1
Chapter 1: Exploration
1 The concept of procurement
1.1 What is procurement
What is the classic definition of procurement?
- Attracting the right goods and / or services from outside the company, from the right
supplier at the right time and at the most favourable conditions.
Describe the important elements of the classical definition of procurement thoroughly.
The right goods and / or services:
- These are the items that are necessary for producing the final product or for the proper
functioning of the own business.
Did the clerk, who was tasked with ordering the right goods, had any authority to decide which
products he could buy?
- No, back then (in the 40’s and 50’s) it was understood that the buyers didn’t determine what
the right products were. They were just ordered to buy them.
Outside the company:
- Parts, semi-finished products and other products that are produced by the company itself do
not fall under the procurement/purchasing function according to the classic definition.
The right supplier:
- The right the supplier is the one who meets our requirements regarding quality, delivery
terms, prices, etc …
How does a company determine who the right supplier is?
- It depends on what the company’s objectives are.
The right moment:
- The production must be able to proceed undisturbed without the unnecessary costs of
surplus stock or the risk of a shortage of inventory.
Yentl Pede 3AMA r0832874
, 2
The most optimal conditions:
- Not only the price, but all elements of the sales contract must be taken into consideration.
Why is the classic definition of procurement not a very suitable definition?
- There is to much emphasis on the implementation of administrative aspects.
Which author has formulated a newer, much more interesting definition of procurement?
- Arjan Van Weele, 1984.
The definition of Van Weele quote1:
“The purchasing function includes all activities of analysis, planning, implementation and
management of programs aimed at developing, expanding and maintaining relationships with the
supplier market to ensure the short- and long-term procurement needs of the company in such way
that the competitive position of the company is strengthened in its end markets”.
What are the key differences between the original definition of procurement and the definition from
Van Weele?
1) The new definition is more market oriented. In this case, market has 2 meanings: the market on
which we buy our goods and the market on which we sell our products eventually.
Automotive example: if you pay to much for a car, then the chances of making a profit on
your end market where you try to sell will drop significantly. So, it’s very important to think
about your selling market when you buy goods yourself.
2) the second difference is strategic importance; the newer definition is talking about goals and
objectives. You must make sure that you maintain a competitive position within the market you are
situated in.
3) Another difference is that we must maintain a long-term relationship with our suppliers.
4) In the past (40s & 50s), procurement wasn’t a management function but a clerk function. The clerk
back then didn’t have anything to say over which goods should be bought. Usually, the clerks had to
follow courses to learn negotiation techniques.
Is purchasing something that only happens in the purchasing department?
1
Definitions are not to be memorised.
Yentl Pede 3AMA r0832874
, 3
- No, purchasing in companies is a complex matter, involving many departments.
Example: the top management can also purchase important items such as shares on the
stock exchange.
1.2 Purchasing – Procurement
The Dutch literature makes a difference between “inkoop” and “aankoop”, both are translated as
purchasing in English. Explain the difference in meaning of these words:
- “Inkoop” is the buying of goods you want to sell.
- “Aankoop” is the buying of components and materials you want to use to produce new
products.
There’s also a difference in meaning between the words purchasing and procurement, explain:
- Purchasing emphasizes the purchase itself.
- Procurement says something about the total of purchases, including strategies, setting
targets and setting out market research. Basically, the term procurement emphasizes the
procurement function as a whole and not just the buying part.
2 Differences between branches
Which 2 company branches will be discussed here?
- Commercial (retail) and industrial companies.
What is price-elasticity?
- When the price of a certain product changes and the reaction from within the market is
huge, then the price elastic.
What is price-inelasticity?
- The opposite of price-elasticity, namely when the price changes drastically and there’s not
really a notable reaction from within the market.
Yentl Pede 3AMA r0832874
, 4
The purchasing function is significant for both types of companies. However, important differences
can be discovered. Name the key characteristics of procurement in retail companies:
- The buying and selling policy of a retail company are closely related. These activities are
often the responsibility of the same person. This isn’t the case at industrial companies.
- The buyer of a retail company has more freedom than his colleague in an industrial company.
The latter is bound to production plans and technical specifications with close tolerances.
Example: retail companies have a lot of power. If they don’t like their current supplier
anymore because e.g., the prices have risen steeply, then the retail (selling) company can
easily swap suppliers.
- Buying prices can result in adapted selling prices.
Example: Ikea buys a couch 10% more expensive than they intended, so their selling price
will rise too because they don’t want to risk losing money instead of making profit.
- Trade goods are often price-elastic, lower purchase prices for the retail company may allow a
reduction in the sales price, while maintaining a normal margin.
Name the key characteristics of procurement in industrial companies:
- Industrial companies often establish a longer and intensive relationship with their suppliers,
especially for products manufactured in a joint venture between buyer and supplier.
Automotive example: car manufacturers maintain a long relationship with suppliers.
Sometimes for decades depending on how long a certain model is being manufactured.
- For an industrial buyer, the price is less important than good quality, delivery reliability and
service.
- There’s less influence of the purchasing price on the selling price at an industrial company. At
retail companies, purchasing prices will immediately lead to a change in the final selling
price.
- Industrial companies will often make purchases that result from planning for many years.
What is a joint venture?
- A joint venture is a business arrangement in which two or more parties agree to pool their
resources for the purpose of accomplishing a specific task.
Yentl Pede 3AMA r0832874
Chapter 1: Exploration
1 The concept of procurement
1.1 What is procurement
What is the classic definition of procurement?
- Attracting the right goods and / or services from outside the company, from the right
supplier at the right time and at the most favourable conditions.
Describe the important elements of the classical definition of procurement thoroughly.
The right goods and / or services:
- These are the items that are necessary for producing the final product or for the proper
functioning of the own business.
Did the clerk, who was tasked with ordering the right goods, had any authority to decide which
products he could buy?
- No, back then (in the 40’s and 50’s) it was understood that the buyers didn’t determine what
the right products were. They were just ordered to buy them.
Outside the company:
- Parts, semi-finished products and other products that are produced by the company itself do
not fall under the procurement/purchasing function according to the classic definition.
The right supplier:
- The right the supplier is the one who meets our requirements regarding quality, delivery
terms, prices, etc …
How does a company determine who the right supplier is?
- It depends on what the company’s objectives are.
The right moment:
- The production must be able to proceed undisturbed without the unnecessary costs of
surplus stock or the risk of a shortage of inventory.
Yentl Pede 3AMA r0832874
, 2
The most optimal conditions:
- Not only the price, but all elements of the sales contract must be taken into consideration.
Why is the classic definition of procurement not a very suitable definition?
- There is to much emphasis on the implementation of administrative aspects.
Which author has formulated a newer, much more interesting definition of procurement?
- Arjan Van Weele, 1984.
The definition of Van Weele quote1:
“The purchasing function includes all activities of analysis, planning, implementation and
management of programs aimed at developing, expanding and maintaining relationships with the
supplier market to ensure the short- and long-term procurement needs of the company in such way
that the competitive position of the company is strengthened in its end markets”.
What are the key differences between the original definition of procurement and the definition from
Van Weele?
1) The new definition is more market oriented. In this case, market has 2 meanings: the market on
which we buy our goods and the market on which we sell our products eventually.
Automotive example: if you pay to much for a car, then the chances of making a profit on
your end market where you try to sell will drop significantly. So, it’s very important to think
about your selling market when you buy goods yourself.
2) the second difference is strategic importance; the newer definition is talking about goals and
objectives. You must make sure that you maintain a competitive position within the market you are
situated in.
3) Another difference is that we must maintain a long-term relationship with our suppliers.
4) In the past (40s & 50s), procurement wasn’t a management function but a clerk function. The clerk
back then didn’t have anything to say over which goods should be bought. Usually, the clerks had to
follow courses to learn negotiation techniques.
Is purchasing something that only happens in the purchasing department?
1
Definitions are not to be memorised.
Yentl Pede 3AMA r0832874
, 3
- No, purchasing in companies is a complex matter, involving many departments.
Example: the top management can also purchase important items such as shares on the
stock exchange.
1.2 Purchasing – Procurement
The Dutch literature makes a difference between “inkoop” and “aankoop”, both are translated as
purchasing in English. Explain the difference in meaning of these words:
- “Inkoop” is the buying of goods you want to sell.
- “Aankoop” is the buying of components and materials you want to use to produce new
products.
There’s also a difference in meaning between the words purchasing and procurement, explain:
- Purchasing emphasizes the purchase itself.
- Procurement says something about the total of purchases, including strategies, setting
targets and setting out market research. Basically, the term procurement emphasizes the
procurement function as a whole and not just the buying part.
2 Differences between branches
Which 2 company branches will be discussed here?
- Commercial (retail) and industrial companies.
What is price-elasticity?
- When the price of a certain product changes and the reaction from within the market is
huge, then the price elastic.
What is price-inelasticity?
- The opposite of price-elasticity, namely when the price changes drastically and there’s not
really a notable reaction from within the market.
Yentl Pede 3AMA r0832874
, 4
The purchasing function is significant for both types of companies. However, important differences
can be discovered. Name the key characteristics of procurement in retail companies:
- The buying and selling policy of a retail company are closely related. These activities are
often the responsibility of the same person. This isn’t the case at industrial companies.
- The buyer of a retail company has more freedom than his colleague in an industrial company.
The latter is bound to production plans and technical specifications with close tolerances.
Example: retail companies have a lot of power. If they don’t like their current supplier
anymore because e.g., the prices have risen steeply, then the retail (selling) company can
easily swap suppliers.
- Buying prices can result in adapted selling prices.
Example: Ikea buys a couch 10% more expensive than they intended, so their selling price
will rise too because they don’t want to risk losing money instead of making profit.
- Trade goods are often price-elastic, lower purchase prices for the retail company may allow a
reduction in the sales price, while maintaining a normal margin.
Name the key characteristics of procurement in industrial companies:
- Industrial companies often establish a longer and intensive relationship with their suppliers,
especially for products manufactured in a joint venture between buyer and supplier.
Automotive example: car manufacturers maintain a long relationship with suppliers.
Sometimes for decades depending on how long a certain model is being manufactured.
- For an industrial buyer, the price is less important than good quality, delivery reliability and
service.
- There’s less influence of the purchasing price on the selling price at an industrial company. At
retail companies, purchasing prices will immediately lead to a change in the final selling
price.
- Industrial companies will often make purchases that result from planning for many years.
What is a joint venture?
- A joint venture is a business arrangement in which two or more parties agree to pool their
resources for the purpose of accomplishing a specific task.
Yentl Pede 3AMA r0832874
