Sourcing and purchasing management overview


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Sourcing and purchasing management overview

  1. 1. Sourcing andPurchasingManagementOverview
  2. 2. Buy the slides 2
  3. 3. Purchasing and the value 3
  4. 4. Main differences buying for primary activities andsupport 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 4
  5. 5. Purchasing process model and some relatedconcepts Purchasing function Tactical purchasing Order function Sourcing Supply Procurement Source: A. Van Weele 5
  6. 6. 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 6
  7. 7. Purchased goods and services as a percentage ofcost of goods sold 7
  8. 8. 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 qualifybefore the actual auction will take place.Reversed auction: In this type of auction the buyer sets a starting price that the supplierneeds to meet in order to get access to the auction. Visible in the auction is also thetarget price that the buyer wants to reach as a minimum. If this target price is notreached, the auction will not be awarded.Forward Auction: This auction is used to sell products. Different buyers need to offertheir bids to the seller. 8
  9. 9. 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 9
  10. 10. Areas for action in purchasingSourcing policyDetermining dependency on suppliers and designing plans to reduce this dependencyDirect versus indirect buyingBuying from importers and distributors, or buying directly from the manufacturerMake-or-buy analysisAnalysis of savings opportunities by eliminating particular production activities and buying the required products fromthird parties; buy-or-lease may be considered as an alternative.Integration between purchasing and other functional areasPlans aimed at removing interface problems between purchasing and materials management, purchasing andengineering and between purchasing and financial administration or treasurySetting up a purchasing information and control systemAnalysis of purchasing’s information needs and design of an automation plan; possibilities of linking this system withexisting information systems in other functional areasCentralized or decentralized purchasingBalancing cost benefits and strategic considerations related to a centralized or decentralized organization ofpurchasingStandardizationDetermining possibilities to achieve standardization in order to reduce product and supplier variety; balancing savingand risks. Source: A. Van Weele 10
  11. 11. Procurement Maturity Model (PMM) Source:
  12. 12. Typology of market structures Number ofNumber of Buyers One Few Manysuppliers 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 12
  13. 13. OutsourcingOutsourcing means that the company divests itself of the resources to fulfill a particularactivity 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 13
  14. 14. Partial versus turnkey outsourcing Advantages DisadvantagesTurnkey • Buyer has minimal responsibility for • The buyer has limited influence on theoutsourcing 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 risksPartial 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 Source: A. Van 14
  15. 15. 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: 15
  16. 16. Advantages and disadvantages of outsourcingAdvantages Disadvantages• 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 Source: A. Van 16
  17. 17. The outsourcing process Transition Strategic phase Operational phase phase Source: Momme et 17
  18. 18. Four-phase strategic outsourcing model Source: Momme et 18
  19. 19. Purchasing management requires management ofsupplier 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 Source: A. Van Weele 19
  20. 20. Purchasing product portfolio and supplier portfolio: Balance of power Purchasing product portfolio Purchasing supplier portfolioHigh 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 solutionsLow Low Low Supply risk High Low Supply risk High 20
  21. 21. Basic characteristics of the four supplier strategiesCharacteristics/ Partnership Competitive bidding Secure supply Category management andStrategies e-procurement solutionsObjective • 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 suppliersSuitable 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/suppliersDecision level • Board level • Board level • Purchasing • Purchasing • Cross-functional • Purchasing • Cross-functional • Cross-functional approach approach approach Source: A. Van Weele 21
  22. 22. How buyer – supplier relationships may changeover 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 Source: A. Van Weele 22
  23. 23. 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 projectsHigh ‘Hilti’-tools Gypsum boards Mineral insulation Doors Kitchen home products Wooden floors Bathroom modules Kitchen furniture Blasting agents Construction equipment Construction equipmentLow Low Feasibility High Source: Skanska 23
  24. 24. Decentralized purchasing organization 24
  25. 25. Centralized purchasing organizational 25
  26. 26. Centralized/decentralized purchasing organization 26
  27. 27. Some advantages and disadvantages related todecentralized purchasing Advantages Disadvantages • 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 27
  28. 28. Buyer profiles and their most importantresponsibilities 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 Source: A. Van Weele • Vendor rating • Stress resistant 28
  29. 29. Key areas of purchasing performance 29
  30. 30. The supplier-partnering 30 Source: Liker et al.
  31. 31. Carroll’s Pyramid of Corporate Social 31
  32. 32. Buy the slides 32