Chapter 1The role of Purchasing in the Value Chain

Program

The role of purchasing in the value chain Definition of concepts Importance of purchasing to business Classification of purchasing goods New developments in purchasing Conclusions

The role of purchasing in the value chain

Primary activities can be divided in five generic

categories: Inbound Logistics Operations Outbound logistics Marketing and sales Services

The procurement function should be able to meet the material requirements related to inbound and outbound logistics, and to operations.

The procurement function should be able to meet the material requirements related to inbound and outbound logistics, and to operations.

The role of purchasing in the value chain

inboundlogistics

operations outboundlogistics

marketing& sales

Margin

Margin

SupportSupportactivitiesactivities

Primary activitiesPrimary activities

p r o c u r e m e n ttechnology development

firm infrastructure

human resource management

service

Drawn from Porter, 1985

The role of purchasing in the value chain

Support activities can be divided in four generic

categories: Procurement Technology development Human resources management Firm infrastructure

Procurement activities may be also related to supplyingproducts and services for the other support functions. Procurement activities may be also related to supplyingproducts and services for the other support functions.

The role of purchasing in the value chain

Aspects Buying for primary activities

Buying for support activities

Product assortment

Number of suppliers

Purchasing turnover

Number of Purchase orders

Average order size

Control

Decision-making unit

Limited to large

Limited, transparent

Very large, considerable

Considerable

High

Depends on type of production planning

Engineering, manufacturing

specialists dominant

Very large

Very large

Limited

Very Large

Small

Limited, forecast-related or project-related planning

Fragmented, varies with product or service

Definition of concepts

Purchasing:All activities for which the company receives an invoice from outside parties. Differentiation between:

Purchasing function Purchasing department

Definition: “Managing the company’s external resources in such a way that the supply ofall goods, services, capabilities and knowledge which are necessary forrunning, maintaining and managing the company’s primary and supportactivities is secured at the most favorable conditions”.

Procurement:All activities that are required in order to get the product from the supplier to its final destination.

Definition of concepts

Sourcing:Finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of supply and gathering knowledge of procurable resources.

Purchasing Management:All activities that are required to manage supplier relationships.

Supply Chain Management:The management of all activities, information, knowledge and financial resources associated with the flow and transformation of goods and services up from the raw materials suppliers, component suppliers and other suppliers in such a way that the expectations of the end users of the company are being met or surpassed

Value Chain Management: Challenging suppliers to improve the value proposition to the end-customers of the value chain. Usually the supplier works closely together with the customer’s technical and marketing staff to reduce the product’s overall costs and add new designs or features to the product which increase the value for the end-customer.

Definition of concepts

Different definitions... Ordering… Buying… Purchasing… Procurement… Sourcing… Supply Chain Management… Value chain management….

Operational, short term, deal and

margin oriented

Operational, short term, deal and

margin oriented

Strategic, long term, performance and

value oriented

Strategic, long term, performance and

value oriented

Purchasing: relates to every activity the company receives an invoice for…

Definition of concepts

purchasing function

tactical / initial ordering/ operational

Sourcing Supply

Buying

Procurement

Internal

customer Supplier Ordering

Follow

up/

evaluation

Expediting

and

evaluation

Speci-

fication Contracting Selecting

Importance of purchasing to business

60-85 60-80 50-70 60-80

25-50

512

18

3 12

50

Admin.

Services

Capex

Spares

Trade-items

Retailers Computers Consumer electronics

Automotive Pharma Service industry

Typicalstructure

10-40 Production parts

adapted from Kluge, 1996

Profit 1,5 %

Value added: 20 %

Purchased materials And services: 78,5 %

Question: what should managers do?

Sales: 100%

Challenge for managers: how to manage our EXTENDED ENTERPRISE ?

Purchased materials and services have a large impact on company profitability…

Importance of purchasing to business

Profit 1,5 %

Value added: 20 %

Purchased materials And services: 78,5 %

Question: what should managers do?

Sales: 100%

Challenge: how to manage our EXTENDED ENTERPRISE ?

Definition of concepts

Suppliers determine 78,5% of total cost, innovation, carbon footprint and customer value…

DuPont analysis:DuPont analysis:

RONARONA

Capital turn-Capital turn-over ratioover ratio

Margin Margin

××

Amounts in Euro mioAmounts in Euro mio

Other costs Other costs

Purchased Purchased mat. & serv.mat. & serv.

++Total costs Total costs

Sales Sales

--

Total assets Total assets

Interest free Interest free liabilitiesliabilities

--

Sales Sales

Net assets Net assets

//

Income Income before taxbefore tax

Sales Sales

//

105 mio105 mio

105 mio105 mio

105 mio105 mio

145 mio145 mio

95 mio95 mio

50 mio50 mio2.1 x2.1 x

105 mio105 mio

40 mio40 mio

60 mio60 mio

100 mio100 mio

5 mio5 mio

4.7 %4.7 %

9.9 %9.9 %

RONARONA

Capital turn-Capital turn-over ratioover ratio

Margin Margin

××

Amounts in Euro mioAmounts in Euro mio

Other costs Other costs

Purchased Purchased mat.& serv.mat.& serv.

++Total costs Total costs

Sales Sales

--

Total assets Total assets

Interest free Interest free liabilitiesliabilities

--

Sales Sales

Net assets Net assets

//

Income Income before taxbefore tax

Sales Sales

//

105 mio105 mio

105 mio105 mio

105 mio105 mio

145 mio145 mio

95 mio95 mio

50 mio50 mio

2.1 x2.1 x

105 mio105 mio

40 mio40 mio

60 mio60 mio

100 mio100 mio

5 mio5 mio

4.7 %4.7 %

9.9 %9.9 %

- 2 %- 2 %

58.8 ---58.8 ---

98.8 ----98.8 ----

6.2 --6.2 --

5.9 ---5.9 ---

12.4 ----12.4 ----

+ 25 % !!+ 25 % !!

DuPont analysis:DuPont analysis:

Classification of purchasing goods (1)

The purchasing process may concern a large variety of goods and services. In general, purchased materials and services can be grouped into the following categories:

■ Raw materials; materials which have undergone no transformation or a minimal transformation and which serve as the basis materials for a production process

■ Supplementary materials; materials that are not absorbed physically in the end product

■ Semi-manufactured products; products that have already been processed once or more times and that will be processed further at a later stage

■ Components; manufactured goods that will not undergo additional physical changes, but which will be incorporated in a system with which there is a functional relationship by joining it with other components

Classification of purchasing goods (2)

Finished products; all products which are purchased to be sold, after negligible added value, either together with other finished products and/or manufactured goods

Investment goods or capital equipment; products that are not consumed immediately, but which purchasing value is depreciated over a period of time

Maintenance, repair and operating materials (MRO items); materials, which are necessary for keeping the organization running in general and for the support activities in particular

Services; labor intensive, non material activities that are executed by third parties on a contract basis

New developments in purchasing

Leveraged purchasing and supply strategies Global sourcing Supplier integration Early supplier involvement in new product development Reciprocity agreements and compensation agreements Corporate Social Responsibility and business integrity

1. Seller’s market Buyer’s market

2. Increasing pressure on sales prices and margins leads to:

Conclusions

In short, purchasing represents a business area which is being confronted with many changes and challenges.

Without doubt these challenges will put purchasing and supply chain management more in the spot light in business.