Purchasing and Supply Management (Harland) by Cremaschi

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

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

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

impact• Established communication plan to inform senior management and all lines of business updated and reviewed quarterly against defined goals and objectives 41.1

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 leadtimes.

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 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.

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

• ERP: Enterprise resource planning function integration

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

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" (Trautmann et 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 Expen