Module: Business Processes

Procurement-Management
3. Semester Bachelor ICM

Mag. Wolfgang Leitner

 Overview
Supply Chain
Management Management of intormation
and material flow starting
Supply- with the raw material
Management supplier to the end-customer.
Purchasing
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management for
companies in respect of
raw materials, products, In addition to procurement:
services and so on. Materials-
management category/commodity groups
management, purchasing
controlling.
Purchasing

In addition to purchasing: Raw material supply, supply

Demand planning, make- of products and services for
or-buy decisions, supplier- Procurement the company, plus
management management of the material
flow up to shipment
activitiep.

Source: BME (o.J.), p. 5.

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 Purchasing, Procurement and Supply
Management from a process perspective
Procurement

Strategic Procurement Purchasing (operative)

PROCUREMENT

Require
Execution
Internal ments- Supplier- Contract- Order Order-
and Supplier
customer specifica selection agreement placement monitoring
evaluation
tion

Sourcing Ordering process

Supply Management

Comprehensive procurement with total supply management

Source: Van Weele/Eßig (2017), p. 22.

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 Procurement
Definition
• Procurement/Purchasing

comprises all company- and/or market-related aktivities aimed at

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making all required but not self-manufactured objects for companies

available.

Source: Arnold et.al. (2008), p. 255.

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 Procurement
Position in companies
Sales planning
• Salesquantities
• Gross-/net-revenues • Sales objects
• Marketing/Sales expenditure • Product groups
• Distribution costs by • Sales segments
Success Planning • Warehousing • Order sizes
• Storage costs
PROCUREMENT

• Planned P&L
• Planned Balance Sheet Production planning
• Planned products P & L
of operational units/production stages
• production prgoram per product quality, -quantity and
timely distribution within the planning period
• Utilization of production equipment
• Production flow scheduling
Financial Planning • Staff deployment
• Material input and external service offering
• Cash inflows • Warehousing for raw materials and semi-finished goods
• Outgoing payment flows • Produktion costs
• Loan volume
• Interest costs/revenues
Procurenment planning
• Staff recruitment
• Asset sourcing
• Material- and service-supply
• Purchasing costs
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 Procurement Management
Definition

• Procurement management targets at the integrated pratise of purchasing of goods and

services, as an elementary activity of any company.
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• A successful procurement management could establish an excellent contribution for the

company‘s succesp.
Besides of maintaining supply reliability and a decrease of the purchasing costs
companies will be able to control procurement complexities too using a successful
procurement management.
• Main activities of procurement management are the management of
product/commodity groups, purchasing controlling and supplier management.

Source: Kerkhoff Consulting, online.

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 Procurement Management
Procurement tasks
Increase of value added
•
•
•
Revenue growth due to new products
Improvement of customer value
Early involvement of suppliers for the
Value
development of new products
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• Faster market-introduction of new

developed products (time-to-market)
• Co-Branding und Marketing

Decrease of purchasing costs

• Reduction of the supply case
• Product standardization
• Globally focused procurement
• Outsourcing and offshoring
• E-Auctions
• Contract management
Costs Risk
Source: Kerkhoff Consulting, online.

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 Procurement Management
• Procurement management requests aktive supplier management within of supply
networks:
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• Aims • Aims
• Resources • Resources
• Restrictions Marketing-/ Distribution • Restrictions
Purchasing-
distribution manage- Transaction Buyer
• Activities for functions ment
department
• Activities for
problem solving problem solving
• People • People

Source: Van Weele/Eßig (2017), p. 43.

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 Key areas of Purchasing
Purchasing
organization
Design of service • Purchasing networks Global Sourcing
• Strategic procurement
depth
• Pooling • Global Sourcing Strategy
PROCUREMENT

• In-/Outsourcing • International presence

• Operator models • Market- /supplier development
Electronic Sourcing • Facility Management
• Online-auctions Advanced Purchasing
• E-markets
Gestaltungsfelder
• E-procurement systems im Einkauf • Product clinic
• Change Management
Purchasing controlling • Performance catalogue
• Balanced Scorecard Supplier management
• Purchase performance reporting
• Design of the supply base
• KPI-systems
• Supplier assessment, -risks
Qualifikation for Purchasing logistics • Supplier development/-integration
purchasing
• Delivery concepts
• Qualification campaign • Supply Chain Management
• Q-Matrix • Asset Management Source: TCW (2020), online.
• Project management

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 Importance of Procurement
Costs of external procured inputs in relation to revenues
120%

100% 5 Service
15
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80%
15

60% 5
Dienstleistungen
Services
10
Investitionen
Investments
40% Ersatzteile
Spare parts
60 - 90

55 - 85

55 - 75

55 - 80

10 - 40
25 - 50
Finished goods
Fertigerzeugnisse
50
20% Components
Bauteile

0%

Source: Van Weele/Eßig (2017), p. 28.

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 Importance of Procurement
Effects on ROI
Sales revenues In case of Heineken a reduction of 2 % of the
-------------------------- procurement costs leads to an increase in the
€ 19.350 Gross assets overall return of 9,6 %
Asset turnover -------------------------- (figures in Mio. €)
---------------------- / € 34.830
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0,73 Capital invested

-------------------------- -/- Shortterm
€ 26.296 liabilities
--------------------------
Overall return
€ 8.352
--------------------
# 0,4 % *
Sales revenues
Operating costs incl.
--------------------------
(11,4 %) personnel
€ 19.350
Operating profits --------------------------
-------------------------- -/- Total costs
€ 4.517
Return on sales € 2.780
-------------------------- + Procurement costs
--------------------
# 4,3 %
/ (€ 3.021) € 16.570 /-volume -2%
+ 9,6 % Sales revenues --------------------------
-------------------------- € 12.053
15,6 %
€ 19.350 (€ 11.821)
Source: Van Weele/Eßig (2017), p. 28.

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 Impact factors of Procurement Activities
on the Overall Return
• Material cost reduction
The margin betwenn revenue and costs, the ROVE, will be positively affected by:
• Reduction of the number of suppliers
• Product standardization
•
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Tenders
• Introduction of substitute goods.

• Net working capital reduction

Measures will positively influence the capital turnover by:
• Increase of payment periods
• Decrease of inventories
• Quality improvements, therefore lower stocks
• Leasing instead of acquistion of assets.

• Improvements the revenue potential

Supplier involvement leads to new developments for process enhancements and new product ideas, in addition to a new value proposition
for customers with higher profit margin.
In a lot of industry segements innovations are driven by suppliers. Therefore procurement is the key for activating the supplier basis.

Source: Van Weele/Eßig (2017), p. 29.

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 Differences between companies and
consumers from a demand perspective
Aspects Company-demand Consumer-demand
Buying purpose Allow production Meet the own needs

Buying motivation Mainly rational Also emotional

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Function holders Professional buyers Consumers

Decision marking Taking into account a large number of decision-makers with Often impuslive without discussion with other
intense discussions decision-makers
Charakteristics Negotiations with intensive exchange Often without negotiation, less exchange

Product-/market-Knowhow Comprehensive Limited

Contract volumes Frequently big volumes Mostly low

Demand Dependend demand, frequently fluctuating Independent demand, relatively stable

Price elasticity Fairly low Fairly high

Number of demanders Often limited Very high number

Geographical market-distribution Often geographically concentrated Wide-spread

Source: Van Weele/Eßig (2017), p. 42.

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 Procrement- and Informationflow
from a Company‘s perspective
Marketing/Distribution
Market-/Customer-
requirements

Development
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Innovation/
Spezification
Delivery time/
-quantity
Logistics Procurement Delivery quality
Quality
Inspection
Purchase/
Make or Buy
Audits

Production/Assembly

Supply

Distribution

Customers
Source: in Anlehnung an: Präuer, A. (2017), p. 7.

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PROCUREMENT

Challenges for Procurement

Management

Mag. Wolfgang Leitner

 Challenges for Procurement Management
(1) Global competition and Reliability of (7) Global competence
cost savings supply
(2) Highest demands on supplier
(8) Volatile markets
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quality

(3) New commodity groups/ (9) Big Data, Digitalization,

categories/commodities Connectivity
Procurement@
(4) Restructuring of industrial future
(10)Sustainability
value-added structures

(5) Innovation impulses out of

(11)Risk management
the supplier market
Efficient, cost-
(12)Human resource
(6) Flexible standardization conscious transaction
management
Source: in Anlehnung an: Präuer, A. (2017), p. 9.

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 (1) Globale Competition and
cost savings
• Global competition stands for the use of global cost differences and
the use of comparative cost advantages too.
• Improvements of cost structures in order to improve the company
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results remain key challenges for procurement.

• Cost saving targets are practivally defined as percentage of the
purchasing volume or as absolute value for a specific period.
• Therefore material cost changes are the basis for the operating results
and the P&L.
• The Total Cost of Ownership (TCO-) method is today often the basis
for a more differentiated consideration of cost saving effects.
Source: vgl. Präuer, A. (2017), p. 10f.

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 (2) Highest Demands on
Supplier Quality
• Supplier quality means to keep certain quality features of the product shipments
in accordance with the quality requirements of the specification.
• Increasing customer requirements, competitive pressure, practices in the industry
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segments, legal framework conditions as well as quality standards need today

increasingly „zero-defects-quality“.
• Quality will be set significantly by suppliers as failures, weak points and issues is
increased from one value added level to the next one.
• However, quality issues are increased too by global procurement models,
identical part strategies, extended waranty periods and the time competition for
innovations as well as the reduction of development times.

Source: vgl. Präuer, A. (2017), p. 11f.

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 (2) Defect cost curve in the
Product Lifecycle model
costs
Factor 10 Recall-
actions
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Repair shop-
Factor 10 actions

Warranty-
Necessary costs
Factor 10 Elimination-
Necessary costs Product-
Identification- liability
Prevention- costs
costs
time
Development Construction Procurement Manufacturing Use
Source: vgl. Präuer, A. (2017), p. 12.

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 (3) Change in Product portfolios
due to „new“ Commodity groups
• Due to changes and shifts in the quantative product-sales-mix because of
customer behavior there are structural quantative adjustments for
purchased parts necessary.
PROCUREMENT

• Product versions need a strikt inventory management with flexibility

agreements with the suppliers involved.
• Impacts for the portfolio structure:
• Strong increase of service-purchases in respect of the total purchasing volume, as
services are offered increasingly in addition to the pure hardware,
• Modifications and innovations for new technologies involve new suppliers and new
industry segments,
• Procurement functions are taking over the responsibility for additional product
groups
(e.g. travel management, freights/logistics services/facility management/IT-Equipment and Services etc.)
Source: vgl. Präuer, A. (2017), p. 14f.

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 (4) Strategic Restructuring
of industrial Value-add Structures
• The idea for differentiation of products from the competition („Lead
by Technology“) leads to the development of service-offerings on all
value-adding levels, by
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• Product-supporting services
• Complete packages
• Solutions.
• In case of solutions the core-offering is a service-offering
(e.g. mobility, operation, applications in the cloud), which only can
be offered via product- and service-combination.
• In this case the value-added share between manufacturer and
suppliers is getting changed …
Source: vgl. Präuer, A. (2017), p. 15f.

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 (4) Strategic Restructuring
of industrial Value-add Structures
• Quantitative value-adding share distribution between manufacturers and suppliers:
Range of competencies
Value-added share for manufacturers
• Business-
Solutions
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process-
competence

• Provision-
process- Complete Service
competence

• Technical
Performance-
Individual Service Scope of
competence Performance/
Supplier‘s value-added share -complexity
• Components, • Modules, systems, • Business processes,
parts assemblies integrated solutions Source: vgl. Präuer, A. (2017), p. 17.

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 (4) Strategic Restructuring
of industrial Value-add Structures
• Quantitative value-adding share distribution between manufacturers and suppliers:
Range of competencies
Value-added share for manufacturers
• Business-
Solutions
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process-
competence
➢ Solutions-Provider as a
0,5 Tier-supplier
• Provision- ➢ Complete service
process- Complete Service offering are hardly to
competence
be specified!

• Technical
➢ Reduction in the performance range
Performance- Individual Service Scope of
competence Performance/
Supplier‘s value-added share -complexity
• Components, • Modules, systems, • Business processes,
parts assemblies integrated solutions Source: vgl. Präuer, A. (2017), p. 17.

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 (4) Strategic Restructuring
of industrial Value-add Structures
Examples for solutions offerings:
• Constructors of power plants run the power plants and sell the energyon behalf of the
energy service provider.
PROCUREMENT

• Third-/Fourth-Party-Logistics-provider take control of the

supply chain.
• Module- and systems suppliers are responsible for the
automotive-assembly (e.g. Magna for BMW, Valmet A-Klasse).
• Machine- and asset-builders are offering selling the manufacturing
solutions of the assets instead of the assets itself (e.g. painted/coated
products incl. toolmanagement, materials management incl. pre-funding).

Source: vgl. Präuer, A. (2017), p. 18f.

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 (5) Implementation of Innovations via the
Supplier Market
Innovations as an important aspect for competitivity in the automotive industry:
Share of new products compared to the total production
199 . 2018 in %
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3 models

4models

3 models 3 models
6 models

1 model 8 models

*Productionvolumes of models 1st and 2nd year of the production

Source: vgl. Präuer, A. (2017), p. 20.

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 (5) Implementation of Innovations in the
Supplier Market
• Utilization of innovation potentials on the procurement market needs procurement
market research for the development of „market intelligence“.
• Only outsourcing of development services or an early
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supplier integration in the development process of

products falls short.
• It needs the identification of new technologies which
maybe were not yet commercially used before.
• Therefore a full understanding of the value-adding
network is necessary for procurement.
• Via supplier management we will be able to determine
the special innovation potential of suppliers.
Source: vgl. Präuer, A. (2017), p. 20.

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 (5) Implementation of Innovations
„Market Intelligence“
Acquisitions Price determination

Competitor-
Technology- intelligence
trends
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Investments Key-Product
interests
Customer- Procurement- Brand-
preferences market Market- Product- awareness
research intelligence intelligence

Market- Market-
Market-
share peculiarities
size
Market-
analysis
Source: vgl. scetachbubble, online.
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 (6) Flexible Standardization
• Due to the massive increase in product-, version-variety as well as derivative
diversifaction strict standardization was seen as to inflexible, partly more inhibiting than
beneficial.
• However, especially this growing heterogenity is looking for solution in order to reduce
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the complexity involved.

• It‘s about an intelligent combination of flexibility and standardization, that allows for
product innovations for product generations.
• This leads us directly to hybrid competitive strategies, like Mass Customization and the
implementation of:
• Modularizations
• Modular systems
• Standardization concepts
• Plattforms
• Postponement strategies. Source: vgl. Präuer, A. (2017), p. 22.

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 (6) Flexible Standardization
as a guiding topic for product design and -structures
1. Decisions about make-cooperate-and-buy need consideration of all potentials of the procurement market.
Specifications in early phased of the product development
Entscheidung über Make-Cooperate-and-Buy-Entscheidungen unter Berücksichtigung der Potenziale des
Beschaffungsmarktes. Lastenheft in frühen Phasen der Produktentwicklung sind vielfach die Basis für einen
Konzeptwettbewerb der Lieferanten.
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2. Global production activities need global operating suppliers. This allows generating of cost savings due to
local sourcing as well as to implement „local-content-models“.
3. Controlling all sub-suppliers takes place via main-supplier directly (tier-structure).
4. In order to avoid inventories production-synchron supply-concepts get put into practise.
5. Also supplier need to provide a modular production-concept with little efforts in case of changes due to
product variations (tool-changeovers).
6. This intensifies the integration of suppliers also in respect of quality concepts.
7. Change management is a challenge for the flexible standardization. Each modification needs to be checked
for cross referenced in the platform system. Protection via texture- and release-procedures.

Source: vgl. Präuer, A. (2017), p. 25ff.

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 (7) Global competency
• World-wide value-adding and company networks require global competence brought in also from
procurement management.
• Besides of the opportunities of global procurement activities, also risks have to be considered.
• For specific markets own procurement-offices are bringing advantages (e.g. Hongkong or Singapore for the
PROCUREMENT

Chinese or Asian markets).

• Due to past experiences companies tend increasingly to a more differentiated handling with low-cost-
countires. Today there is typically a total cost view for procurement in place, e.g. with the Total Cost of
Ownership (TCoO) view. Included in the view are also logistics-costs, packaging, currency-risks, export-/
import-duties, support-activities, quality management and all kind of general risk.
• Special sensitivity relates to transferring information and know how in case of global procurement as there
are huge differences in how to handle copyright regulations between European law and Asian view.
• In addition logistics challenges have to be considered in case of global procurement. Shipment from China to
Europe still takes 6 to 8 weeks!
Source: vgl. Präuer, A. (2017), p. 27ff.

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 (7) Global Competency
Opportunities and Risks of global Procurement
Opportunities Risks
• Cost-reduction due to less wage-/incidental wage costs • Quality issues

• Increasing competition due to new supplier • High efforts for monitoring and support
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• Higher rank in risk spreading • Supply risks increases with the distance

• Better supply reliability for global locations • Loss of flexibility due to longer replenishment times

• Early recognition of trends and innovations in various markets • Development of currencies cannot be calculated

• Distribution support due to close supplier contacts, also to other • Different legal positions and legal guidelines
parties and authorities. Local-content-requirement could be kept. • Know how protection difficult
• Anticyclical procurement in consideration of economic • Difficulties in communication due to distance, language skills and
downturns possible cultural differences
• Avoidance of capacity bottlenecks • Increasing effort for screening of the supply markets

Source: vgl. Präuer, A. (2017), p. 28.

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 (8) Volatile Markets
Volatile Raw Material Markets
• Raw material prices are one of central inputfactores and
costdrivers for manufacturing companies.
• The challenge for procurement remains to offer a stable
supply with competitive and stable prices and conditions.
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• Without reliable prices for cost calculations and margin-

calculations für product prices and projects a serious
planning of company results will be impossible.
• Hedging and derivates trading could be used in order to
limit the risk.
• Constructive optimization.
• Multiple-sourcing strategy.
• Price-adjustment clauses for risk-limitation.
• Forward ordering and inventory increase
could be used too.

Source: vgl. McKinsey (2013), p. 6/Präuer, A. (2017), p. 31f.

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 (8) Volatile Markets
Volatile foreign Exchange Markets
• Development of foreign exchange rates are in addition an important impact factor for cost effects in global
procurement just because of the volatility of foreign exchange markets.
• This is valid for all business cases with a closing different from the home-currency.
• Countermeasures:
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➢ Hedging offered by financial institutions but additional cost aspects need to be considered here!
➢ Natural Hedging in case of affiliated companies and/or customers are located in the referring currency
zone.
➢ Volatilities could be limited with such activities, however, primarily on short-term currency-alterations.
Not for long-term alterations!

Source: vgl. Präuer, A. (2017), p. 23ff.

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 (8) Volatile Markets
Volatile Exchange Markets
PROCUREMENT

€/UK Pfund Sterling longterm

€/UK Pfund Sterling short-term Brexit-scenario

Source: FXTOP, online. [2019-10-29]

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 (8) Volatile Markets
Volatile Exchange Markets
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€/US-$ longterm

€/US-$ shortterm with Trump-impacts

Source: FXTOP, online. [2019-10-29]

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 (8) Volatile Markets
Volatile foreign Exchange Markets
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€/JPY longterm

€/JPY shortterm with Abenomics

Source: FXTOP, online. [2019-10-29]

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 (8) Volatile Markets
Volatile foreign Exchange Markets
PROCUREMENT

€/CNY longterm

€/CNY short-term
Source: FXTOP, online. [2019-10-29]

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 (8) Volatile Markets
Volatile customer Markets
• Volatilities are referring to the product-sales-mix as well as to the absolute sales quantities for different
markets.
• Managing these market realities and their effects for the supplier network is one of the challenge for
procurement mangement.
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• Effects are located in changing purchasing prices and in the stability of the supplier network.
• Price effects:
- Pressure for price adjustment are typically evolving from quantity fluctuations as they eventually exceed
contractually agreed fluctuating corridors. Generally speaking prices will decrease in a case of quantity-
increases, in case of quantity decreases prices will generally be increased.
- Background for this changes are the supplier‘s calculation bases and the relation of all single cost
components.
• Quantity fluctuations:
Without agreements with suppliers quantity fluctuations typically lead to higher inventories, increased
production and the need for sales and marketing campaigns (e.g. discounts) in case of over stocks → check
against Bullwhip effect in supply chains.
Source: vgl. Präuer, A. (2017), p. 36f.

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 (9) Big Data, Digitalization and
Connectivity
• The potential of increased information generation out of worlwide available data will be used more and
more for intelligent reports and the generation of knowledge.
• Central challenge here is the possibility fo effective and fast analysing, distilling and the clear and user-
oriented deployment or communication of results incl. interpretation and action recommendation.
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• This broader functions break all links in the „Internet of Things“ as well as all traditional product limits.
Therefore companies get new opportunities for new business models. Solutions with significantly less
investment and barriers to entry.
Procurement
4.0

Networking along the

Digitalization of Digitalization of
supply chain (internal
procurement goods procurement processes
and external)

Source: vgl. Präuer, A. (2017), p. 39f.

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PROCUREMENT

Importance for purchasing in

companies

© Mag. Wolfgang Leitner

 Definition of Purchasing
• Purchasing or procurement includes
• all operational activities for
• guaranteeing material supply for any company,
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so that
• All required but not self-manufactured goods will
be available
• in the right quantity,
• at the right time and
• with the quality required.

Source: Schuh, G./Hoppe, M. (2014), p. 5.

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 Importance for Purchasing in Companies
• Strategically relevant key role
for generation and protecting of competitive advantages.
• Main drivers:
• Tendency for outsourcing
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• Decrease of the vertical range of manufacturing

• Increase in material costs to more of 50 % of the manufacturing costs.
• This leads to an increase of the monetary levers for the company result and it leads to a
• Shift of value-adding activities and know how to suppliers
• Even development competency and innovative capacity are being attached to suppliers.

Source: Schuh, G./Hoppe, M.(2014), p. 5.

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 Problem-field Purchasing
20 % of the purchasing volume
is causing 80 % of the process costs

20 % Lack of transparancy
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for C-parts and MRO

(indirects) Maverick Buying

Complex Master
80 % data management
No clear picture about
internal processing costs. Contracting and negotiations with
lots of suppliers

80 % No automated invoce- We‘ve always done it

releasr process. that way!
Fear for job-losses.
Multiple suppliers for
the same C-parts.
20 % Lower purchasing volumes are
causing high processing costs.
Purchasing Process-
volume costs

Source: Mercato, online: http://getridoftheshit.com/mercateo-webinar-teil-1-intransparenz-und-maverick-buying-sind-nur-die-spitze-des-eisbergs/.

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PROCUREMENT

Typologies of
procurement processes

Mag. Wolfgang Leitner

 Typologies of Procurement processes
• The main focus at the beginning lies in the separation of
• Strategic and
• Operative purchasing tasks.
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• The consequential separation of strategic and operative tasks on one

hand and the object-oriented distinction of
• Produktion-
• Non-production material
• On the other hand leads to a systematization of purchasing activities
in preparation to the defintion of purchasing processes.
Source: Schifferer, p. 2004), p. 4.

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 Operative Purchasing tasks

Demand recognition Point-of-use

PROCUREMENT

Implementation of the request in supplies

Dispo- Date,
sition Demand quality
Order- Deadline Invoice
and recog- and
handling tracking tracking
request- nition volume-
handling controlling

Master data maintenance/supplier controlling

Source: Schifferer, p. (2004), p. 4.

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 Strategic Purchasing tasks

Problems of supply Supplier relationships

PROCUREMENT

Establishment, maintenance and development of supplier structure

Purcha-
Demand Supplier- Price- Contract Contract
sing Offer-
recog- selec- Negotia- ual controlli
market- selection
nition tion tions design ng
research

Supplier management

Source: Schifferer, p. (2004), p. 5.

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 Procurement Organization
Strategic vs. operational Purchasing
Strategic Purchasing Operative Purchasing

• Long-term tasks in purchasing • Administrative, ausführende Einkaufstätigkeiten

PROCUREMENT

• Aim: Value-creation orientation • Aim: Purchase cost-reduction

• Activities: • Activities:
• Procurement market-research • Order handling
• Supplier management • Complaint handling
• Purchase framework-contracts • Deadline coordination
• Purchasing-strategy execusion. • Invoice-control
• Order confimations.
• Supplier relationships are also seen as strategic: • Very often IT-tools are used to execute operative,
• Evaluation of the total performance as well administrative Activities.
as the
• Total costs involved. Source: BME (2020), p. 7.

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 Transition of Purchasing
in direction of Value-adding orientation
Purchasing seen as a supporting … moving to more strategic,
company function … value-adding company function.
PROCUREMENT

• Reducing purchase prices • Optimization of the total costs of the material-supply

• Purchase cost-reduction • Improve the competitive position

➔ Cost-oriented management of Purchasing ➔ Value-oriented management of Purchasing

Source: Schuh, G./Hoppe, M.(2014), p. 6.

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 Transition of Purchasing
in direction of Value-adding orientation
Cost-orientation in Purchasing Value-orientation in Purchasing

• Short-term focusing on generation of price- • Long-term, active integration of supplies in order

potentials to strengthen the company‘s competitive
PROCUREMENT

position
• Primarily operative, operational supporting • Strategic, value-adding understandig of
function purchasing functions
• Traditional purchasing goals for cost-reduction • Multi-dimensional goal-system:
• Mutual cost-optimization
• Risk-avoidance
• Promoting innovations.
• Functions for supporting other company- • Management-function as an interface to internal
functions. processes as well as to upstream supply chain
parties. Source:
Source: Schuh,
Schuh, G./Hoppe,
G./Hoppe, M.(2014),
M.(2014), p.
p. 6.
6.

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ORGANIZATIONAL STRUCTURES
IN PURCHASING AND
PROCUREMENT

Mag. Wolfgang Leitner

 Purchasing Organization
Project purchasing vs. Serial purchasing
Project purchasing Serial purchasing
• Purchasing of material that is required before • Procurement of all volumes that are required
serial production. with series production.
PROCUREMENT

• Organizationally assigned to a customer- or

development project.
• Assignments:
• Active contribution of products in project
teams
• Assurance and coupling of purchasing- and
development-tasks.
• Supplier-integration in the product
development process.
• Coordination of purchasing activities.
.

Source: BME (2020), p. 7.

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 Purchasing Organization
Central vs. decentral purchasing
Central Purchasing Decentral Purchasing
• Purchasing takes place at one central place in • Each business unit or each location organizes
the company. their own purchasing unit without coordination
with all other units.
PROCUREMENT

• Advantages: • Advantages:
• Pooling brings savings • Shorter decision paths
• Transparancy over procurement-activities • Shorter delivery time in case of local
• Standardized controlling and reporting. procurement.
• Disadvantages: • Disadvantages:
• Long decision paths • No potential for bundeling
• High coordination effort • Lacking transparancy over procurement
• Less contact to internal customers activities of single units
• No motivation for cost-optimization • Standardization will be difficult.
from the business units.
Source: BME (2020), p. 8.

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 Purchasing Organization
Purchasing of production and non-production material
Production Materials Non-production Materials
• Direct material will be directly used for the • Is also necessary for the entrepreneural
production of a product or for order-processing performance as well as for operational
within the value-adding processes. maintenance. Is definitely not directly part of the
PROCUREMENT

end-product.
• Examples: raw-materials, additives, semi- • Typically non-production material does not have
finished materials or components and modules direct impact on the produce quality apart from
that will be used for assembly processes. production equipment and tools.
• Direct material comprises all goods that ould not • Superior aim for procurement should be seen in
be procured if we would not need it for achieving process-efficiency, in a broader sence
manufacturing of a specific production order. looking for speed and simplicity of the ordering
process.
→ Maverick Buying!
Source: Schuh, G. ( 2014), p. 38f.

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 Non-production material Purchasing
Heterogenity of the objects procured
Operating materials
Office-supplies Tools I
PROCUREMENT

Lever: process costs IIa

Order frequency

Energy

Services

IIb
Production materials

Non-production materials Fleet

III CAPEX

Special
equipment

Order value
Level: cost/acquistion price Source: Schuh, G. ( 2014), p. 40.

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 Purchasing Organization
Background for the organizational design of procurement functions

I. High order value/high order frequency

(e.g. critical wearing tools for large machines, machines or machine part that need to be regularly
renewed)
PROCUREMENT

• Great impact for the value added

• Central procurement organization for
• greater procurement power and quantity pooling
• therefore prices can be enforced.

• Significance for procurement is very high

therefore decision making takes place on the Top Management-Level.

Source: Schuh, G. ( 2014), p. 41.

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 Purchasing Organization
Background for the organizational design of procurement functions

II. Small order value/high order freqency

(e.g. continuously required operating materials, like libricants or energy)

• Great impact on the value-added

PROCUREMENT

• Central purchasing organization lead to …

• more purchasing power and quantity pooling
• and therefore prices could be enforced vehemently.

• Importance for procurement very high,

therefore procurement-decisions will be handled on top-management level.

Source: Schuh, G. ( 2014), p. 41.

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 Purchasing Organization
Background for the organizational design of procurement functions
III. High order value/low order frequency
(e.g. investment goods, machines, assets or fleet)

• Control lever are the cost/acquisition price

PROCUREMENT

• Instead of framework agreements direct price negotiations for each purchasing operation
• Tendering and global procurement are offering further potentials
• Valuation method via Total cost of Ownership-analysis
• Purchasing-team will be enhanced with further company funtions.
So a broader perspective is made available delivering more than just purchasing topics.

Source: Schuh, G. ( 2014), p. 41.

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 Purchasing Organization
Background for the organizational design of procurement functions

IV. Low order value/low order frequency

(e.g. special and individual orders)

• Individual orders preferably should be summed up

PROCUREMENT

• Lot of Maverick-Buying operations in this segment

• Aims for the accomplishment in these order categories:
• Process standardization
• Central verification and/or release of order processes
• Order pooling of the volumes
• Decrease the large variety of similar purchasing objects
• Sustainable demand optimization
• Adjustment of the supplier base.

Source: Schuh, G. ( 2014), p. 41.

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 Classification of the
Procurement Organization
Objective: streamline the supplier structure Objective: process and supplier selection and development
strategically

Challenge: Creation or reliable procurement structures as well as for Challenge: Structure and development of a high-quality supplier base,
investment goods and for indirect consumable supplies (heavily interface purchasing and development, long-term quantity-pooling.
Methode of procurement task

inhomogeneous).
PROCUREMENT

Design scope: commodity group management resp. Lead Buying,

Design scope: Technical purchasing (high professional skills for global procurement, standardization, preferably high degree of
investment proceurement necessary), project organization, high level centralization, Beschaffung, Standardisierung, möglichst hoher Zen-
of centralization for quantity-pooling, active and sustainable supplier tralisierungsgrad, harmonized purchasing- and development
management. processes.

Objective: design for efficient supply Objective: ensure reliable supply & minimize costs

Challenge: Ensure simple and cost-efficient supply with indirect Challenge: Production supply on schedule, with the right quality and
consumables. in the right quantity, Interface btw. Production and Procurement.
operational

Design scope: System support for efficient and standardized Design scope: Efficient logistics structrues (JiT, JiS, Kanban), highly
disposition, reduction of single-orders and Maverick Buying, central efficient system-support via ERP-systems, deployment of a supply
definition of approved suppliers incl. decentral operational ordering- chain network, decentral disposition nearby the consumption
responsibility. location, harmonized Procurement and Production functions.

indirect direct
Type of procurement objects
Source: Schifferer, ( 2004), p. 6.

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 Procurement Organization
Cooperative, cross-organizational Procurement
• Aims on synergy between operative and strategic procurement.
• While strategic jobs will be solved centrally at the beginning of the
procurement process all following operational tasks will be set
PROCUREMENT

decentrally.
• Based on a reasonable materials group management.
• The investment will be paid off within one year via::
• Minimization of the purchasing costs
• More favourable purchasing prices
• Stronger market position
• Better supplier performance. Source: Rüdrich et al. ( 2016), p. 7f.

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 Procurement Organization
Cooperative, cross-organizational Procurement
Rating Feature Rating
+ Negotiation power -

De-central Purchasing
Central Purchasing
+ Inventory optimization -
PROCUREMENT

- Flexibility +
- Problem orientation +
- Speed +
+ Purchasing Know-how -
- Technical Know-how +
+ Utilization -

Termination of
all contradictions

Source: Rüdrich et al. ( 2016), p. 8.

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 Procurement Organization
Cooperative, cross-organizational Procurement
strategically operationally
Effort
PROCUREMENT

gain

• Bundling, • Call-off orders based on framework contracts Procurement-

framework contracts • Less supplier and orders
• Information supply
processes
• Automated processes
Source: Rüdrich et al. ( 2016), p. 8.

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 Procurement Organization
Cooperative, cross-organizational Procurement
• Cross-organizationally procurement for selected commodity groups, explicitly not for all
commodity groups.
• Selection criteria: benefit for effort wheregy benefit can be considered in values as flexibility and
speed.
PROCUREMENT

• Inter-disciplinary teams are involed in the definition and selection of the commodity groups,
aiming:
• Flexible, cross-organizational procurement coordination, no head office,
• Synergy utilization within the network via common Know-how utilization, bundling, logistics,
warehousing,
• Realization of common framework contracts; operational procurement remains in the functions
company unit,
• Commodity group management is a self-adjusting, self-learning system,
• Organizational entities will be resulting directly from the benefits,
• Management and advancement via first management level in the organization.Source: Rüdrich et al. ( 2016), p. 8f.
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 Procurement Organization
Cooperative, cross-organizational Procurement
OE A OE B OE C
PROCUREMENT

e.g.
x s x x q s IT-service

q x s e.g.
alloys

q Commercial lead s Involvement x Participation

Source: Rüdrich et al. ( 2016), p. 9.

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 Typologies of
Procurementsituations

Mag. Wolfgang Leitner

 Procurement-objects
Production material
Operating materials Investment goods Service
(Commodities)

Manufacturing
PROCUREMENT

Customer-specific Production-specific Produktion-specific

specific operating
production material investment goods services
materials

Repair- and Non production-

Relationship-specific Non production-
maintenance specific investment
production material specific services
materials goods

Provider-specific Physical energy

production material ressources
Commodities

Unspecified Other operating

production material materials

Source: in Anlehnung an Large, R.O. (2013), p. 8.

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 Typologies of buying situations:
Product complexity

low Product complexity high

PROCUREMENT

• Standard product • Customized product

• Technically trivial • Technically complex
• Established product • New product
• Repeated purchasing process • Initial purchase
• Simple to install and to use • Difficult to install
• After-sales service not necessary • After-sales service necessary

Source: Fisher, L. (1970), quoted from van Weele/Eßig (2017), p. 46.

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 Typologies of buying situations:
Economic uncertainty

low Economic uncertainty high

PROCUREMENT

• Limited investments • High investments

• Low order-volumes • High order-volumes
• Short-term impact • Long-term impact
• No organizational adaptation necessary • Extensive organizational
• Low impact of the financial adaptations necessary
results. • Strong impact on the financial
results.

Source: Fisher, L. (1970), quoted from van Weele/Eßig (2017), p. 46.

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 Typologies of buying situations:
Product complexity/economic uncertainty
Product-
complexity

Economic low high

uncertainty
PROCUREMENT

• Dominance of • Dominance of
low
procurement department engineers

• Dominance of financial • Cross-functional decision-

high
department and administration finding
Source: Fisher, L. (1970), quoted from van Weele/Eßig (2017), p. 46.

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 Maverick Buying:
Purchasing without Purchasing-involvement
Charakteristics:
• Intransparancy
• Personnel preferences to suppliers
PROCUREMENT

• No structured supplier selection

• Negotiations will be held without specific competency in negotiations. Therefore not
utilized framework-contracts,
• due to badly organized purchasing processes.
Source: Schuh, G. ( 2014), p. 35.

• Maverick Buying causes a fragmentation of the expenses. Therefore prices cannot be

negotiated on company-level as well as consolidated data is missing in order to gain
visibility. Source: Karjalainen, K., Van Raaij, E.M. (2011), p. 195f.

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 Maverick Buying
• Definition:
„Maverick buying, the off-contract buying of goods and services for which an established procurement process is in
place based on pre-negotiated contracts with selected suppliers, is common in organizations using central frame
agreement. Maverick buying can hinder organizations from gaining the benefits from purchasing centralization.”
PROCUREMENT

Source: Karjalainen, K., Van Raaij, E.M. (2011), p. 185.

• Aims:

• Better purchasing prices and -conditions

• Maintenance of previous supplier conditions
• Existing framework-contracts are simply not known.
Source: Karjalainen, K., Van Raaij, E.M. (2011), p. 190f.

• Forms:
• Procurement activities are not placed via purchasing department.
• Purchasing department will be involved too late in the procurement activity
• Existing contracts will not be used for procurement activities.
Source: Orpheus, online.

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 Maverick Buying:
For negotiating better and more beneficial business conditions

• Staff members are negotiating a

- lower price
- beyond of existing framework-contracts believing that they can
PROCUREMENT

- reduce purchasing costs.

• Companies are missing a holistic view for procurement activities in the sense of a
- Total Cost of Ownership (TCO-) view.
• Therefore, existing framework agreements are not being considered
- discounts,
- special waranty-agreements,
- as well as special conditions for after sales service.

Source: Schuh, G. ( 2014), p. 35f.

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 Maverick Buying:
For maintaining existing supplier relationships

• There are different motivations for employees for maintaining existing supplier relationships:
• Advantes due to long-term customer- and supplier relationships
• Existing routines of employees
PROCUREMENT

• Supplier-loyality.

• Therefore it is difficult to get employees motivated to establish new supplier relations as individual
relations of single employees are typically not considered in framework-contracts.

Source: Schuh, G. ( 2014), p. 36.

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 Maverick Buying:
Impact on purchasing volumes
Maverick Buying narrowly Maverick Buying in a broad sense
Internal
suppliers tax
Outside of
authority etc. purchasing
Missing
PROCUREMENT

order- Outside of
reference contracts

Without Outside of
contract- conctract
reference conditions

Total „Cash-Out“ Relevant Spend with Contract-spend Contract-spend, that is

(invoicing volumes) „Cash-Out“ purchasing- contact-compliant.
responsibility
Source: Orpheus, online.

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 Consequences of Maverick Buying
• High number of suppliers and therefore fragmented supplier base
• Overview of requested suppliers is missing
• Varying contract-conditions and –base,
PROCUREMENT

like prices or delivery times

• Higher prices due to not or badly negotiated contracts
• Higher prices due to smaler purchasing quantities
• Not utilizes price saving connected to framework contracts
• Higher costs due to not consolidated procurements processes in various departments
• Missing total expense overview of the purchasing department
• Unnecessary administrative time effort for managing low-value suppliers
• Operational risk due to manual data maintenance.

Source: Procurehere, online: https://www.procurehere.com/tackling-maverick-buying/.

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 Actions against Maverick Buying
Actions against Maverick Buying
Communicate • Utilize various communications channels (town hall meetings etc.) in order to inform
processes staff members about existing purchasing processes and -guidelines.
PROCUREMENT

Streamline • Establish lean and simple purchasing processes

processes • Offering of electronic catalogue-systems for efficient ordering of goods/services.

Enhance • Control which suppliers are getting deployed

transparancy • Measuring of quantity- and price-variances
• Deploy purchasing reporting systemes for analysing order volumes.

Penalize • Clear communication in case of mistreating existing purchasing guidelines

misbehaviour (e.g. written warning).

Streamline accounts • Invoices are only getting paid in case of existing order-reference
payables • Blocking of selected suppliers in teh accounts payable systems

Control • Clear order for suppliers only to ship products/services that are listed.
Source: Höveler Holzmann Consulting, online:
suppliers https://www.wvib.de/beratung/themen/einkauf/181-maverick-buying

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