TDE 13-11-24 Purchasing and supply management

KPI.

Evaluation Parameters SourceTech ComponTrends GammaElectronics

Levels

Operational

Global

Strategic

2. Calculate the overall score per each supplier by applying the appropriate weights and using the vendor

rating tool.

3. Indicate which supplier TechGadgets should rely on for component supply according to the obtained

scores.

Exercise 2 – Make or Buy produce in house or outsourcing the production to one or more suppliers

TechGadgets operates in an industry where rare metals are needed in production and the digital and sustainable

transformation requires the increasingly massive extraction of these components. Among these is Lithium. In

fact, one of the most critical components in tech products is the lithium-ion battery, which requires high-quality

lithium. Currently, TechGadgets procures lithium from various suppliers around the world. However, the

increasing demand and the strategic importance of lithium have prompted the company to evaluate whether it

should continue to buy lithium from external suppliers or invest in the capability to produce lithium in-house.

Purchasing lithium from suppliers could potentially be cheaper in the short term due to the absence of capital

investment. However, the price of lithium is subject to market fluctuations. Establishing lithium extraction and

processing facilities will involve significant capital investment, ongoing operational costs, and maintenance

expenses. However, this could lead to better control over the quality and supply of lithium.

According to the recent studies (Figure 1), lithium carbonate price has increased sharply in the last three years

(46K€/metric ton in 2023), with an inability to predict future trends for the coming years. Indeed, the price

depends not only on the supply and demand mechanism, but also on geopolitical situations in the areas where

it is extracted. These tensions have exacerbated the price increase that was already expected due to the ever-

increasing demand for electric cars. Below, the image shows the price trend in the last 14 years.

Figure 1: price of carbonate price from 2010 to 2023.

Another important information to disclose is that the supply market is becoming less fragmented since

many small companies supplying lithium have been acquired by bigger firms and the whole market

is going towards an oligopoly of very large companies dominating the market. Lithium is key for the

digital and sustainable transformation of companies and managing this raw material is complex.

Dedicated industrial machines are needed to extract the metal that must be stored and distributed then

to a dedicated plant which transforms, after chemical and mechanical processes, the metal in a usable

raw material for batteries. The additional difficulty is identifying potential areas where to extract the

metal: this is considered a rare element, and the larger companies pay governments for the right to

exploit an area rich in the precious metal for a number of years. The price for the concession is

generally very high and is around 25 million €/year.

related to asset specificity, but pay attention, the supplier make the investment indipendently from us because the machine is

needed for extract the metal and the supplier doesn't buy the machine on purpose because I need the product

The only possibility for TechGadgets to insource the production of Lithium is to acquire one of the small

company that otherwise will be acquired by other firms. TechGadgets’ Chief of Strategy Officer has found one

of the current supplier for Lithium (Lith4You) to be interesting to purchase, with a total cost for the acquisition

equal to 87 million €. Lith4You has the right to use an area in Portugal for the next 3 years, with the possibility

to renew the right for additional 3 years at a cost of 60 million € to be paid upfront. The CPO knows that

Lith4You will be purchased otherwise by another firm for that concentration effect that is occurring in the

market.

This effect is leading to another impact: the category buyer has referred that now it is really difficult to negotiate

with suppliers as their bargaining power is increasing more and more due to the increasing size of these

companies after acquisitions. Thus, the size of the suppliers doubles, while the increase in the purchase volume

of Lithium by TechGadgets is just +7,8% year after year. This makes the negotiations more difficult and costs

to switch suppliers increasing.

TechGadgets requires a steady and reliable supply of lithium due to the high production volume of their

batteries. This is a really critical and strategic product category: last year the transaction volume was equal to

274,7 metric tonnes that have been purchased from 11 different suppliers all over the world. Quality is also

essential as Lithium has a direct effect on the length of the battery longevity and the satisfaction of the ultimate

customer who owns the device. Despite of this, TechGadgets has always purchased the raw material ready to

be installed in the batteries with just a partial knowledge about the chemical and mechanical processes needed

to arrive at the cleanest raw material to create the batteries. In fact, TechGadgets is generally relying totally on

the suppliers which provides the raw material with a similar high quality. In fact, there is no need for

customization or adaptation to the batteries. Regarding this, all the 11 suppliers can provide the required

quality. this sentence is related to description complexity

Knowing that TechGadgets has registered in 2023 fixed assets for 223-million-euro, total assets for 1,242

billion euro, and purchasing costs equal to 2,617 billion euros, what decision would you take in terms of make

or buy regarding the extraction and production of lithium?

Based on the information provided in the text, what’s the output of the analysis (make vs buy)

1. economic theory : description complexity,

according to the economic theory? Explain your analysis. asset specificity, uncertainty

Based on the information provided in the text, what’s the output of the analysis according to the

2. strategic drivers? Explain your analysis. management theory: competencies, cost, capex

3. What is the final decision in terms of make or buy according to the analyses? Explain the decision

Exercise 3 – Financial impact of purchasing

For a comprehensive analysis of the purchasing performance the CEO has also requested to the CPO a detailed

analysis of the financial impact of purchasing. Thus, the CPO has requested some financial data to the CFO

that has achieved to respond with the following table.

Value (€) Value (€)

Income statement (2023) Balance sheet (2023) 325.931.000,00 €

Revenues 2.719.248.000,00 Inventories (2022)

€ 733.125.000,00 €

Raw materials, consumables material 2.569.656.000,00 Trade payables

€

and goods for resale

Total production costs 2.691.636.000,00

€

27.612.000,00 €

EBIT € €

Use of third party assets 0,00 NOWC -10.841.000,00

47.495.000,00 €

Services COGS 2.644.081.000,00

€

1. According to the data above, calculate the DSO, DPO, DIH and C2C cycle of TechGadgets.

Provide a comment about the results obtained.

Exercise 4 – Leverage effect

The CPO of a firm is conducting some analyses and he has asked to an analyst to consider the economic impact

the purchasing department has on the profitability of the firm. For this reason, he would like to know what the

impact of reducing purchasing costs by 5% would be. Below, data and useful information to perform the

analysis are reported, knowing that Inventories for 2021 have been equal to 937.672,00€.

9.555.715,00€

Sales 5.381.637,00€

Direct spending

Income statement data 1.102.576,00€

Indirect spending

(2022) 1.755.197,00€

Other costs 7.839.282,00€

COGS 746.685,00€

Balance sheet data (2022) Other current assets

Fixed assets 6.345.941,00€

What is the current ROA (before the 5% saving in purchasing)? Explain the procedure.

What would be the ROA with a 5% saving in purchasing? Explain the procedure.

Starting from the initial situation, what is the percentual increase in sales that the company should achieve to

reach the same ROA increase?

Exercise 5 - Spend analyses

Recently, the procurement team has been reviewing their current category structure to optimize purchasing

strategies and streamline operations.

The team oversees a variety of purchases, which can broadly be divided into long-term investments and day-

to-day operational expenses. A significant portion of their expenditures goes into acquiring manufacturing

equipment. This includes essential machinery such as mixers, fillers, and packaging machines, all of which are

crucial for the production process. Another important area of capital expenditure is investment in office and

warehouse buildings where to install machines and stock inventories. These are necessary to ensure the

expansion of production and business management. The governance imposes that spaces are not rented but

owned, so the purchase of this category is still managed by the purchasing department.

On the operational side, raw materials form a substantial part of the procurement budget. This category covers

all essential ingredients used in their beauty products, including high-quality organic oils, vital active

ingredients like vitamins and peptides, various packaging materials such as containers and labels. The

procurement team also manages expenditures associated with marketing and sales, which are critical for

promoting and selling Luxe Beauty’s products. This includes costs related to advertising, digital marketing,

print ads, social media campaigns, and promotional materials like brochures, samples, and point-of-sale

displays.

Furthermore, there are all the materials and services needed for the company’s day-to-day functioning. It is

possible to find office supplies such as stationery and office equipment. Another category is logistics and

distribution costs related to warehousing, shipping, and transportation. These are outsourced to external players

such as logistics service providers and this spending should be managed and monitored as it accounts for the

7% out of the overall purchasing costs. In addition to these, the procurement team is also responsible for

managing ICT (Information and Communication Technology) investments, which include software licenses,

IT infrastructure, and telecommunication services that support the company's digital operations.

Understanding the categorization of these expenditures is crucial for Luxe Beauty’s procurement team as they

strive to enhance efficiency and cost-effectiveness. The team must create a detailed category tree to visualize

and manage these product categories effectively.

Question 1 – Create the category tree arriving at the third level (do not overcome the third level). You

can draw it or create it by using bullet points.

The procurement team has conducted an in-depth analysis using a crossed-ABC matrix to evaluate all 467

suppliers bas