TDE 18-12-24 Purchasing and supply management

Below, there is the crossed-ABC matrix for all suppliers, indicating the number of suppliers in each

classification:

• Economic Volume (X-axis) – (A = High economic value, … , C = Low economic value)

• Number of Orders (Y-axis) – (A = High number of orders, … , C = Low number of orders)

Crossed-ABC Matrix Economic volume

Value A B C

A 15 60 130

Number of orders B 50 60 80

C 40 70 162

Questions 2 -What conclusions can you draw by seeing this matrix, and which actions for improvement

can you suggest to the CPO?

[….]

Exercise 4 – Procurement strategy

Tukytech is a manufacturing enterprise based in Italy and operating in the technology sector. Specifically, it

produces and sells electronic devices of the highest value and quality, such as tablets, computers, cell phones,

and audio and video devices. Tukytech in 2023 reached a record milestone of 575 million euros of turnover,

with a gross operating margin of 21 million euros and a net profit of nearly 7 million euros. Despite being

based in Italy, Tukytech sells its products all over Europe, in which Italy, Germany, France, Spain and Portugal

are the main markets. The supply network is international, with the main suppliers for electronics and

components in the far east (predominantly China) and in the USA. The headquarter of Tukytech is in Italy

(Florence), in which there is a plant and central offices where core activities such as finance, procurement,

design and R&D are managed, and there are other 2 manufacturing hubs in Europe, respectively in Poland and

in Spain.

The value of purchasing costs is almost 530 million €, out of which the direct purchases account for

approximately 500 million euros. Beyond the economic impact, purchasing plays a key role in product quality

and innovativeness. The CPO is part of the Board of Directors (BoD) and is frequently required to report to

the CEO on actions taken at the strategic, tactical, and operational levels regarding purchasing and supplier

relationship management. In fact, purchasing management is extremely important in the current landscape

where natural resources related to electronic devices are becoming scarce and there is a high supply market

complexity. Also, electronic chips have become very expensive after some geo-political tensions, and it is also

extremely hard to find suppliers with the required competences to create high quality components. For this

reason, the CEO highlights very often that it is fundamental to define a strategic planning which is coordinated

among all the departments, procurement included, so to align the strategy of the company together with the

strategy of all the departments.

Beyond the supply market complexity, also on the demand side there is a high competition. Despite Tukytech

is a large company, competitors are often bigge. Tukytech has 3 main competitors: Melanta, Japonji and

Huatech. These are companies of more than 5 billion euros of revenue, through a huge market share.

Furthermore, newcomers are always ready to enter the market offering products of lower quality but also lower

price.

In the last BoD, the CEO presented the new 3-year strategy. A key starting point is that Tukytech cannot

compete on prices, because the marginality is low. Thus, the decision is to differentiate the company from

competitors according to three main directions: 1. 3. Target (B2B instead of B2C); 2. Innovation; 3. Design.

Procurement has been nominated a core department and assigned a great responsibility as it is perceived as

one of the main departments that can add directly value to the performance of the company. In fact,

procurement is required to identify opportunities in the supply market to cope with the uncertainties of the

context and create value. The CEO has expressed the idea that, in the long run, the spending can even increase

as it would be justified from an increase in the operating margin. Thus, effectiveness becomes more important

than efficiency.

1. According to the information in the text, what would be the proper purchasing strategy to adopt

according to the model you have seen in class that considers the external and internal context? Which

are the purchasing practices that you would adopt according to the strategy you have selected in order

to create value from the procurement department and make the strategy effective?

Explain in detail the reason why you have selected the strategy, describing the role of the variables

you have considered. Then, explain and describe in detail the purchasing practices you have identified

and the value they add to the firm’s performance.

[------]

Exercise 5 – Procurement organization

Tukytech has a relevant procurement department as it has to manage purchasing costs equal to 530 Million €,

out of which 500 million € are for direct spending. The category tree has 4 main product categories divided

among direct spending and indirect spending. Direct spending includes two categories: 1. Electronic

components (electronic chips, video components, audio components, connectors, etc.); 2. Cover, cases, and

packaging (plastic and metal cases and covers of all the devices, metal and sheet packaging for all the devices).

Indirect spending has 2 main categories: 1. Logistics (transportation and warehousing); 2. ICT (softwares and

hardwares to manage all the processes).

About direct spending, the department is full of competent and specialized buyers: buyers and category

manager have a specific role in collaborating with the suppliers, to define the specific requirements needed in

Tukytech production for the single products. Each buyer knows exactly one product and understand how

specific components can add value to the final product. They have the responsibility to find innovative

suppliers, to implement development programs and co-design projects, to increase the value of the single

products. Anyhow, there is a certain inefficiency in the management of the product category and the supply

base: there is a high fragmentation because suppliers are very product-specific, and so similar components are

supplied by different suppliers according to the final product. In fact, it is not possible to adopt the same

component (ex. electronic chip) in different devices (ex. laptop, smartphone or tablet). This issue, together

with a high description complexity, imply very high transactions costs. Moreover, purchasing are now managed

in the between of a centralization and a decentralization approach. Sometimes, the buyers collect all the internal

needs of the different plants and manage all of them together. Other times, plant managers directly purchase

components required to finish production as they have the direct approval to do it.

Consistently with the new strategy imposed by the CEO, the goal aims at achieving effectiveness rather than

efficiency and work on the product.

Indirect spending, instead, comprehends logistics services and ICT. The spending for logistics services is equal

to 4.563.234,00 €, so it is not so high. Moreover, this category does not require a high knowledge of the

products beyond the measures and weights of the final packaging, which are given information. ICT, instead,

is even less important from an economic perspective, as it accounts for 1.550.000,00 €. Also for this category,

there is not a specific competence that is required. It just needs to aggregate the requirements of the internal

clients.

The CPO is starting to think how to change the procurement organization according to the new strategy of the

company. It wants to think out of the box, starting from scratch and renew completely the procurement

organization structure without starting from an initial point. So, it must decide how to structure the department

according to the Functional vs. Divisional criteria, and to the Central vs. Decentralized structure. It has

requested just simple information, and it knows that total centralization of direct spending (no rights for plants

manager to purchase directly components) will lead to a saving in the direct spending equal to 0,93%. Still,

this choice will lead to an increase in the purchasing costs for logistics equal to 375.000,00 € for the additional

services required to store higher volumes of components. In fact, the Italian plant will send a higher number

of Full Truck Loads to Poland and Spain factories. On the contrary, a decentralized structure in which plants

manage direct spending will lead to an increase in spending for logistics equal to 550.000,00 € due to the

higher volumes to manage and related additional services required locally.

2. According to the information provided in the text, how would you design the procurement department

in terms of functional vs divisional criteria, and central vs decentralization configuration? Report all

the reasonings and calculations you have taken into account and explain in detail the advantages and

disadvantages of your choice.

[……]

Exercise 6 – Total cost of ownership

Since volumes are increasing over time, the CPO needs to make a make-or-buy decision, but for now has only

requested a preliminary quantitative analysis. Since there is a need for additional space, both in the case of

decentralization and centralization, the CPO is considering to rent 8 warehouses (which are needed for the

additional volumes expected). At the same time, it is wondering whether it is not more cost-effective to build

a new warehouse. To make this decision, the CPO has requested to develop a TCO model that could give an

answer from a cost perspective.

To build a new warehouse, it is necessary to buy a plot of land near the facility, with a cost of 220.000,00 €. In

addition, the fixed construction cost is estimated at 1,850,000 €.

On the other hand, to rent 8 warehouses, initial fixed transformation, and renovation costs of 30.000,00 € for

each of the 8 warehouses are estimated. In addition, a high voltage power distribution for industrial use is

necessary and the initial fixed cost is equal to 2.000,00€ for each warehouse.

From a contractual perspective, renting the warehouses implies a security deposit at the beginning of 5.000,00€

per warehouse and a renting fee of 3500€/month per each warehouse. Other recurring costs would be the

maintenance (500€/month per each warehouse), and energy consumption (2500€/month per each warehouse).

Instead, building a warehouse will lead to much lower energy consumption thanks to the installation of

photovoltaic panels, with an expected cost of 150€/month. Moreover, this option will lead to tax charges for

an amount equal to 20.000,00€ per year. Nevertheless, after three years the end-of-life value of the warehouse

would be equal to 570.000,00€.

3. You have to build the TCO model for the renting option and the building warehouse option. You have

to calculate the final cost coming from the two models, knowing that the cost of capital is equal to

10% and the time period to consider is 3 years. Finally, decide if it is more convenient to rent the 8

warehouses or build a new proprietary warehouse. Do assume that opportunity costs should