider carefully how this
should be managed.
The Kraljic matrix is the main positioning tool for thinking about supply management decisions.
Classification of purchase items
High
Leverage: Best deal
Critical: Cooperation
 Unit cost management important
 Custom design or unique specification
because of volume usage
 Supplier technology important
 Substitution possible
 Changing source of supply difficult or costly
Impact on
 Competitive supply market with several
 Substitution difficult
business
capable suppliers
(internal
Routine: Efficiency
Bottleneck: Supply continuity
issues)
 Standard specification or ‘commodity’ Unique specification
type items
 Supplier’s technology important
 Substitute products readily available
 Production-based scarcity due to low
 Competitive supply market with many
demand and/or few sources of supply
suppliers
 Usage fluctuation not routinely predictable
Low
 Potential storage risk
Low
Supply risk/supply market complexity (external issues)
High
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Porter’s five forces model gives a good indicator of the factors causing rivalry in an industry.
- Barriers to new entrants, power of buyers, substitutes, power of suppliers, industry rivalry
Pareto-analysis
80/20 rule.
 20% of the products use to build a car
will make up 80% of the costs
The critical strategy = Group A
 First-tier suppliers, key technology
suppliers, major outsourcing providers
Each quadrant of the Kraljic matrix suggests a sourcing strategy which in turn dictates a related sourcing or
supply structure.
(1)
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Single sourcing
Critical of bottleneck quadrants
Easier to exchange ideas, clear understanding of cost structures, easy way to redesign
Buyer has position of weakness, firms competitiveness is in danger.
Windows Operating system has many loyal customers thereby forcing manufacturers to source
exclusively from Microsoft.
(2)
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Multiple sourcing
Routine quadrant
Competition based on price, focus on purchase price
Dutch auctions
(3) Delegated sourcing strategy
 Leverage and critical quadrant
 Making one supplier responsible for the delivery of an entire sub-assembly as opposed to an
individual part. = first-tier supplier
 Reduce day-to-day transaction costs by working closely with the supplier
 Exchanging more detailed information, particularly around cost issues
 Transfer capabilities and technologies that enable that supplier to produce the required sub-assembly
- Suppliers van become very powerful and exert their power over to the buyer, e.g. price increases.
(4) Parallel sourcing
 Allows the buying firm to work on a single or sole-sourced basis with each component supplier within a
product group while maintaining a multiple-sources relationship across product groups.
 Advantages of sole and multiple sourcing, excluding the disadvantages
5.
X
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6. SUPPLIER DEVELOPMENT
Supplier development is any effort of a buying firm with a supplier to increase its performance and/or
capabilities and meet the buying firm’s short and/or long-term supply needs.
This can be limited such as supplier evaluation and performance improvement requests. It can also be
extensive which include training and investment in the supplier’s operations. Kaizen
Improve supplier performance
 Workflow simplification, layout changes and set-up time reduction
- Limited input of supplier, narrow understanding of underlying problem solving techniques and it
ignored many socio-technical elements.
Supplier capability development
It is the buyer’s attempts to transfer its own in-house capabilities across firm boundaries and into the
supplier. This approach is more problematic to achieve. One of the key challenges is managing the transition
out of the supplier’s organization.
- Large commitments of time and resources are required by the buyer, results may not come quickly
and there is danger of frustration.
Activities to develop supplier’s performance and/or capabilities:
Evaluation of supplier performance, raising performance expectations, recognition and awards, promises of
increased present and future business if supplier improves, training of supplier’s personnel, integrated
technology roadmaps, financial assistance.
Direct improvement activities such as standardized, technically focused approaches (value analysis, workflow
analysis) have been unable to sustain their improvement rates.
Supplier development may focus on achieving relatively short-term, narrow fixes to stabilize supplier
performance. Improvement activities can then take place, seeking to improve dimensions such as quality,
reliability, delivery and cost. Over the long term the partners will aim to build supplier capability, whereby
improvement efforts on the part of the supplier become self-sustaining.
Supplier development strategies
1. Competitive pressure
2. Evaluation and certification systems
3. Incentives (vooruitgestelde beloning)
4. Direct involvement
 Most effective strategy
 Capital and equipment investments in suppliers
 Partial acquisition of the supplier firm (vertical keiretsu)
 Investment of human and organizational resources
The suppler development process
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Step 1: Identify critical commodities
 Kraljic’s matrix: routine, leverage, bottleneck and critical
Step 2: Identify critical suppliers
 Amount of expenditure
 Suppliers of strategically important components
 Likely length of relationship
 Improving weakest suppliers  can be done by a Pareto analysis of supplier performance
 The type of manufacturing/administrative processes used by suppliers
Step 3: Form a cross-functional team
The buyer also needs to be conscious of their supply chain strategy and the role of procurement and the
supplier within that strategy.
Step 4: Meet with supplier top management
Gaining commitment of top management s a key success factor for supplier development.
 Top management can push aside political barriers, assign resources etc.
 How? – show how supplier development would lead to greater profit/better quality, often through
supplier forums or meetings.
Step 5: Identify key projects
Improvement efforts target work on the hottest items rather than step back and assess the highest-priority
improvements with the greatest impact on operational performance.
Step 6: Define details of agreement
The value to be created and the metrics for doing so should be agreed on both sides.
Step 7: Monitor status and modify strategies
The most sustaining improvements occur where the supplier has been trained in capability development
and the customer maintains an oversight and monitoring role on the supplier’s operation.
Barriers to supplier development
Table 6.1, page 87
E.g. lack of mutual trust, lack of supplier commitment, supplier not important enough to buyer.
[PURCHASING] IBA
PART 2
DEVELOPING SUPPLY STRATEGY
7. SUPPLY STRATEGY: THE DEVELOPMENT OF THE STRATEGIC SUPPLY WHEEL
The main development of strategic supply came from these three basic approaches:
Process-based approaches are those linked to specific organisations processes that need to be in place in order to
facilitate strategy implementation.
Include development of appropriate skills and competencies and information systems.
Procedures-based approaches are those concerning the organisational procedures that are needed to facilitate
implementation of a strategy through the organisational system.
Include performance measure and total cost-benefit analysis.
Policy-based approaches are necessary for the formulation of the strategy itself.
Centre of model: no policy  isolated strategy formulation and deployment  lacking robustness
Rationale of the supply wheel
Appropriateness
Most appropriate strategy is balanced against the other elements within the model.
Strategic planning tool
Strategic (capabilities) analyze, strategic choices, strategic implementation, identify gaps.
Linkage with sourcing strategies and Kraljic’s positioning model
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8. ALIGNING SUPPLY WITH CORPORATE STRATEGY
Strategy is a pattern or plan from which an organization can develop its major goals and objectives.
- Affects the scale and scope of an organization’s activities over the long term.
- Is about being responsive to changes in the external environment.
- Is about aligning activities with strategic resources and capabilities  inside-out approach
Levels of strategy
Corporate strategy
Business-level strategy
Functional-level strategy
What business are we in?
How do we compete in our chosen markets?
How can our function support business- and corporate-level strategies?
Strategic alignment
Functional strategies should connect with business- and corporate-level strategies.
 A company with a low-cost corporate strategy should be
supported at the functional level by activities that help get the product
to market for the lowest price possible.
Top down strategy development:
from corporate to functional
Bottom up strategy development
from functional to corporate
Aligning purchasing and corporate strategies
Strategic alignment between supply chain and corporate strategies is achieved where supply chain strategy
supports and facilitates corporate strategy.
It is an internal activity and does not require large capital investment. It is more to do with information
sharing, the status of the purchasing function, the knowledge and skills of purchasing personnel, and
managing organization change.
Organization’s competitive priorities for supply
Cost
Quality
Delivery
Flexibility
Innovation
Typical measurement criteria
Total cost, pricing terms, exchange rates
Durability, performance reliability
Delivery speed and reliability
Volume flexibility, mix flexibility
Supplier technological capability, speed of NPD
Organizations usually develop a reputation based on one or two of these priorities.
 EasyJet has established a reputation for low cost, Dell for flexibility and 3M a reputation for innovation.
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Content of strategy examines the specifics of what was decided, whereas the process of strategy considers
how such decisions are made within organizations.
Objectives should conform to SMART: specific,
measurable, achievable, relevant, time bound.
Supplier base rationalization, supplier selection,
supplier development, supplier performance
measurement, relationship management
9.
10. ORGANIZATIONAL STRUCTURES FOR SUPPLY MANAGEMENT
Selecting the right structure for the Supply department involves a combination of 3 schools of knowledge:
strategic supply, competition, and organisational design.
A good strategic will always consult the broadest possible literature before making decisions and designs,
searching for ideas that others have not exploited in the search for competitive advantage.
Roles within function dividing:
1. Day-to-day operations
 Focus concerned with efficiency measures such as lead-times and delivery reliability
2. Leading-edge deal making
 Responsible for supplier development, ensuring that they have capabilities to support HM and
projecting what future needs are going to be.
History: Venkatraman showed how information systems required organisations first to evolve and then go
through a ´revolution´. In the 1990s, the rise of electronic commerce has been as a revolutionary stage.
Business organisations have to join this wave or simply get left behind.
The development of organizational design
Many modern business organization are still close to a Weberian model of bureaucracy.
During the 1970s, much discussion began on the need for a more practical approach to the horizontal flows
of communication, i.e. a member of staff might be permitted to speak to their opposite number in another
department without ‘going through’ their manager.
The operational-level impact of this was the concept of cross-functional teams – in which people from
different functional silos were put together to work as a unit, for a specific purpose.
 The purpose of organizational design is to arrange the intelligent resources of the organisation
(people and ICT) in such a way that it can engage with the market effectively.
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The basic approaches available to the Supply Strategist when deploying people and resources to provide the
organisation with effective service. The actual choice will depend on market pressures.
Centralization
A powerful central purchasing
office specifies and buys on
behalf of the divisions.
Decentralization
A central Purchasing office
makes policy, does corporate
deals; the division purchase
on their own behalf.
Atomization
A small central Purchasing
office makes policy;
responsibility for sourcing and
supply management is given
to budget holders.
Federal structure
Divisions award power to
central office to develop
policy and provide necessary
services to them with specific
mandates.
Hybrids
Combining the strengths of
central planning with the
necessities and opportunities
of local sourcing.
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Advantages
Economies of scale
Standardization
Policy deployment
Financial control
Auditing
Policing
Common ICT and systems
Staff exchange
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Disadvantages
Resentment in the regions
Bucking the system
Missed opportunities
‘Overweight’ overheads
Slow response
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Autonomy
Variety/diversity
Local prudence
Cross-deals
Local satisfaction
Inter-divisional competition
Staff exchange
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Suppliers divide and confuse
Cost anomalies
Skills shortages/duplications
Lack of financial control
Local covert deals
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Maverick buying
Personal favorites
Suppliers divide and confuse
Lack of control on prices
Commercial risk
Overload on support staff
System update dislocation
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Department autonomy and
responsibility
Simple controls
Procurement cards
Removes budgeting anomalies
Purchasing as a ‘school’ or
specialist
Quick response
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Agreed rules
Dual citizenship
Subsidiary
Minimal central control
Cross-fertilization
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Complex arrangement
Unclear hierarchies
Central bureaucrats
Risk of instability
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11. PERFORMANCE MEASUREMENT
To achieve the most effective blend, financial information with non-financial information.
Performance measures as signaling devices
Management can use performance measures as a means of signaling and influencing the actions of the
people who are responsible for performing the tasks.
 Employees will take their lead from these criteria to maximize their own performance.
A well-balanced and well-structured system should support and encourage performance in the areas which
are critical to the firm’s success.
Cascading performance measures
The aim is to create an alignment: Hierarchy of performance measures:
Benefits of measures
 Decision making
Directing activity which is aligned to the needs of the organization
and identifies variance from planned results. The cause-and-effect
relationship will be more readily apparent, facilitating greater ease of
planning, control and coordination.
 Communication
Other functions must be aware of the contribution which Purchasing
can make, to draw it to their own advantage.
 Visibility
Identifying areas of waste in terms of defects, delays, surpluses and
mistakes.
 Motivation
People feel the need to contribute. If measures have no apparent purpose or link to the overall
working of the company, there will be little attraction in achieving them.
Problems with measurement
Management system was not originally designed as a measurement
tool, but to meet operational requirements.
 Order processing and inventory tracking
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Key performance measurement concepts
Efficiency is an operating ratio of effort against results.
This may depend on organizational factors such as the
workload, certain procedures, information system used,
and the headcount, often focusing on transactions.
Supplier development, value analysis, forward buying
programs and lead-time reduction all impact on
assessments of Purchasing effectiveness.
Cost-based measures can be dysfunctional
 The real price may be blurred by quantity discounts, payment terms, credit and currency
fluctuations.
 The price paid in one period compared to the previous may be meaningless.
Who is actually responsible if a fall in the market occurs?
Price savings  value improvements, cost/price reductions, avoidance of higher costs
Financial and non-financial measures
Important issues are often overlooked when focusing on one performance. An over-reliance on efficiencybased measures has the problem that the nature of much financial data means that they may not be useful
in decision making, when considered in isolation.
Performance measurement systems in many of today’s companies focus on historic rather than future
performance, financial rather than operational indicators, internal rather than external data and numeric
rather than qualitative results.
- This does not enable managers to monitor the activities and capabilities that enable them to
perform a given process.
Gaining buy-in
Employees are closest to the action and will know more about the nature of their work and should be able
to judge which measures will be relevant and effective.
Cost
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Total distribution cost
Total inventory cost
Quality
Three levels: manufacturing-related, supplier-related and customer-related.
 Production quality
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Defects per supplier
Trend analysis of individual suppliers, setting a minimum quality benchmark and making
performance levels public across the supply base which provides social norms for improving
performance.  suppliers want to be on top
Customer returns
Time
On-time deliveries, customer response time and backorder/stock out
Supplier performance
Level and degree of information sharing, degree of collaboration etc.
Developing a performance measurement system
Requires top management support, organizational buy-in and resources to set up procedures for
appropriate date collection.
1. Determine goals to measure
Specific measures are not necessary at this stage. Key pitfall: selecting goals which do not reflect the
corporate- and business-level strategy of the firm.
2. Establish performance measures
SMART. Performance measures (1) can lack of power to influence behavior where they are not linked to
employee evaluation or incentive plane.. (2) Organizations select to many measures, leading to lack of
focus. (3) Select too few measures which may lead to missing information. (4) Generate conflicting signals
as to desired behaviors.
3. Establish standards for comparison
Main approaches:
 Analysis of historical data
 Planned performance
 Publish lead table of highest performers, which stretch goals for the others.
This can lead to dysfunctional rivalry as units compete, rather than cooperate.
 Competitive benchmarking
4. Monitor progress
Firms must make decisions about the type of feedback they require from their performance measures.
They must identify who the users are, what information they require etc.
5. Evaluate progress
Problem: over-aggregation of data which can lead to masking of potentially important trends.
6. Implementing improvement actions
The firm must move to correct the problems or issues identified. They have to ensure they are not driving
the wrong performance; they must be sure that the measures used will result in the desired actions.
7. The Purchasing Balanced Scorecard
= a tool for focusing the organization, improving communication, setting organizational objectives and
providing feedback on strategy.
Figure 11.6, page 159!!
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12. COST-BENEFIT ANALYSIS
Measurement of costs
Zero-based pricing worked until firms started to consider the ‘cost of quality’ rather than ‘cost of poor quality’.
Price versus cost
Price-focused approach means that you (as a customer) want to pay less than you did last
time you bought the product or service.
Selling price:
Profit
Variable costs
Fixed costs
Business cycle: price rises  new sources of supply see a lucrative market  they enter the market  thus
increasing the number of suppliers relative to the number of buyers  equilibrium/break-even is reached
 prices stabilize  process begins again.
Total cost of ownership
- Its purpose is to help consumers and enterprise managers determine direct and indirect costs of a
product or system.
- A TCO analysis includes total cost of acquisition and operation costs. A TCO analysis is more
relevant in determining the viability of any sourcing initiative than just TCA.
- The TCO concept, together with activity-based costing (ABC) system enable Purchasing managers to
estimate these costs and/or savings.
Quality
Management
Delivery
Service
Communications
price
The Degraeve and Roodhooft matrix can be used to help firms uncover all these relevant costs of
procurement. The matrix enables managers to assess costs along the length of the procurement value
chain, and at all levels of its supplier relationships.
5 stages:
Initial
acquisition
Costs relate to activities which take place to receiving the product from supplier.
 Product price, cost related to negotiation and contracting, supplier vetting costs
Reception
Possession
Costs occur when receiving goods, processing invoices and payments.
Costs occur between receiving goods and actual utilization of goods in production or service.
 Internal transportation from storage to factory floor, inventory holding costs.
Costs of use may include installation, personnel training and impact of product failure.
Costs that are often omitted from the initial procurement decision, but can be represent
considerable cost to the buying firm.
 Electronic equipment such as mobile phones, computer and consumer electronics
Utilization
Elimination
Three hierarchical levels:
1. Supplier-level  cost of supplier audit, salary of buyer responsible for managing the relationship
2. Order-level
 receiving, invoicing and external transportation
3. Unit-level
 production shutdown caused by suppliers faulty product, disposal/recycling.
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13. MANAGING INTER-FIRM RELATIONSHIPS
Relationship management can be viewed from a variety of perspectives: level of the firm, level of a
particular project or group within or between firms, and the level of the individual.
Example 1.
Example 2.
Simple output: price reduction, simple input: buyer focusing on price negotiation.
Complex output: technology development, risk and reward sharing etc.
Complex input: cross-functional teams, inter-firm teams etc.
There is a cost-benefit analysis equation that will need to be balanced when deciding on various
relationship strategy approaches.
What makes Japanese firms successful? – They see suppliers as essential to their business and view
relationship management as the primary role of the procurement professional.
The development of supply chain and relationship management
Supply chain management has a convergence of two areas: logistics and purchasing
Kanter – successful partnerships being needed to manage the relationship, becoming best PALs (pooling,
allying and lining)
Strategic Focused Outcomes Model (SFOM)
Strategic
/longterm
Tactical/
shortterm
Market collaboration
B
 Shared merchandising
 Co-branding
 Joint selling
 Distribution channel mgmt
Strategic collaboration
C
 Align customer requirements
 Sharing basic technologies
 Joint NPD
 Shared production engineering
 Develop joint mktg entry status
 Develop joint capital expenditure
Operational collaboration
A
 Shared ops planning info
 Develop & share demand and forecast
 Link order mgmt systems (e.com)
 Joint capacity mgmt systems
COST
Differentiation
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Relationships can be thought of as a process or course of action, which should be designed to deliver
business outcomes.
Strategic Relationship Positioning Model(SRPM)
Opportunism: the dominant partner gets the change to
take advantage of the situation.
Adversarial: arm’s length contractual relationships.
Tactical: because a modularity strategy or supply base
reduction has been followed.
Strategic collaboration: require large investments
The 4 key dependencies
1. Historic
Previous interaction > level of knowledge
2. Economic
Switching costs e.g. training, patents
3. Technological
Competencies and capabilities
4. Political
P = big impact, p = small impact, know to play the political game.
The 4 levels of certainty
1. Contractual
Are you certain that the other will perform to the specifications and standards of the contract?
2. Competence
Has one the capabilities to perform to the contract? E.g. required skill level, competencies
3. Goodwill
Is the other willing to go (or not) beyond their contractual duties?
4. Political
What are the political risks or gain of dealing with the party?
Partnership Life Cycle Effect
Figure 13.7, page 184
Embryonic
solve huge barriers to the project’s implementation
Growth
different skills were required which align e.g. control and problem solution.
Maturity
requires amalgamation of the 2 previous approaches. Requires management
monitoring and general problem solving.
Decline
- Limited in its description of what occurs within and between organizations.
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Partnership Expectations Effect
Figure 13.8, page 185
Short term (t1)
 Buyer and supplier set measurable benefits such as improvement in pricing.
 There can be a kaizen approach.
Medium term (t2)
 Buyer and supplier have the opportunity to take a further decision: engender/rejuvenate.
ROP = return on partnership
Long term (t3)
 The level of goodwill and competence trust have again been built up
 Decision on the further development of the relationship is based on a cost-benefit analysis
approach.
Partnership Desert
Figure 13.10, page 187
The model shows how in the short (t1), medium(t2) and long term (t3), the parties receive benefits from
entering into relationships. The model depicts an oscillation effect, with deserts occurring at various time
intervals.
Implications for managing relationships
1. The management of inter-firm relationships is complex.
2. Relationships are referred to as processes that drive or facilitate changes in behavior.
3. Relationships should be considered at the level of the product or service and not at the level of the
firm.
4. Relationships strategies are dynamic, they need to be thought through and managed over time.
PART 3
STRATEGIC ISSUES IN SUPPLY CHAIN MANAGEMENT
14. ENVIRONMENTAL AND ETHICAL ISSUES IN SUPPLY MANAGEMENT
Pressure:
External sources include industry requirements, financial institutions, regulatory authorities and public
bodies.
Internal sources include the desires of marketing departments to go green their respective organization’s
image; the legal mandates of health and safety inspectors.
Triple bottom line refers to an organization’s responsibilities in the areas of economic behavior,
environmental impact and social policies.
Basic environmental concerns
1. Understanding pollution
2. Establishing a policy on environmental soundness
Total Quality Environmental Management (TQEM)
If a lean enterprise seeks to produce goods and services
using significantly lower levels of input (materials, labor,
time, space) and avoiding all forms of waste, it is likely to
adopt the principles of environmentally sound supply
easily.
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Five main levels of approach:
 Reducing the total amount of resources used in the production and use of a unit of service/goods.
 The extension of the life of that unit
 The reduction of the unwanted side effects of the unit throughout its life, including pollution and
waste.
 Reuse, recycling or incineration with energy recovery at the end of a products useful life.
3. Strategy for minimizing impacts
Key areas of urging the supplier to improve their environmental performance at each stage of the supply
chain through implementing the appropriate features of the waste hierarchy.
 Customer specification
 Quality requirements
 Interface waste due to distance, and differing customer-supplier processes
 Company internal processing of materials: scrap, stock and transport requirements
 Progression to the next manufacturing firm in the value chain
 Post-consumption waste, not consumed by the end user.
Companies should focus on the quality of supply as a whole rather than just the constituents of the
product. Standards, legislation expectations and competition will only become tighter and more stringent
over time, so continuous improvement is the key to succeeding in this area of business.
4. Risks for purchasing and supply managers
Measuring environmental effectiveness
The number of incidents or prosecutions faced by the company over time is a public measurement,
companies want to avoid. More sophisticated systems include progress against corporate goals,
improvements against environmental audit results, waste tracking etc..
Supplier assessment
Life cycle inventory is one tool which could enable Buyers or Purchasing managers to build an impact profile
for suppliers, forming a baseline for assessing their future performance.
Figure 14.6, page 210 Development of Kraljic’s model to incorporate environmental concern
Issues to consider in using the matrix include the supplier’s capacity, utilization and flexibility, past variations
in capacity utilization, the uniqueness of the product, volumes purchased and their expected demand, levels
of technology, quality history and organizational culture.
Strategy and senior management commitment
Alignment between the purchasing and supply environmental strategy and the overall environmental goals
of the organization is clearly vital.
15.
G
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16. PUBLIC AND REGULATED SUPPLY MANAGEMENT
The purpose of the EU procurement rules is to open up the public procurement market and to ensure the
free movement of supplies, services and works within the EU.
Public procurement: the purchases of goods, services and public works by governments and public utilities.
European union is relevant to UK public procurement
Public fund spending must explore the whole single market and have the best change of getting value for
money. Firms in member stated get the chance of bidding for business throughout the whole market.
Thresholds – financial levels above which the expenditure is deemed to be significant, are used to establish
whether or not an amount is significant in the EU principles and purposes context.
Regulations
 overheidsopdrachten moeten worden gegund na mededinging
 aanbestedende overheden moeten de gelijkheid der inschrijvers respecteren
 naleving van de principes van vrij verkeer van goederen en diensten
 maximale transparantie van de gunning van overheidsopdrachten door verplichting tot
bekendmaking van overheidsopdrachten
 overheidsopdrachten worden gegund tegen een forfaitaire prijs
 verbod op afspraken en handelingen die de concurrentie belemmeren
Rules of aggregation state that the thresholds apply to ‘one-off’ purchases and to a series of contracts with
similar products and services, for a single or recurring need. If the eventual value of a contract is above the
threshold, it is assumed that the purchaser should have foreseen this and followed the procedures.
An organization that can show that the separate parts of the organization are DOU (a part of a business
which buys goods for its own purpose) is does not have to aggregate.
Attestation is the process where an organization can let their in-house procedures inspected for
compliance so they will be viewed as having followed the correct path.
Four award procedures are provided for in the Regulations:
 The open procedure, under which all those interested may respond to the advertisement in the
OJEU by tendering for the contract;

The restricted procedure, under which a selection is made of those who respond to the
advertisement and only they are invited to submit a tender for the contract. This allows purchasers
to avoid having to deal with an overwhelmingly large number of tenders;

The competitive dialogue procedure, following an OJEU Contract Notice and a selection process,
the authority then enters into dialogue with potential bidders, to develop one or more suitable
solutions for its requirements and on which chosen bidders will be invited to tender; and
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
The negotiated procedure, under which a purchaser may select one or more potential bidders with
whom to negotiate the terms of the contract. An advertisement in the OJEU is usually required but,
in certain circumstances, described in the Regulations, the contract does not have to be advertised
in the OJEU. An example is when, for technical or artistic reasons or because of the protection of
exclusive rights, the contract can only be carried out by a particular bidder.
a) Without a call for competition (including urgency procedure)
b) Negotiated procedure with a call for competition
Comments on Directives:
Directives do not help small and medium-sized enterprises. Rather than firms in each of the EU countries
bidding for business, there has been a tendency for large organizations to set up operations in those
countries to bid for local contracts.
17.
D
18. THE RELEVANCE OF COMMODITIES
Commodities are materials and services which can be specified precisely and bought largely on the basis of
price and availability. To be a true commodity, the liquidity of an item must be quantifiable (i.e.
manageable lot sizes are agreed) and quality stabilized and guaranteed.
- Affected by macroeconomic and geographical forces
To be a trading centre, the location must be seen as stable and established – as it is trust that is key to the
success of its business. As countries grow and develop so commodity markets change.
1.
2.
3.
-
Hard commodities include metals
Base metals, such as aluminum, lead, nickel, tin, zinc, copper
Precious metals, such as gold, silver, platinum, palladium
Soft commodities include such things as cocoa, cocoa mash, white sugar, cotton, orange juice.
Other categories:
Grains and seeds
Meat and livestock
energy
Open outcry is a method of trading that uses verbal bids and offers in the trading pits.
Deal with price fluctuations:
Private deals
 Know supply market well
 Relationships are good
 Avoid open market pressure
Backward integration
 Involves the purchase of suppliers in order to reduce dependency.
 Owning the raw material production
Opportunistic buying
 Opportunities may arise sporadic (risk of imminent obsolescence) or seasonal
 Involves quick responses or strategic planning
 Buying winter fuel in summer may mean paying less for it
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Buying on the future market
 Moderate risks by hedging: financial documents are traded in their own market in order to avoid
the problems of paying more than they planned.
Spot price:
Contango:
Backwardation:
Long:
Short:
Arbitrage:
Bear:
Bull:
the price that would need to be paid for the commodity for delivery on that day.
situation in which the futures price is higher than the spot price.
situation in which the future price is lower than the spot price.
owning commodities or futures that are not fully hedged
selling commodities or futures in excess of what it actually owned.
buying in one market and selling in another to exploit differences in prices.
someone who speculates expecting a fall in price.
someone who speculates expecting a rise in prices.