12
Analysis
1. The role of Purchasing in the
Supply Chain
/t
12
Programme
• Changes in the business context and its impact on
strategies and structures
• The role of purchasing in the Supply Chain
• Definition of concepts
• Importance of the purchasing function
• Classification of purchasing goods
• The changing landscape in purchasing and supply
• Conclusions
/t
12
Changes in the business context
1. Globalisation of trade
Resulting from:
• Deregulation in many industries
• Intercultural homogenisation and the resulting homogenisation of
consumer preferences
• The forming of trade blocks (NAFTA, GATT, EEC)
• Improved transportation facilities
• More sophisticated information and communications technology
/t
12
Changes in the business context
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
Xerox: ‘pay for production’
3. Changing consumer patterns
•
•
•
Customers increasingly demand convenience of purchase, after-sales
service, relaibility, uniqueness, quality etc.
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
/t
12
Impact on strategies & structures
1. Value Chain Management
•
•
•
/t
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
Companies should focus on their core competencies
12
Impact on strategies & structures
2. Process orientation
•
•
Shift from functional organisation to process organisation
Process means in this case the set of activities that produce a value to
a customer
3. Outsourcing and managing best-in-class supplier
networks
•
•
Often specialist suppliers can perform the outsourced activities at lower
cost and with higher value-added than the buyer
Best-in-class suppliers are then needed
/t
12
The role of Purchasing
firm infrastructure
human resource management
Support
activities
technology development
procurement
inbound
logistics
/t
operations outbound
logistics
Primary activities
marketing
& sales
service
12
The role of Purchasing
Aspects
Buying for primary
activities
Buying for support activities
Product assortment
Number of suppliers
Purchasing turnover
Number of Purchase orders
Average order size
Control
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
Decision-making unit
/t
12
Definition of concepts
purchasing function
ordering/ operational
tactical / initial
Internal
customer
Specification
Selecting Contracting
Sourcing
Expediting Follow
Ordering
and
up/
evaluation evaluation
Supply
Buying
/t
Procurement
Supplier
12
Definition of concepts
Purchasing:
All activities for which the company receives an invoice from outside
parties. Differentiation between:
– Purchasing function
– Purchasing department
Procurement:
All activities that are required in order to get the product from the
supplier to its final destination.
Sourcing:
Finding sources of supply, guaranteeing continuity in supply, ensuring
alternative sources of supply and gathering knowledge of procurable
resources.
/t
12
Definition of concepts
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
/t
12
Importance of the purchasing
function
60-85
60-80
50-70
60-80
25-50
/t
Retailers
Computers
Consumer
electronics
Automotive
Pharma
10-40
Service
industry
5
12
Admin.
18
Capex
3
12
Spares
50
Typical
structure
Services
Tradeitems
Produc
tion
parts
12
DuPont analysis:
Sales
105 mio
Capital
turn-over
ratio 2.1 x
RONA
9.9 %
/
×
/t
Amounts in mln Euro
Interest free
liabilities
95 mio
Sales
105 mio
Income
before tax
5 mio
Margin
4.7 %
Net assets
50 mio
Total assets
145 mio
-
Other costs
40 mio
Total costs
100 mio
/
Sales
105 mio
+
Purchased
mat. & serv.
60 mio
12
DuPont analysis:
Sales
105 mio
Capital
turn-over
ratio 2.1 x
RONA
12.4 9.9
----%
/
×
/t
EC million
Interest free
liabilities
95 mio
Sales
105 mio
+ 25 % !!
Margin
5.9 4.7
--- %
Net assets
50 mio
Total assets
145 mio
Income
before tax
6.2 --5 mio
-
Other costs
40 mio
Total costs
98.8 100
--- mio
/
Sales
105 mio
+
Purchased
mat.& serv.
58.8 60
-- mio
-2%
12
Classification of Purchasing goods
•
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
/t
12
Classification of Purchasing goods
•
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
/t
12
The changing landscape in
purchasing and supply
1. Seller’s market
Buyer’s market
2. Increasing pressure on sales prices and margins leads to:
•
•
•
•
•
•
•
Co-ordination of purchasing requirements
Integration of purchasing and logistics
Integration of purchasing in engineering and production planning
Make or buy
Reciprocity agreements and compensation agreements
Total quality control and just-in-time production
Environmental issues
/t
12
Conclusions
• The scope of the purchasing function extends from the
purchasing market to inside the company gate
• The purchasing function is a very important link in the
production chain of organisations
• The purchasing function is concerned with obtaining all goods
necessary for running, maintaining and managing the company
• A distinction should be made between the purchasing function
and the purchasing department
• Purchasing management is the activity aimed at systematising
the purchasing process and achieving specific improvements
through the management of supplier relationships
/t
• The purchasing function is subject to many changes