Purchasing and Supply Management (Harland) by Cremaschi

PURCHASING AND SUPPLY

MANAGEMENT

Sommario

1.0 Introduction ................................................................................................................................................. 2

1.1 The purchasing cycle ............................................................................................................................... 5

1.2 Purchasing process .................................................................................................................................. 5

1.3 Strategic outsourcing process: Building and maintaining a sustainable supply base ............................. 6

1.4 Policy, Strategy, Management & Operations .......................................................................................... 6

1.5 Purchasing goods and services ................................................................................................................ 6

1.6 Supply markets, bases, portfolios and category management ............................................................... 8

2.0 Service purchasing ..................................................................................................................................... 12

3.0 Psychology of Purchase and Supply Management .................................................................................... 14

3.1 Negotiations .......................................................................................................................................... 18

4.0 Purchasing and supply strategy ................................................................................................................. 19

4.1 Describing the environment .................................................................................................................. 19

4.2 Purchasing and supply strategy ............................................................................................................. 20

4.2.1 The purchasing wheel ..................................................................................................................... 21

4.2.2 Centralized or decentralized operational models .......................................................................... 21

4.2.3 Purchasing maturity models ........................................................................................................... 24

4.3 Strategy implementation issues ............................................................................................................ 27

5.0 Relationships and supplier development .................................................................................................. 27

5.1 Supplier relationship management and development .......................................................................... 32

6.0 Ethical procurement .................................................................................................................................. 35

7.0 Public procurement ................................................................................................................................... 37

8.0 Make or buy decisions ............................................................................................................................... 44

8.1 Rationales for outsourcing .................................................................................................................... 44

8.2 Theories to keep in mind ....................................................................................................................... 46

8.2.1 Transaction Cost Economics (TCE) approach ................................................................................. 46

8.2.2 Core competence approach ........................................................................................................... 49

8.2.3 Resource Based View (RBV) ............................................................................................................ 49

8.2.4 Network approach .......................................................................................................................... 50

8.3 CSF of outsourcing and Reshoring ......................................................................................................... 51

1.0 Introduction

Purchasing and supply management is important because it can save companies money on direct

expenditures, which translates in higher margins. Here is a detailed example which shows this concept.

Du Pont analysis: tree of composition of return on net assets (RONA) which can be used to understand how

the different elements relate to the final indicator. By focusing company’s efforts on purchases, we can

strongly impact RONA while a focus on sales has a weak impact.

AS IS:

PURCHASE EFFORT: -2% purchase costs (low effort) 2

SALES EFFORT: +10% sales increase (very high effort)

Price is only the tip of the iceberg: hidden costs and risks have to be eliminated too.

• Supplier search and selection costs

• Supplier negotiation costs

• Transportation costs

• Supplier monitoring and development costs

Purchasing & Supply Management in the old days

Reduction of costs was imperative to give to the customer the lowest cost ever. The main problem was

negotiating with low value/risk suppliers and keeping record of expenditure. The style of negotiation was

very hard. There was “Blame-retaliation” behaviour (adversarial & transactional relationships with

suppliers) and top-down control (one-way dictatorial control). Techniques used were multi-sourcing and

tactical purchasing to further reduce bargaining power of suppliers.

Developments in Purchasing: towards Supply Management

Companies now prefer outsourcing. Purchasing is no longer an administrative/clerical function, it has

become an important, even strategic, business function used to improve the bottom line. Purchasing has

evolved into supply management: a driver of value and competitive advantage.

Developments in purchasing: Sustainability

Purchasing decisions are often still driven by cost reduction, but the new trend is to take into consideration

also sustainability. The risks associated with global sourcing are increasing due to the increase of

importance in brand reputation and image. Also there is an argument to be made that having a sustainable

supply chain which lasts over long periods of time made by strong relationships creates more value over

flimsy supply chains which keep changing players.

Operational view of a company 3

➢ Direct purchases: directly involved in the creation of the final product.

➢ Indirect purchases: equipment, information system, salespeople, people who travel in the

organisation. Everything that supports the production process.

The objective for the purchasing department is to purchase the RIGHT QUALITY of material, at the RIGHT

TIME, in the RIGHT QUANTITY, from the RIGHT SOURCE, at the RIGHT PRICE.

Purchasing has different responsibilities:

• Determining the specification (quality and quantity) of goods and services to be purchased

• →

Supplier appraisals and approvals How to judge suppliers and approve them

• Selecting the most appropriate supplier/s

• Preparing and conducting negotiations with chosen suppliers to form agreements

• Placing an order with the supplier

• Monitoring, controlling and chasing the ordered goods and services (expediting)

• Resolving queries and disputes

• Performance management and measurement – vendor rating: how suppliers are performing over

time and gives a way to compare different suppliers.

Operational purchasing satisfies internal customers’ demands for direct materials and services, it provides

much of the indirect materials, equipment and possibly IT, financial services and travel. The role and

responsibilities of purchasing varies between manufacturing and service sectors, public and private sectors.

Engagement of purchasing in organisational decision making varies.

For instance, characteristics of a mature, well-developed supply strategy includes:

• A repeatable and well-defined process for building strategy and governance around defining,

planning, managing, and receiving products and services for a business

• Clear alignment with executive vision and internal user-specific business goals

• A process based on well-developed supplier market intelligence and input from executives and

internal customers

• Established goals and metrics for short-term project plans, as well as a definite five-year plan that

provides year over year performance improvements

• Establishes procurement transformation initiatives that involve improving the maturity of the

procurement function to elevate strategic value and impact

• Established communication plan to inform senior management and all lines of business updated

and reviewed quarterly against defined goals and objectives 4

1.1 The purchasing cycle

1.2 Purchasing process

The purchasing process consists of several stages: specification, supplier selection, contracting, ordering,

expediting & evaluation. Specification stage is particularly challenging especially when buying services.

Specifications should use clear unambiguous language and bridge technical and sourcing requirements. The

terms used (sourcing, buying, procure, purchase) differ internationally and depend on sector. When there is

a new purchase, we have more steps than a re-purchase because there are some steps that you can skip.

The different types of purchases can have different implications and so have different level of risk and

uncertainty. 5

1.3 Strategic outsourcing process: Building and maintaining a sustainable supply base

1.4 Policy, Strategy, Management & Operations

1.5 Purchasing goods and services

A bill of materials is the list of components needed to assemble a part or the final product and their lead

times. Forecasting is the process of making statements about events whose actual outcomes (typically)

have not yet been observed and are not certain. We forecast to plan ahead, secure resources which may be

scarce and reduce risk (in terms of pricing). We forecast looking at the past and projecting ahead, but some

things are unpredictable and generally they are wrong.

→

Back-scheduling you start from the demand forecast, we know when and where the order is needed, so

we work backwards in scheduling all activities and inventories, using the bill of materials, in order to satisfy

it. This is how operation planning and control worked in the past, now we use lean.

In Forecasting we should look at the past, like when driving we look at mirrors, but by looking back you we

have no idea on where we are going. Thus, we should also project ahead and look forwards. Forecast is a

very dangerous thing and can be very costly, no one can predict the future. Forecasts are wrong or they’re

lucky. It is gambling. Some things are even completely unpredictable. 6

Inventory management is used to reduce the amounts of inventories in stock. It can be deterministic,

looking forward, based on forecasts or it can be stochastic, backward looking, based on statistics. Both are

often not very good, errors multiply and become worse and worse the further back you go in the supply

chain (bull-whip effect).

Capacity management is used to align production capacity with the demand.

Today we use complex systems to solve complex scheduling problems like:

→

• MRP: Material requirement planning signal the suppliers in order to have all the materials ready

to produce the final product in time →

• MRP II: Manufacturing resource planning capacity management

• CRP: Capacity requirement planning →

• DRP: Distribution requirement planning logistics management

→

• ERP: Enterprise resource planning function integration 7

But a smarter way to do things is using Just in Time (JIT) philosophy. Which is to reduce the complexity of

the problem in order to make it simpler to solve. Inventories are just a buffer to discard once the

complexity is reduced through our efforts.

1.6 Supply markets, bases, portfolios and category management

A supply market comprises all the potential supplies and suppliers of a particular good or service. Not all

suppliers might be suitable for various reasons, thus the pool reduces to approved suppliers. Finally, we

have preferred suppliers with which we have an open and positive relationship. Supply market research

and analysis involves the gathering and analysing of facts, data, observations and trends about the

marketplace in which suppliers operate. A comprehensive supply market analysis for a product or service

starts with an overview of the global market. It identifies and evaluates the major players and their market

shares in that market.

A supply base comprises all your suppliers that are supplying you with goods and services i.e. you have

active relationships with them within which goods and services are transacted for payment. Some

companies have certain specifications that depend on their operations and strategy, potential suppliers

must be vetted and approved to be compliant before entering the supply base. Supply base rationalisation

involves analysing the existing supply base and deliberately and strategically changing it. It usually involves

focusing more business with fewer suppliers to work closer with a reduced supply base. Large supply bases

are more costly, but more flexible. Small supply bases are less costly, but less flexible. A supply/ spend

portfolio contains all the goods and services purchased by an organisation.

Portfolio analysis is a tool used to analyse the risk and the impact on profit for all items in our supply

portfolio. There are 4 different zones that correspond to different attitudes the buyer should have while

buying that product. 8

Drivers of risk or challenge in the supply market:

• Cannot switch suppliers easily

• One or few suppliers

• Complex products/ services

• Limited capacity in supply market

→

• Shortages in supply market Companies will try to secure their resource in the market

• High demand from your competitors

Drivers for Spend/impact on profit:

• High spend for your organisation

• Big order for the supplier

• High volume purchased

• Impact on product quality

• Impact on business growth

Acquisition: Product standardization, multiple sourcing, spot transactions

Critical: Partnership or vertical integration, sole sourcing

Leverage: Exploitation of purchasing power, placing high volume orders

Strategic: Partnerships, long term collaborations, single/dual sourcing

A category is a meaningful grouping of goods and services. Category management segments the supply/

spend portfolio into meaningful groups according to the type of goods and services and characteristics of

the supply market they can be purchased from. The purpose of category management is to source

strategically and to manage the supply market while driving change.

A category manager is responsible for sourcing that specific item category. These people are ensuring that

the items are the best possible for the organization.

Category: “a group of similar items that are required for specific business activities of the firm”

(Trautmannet al, 2009)

Different categories require different information processing capacities, different organizational designs

and different actions for improvement. Buying raw materials is very different to buying logistics services.

The first step requires a meticulous classification of our portfolio. Some retailers might become very strong

in one category and use this as a competitive advantage over competitors.

Two major categories of expenditures:

CAPEX (Capital Expenditure): acquisition of tangible assets required to perform the transformation to

produce products and services:

• Buildings

• Installation Equipment, e.g. plants, essential to the production (direct)

• Accessory equipment, to support the production (indirect)

• Operating equipment, semi-durable minor equipment, e.g. special footwear, goggles

• Tools and instruments

• Furnishing and fittings

→Lose value over time: impact on the Balance Sheet statement 9

Yield service beyond accounting period in which they are purchased, they are investment decisions.

Traditionally managed by finance and/or top management, and not by purchasing, but this is changing.

They are critical for service organizations such as financial services/banks, hotels and restaurants: customer

perceptions of physical premises plays a key part in customer perceptions of quality and value. Retailers

rely greatly on purchasing of CAPEX: shop buildings, warehouses, technical/computer systems etc.

OPEX (Operating Expenditure): Materials, components and services transformed in manufacture

• Raw materials: are often sensitive commodities with daily price fluctuations, traded on commodity

markets:

o Interest rates →

o Currency fluctuations Double the risk

o Inflation

o Government policies

o Shortage supply factors

o Relationships between countries

Frequently dealt with in recognized global commodity markets e.g. the London Metal Exchange.

These resources are often safeguarded in some organizations by backward integration strategies i.e.

acquire the supplier.

Hand-to-mouth: according to need, appropriate when prices are falling or when a change in design

is imminent.

Forward buying: increasing stocks beyond quantities required by normal production

▪ To benefit from economic order quantities (EOQ)

▪ When saving on future price increases are greater than opportunity costs and storage costs

▪ To prevent suspension of production due to strikes or shortages

▪ To secure materials for future requirements when the opportunity arises

• Components and Assemblies. Components and assemblies can come in standard or specific

(customised) parts. Standard components are often readily available while specific components:

o Offer opportunities for liaison between design and purchasing

o May be jointly developed by purchaser and supplier

o May involve negotiation over aspects such as tooling costs

o Should always be subject to value analysis

o Raise make or buy issues

o Can often be combined into subassemblies

• Consumables (Maintenance Repair and Operating MRO): MRO the purchasing function can:

o Liaise with maintenance staff to ensure that information for critical items is avai