1 11 Purchasing Purchase Categories Component parts

1 11 Purchasing

Purchase Categories Component parts n Raw materials n Process equipment n Support equipment n Services (These may be routine, ongoing purchases or non routine purchases/ a new buy, an infrequent purchase, a major acquisition) n

NARROW SET OF ACTIVITIES OF PURCHASING n Purchasing was not seen as an activity of strategic importance. (Day-to-day, short term basis) n It involved following a series of prescribed steps, which included; – writing up a purchase order, – contracting suppliers for pricing, – following up on a supplier who failed to deliver. n It was not the responsibility of purchasing to question those needs, for the long-term relationships with suppliers, or to understand the needs of the end customer.

Procurement Activities of procurement • Selects and qualifies suppliers • Rates supplier performance • Negotiates contracts • Compares price, quality, and service • Sources goods • Times purchases CR (2004) Prentice Hall, Inc. • Sets terms of sale • Evaluates the value received • Measures inbound quality if not a responsibility of quality control • Predicts price, service, and sometimes demand changes • Specifies form in which goods are to be received 10 -32

The Strategic Role of Procurement 1. Access to External Markets 2. Supplier Development and Relationship Management 3. Relationship to Other Functions

1. Access to External Markets Through; n external contracts with the supply market, n information about new technologies, new materials/services, new sources of supply, and changes in market condition n purchasing can help reshape the organization’s strategy to take advantage of market opportunities.

2. Supplier Development and Relationship Management n identifying and developing new and existing suppliers. n Supplier development: a systematic organizational effort to create and maintain a network of competent suppliers and to improve various supplier capabilities that are necessary for the buying organization to meet its increasing competitive changes. Long term relations supplier development efforts n

Early Supplier Involvement n ESI (Early supplier involvement)-Getting suppliers involved early in the development of new products and services or modifications to existing offerings------reduction in development times—quick launch---competitive advantage n Concurrent engineering is a type of early supplier involvement where the engineers in the buying and selling firms work together on product development or product improvement. Buyer- Motorola/Supplier-Philips: The chipsets developed through the ESI program will enable Motorola to maintain its leadership position. n

3. Relationship to Other Functions n Every department within an organization relies on the purchasing function for some type of information or support. n Purchasing may play a support role and as well as a strategic function. n Being well informed allows the purchasing function to better anticipate and support the needs of other functional areas.

Importance of procurement n Purchasing is responsible primarily for; – Inbound or upstream channel activities Decisions impact on sales n Purchasing has a leverage effect n Cost of materials and equipment purchased n

Stages in Purchasing n Preliminary stage n Establish relationship o Establish need o n Identify potential suppliers o Document contacts Feedback n Evaluate relationship o o Determine selection criteria Identify potential suppliers n Screen and select o Continue at current level Expand relationship Reduce/dissolve interaction o Contact potential suppliers Evaluate suppliers Choose o o

SUPPLIER SELECTION AND EVALUATION Purchasing managers may consider a broad range of factors such as n lead time, n on time delivery performance, n ability to expedite, n flexibility n quality n supplier proximity n price competitiveness, n post purchase sales support when making the purchasing decision.

10 10 Performance Measurement and Management Performance measurement involves monitoring and evaluating activities to determine their conformance to requirements. Useful tools for this important effort are scorecards which are used to: n communicate expectations or requirements n indicate their relative importance n measure performance n highlight improvement opportunities

HP’s SRM (Supplier Relationship Management) n HP utilizes a number of ways to measure supplier performance. n Procurement Management Process (PMP) : It covers a number of areas related to suppliers, including identification of needs, evaluation, selection, contracting, and execution. n High Performance Supplier Scorecard- This is HP's way of measuring supplier performance in technology, quality, assurance of supply, cost, business terms, general business environment, etc. Supplier Reverse Scorecard- HP takes the information that suppliers provide, brings it back in-house, and actually changes the way it does business, when it makes sense to do so. – – The Operational Reverse Scorecard- transactional activities. The Strategic Reverse Scorecard--at the executive level of the company, and focuses on strategic things.

Quality Insurance n High quality material—longer life span, higher customer service, lower overall product costs, higher prices for finished goods n Selection of best quality-cost combination offering supplier!!!! Supplier Certification—NO INSPECTION of incoming material Reliability proven suppliers n n n SUPPLIER CERTIFICATION: In the certification process, the supplier’s quality levels and processes are closely evaluated by members of the buying firms. Warner Bross, Starbucks certification and auditing systems

Starbucks • Strategic Supplier: Achieved a minimum of 80% in each of the scored subject areas (social responsibility, environmental leadership-coffee production, environmental leadership-coffee processing). • Preferred Supplier: Achieved a minimum of 60% in each of the scored subject areas • Verified Supplier: When applicant achieved less than 60% or more in each of the scored subject areas

• All suppliers with a ‘meaningful ongoing relationship’ must also be Profiled and Audited. Profiled and audited suppliers get some benefits: • Suppliers only need to provide company information once • Suppliers are able to review their own detailed report online comparing them to ‘ideal supplier’ which shows their strengths and weaknesses and so allows suppliers to improve. • The opportunity to make their company’s details easily available to all operating companies within the STARBUCKS COFFEE Group. • Use of the ‘STARBUCKS COFFEE Supplier Accreditation Programme’ certificate and logo for promotional purposes.

Timing of Purchases Methods • According to market conditions -Speculative buying -Forward buying -Buying to current requirements 10 -49

Timing of Purchases (Cont’d) Speculative buying Buying more than the foreseeable requirements at current prices in the hope of reselling later at higher prices. Some of the purchased quantities may be used in production and some simply resold.

Forward buying n n Buyer commits to buy a contracted quantity at a future date at a contracted price Due to the potential supply constrictions buying in quantities exceeding current requirements, but not beyond foreseeable needs. Takes advantage of favorable prices in an unstable market Protects from anticipated shortages or delays the impact of rising prices

Volume Contracts To leverage over time purchase of various business units, locations… n Combining purchases n Cumulative quantity discounts (smaller more frequent buyes ) & non-cumulative quantity discounts (price for each order) n

Stockless Purchasing n The buyer firm does not carry inventory of purchased materials n A means of reducing materials-related costs such as unit purchase price, transportation, inventory, administration. n Contracts are arranged for a given volume of purchases over a specified period of time. Best suited for frequently purchased low-value items Adminis. Costs > Unit Prices n

Objectives of Stockless Purchasing n n n n Lower inventory levels, Reduce the supplier base, Reduce administrative cost and paperwork, Reduce the number of purchases that purchasers have to handle, freeing up time for more important activities, Achieve volume leverages with suppliers, lowering costs and improving service, Provide for timely delivery of material directly to the user, Standardize purchase items where possible, Have supplier manage inventory and, in some cases, place orders.

Integrated Supply A purchaser combines all buys of like items with one supplier n Office supplies, small tools… n Further reduction in adminis. costs n

Types of Relationships 10 14 Partnerships Arm’s length Type III Joint venture Vertical integration Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Supply Chain Partnerships, ” The International Journal of Logistics Management, Volume 7, No. 2. (1996), p. 2.

12 10 Partnerships - Definition A tailored business relationship based on mutual trust, openness, shared risk and rewards that yields a strategic competitive advantage, resulting in business performance greater than would be achieved individually. Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Supply Chain Partnerships, ” The International Journal of Logistics Management, Volume 7, No. 2. (1996), p. 2.

13 Why Partner? 10 n n n To gain advantages of vertical integration while still maintaining organizational independence To take advantage of “best in class” expertise To achieve service improvements To gain operational efficiencies To respond to competition Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Supply Chain Partnerships, ” The International Journal of Logistics Management, Volume 7, No. 2. (1996), p. 2.

Arm’s Length No sense of joint commitment n When exchange ends, relationship ends n Partnership No ideal partnership model n Majority Arm’s Length and Type I n Coca-Cola & Mc Donalds-> Type III n