Sourcing and purchasing management overview

Sourcing and
Purchasing
Management
Overview

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Purchasing and the value chain

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Main differences buying for primary activities and
support activities

Aspects Buying for primary Buying for support
activities activities
Product assortment Limited to large Very large
Number of suppliers Limited, transparent Very large
Purchasing turnover Very large, considerable Limited
Number of purchase orders Considerable Very large
Average order size High Small
Decision-making unit Engineering, manufacturing Fragmented, varies with
specialists dominant product or service
Control Depends on type of Limited, forecast-related or
production planning project-related planning
Source: A. Van Weele


Purchasing process model and some related
concepts

Purchasing function

Tactical purchasing Order function

Sourcing Supply

Procurement


Purchasing process approach: Managing interfaces

• Get • Assure • Prepare • Establish • Establish • Assess
specification adequate contract order routine expediting supplier
supplier routine
selection

• Functional • Prequalification • Contracting • Develop order • Expediting • Supplier
specification of suppliers expertise routines • Trouble- evaluation
• Technical • Request for • Negotiating • Order shooting • Supplier rating
changes quotation expertise handling
• Bring supplier-
knowledge to
engineering
• Functional • Supplier • Contract • Order • Exception • Preferred
specification selection report supplier list
• Norm/spec proposal • Due date • Supplier
control listings ranking
• invoices scheme


Purchased goods and services as a percentage of
cost of goods sold


E-Procurement

An electronic marketplace is a marketplace on
the Internet where transactions between
business-to-business partners can be made.
Electronic marketplaces simplify the process
of searching and finding suitable suppliers.

Electronic Marketplaces can have different forms:
Open RFI/RFP: In this case, potential suppliers are requested by the buyer to qualify
before the actual auction will take place.

Reversed auction: In this type of auction the buyer sets a starting price that the supplier
needs to meet in order to get access to the auction. Visible in the auction is also the
target price that the buyer wants to reach as a minimum. If this target price is not
reached, the auction will not be awarded.

Forward Auction: This auction is used to sell products. Different buyers need to offer
their bids to the seller.

Balancing cost-risk-value

Value improvement
•Revenue growth through new
products
•Improving customer value propositions
•Early supplier involvement in NPD
•Faster new product introduction
•Co-branding and advertising

Purchasing cost reduction Risk management
•Supply base reduction •Single vs. multiple sourcing
•Product standardization •Performance-based contracting
•Global sourcing •Corporate social responsibility
•Outsourcing and offshoring •Sustainable purchasing
•Electronic auctions •Supplier auditing
•Contract management •Supplier quality assurance
•Supplier financial position
•Intellectual property (IP) protection


Areas for action in purchasing

Sourcing policy
Determining dependency on suppliers and designing plans to reduce this dependency

Direct versus indirect buying
Buying from importers and distributors, or buying directly from the manufacturer

Make-or-buy analysis
Analysis of savings opportunities by eliminating particular production activities and buying the required products from
third parties; buy-or-lease may be considered as an alternative.

Integration between purchasing and other functional areas
Plans aimed at removing interface problems between purchasing and materials management, purchasing and
engineering and between purchasing and financial administration or treasury

Setting up a purchasing information and control system
Analysis of purchasing’s information needs and design of an automation plan; possibilities of linking this system with
existing information systems in other functional areas

Centralized or decentralized purchasing
Balancing cost benefits and strategic considerations related to a centralized or decentralized organization of
purchasing

Standardization
Determining possibilities to achieve standardization in order to reduce product and supplier variety; balancing saving
and risks.
www.Tools4management.com Source: A. Van Weele 10

Procurement Maturity Model (PMM)

Source: www.vmo-blog.com 11
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Typology of market structures

Number of
Number of Buyers One Few Many
suppliers
Bilateral monopoly, Limited supply-side Supply-side monopoly
One captive market monopoly (gas, water, electricity)
(spare parts) (fuel pumps)
Limited demand-side Bilateral oligopoly Supply-side oligopoly
monopoly (chemical semi- (copiers, computers)
Few
(telephone exchanges, manufacturers)
trains)
Demand-side monopoly Demand-side oligopoly Polypolistic competition
(weapons systems, suppliers (office supplies)
Many
ammunition) (components
automobile industry

Demand-side stronger than supply-side
Demand and supply more or less in balance
Supply-side stronger than demand-side


Outsourcing

Outsourcing means that the company divests itself of the resources to fulfill a particular
activity to another company, to focus more effectively on its own competence.

Labour outsourcing Mixed outsourcing Complete outsourcing

Contractor • Some employees Some or all of the following: • Employees
provides… •Employees • Materials
•Materials • Process and systems
•Process and systems • Technology and Equipment
•Technology and Equipment • Facilities
•Facilities • Management / Supervision
•Management / Supervision

Host firm • Some employees Some or all of the following: • Programme management
provides… • Materials •Employees
• Process and systems •Materials
• Technology and Equipment •Process and systems
• Facilities •Technology and Equipment
• Management / Supervision •Facilities
•Management / Supervision

Source: Chandrashekar


Partial versus turnkey outsourcing

Advantages Disadvantages
Turnkey • Buyer has minimal responsibility for • The buyer has limited influence on the
outsourcing outsourced processes determination of the price and little
• Buyer does not need to have insight in cost structure of provider
experience with similar projects • The buyer has limited influence on the
• The project generally goes smoothly staff, technology and materials used
for the buyer and their quality
• Large dependence of buyer on provider
resulting in high commercial, technical
and performance risks
Partial outsourcing • The buyer has more influence on • The buyer is required to have
prices, rates and costs knowledge of the separate parts of the
• The buyer has more influence on the outsourced function / activities
staff, technology and materials used • The buyer is required to have the
and their quality organizational capacities to co-ordinate
• Specific advantages can result in cost and integrate the outsourced
reductions function/activities
• Communication and co-ordination
problems between parties involved can
be a cause of delay and
disappointment


The outsourcing matrix

High Maintain/invest (opportunistically) In-house/invest

Competencies are not strategic but Competencies are strategic and world-
provide important advantages; keep in- class. Focus on investments in
house as long these advantages are technology and people; maximize scale
(integrally) real and stay on leading edge

Outsource Collaborate/maintain control

Competencies have no competitive Competencies are strategic but
advantage insufficient to compete effectively.
Explore alternatives such as
partnership, alliance, joint-venture,
Low licensing, etc.
Low Strategic importance of competence High
(non-core) (Core)

Source: Savelkoul


Advantages and disadvantages of outsourcing


• Freeing up of cash: investments can be • Increased dependence on suppliers
concentrated on core activities • Continuous follow-up and monitoring of the
• Optimal usage of knowledge, equipment and supplier relationship is necessary
experience of third party • Risks of communication and organizational
• Increased flexibility: fluctuations in the workload problems during the transfer of activities to a third
can more easily be absorbed party
• Outsourcing leads to easier and more focussed • Risk of leakage of confidential information
primary processes in the organization • Depending on balance of power between parties:
• Input through an independent party’s point of inability to execute contractual performance
view which reduces the risks of introvert short- incentives and penalties
sightedness in the organization • Risk of losing essential strategic knowledge



The outsourcing process

Transition
Strategic phase Operational phase
phase

Source: Momme et al.


Four-phase strategic outsourcing model

Source: Momme et al.


Purchasing management requires management of
supplier relationships within organizational networks

Supplier: Sales/marketing Customer: Purchasing
 Goals
 Resources  Goals
 Constraints  Resources
Problem- Marketing/  Constraints
 Sales Transaction Purchasing
Sales Buyer  Problem-
solving manager department
department solving
activities
 People activities
 People



Purchasing product portfolio and supplier portfolio:
Balance of power

Purchasing product portfolio Purchasing supplier portfolio
High Leverage products Strategic products High Leverage suppliers Strategic suppliers

•Alternative sources of supply •Critical for product’s cost •Many competitors •Market leaders
available price •Commodity products •Specific know-how
•Substitution possible •Dependence on supplier
Buyer dominated segment Balance of power may differ
Competitive bidding Performance-based among buyer-supplier
partnership
Routine products Bottleneck products Routine suppliers Bottleneck suppliers

•Large products variety •Monopolistic market •Large supply •Technology leaders
•High logistics complexity •Large entry barriers •Many suppliers with •Few, if any, alternative
•Labour intensive dependent position suppliers
Secure supply + search for
System contracting + alternatives Reduce number of suppliers Supplier-dominated segment
e-commerce solutions
Low Low
Low Supply risk High Low Supply risk High


Basic characteristics of the four supplier strategies

Characteristics/ Partnership Competitive bidding Secure supply Category management and
Strategies e-procurement solutions
Objective • Create mutual • Obtain ‘best deal’ for • Secure ‘best deal’ for • Reduce logistic complexity
commitment in long- short term short term • Improve operational
term relationship efficiency
• Reduce number of
suppliers
Suitable for • Strategic products • Leverage products • Bottleneck products Routine products
(gearboxes, axles, (commodities, steel (natural flavors, (consumables, supplies)
optics, engines) plate, wire) vitamins, pigments)
Activities • Accurate forecast of • Improve • Accurate forecast of • Subcontract per product
future requirements product/market future requirements group/products family
• Supply-risk analysis knowledge • Supply-risk analysis • Standardize product
• Careful supplier • Search for alternative • Determine ranking in assortment
selection products/suppliers supplier’s client list • Design effective internal
• ‘Should cost’ analysis • Reallocate purchasing • Develop preventative order delivery and
• Rolling materials volumes over measures (buffer invoicing procedures
schedules suppliers stock, consigned stock, • Delegate order handling
• Effective change-order • Optimize order transportation) to internal user
procedure quantities • Search for alternative
• Vendor rating • ‘Target-pricing’ products/suppliers
Decision level • Board level • Board level • Purchasing • Purchasing
• Cross-functional • Purchasing • Cross-functional • Cross-functional approach
approach approach


How buyer – supplier relationships may change
over time

Relationship • Operational • Operational • Tactical • Strategic
Characteristics
Time horizon • From order to order • 1 Year • 1-3 Years • 1-5 Years

Quality • As requested by • As requested by • ‘Sign-off’ by • ‘Sign-off’ by
producer producer supplier supplier
• Quality control by • Quality control by • Quality assessment • Early supplier
producer producer and by supplier (process involvement in
supplier quality) design
• Quality assessment
by supplier
Logistics • Orders • Annual agreements • Periodical • Electronic
+ call-off orders scheduling of document
materials interchange (EDI)
requirement by
producer
Contract • From order to order • Annual agreements • Annual agreement • Design contract
(1 year (>1 year) • Life of type
• Quality agreement responsibility
Price/Cost • Price • Price + rebate • Price + cost- • Price based on
reduction targets open calculations
• Continuous
improvement


How to identify cost savings potential

The categories need to be prioritized on the basis of their cost savings potential and their
ease of implementation using the Purchasing Prioritization Matrix

Area of high-value projects

High ‘Hilti’-tools
Gypsum boards
Mineral insulation
Doors
Kitchen home products
Wooden floors
Bathroom modules
Kitchen furniture
Blasting agents
Construction equipment
Construction equipment

Low
Low Feasibility High

Source: Skanska


Decentralized purchasing organization structure


Centralized purchasing organizational structure


Centralized/decentralized purchasing organization
structure


Some advantages and disadvantages related to
decentralized purchasing


• Direct responsibility for profit centers • Dispersed purchasing power, lack of economies
• Stronger customer orientation towards internal of scale
user • No uniform attitude towards suppliers
• Less bureaucratic purchasing procedures • Scattered market research
• Less need for internal coordination • Limited possibilities for building up specific
• Direct communication with suppliers expertise on purchasing and materials
• Probably different commercial purchase
conditions for different business units


Buyer profiles and their most important
responsibilities and skills
Function Responsibilities Skills required

Chief procurement • Developing corporate sourcing • General management skills leadership
officer strategies, systems and reporting • Communication skills
Corporate buyer • Strategic commodities • Commercial skills
• Long-term planning horizon
• Broad business orientation
• Communication skills
Category buyer • New materials and components • All-around technical education
• New suppliers • Medium planning horizon
• Commercial skills
• Communication skills
Project buyer • Investment goods and maintenance • Project management skills
goods and services • Technical education
NPR-buyer • General and facility goods and • Generalist
services • Business administration
• Communication
Operational buyer / • Materials planning • All-around
materials planner • Order handling • Pragmatic
• Troubleshooting • Customer driven
• Vendor rating • Stress resistant

Key areas of purchasing performance measurement


The supplier-partnering hierarchy

Source: Liker et al.

Carroll’s Pyramid of Corporate Social Responsibility


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Sourcing and purchasing management overview

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