Lecture 2
Purchasing process models (PPM)
• Decision-making à buying decisions
• Linear à sourcing
• Strategic à supplier management
• Cyclical à continuous
• Hybrid linear cyclical
Linear purchasing process
Specification: what to buy and a description
Selection: identifying the most appropriate supplier
Contracting: drawing up the contract and signing
Ordering: ordering actual parts/materials
Expediting: is it delivered right?
Evaluation: evaluate supplier performance
,Purchasing process in practice
• Overspecification: specification that are more than fit for purpose
• Supplier or brand specifications: most buyers are involved only to a minor extent in
the specification phase...specifications of the users are often designed 'towards' a
particular supplier
• Inadequate supplier selection: suppliers insufficiently screened on financial status
and strengths…and capabilities...
• Insufficient contracting expertise: in many cases insufficient legal contracts in place.
• Too much emphasis on price: strong price orientation leads to suppliers delivering
inferior quality...
• Administrative organization: order to pay cycle insufficiently organized…leading to
invoices that are paid without sufficient control on products delivered...
Key principles in public procurement
Non-discrimination:
No differentiation about nationality of the bidder
Equality:
Obligation of the contracting authority to deal with all bidding suppliers in an equal manner
Transparency:
1. Public announcing the tender beforehand
2. Motivating the award decision
Proportionality:
Fairness of the tender/realistic demands and procedures
Nature of public procurement
Public accountability
• Legitimacy of procurement process is important
• Public institutions are subject to European procurement laws
• Process is procedure driven rather than result or performance driven
• This often has a negative effect on the efficiency
,Not subject to free markets:
• Public institutions are funded by money from taxes
• Not always a drive to create best value for taxpayers
• Sometimes focus on other than commercial goals:
o Support local economy
o Sustainable investments
Service procurement
Difficulties in service purchasing
1. Describing the service (specification)
2. Evaluating the service in advance of the purchase (selection)
3. Capturing the service in the right type of contract
4. The high interdependency/ongoing interaction between buyer and seller
5. Services are very diverse
6. Continuous cost focus, value focus hardly adopted
Identifying the content of the service
• Specifying in more detail what you want to see happening back-stage, and what
resources to be used.
• Specifying what activities, you want to buy (throughput)
• Specifying what you see and know of as desired performance
• Specifying outcome – often linked to specific forms of contract
Choosing a specification method
• Can the supplier manage the output/outcome, or just the input/throughput
o Degree of interaction buyer-supplier
o Contributions/responsibilities other suppliers
o Willingness to take risks
• Which aspects are easiest to define/measure transparently and consistently, for both
sides?
o Skills and expertise buyers and sellers
, Lecture 3
Resource based view
Firm as a bundle of assets and resources that can be combined to create competitive
advantage.
Key: to be sustainable as a firm
VRIO model
Value: exploit opportunities or counter threats
e.g., human resources
Rare: small number of other firms possess it
e.g., good designs (Apple)
Inimitability: other firms cannot readily conceive or imitate
e.g., Movies from Christopher Nolan
Organization: reporting structure, incentives, etc.
e.g., Campus to educate personnel (Google)
Think of competitive advantage as a dependent variable
Identify the source of advantage (e.g., Visionary leadership)
Distinguish from type (e.g., lower costs, superior quality)
Transaction cost economics
A comparative assessment of the economic efficiency of alternative governance modes
• Market: parties exchanges are governed by prices in supply-demand equilibrium
• Hierarchy: transactions occur under a unified owner, who settles disputes by
administrative fiat.
o Authority relationship: customer cannot choose everything, the boss can.
• Hybrid: Long-term contracts that preserve autonomy (of transacting parties) but
provide more transaction specific safeguards as compared with the market.
Canonical question: make or buy
Assumptions:
Transactions and Knightian Risk (= not measurable risk)
• TCE assumes that the outcome distributions are known
• Premise derived from Arrow (1974) – uncertainty is equated to Knightian risk
Why does it matter?
• Allows according to economics agents considerable foresight - choose governance
forms accordingly.
Weak form selection
TCE is comparative (more efficient – survival of the fitter)
Alternative forms of governance must be feasible
Purchasing process models (PPM)
• Decision-making à buying decisions
• Linear à sourcing
• Strategic à supplier management
• Cyclical à continuous
• Hybrid linear cyclical
Linear purchasing process
Specification: what to buy and a description
Selection: identifying the most appropriate supplier
Contracting: drawing up the contract and signing
Ordering: ordering actual parts/materials
Expediting: is it delivered right?
Evaluation: evaluate supplier performance
,Purchasing process in practice
• Overspecification: specification that are more than fit for purpose
• Supplier or brand specifications: most buyers are involved only to a minor extent in
the specification phase...specifications of the users are often designed 'towards' a
particular supplier
• Inadequate supplier selection: suppliers insufficiently screened on financial status
and strengths…and capabilities...
• Insufficient contracting expertise: in many cases insufficient legal contracts in place.
• Too much emphasis on price: strong price orientation leads to suppliers delivering
inferior quality...
• Administrative organization: order to pay cycle insufficiently organized…leading to
invoices that are paid without sufficient control on products delivered...
Key principles in public procurement
Non-discrimination:
No differentiation about nationality of the bidder
Equality:
Obligation of the contracting authority to deal with all bidding suppliers in an equal manner
Transparency:
1. Public announcing the tender beforehand
2. Motivating the award decision
Proportionality:
Fairness of the tender/realistic demands and procedures
Nature of public procurement
Public accountability
• Legitimacy of procurement process is important
• Public institutions are subject to European procurement laws
• Process is procedure driven rather than result or performance driven
• This often has a negative effect on the efficiency
,Not subject to free markets:
• Public institutions are funded by money from taxes
• Not always a drive to create best value for taxpayers
• Sometimes focus on other than commercial goals:
o Support local economy
o Sustainable investments
Service procurement
Difficulties in service purchasing
1. Describing the service (specification)
2. Evaluating the service in advance of the purchase (selection)
3. Capturing the service in the right type of contract
4. The high interdependency/ongoing interaction between buyer and seller
5. Services are very diverse
6. Continuous cost focus, value focus hardly adopted
Identifying the content of the service
• Specifying in more detail what you want to see happening back-stage, and what
resources to be used.
• Specifying what activities, you want to buy (throughput)
• Specifying what you see and know of as desired performance
• Specifying outcome – often linked to specific forms of contract
Choosing a specification method
• Can the supplier manage the output/outcome, or just the input/throughput
o Degree of interaction buyer-supplier
o Contributions/responsibilities other suppliers
o Willingness to take risks
• Which aspects are easiest to define/measure transparently and consistently, for both
sides?
o Skills and expertise buyers and sellers
, Lecture 3
Resource based view
Firm as a bundle of assets and resources that can be combined to create competitive
advantage.
Key: to be sustainable as a firm
VRIO model
Value: exploit opportunities or counter threats
e.g., human resources
Rare: small number of other firms possess it
e.g., good designs (Apple)
Inimitability: other firms cannot readily conceive or imitate
e.g., Movies from Christopher Nolan
Organization: reporting structure, incentives, etc.
e.g., Campus to educate personnel (Google)
Think of competitive advantage as a dependent variable
Identify the source of advantage (e.g., Visionary leadership)
Distinguish from type (e.g., lower costs, superior quality)
Transaction cost economics
A comparative assessment of the economic efficiency of alternative governance modes
• Market: parties exchanges are governed by prices in supply-demand equilibrium
• Hierarchy: transactions occur under a unified owner, who settles disputes by
administrative fiat.
o Authority relationship: customer cannot choose everything, the boss can.
• Hybrid: Long-term contracts that preserve autonomy (of transacting parties) but
provide more transaction specific safeguards as compared with the market.
Canonical question: make or buy
Assumptions:
Transactions and Knightian Risk (= not measurable risk)
• TCE assumes that the outcome distributions are known
• Premise derived from Arrow (1974) – uncertainty is equated to Knightian risk
Why does it matter?
• Allows according to economics agents considerable foresight - choose governance
forms accordingly.
Weak form selection
TCE is comparative (more efficient – survival of the fitter)
Alternative forms of governance must be feasible
