Introduction to Purchasing

Dr M. Chibaro (PhD)
 Overview
• Business Context
• SCM Drivers
• Importance of Purchasing
• Definition of Purchasing
• Strategic Purchasing
• Enablers of SCM
• Evolution of Purchasing and SCM
 OBJECTIVES OF THIS CHAPTER

• To discuss the scope of purchasing

• To identify the purchasing cycle concept
• To discuss purchasing and supply as a service activity
• To discuss the changing role of purchasing and supply
• To explain how purchasing might develop from an
independent function to an integrated activity
• To identify the internal and external influences that
have affected the evolution of purchasing
• To consider the adoption of relationships based on
mutual benefits as an alternative to the traditional
transactional, adversarial approach
 INTRODUCTION

• All organisations need inputs of goods and

services from external suppliers or providers.
• In this section the module examine the
developing role of the procurement and
supply function in managing these inputs, and
comment upon the ways in which the activity
can contribute to the efficiency and
effectiveness of the organisation
What is supply chain?
 Purchasing

• A functional group (i.e., a formal entity on the

organization chart) as well as a functional
activity (i.e., buying goods and services)
• Aka as procurement
• The process of buying: learning the need,
locating and selecting a supplier, negotiating
price and other pertinent terms, and following
up to ensure delivery” – Institute of Supply
Management
6
 THE SCOPE OF PURCHASING

• A well-known statement of the objectives of

purchasing is: to acquire the right quality of
material, at the right time, in the right
quantity, from the right source, at the right
price.
• This statement is criticised by some as being
rather superficial and simplistic.
• For present purposes, the following broad
statement of objectives is suggested:
 THE SCOPE OF PURCHASING
A. To supply the organisation with a flow of materials and
services to meet its needs.
B. To ensure continuity of supply by maintaining effective
relationships with existing sources and by developing
other sources of supply either as alternatives or to meet
emerging or planned needs.
C. To buy efficiently and wisely, obtaining by ethical means
the best value for every dollar spent.
D. To maintain sound cooperative relationships with other
departments, providing information and advice as
necessary to ensure the effective operation of the
organisation as a whole.
E. To develop staff, policies, procedures and organisation to
ensure the achievement of these objectives.
 THE SCOPE OF PURCHASING
• In addition, we might add some more specific
objectives such as:
a. To select the best suppliers in the market.
b. To help generate the effective development of new
products.
c. To protect the company’s cost structure.
d. To maintain the correct quality/value balance.
e.To monitor supply market trends. f.
To negotiate effectively in order to work with
suppliers who will seek mutual benefit through
economically superior performance.
g. To adopt environmentally responsible supply
management.
• Another viewpoint is summarised by Scheuing
(1998) as follows:
 SCOPE OF PURCHASING

• Participation in product and process design

• Use of cross-functional teams
• Early supplier involvement
• The supply chain’s impact on competitive
advantage

Sourcing & Supply

Chain Management,
4e 11
 TWENTY-FIRST-CENTURY
PERSPECTIVES FOR PROCUREMENT
1. A vision of competitiveness
2. Driven by customer requirement
3. Emphasising value creation
4. Suppliers seen as external sources of ideas/technologies/
time compression
5. Bottom-line focus not price
6. Enhance competitiveness by using supplier capabilities
7. Global sourcing
8. Strategic alliances with key partners
9. Long-term contracts to establish relationships
10. Emphasise continuous improvements
11. Mutual cost management
13. Early involvement in new product developments
14. Skilled professionals in procurement
15. Outsourcing non-core activities
16. State-of-the-art IT systems
17. Dramatic cycle-time reduction
18. Benchmarking of best practice
19. Internal customer focus
20. Service level agreements established
21. Procurement professionals involved in innovation
22. Cross-functional teams involving internal stakeholders
to build and lead supplier relationships
• In summary, firms need access to competitive and
productive supply markets if they are to be in business at
all.
• The trend is from tactical to strategic procurement,
establishing collaborative relationships with external
resources and securing major business advantage from
procurement.
• Many executives are now looking to procurement to
engage in strategic conversations about how supply chains
can be improved to deliver the greatest returns.
• Procurement has been slow to evolve or has struggled to
make an impact because teams operate in a manner that
inhibits their ability to become trusted business partners.
 CATEGORIES OF PROCUREMENT

• Goods
– Tangible items
– Equipment
• Works
– Construction/Reconstruction
– Rehabilitation/Renovation
• Consulting Services
– Intellectual services
• Non-Consulting Services
– Combination of works and services
– Installation
A case where all the categories can be executed A
technical challenge realized by RAZEL-BEC on the Kariba
 THE PURCHASING CYCLE
• The main stages in the procurement process may be
summarised as follows:
1. Recognition of need

CONTRACT MANAGEMENT
2. Specification
3. Make-or-buy decision
4. Source identification
5. Source selection
6. Contracting
7. Receipt, possibly inspection
8. Payment
9. Fulfilment of need
10. Disposal
 THE PROCUREMENT CYCLE
• The idea of the procurement cycle is often employed to
indicate the main activities in which procurement might be
involved.
• The activities included in the cycle do not cover all of those
that a procurement staff might be involved with; there are
many activities, such as negotiation, vendor rating and
source development that are not specifically included.
• It will be noticed that, historically, the early and late stages
in the cycle have not necessarily involved specialist from
the procurement with the core procurement contribution
to the cycle being the items included in the central part of
the list.
• However, this has changed with early buyer involvement in
design/specification work and greater involvement in
ongoing contract management.
 IS PROCUREMENT A SERVICE
ACTIVITY?
• The thinking prevalent before was that procurement was a
service function, often subordinated to production or
engineering in the manufacturing sector, or to finance in the
service or public sectors.
• The idea was that specialist supplies staff could do the
bidding of the more strategic elements of the organisation,
and employ their skills at a secondary ‘support’ level.
• Thinking moved on, and there came a more general
realisation that procurement might contribute more
effectively at a strategic as well as at an operational level.
 IS PROCUREMENT A SERVICE ACTIVITY?

• The idea that procurement and supply was merely a

support activity is somewhat being discredited, with a
developing recognition that procurement involvement in
issues such as the ‘make or buy’ decision or strategic
commercial relationship which is giving the function a
central and strategic role in the competitive organisation.
 IS PROCUREMENT A SERVICE ACTIVITY?

• Procurement has been transformed from a

service function whose aims were expressed
in the price, quality and delivery equation to
one that makes a contribution to sustainable
competitive advantage by reducing the cost of
ownership, cycle-time reduction and
improving time to market.
• Simply to improve service levels or to cut costs
is no longer enough.
 Evolution of Purchasing and
SCM
• The early years: 1850 – 1900
• Growth of purchasing fundamentals: 1900 –
1939
• The war years: 1940 – 1946
• The quiet years: 1947 – mid-1960s

Sourcing & Supply 21

 Evolution of Purchasing and
SCM…
• Materials management comes of age: mid-
1960s – Late 1970s
• The global era: Late 1970s – 1999
• Integrated supply chain management: beyond
2000

Sourcing & Supply 22

 PROCUREMENT EVOLUTION
• It was the business that decided which suppliers
were core to the organisation and little more was
expected of procurement than to battle some
cost out of the contract and then hand the
relationship back to the business to manage.
• Today, many executives are increasingly looking
to procurement to engage the business in
strategic conversations about how the supply
chain can be optimised to deliver the greatest
returns.
 PROCUREMENT EVOLUTION
• The recent research shows that the majority of
procurement functions still do not have a strategic role
and are generally not considered as a true business
partner to the organisation.
• In many cases, this is a direct outcome of ineffective
governance, policies and procedures or a lack of
appropriate procurement engagement during the early
stages of the procurement process.
• As a result, those organisations are failing to make
effective procurement decisions, not fully leveraging
their spend and economies of scale, and exposing
themselves to business and commercial risk.
 THE CHANGING ROLE OF
PROCUREMENT
• The perception that procurement is no longer
a routine, administrative ‘ordering’ activity is
now widely, if not universally, held.
• Procurement is no longer just about ordering
or buying, but has a strategic role, and is
concerned with the flow of materials from
raw state to use and disposal.
• There are a number of reasons for this shift in
importance and recognition, and the main
ones can be summarised as follows:
 EXTERNAL ORGANISATIONAL FACTORS
Leading edge concepts
• Organisations employing leading-edge approaches to the management
of materials are putting into practice integrative ideas, which are, at
least in part, based on a strategic and integrated role for procurement.
• Approaches and concepts which might be considered under this
heading are:
1. Best practice benchmarking;
2. Total quality management;
3. Just-in-time philosophies and lean production;
4. Supply chain concepts;
5. Tiering and empowerment of suppliers;
6. Relationship management;
7. Customer focus.
• The expression ‘world-class concepts’ is sometimes employed to
describe these, and in order to achieve such concepts, procurement
needs to be well developed and proactive.
EXTERNAL ORGANISATIONAL FACTORS
Fewer but larger suppliers
• Concentration in the supply market has had a profound
effect in recent years.
• For example, the production of pharmaceutical
products is almost entirely in the hands of a small
number of large organisations.
• This process of concentration through amalgamations,
takeovers and the failure of the smaller and less viable
business units continues.
• This poses challenges for procurement and supply, and
ensures a higher profile and more strategic role for the
function.
EXTERNAL ORGANISATIONAL FACTORS
Increasing environmental awareness
• The recognition has dawned, perhaps belatedly,
that it is good business sense to be ‘green’, and to
be seen to be responsible in this respect.
• Recycling, the specification of renewable raw
materials, a greater concern with the effects of
waste and by-products, wider concern for the use
of returnable packaging and many other related
concerns all have implications for procurement
and are affecting perceptions of the function.
EXTERNAL ORGANISATIONAL FACTORS
Competitor activity
• When attempting to develop new ideas, pressure is
often placed on an organisation to look at what levels
of performance competitors and other organisations
are achieving.
• The term ‘benchmarking’ is often given to this process,
but benchmarking is not simply copying good ideas.
• Demonstration of the real benefits that a developed
supply function confers on the rest of an organisation
has been a stimulant for other companies to improve
that function, and this in turn has raised the profile of
procurement
EXTERNAL ORGANISATIONAL FACTORS
The Chartered Institute of procurement and Supply (CIPS) and the
contribution of procurement
• In the early 1990s, the Institute of procurement and Supply was
granted a Royal Charter.
• This was a landmark in the development of the procurement and
supply function, and it is now more widely regarded as a truly
professional activity.
• The Institute has spent considerable time and effort at a national
level demonstrating the importance and contribution of effective
procurement in both the public and private sectors.
• Its examination scheme and courses have done much to enhance
the status of the procurement function, and the CIPS is now
represented on many government committees where procurement
issues are discussed.
• The change of the status of purchasing and its evolution into
procurement is further reflected in the imminent change of name
from the Chartered Institute of purchasing and Supply to the
Chartered Institute of Procurement and Supply (2014)
EXTERNAL ORGANISATIONAL FACTORS
Increasing proportion of revenue spent externally
• Organisations are spending a greater proportion of their income
externally and less on internal costs such as wages and overheads.
• With the increased share of the expenditure comes an increasing
responsibility for procurement.
• Labour and overheads are decreasing because of:
1. automation
2. more efficient work
3. competitiveness depending on access to ‘best practice’
• Externally provided resources are increasing because of:
1. greater specialisation on part of buying organisations
2. ‘outsourcing’ policies
3. focus on core competencies
4. development of specialised contractors
5. easier access to world supply market
6. complex technology restricting breadth of ‘make’ capabilities
EXTERNAL ORGANISATIONAL FACTORS
Innovation
• The pace of change has quickened over the years.
• Organisations must be able to develop new practices and products
quickly and effectively.
• This in turn requires significant improvements in the internal
interface between procurement on the one hand and production,
marketing, finance etc. on the other, as well as with external
suppliers and customers.
• As product life cycles get shorter, reaction times are being
compressed.
• Procurement must be prepared to help initiate new ideas and
developments.
• A good deal of attention is being paid today to ‘time to market’
initiatives.
• New products cannot be developed and marketed rapidly without a
proactive procurement function.
INTERNAL ORGANISATIONAL FACTORS

• Although there is considerable pressure from

outside to develop the procurement function,
it is often internal influences that initiate the
changes.
• These internal influences include the following
factors:
INTERNAL ORGANISATIONAL FACTORS
The level and percentage of purchased goods
and services
• Normally, as the external expenditure increases
as a proportion of the total, greater attention is
paid to the input activities.
• For example, in large automotive, electronic and
retail organisations percentages of bought-out
material and services expenditure in relation to
sales income run at between 60 and 90 per cent.
• Clearly this expenditure is of crucial importance
and needs close attention at policy level.
INTERNAL ORGANISATIONAL FACTORS

Structural changes
• Moves towards materials management,
logistics and supply chain concepts have in
turn helped to develop the procurement and
supply function.
• In almost all cases, the amount of attention
paid to procurement and supply has risen.
INTERNAL ORGANISATIONAL FACTORS
Performance measurement
• There has been more emphasis in recent years on
measurement.
• Within organisations that measure the
contribution of the procurement and supply
function, its status is usually affected in a positive
way.
• Senior management have become aware of its
contribution to cost reduction and its strategic
capabilities, and in consequence are far more
likely to promote its development.
 PROACTIVE PROCUREMENT
• As the level of attention paid to procurement
and supply increases, the work tends to
become more strategic in emphasis.
 PROACTIVE PROCUREMENT
Reactive buying Proactive buying
• procurement is a cost centre • procurement can add value
• procurement receives specifications • procurement ( and suppliers) contribute to
specification
• procurement rejects defective material • procurement avoids defective suppliers
• procurement reports to finance or production • procurement is a main management function
• Buyers respond to market conditions • procurement contributes to making markets
• Problems are supplier’s responsibility • Problems are a shared responsibility
• Price is key variable • Total cost and value are key variables
• Emphasis on today • Emphasis strategic
• Systems independent of suppliers • Systems may be integrated with suppliers’ system
• Users or designers specify • Buyers and suppliers contribute to specification
• Negotiations win/lose • Negotiations win-win (or better)
• Plenty of stock = security • Plenty of stock = waste
• Plenty of suppliers = security • Plenty of suppliers = lost opportunities
• Information is power • Information is valuable
 Strategic Purchasing

Is the process of planning implementing,

evaluating and controlling strategic and
operating decisions for directing all activities of
the purchasing function towards opportunities
consistent with the firms capabilities to achieve
its long term goals. - Sanches-Rodriquez (2009)
 Class Discussion

Qn: Purchasing operations are too hazardous if

left completely unregulated. Discuss
 Defining Supply Management
Strategic
Orientation

Cross
Supply Base
Functional
Management
Groups

Process-Driven
Approach

41
 Enablers of Purchasing and
SCM
Human Organizational Information
Measurement
Resources Design Technology

View the supply chain Use data from visible sources

holistically Centrally-led supply teams Demand planning

Executive responsibility for Order commitment, Quantify what creates value

Manage critical relationships coordination purchasing and scheduling, and production
supply chain activities management
Use goals that change over
Collocation of supply time
Understand the business Distribution and
personnel with internal
model transportation planning
customers
Rely on benchmarking to
establish performance targets
Cross-functional teams to
Engage in fact-based decision
manage supply chain Material replenishment
making
processes Link to business goals and
objectives
Supply strategy coordination
Practice advanced cost
and review sessions between Reverse auctions Feature efficiency and
management
business units effectiveness measures

Executive buyer-supplier
Understand electronic Assign ownership and
council to coordinate with Electronic data interchange
business systems accountability
suppliers
The End