Hoorcollege 1
Type Hoorcollege
Titel Procurement and Supplier Management
Introduction
The procurement function is at the core of all organizations.
It concerns the acquisition of materials, components, finished goods, service inventories, support services, etc.
Advantages of effective design and execution of procurement:
actualizing business and operations planning objectives concerning production, supply chain delivery,
flexibility, quality, and costs.
strengthening the financial stability and profitability of trading partners - procurement costs amount to 40-
70% of sales revenue.
improving the capability to effectively respond to marketplace demands.
Effective procurement requires strong supply chain partnerships.
Highly integrated relationships between buyers and suppliers are more and more important and have given birth to
the field of Supplier Relationship Management (SRM).
The real value-added component of procurement does not come from high quality and low costs but from the
buyer/seller relationship:
The closer the customer demands and the supplier capabilities are synchronized, the more total costs decline, the
more complex demands are met, and the faster inventory moves are.
The more integrated the supply chain is, the more channel partners can truly fashion collaborative partners
where core competencies are merged to generate a common competitive vision.
Defining the Procurement Function
Defining Purchasing
Purchasing was once regarded as a low-level management activity responsible for acquiring goods and services
for other departments of the organization at the lowest possible price.
With the emphasis on both cost reduction and buyer-supplier relationship building, purchasing is now an
important strategic function.
The term “procurement” has replaced the term “purchasing” to emphasize its growing strategic role in the
supply chain.
The Purchasing Handbook defines purchasing as: “The body of integrated activities that focus on the purchasing of
materials, supplies, and services needed to reach organizational goals. In a narrow sense, purchasing describes the
process of buying; in a broader sense, purchasing involves determining the need, selecting the supplier, arriving at
the appropriate price, terms and conditions, issuing the contract or order, and following up to ensure delivery.”
Hoorcollege 1 1
, Key concepts implied in this definition: purchasing is
a business function
about the acquisition of goods and services
about developing close supplier relationships
about the close review of purchasing and supplier performance
Purchasing Responsibilities
Buying goods and services is the core responsibility of purchasing
Product outsourcing, globalization, and supplier networking have expanded the purchasing activities and
responsibilities
Examples of purchasing responsibilities:
materials management
sourcing
supplier development
contracting
cost management
purchasing and receiving
performance measurement
Categories of Purchasing
Broadly speaking, there are four types of purchasing:
For consumption or conversion
are the concern of industrial buyers
consist of raw materials (e.g., petroleum, coal, wood), semi-finished, and finished components (e.g.,
subassemblies, assemblies) consumed or converted in the production process
are rarely sold to customers
E.g. in case of KLM; fuel.
For resale
are the concern of distributors and retailers
are bought by intermediaries for the movement of inventory from the production source to another
intermediary, a retailer, or the end-customer
usually do not require additional processing before being sold to the end-customer
E.g. webshops. In case of KLM; water bottles, food, beverages.
For maintenance, repair, and operations functions (MRO)
Hoorcollege 1 2
, are used for operating activities, repair, or services
are purchased only once or periodically
include general supplies (paper, pens, paper towels, light bulbs), equipment repair parts, contracting of
services (equipment maintenance, education, cleaning services), facility repair
buyers include manufacturers, service businesses, institutions, utilities, government
E.g. in case of KLM; all the maintenance service that is needed for the aircraft, but also cleaning.
For custom equipment and services
unique products that the company needs.
are products specially designed or fabricated to meet specific needs
include custom-made machinery, storage and material handling equipment, computerized information
systems
E.g. in case of KLM; the aircraft itself, clothing for employees, computerized information systems.
Objectives of Purchasing
To obtain the right products/services at the right time, in the right quantity, at the right place, at the right price, with
perfect quality.
The buyer must pursue a multitude of (conflicting) objectives.
Optimal quality, service, and price can rarely be obtained from a single supplier, but a multitude of suppliers is
usually necessary.
Cost management is the crucial goal, but there are other goals:
Providing an uninterrupted flow of materials and services.
Keeping inventory investment to a minimum.
Developing the supplier base.
Provide consistent, quality purchased materials and services.
A more and more important goal is expanding the scope of supplier value-added services, which is obtained by:
Reducing wastes in ordering and delivery.
Facilitate the flow of goods, information, and service through the supply channel.
The Purchasing Organization
The ability to execute the purchasing functions requires an effective purchasing organization.
The structure of purchasing is determined by how it is used by the rest of the organization.
Companies that consider purchasing fundamental view it as a strategic advantage and provide it with high-
level decision-making power.
Hoorcollege 1 3
, Conversely, companies that consider purchasing as a purely operational activity treat it as an administrative
function without much of a strategic impact on the business.
Each business determines what role the purchasing function plays in the organization.
The Role of Purchasing in the Organization
The higher the level of the purchasing function, the greater the role it plays in supporting strategic objectives
Three possible models: executive, director, and operations levels
Purchasing in organization
Executive Level
The purchasing executive has the role of vice-president
Purchasing is considered as a strategic advantage
Typical of high-tech companies and companies facing high costs for materials and purchased components
Director Level
The purchasing executive is at the director level and reports directly to the vice-president of manufacturing or
operations
Purchasing is considered as a tactical advantage
Typically large purchasing department with high volumes of activity
Operations Level
Hoorcollege 1 4
Type Hoorcollege
Titel Procurement and Supplier Management
Introduction
The procurement function is at the core of all organizations.
It concerns the acquisition of materials, components, finished goods, service inventories, support services, etc.
Advantages of effective design and execution of procurement:
actualizing business and operations planning objectives concerning production, supply chain delivery,
flexibility, quality, and costs.
strengthening the financial stability and profitability of trading partners - procurement costs amount to 40-
70% of sales revenue.
improving the capability to effectively respond to marketplace demands.
Effective procurement requires strong supply chain partnerships.
Highly integrated relationships between buyers and suppliers are more and more important and have given birth to
the field of Supplier Relationship Management (SRM).
The real value-added component of procurement does not come from high quality and low costs but from the
buyer/seller relationship:
The closer the customer demands and the supplier capabilities are synchronized, the more total costs decline, the
more complex demands are met, and the faster inventory moves are.
The more integrated the supply chain is, the more channel partners can truly fashion collaborative partners
where core competencies are merged to generate a common competitive vision.
Defining the Procurement Function
Defining Purchasing
Purchasing was once regarded as a low-level management activity responsible for acquiring goods and services
for other departments of the organization at the lowest possible price.
With the emphasis on both cost reduction and buyer-supplier relationship building, purchasing is now an
important strategic function.
The term “procurement” has replaced the term “purchasing” to emphasize its growing strategic role in the
supply chain.
The Purchasing Handbook defines purchasing as: “The body of integrated activities that focus on the purchasing of
materials, supplies, and services needed to reach organizational goals. In a narrow sense, purchasing describes the
process of buying; in a broader sense, purchasing involves determining the need, selecting the supplier, arriving at
the appropriate price, terms and conditions, issuing the contract or order, and following up to ensure delivery.”
Hoorcollege 1 1
, Key concepts implied in this definition: purchasing is
a business function
about the acquisition of goods and services
about developing close supplier relationships
about the close review of purchasing and supplier performance
Purchasing Responsibilities
Buying goods and services is the core responsibility of purchasing
Product outsourcing, globalization, and supplier networking have expanded the purchasing activities and
responsibilities
Examples of purchasing responsibilities:
materials management
sourcing
supplier development
contracting
cost management
purchasing and receiving
performance measurement
Categories of Purchasing
Broadly speaking, there are four types of purchasing:
For consumption or conversion
are the concern of industrial buyers
consist of raw materials (e.g., petroleum, coal, wood), semi-finished, and finished components (e.g.,
subassemblies, assemblies) consumed or converted in the production process
are rarely sold to customers
E.g. in case of KLM; fuel.
For resale
are the concern of distributors and retailers
are bought by intermediaries for the movement of inventory from the production source to another
intermediary, a retailer, or the end-customer
usually do not require additional processing before being sold to the end-customer
E.g. webshops. In case of KLM; water bottles, food, beverages.
For maintenance, repair, and operations functions (MRO)
Hoorcollege 1 2
, are used for operating activities, repair, or services
are purchased only once or periodically
include general supplies (paper, pens, paper towels, light bulbs), equipment repair parts, contracting of
services (equipment maintenance, education, cleaning services), facility repair
buyers include manufacturers, service businesses, institutions, utilities, government
E.g. in case of KLM; all the maintenance service that is needed for the aircraft, but also cleaning.
For custom equipment and services
unique products that the company needs.
are products specially designed or fabricated to meet specific needs
include custom-made machinery, storage and material handling equipment, computerized information
systems
E.g. in case of KLM; the aircraft itself, clothing for employees, computerized information systems.
Objectives of Purchasing
To obtain the right products/services at the right time, in the right quantity, at the right place, at the right price, with
perfect quality.
The buyer must pursue a multitude of (conflicting) objectives.
Optimal quality, service, and price can rarely be obtained from a single supplier, but a multitude of suppliers is
usually necessary.
Cost management is the crucial goal, but there are other goals:
Providing an uninterrupted flow of materials and services.
Keeping inventory investment to a minimum.
Developing the supplier base.
Provide consistent, quality purchased materials and services.
A more and more important goal is expanding the scope of supplier value-added services, which is obtained by:
Reducing wastes in ordering and delivery.
Facilitate the flow of goods, information, and service through the supply channel.
The Purchasing Organization
The ability to execute the purchasing functions requires an effective purchasing organization.
The structure of purchasing is determined by how it is used by the rest of the organization.
Companies that consider purchasing fundamental view it as a strategic advantage and provide it with high-
level decision-making power.
Hoorcollege 1 3
, Conversely, companies that consider purchasing as a purely operational activity treat it as an administrative
function without much of a strategic impact on the business.
Each business determines what role the purchasing function plays in the organization.
The Role of Purchasing in the Organization
The higher the level of the purchasing function, the greater the role it plays in supporting strategic objectives
Three possible models: executive, director, and operations levels
Purchasing in organization
Executive Level
The purchasing executive has the role of vice-president
Purchasing is considered as a strategic advantage
Typical of high-tech companies and companies facing high costs for materials and purchased components
Director Level
The purchasing executive is at the director level and reports directly to the vice-president of manufacturing or
operations
Purchasing is considered as a tactical advantage
Typically large purchasing department with high volumes of activity
Operations Level
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