Purchasing Management SUMMARY
Lecture
Setting the scene
Strategic importance/relevance purchasing in globalizing supply chains 1
Purchasing organization and processes (goods vs services, private vs public) 2
Outsourcing: make or buy 4&5
Getting value out of supply base
Supplier selection, evaluation and development 3
Contract management 6
Supplier relationship management 8&9
Strategic cost management 10
Emerging topics
Purchasing ethics (linked to negotiations) 12
Sustainable sourcing (triple bottom line) 13
Book: Purchasing and Supply Chain Management (van Weele), chapters 1, 2, 3, 4, 5, 6, 7, 9, 14, 15
Lecture 1 Introduction to global sourcing
Purchasing basics (Ch 1)
Purchasing and supply management
o relates to all activities for which invoices are received
o core activity: managing supplier relationships
o structuring purchasing processes internally
o structuring supplier relationships externally
o aimed at:
o securing supply
o consistent quality
o cost reduction
o product innovation
o efficiency improvement
o through mobilizing supplier expertise
Importance, relevance & scope
Outsourcing has become a wide strategic trend. Therefore, purchasing is also a crucial element.
Improved purchasing performance can contribute to increased customer value. à what does it ultimately bring to our
customers?
Good purchasing management à higher potential for profitability, better outsourcing, improved quality
Purchasing management seems to be less important for service company. The percentage of ‘purchasing management’
money is lower than eg retailers. However, the strategic importance of purchasing is still important, although lower
than for other typical companies. Remember: if you add it all up, the financial value can be quite substantial.
What includes ‘purchasing’: mostly production parts, but also trade items, spare parts, capex (buildings), services
(insurance, cleaning or travelling), administration
Purchasing & business strategy (Ch 7)
• Towards purchasing excellence
Globalization is not a goal in itself; it’s a means to an end. Globalization leads to interdependency, connectivity,
integration of economies, new outsourcing opportunities on supply side, new market opportunities on demand side
and issues of trade balances.
• Global sourcing = Proactively integrating and coordinating common items and materials, processes, designs,
technologies and suppliers across worldwide purchasing, engineering and operating locations.
à Organize your purchasing function across the organization in such a way that you work with the best possible
suppliers available in the world.
à Global = all imported goods/services from non-traditional regions
à Sourcing = actual purchasing spend from foreign suppliers, the worldwide selection process for the best suppliers
(companies must make sure they put all efforts to look for the best supplier worldwide)
J Lower unit costs, benchmarking current suppliers, accessing new markets/technologies
1
,L more complicated distribution and logistics, increasing handling costs, dealing with different cultures, contractual
problems, higher uncertainty about on-time delivery and quality, political ‘dynamics’
Offshoring: “Relocation of parts of production to locations abroad (own facilities or suppliers)”
Near-sourcing: “Relocation of production activities to a foreign country in the company’s regions (i.e. nearby)”
Back-shoring: “Re-concentration of production from foreign sources to company’s domestic production site”
Reshoring: “Moving manufacturing back to country of parent company”
Sourcing abroad opportunities
General: Contribute to firm’s competitive advantage
• Cost reductions
– Lower prices (transparency!!)
– Introduce competition to domestic supply base
• Differentiation opportunities
– Better quality – Flexibility
– Access to (advanced) technologies – Increased supply performance
– Access to limited sources
Sourcing abroad challenges
• Quantitative
– Logistics (e.g. longer pipelines, shipping delays, less advanced infrastructure in emerging economies)
à in other words; the abroad supplier must outperform your local neighbour supplier and treat you as
a ‘king’.
– Economical (e.g. exchange rates, duties)
– Quality (e.g. damaged products)
– Information and communication (e.g. time zones)
• Qualitative
– Political/legal
– Cultural/language
– Other; e.g. bureaucracy, environment, human rights, (child) labour policies
Sourcing abroad barriers
• Lack of understanding of international purchasing procedures
– Poor knowledge about potential supply sources
– Lack of familiarity with required documentation
• Lack of knowledge about foreign business practices, languages and cultures (for purchasing this may affect
product/component specifications)
• Higher risks (e.g. due to more complex logistics)
• Lack of senior management support
• Resistance to change
Sourcing abroad critical success factors
• Executive commitment to global sourcing
• Rigorous and systematic processes (“learning from past experiences”)
• Availability of needed (critical) resources
• Integration through IT
• Supportive organizational design (“governance”)
• Structured approaches to communication
• Ability to measure performance improvements (savings)
Lecture 2 Purchasing across different business contexts
Purchasing and business strategy (Ch 7)
Is purchasing strategic? We do not all agree. From the RBV perspective, it might not be strategic; intangibles might
add more strategic value (eg learning by doing and culture) (Ramsay, 2001). Others say that purchasing has become
strategic (Mol, 2003).
2
, The changing purchasing landscape has 3 main factors: cost, value and risk. At glance, it seems it is ‘all about the
money’ (purchasing savings, aggressive sourcing, inventory management, contract management). However, value
improvement through customer satisfaction, supplier involvement, joint promotions and increased value proposition
of the company are also important. Next to that, risk management is becoming more important. This includes single vs
multiple sourcing, buyer/vendor dependence, proprietary knowledge and sustainability.
Alignment of purchasing and corporate strategy
• Corporate strategy addresses long-term mission & survival and a company’s ability to compete in a
changing competitive environment
• Getting the basics right: An organization must take in more revenues than it spends on operating costs in the
long term to grow and increase profits
à purchasing should make a contribution to this quest for continued profitability
In strategy development we acknowledge four levels: corporate, business, functional (SCM), category.
The challenge is to achieve integrative processes in which corporate strategic plans are ‘cascaded’ into more specific
plans in an iterative way.
Purchasing process (management)
Each step requires the previous steps to be completed. Also, each step requires a certain document. Eg functional
specification doc, supplier selection proposal, contract, etc. These step make sure there is a track record and that the
responsibilities are clear and divided over people (the decision-making units).
Decision-making units
§ Users: people who will work with the product
§ Influencers: people who are able to affect the outcome of the purchasing process by means of solicited or
unsolicited advice
§ Buyers: people who will negotiate with the suppliers about terms and conditions and who place the order
§ Decision makers: people who actually determine the selection of the supplier
§ Gatekeepers: people who control the flow of information from the supplier towards the other team members
Internal integration/alignment is crucial!
Purchasing is related to quality insurance, operations, accounting, engineering, legal, marketing, etc.
Purchasing process problems in practice
o Supplier or brand specifications: most buyers are involved only to a minor extent in the specification
phase…specifications of the user are often designed ‘towards’ a particular supplier
o Inadequate supplier selection: suppliers insufficiently screened on financial status and strengths…and
capabilities….
o Insufficient contracting expertise: in many cases insufficient legal contracts in place…
o Too much emphasis on price: strong price orientation leads to suppliers delivering inferior quality….
o Administrative organization: order to pay cycle insufficiently organized…leading to invoices that are paid
without sufficient control on products delivered…
Service purchasing à intangible, can’t be stored, simultaneous production/consumption, etc. (however, exceptions!)
Difficulties:
1. Describing the service (specification)
2. Evaluating the service in advance of the purchase (complicates selection), or even in hindsight (performance
evaluation)
3
Lecture
Setting the scene
Strategic importance/relevance purchasing in globalizing supply chains 1
Purchasing organization and processes (goods vs services, private vs public) 2
Outsourcing: make or buy 4&5
Getting value out of supply base
Supplier selection, evaluation and development 3
Contract management 6
Supplier relationship management 8&9
Strategic cost management 10
Emerging topics
Purchasing ethics (linked to negotiations) 12
Sustainable sourcing (triple bottom line) 13
Book: Purchasing and Supply Chain Management (van Weele), chapters 1, 2, 3, 4, 5, 6, 7, 9, 14, 15
Lecture 1 Introduction to global sourcing
Purchasing basics (Ch 1)
Purchasing and supply management
o relates to all activities for which invoices are received
o core activity: managing supplier relationships
o structuring purchasing processes internally
o structuring supplier relationships externally
o aimed at:
o securing supply
o consistent quality
o cost reduction
o product innovation
o efficiency improvement
o through mobilizing supplier expertise
Importance, relevance & scope
Outsourcing has become a wide strategic trend. Therefore, purchasing is also a crucial element.
Improved purchasing performance can contribute to increased customer value. à what does it ultimately bring to our
customers?
Good purchasing management à higher potential for profitability, better outsourcing, improved quality
Purchasing management seems to be less important for service company. The percentage of ‘purchasing management’
money is lower than eg retailers. However, the strategic importance of purchasing is still important, although lower
than for other typical companies. Remember: if you add it all up, the financial value can be quite substantial.
What includes ‘purchasing’: mostly production parts, but also trade items, spare parts, capex (buildings), services
(insurance, cleaning or travelling), administration
Purchasing & business strategy (Ch 7)
• Towards purchasing excellence
Globalization is not a goal in itself; it’s a means to an end. Globalization leads to interdependency, connectivity,
integration of economies, new outsourcing opportunities on supply side, new market opportunities on demand side
and issues of trade balances.
• Global sourcing = Proactively integrating and coordinating common items and materials, processes, designs,
technologies and suppliers across worldwide purchasing, engineering and operating locations.
à Organize your purchasing function across the organization in such a way that you work with the best possible
suppliers available in the world.
à Global = all imported goods/services from non-traditional regions
à Sourcing = actual purchasing spend from foreign suppliers, the worldwide selection process for the best suppliers
(companies must make sure they put all efforts to look for the best supplier worldwide)
J Lower unit costs, benchmarking current suppliers, accessing new markets/technologies
1
,L more complicated distribution and logistics, increasing handling costs, dealing with different cultures, contractual
problems, higher uncertainty about on-time delivery and quality, political ‘dynamics’
Offshoring: “Relocation of parts of production to locations abroad (own facilities or suppliers)”
Near-sourcing: “Relocation of production activities to a foreign country in the company’s regions (i.e. nearby)”
Back-shoring: “Re-concentration of production from foreign sources to company’s domestic production site”
Reshoring: “Moving manufacturing back to country of parent company”
Sourcing abroad opportunities
General: Contribute to firm’s competitive advantage
• Cost reductions
– Lower prices (transparency!!)
– Introduce competition to domestic supply base
• Differentiation opportunities
– Better quality – Flexibility
– Access to (advanced) technologies – Increased supply performance
– Access to limited sources
Sourcing abroad challenges
• Quantitative
– Logistics (e.g. longer pipelines, shipping delays, less advanced infrastructure in emerging economies)
à in other words; the abroad supplier must outperform your local neighbour supplier and treat you as
a ‘king’.
– Economical (e.g. exchange rates, duties)
– Quality (e.g. damaged products)
– Information and communication (e.g. time zones)
• Qualitative
– Political/legal
– Cultural/language
– Other; e.g. bureaucracy, environment, human rights, (child) labour policies
Sourcing abroad barriers
• Lack of understanding of international purchasing procedures
– Poor knowledge about potential supply sources
– Lack of familiarity with required documentation
• Lack of knowledge about foreign business practices, languages and cultures (for purchasing this may affect
product/component specifications)
• Higher risks (e.g. due to more complex logistics)
• Lack of senior management support
• Resistance to change
Sourcing abroad critical success factors
• Executive commitment to global sourcing
• Rigorous and systematic processes (“learning from past experiences”)
• Availability of needed (critical) resources
• Integration through IT
• Supportive organizational design (“governance”)
• Structured approaches to communication
• Ability to measure performance improvements (savings)
Lecture 2 Purchasing across different business contexts
Purchasing and business strategy (Ch 7)
Is purchasing strategic? We do not all agree. From the RBV perspective, it might not be strategic; intangibles might
add more strategic value (eg learning by doing and culture) (Ramsay, 2001). Others say that purchasing has become
strategic (Mol, 2003).
2
, The changing purchasing landscape has 3 main factors: cost, value and risk. At glance, it seems it is ‘all about the
money’ (purchasing savings, aggressive sourcing, inventory management, contract management). However, value
improvement through customer satisfaction, supplier involvement, joint promotions and increased value proposition
of the company are also important. Next to that, risk management is becoming more important. This includes single vs
multiple sourcing, buyer/vendor dependence, proprietary knowledge and sustainability.
Alignment of purchasing and corporate strategy
• Corporate strategy addresses long-term mission & survival and a company’s ability to compete in a
changing competitive environment
• Getting the basics right: An organization must take in more revenues than it spends on operating costs in the
long term to grow and increase profits
à purchasing should make a contribution to this quest for continued profitability
In strategy development we acknowledge four levels: corporate, business, functional (SCM), category.
The challenge is to achieve integrative processes in which corporate strategic plans are ‘cascaded’ into more specific
plans in an iterative way.
Purchasing process (management)
Each step requires the previous steps to be completed. Also, each step requires a certain document. Eg functional
specification doc, supplier selection proposal, contract, etc. These step make sure there is a track record and that the
responsibilities are clear and divided over people (the decision-making units).
Decision-making units
§ Users: people who will work with the product
§ Influencers: people who are able to affect the outcome of the purchasing process by means of solicited or
unsolicited advice
§ Buyers: people who will negotiate with the suppliers about terms and conditions and who place the order
§ Decision makers: people who actually determine the selection of the supplier
§ Gatekeepers: people who control the flow of information from the supplier towards the other team members
Internal integration/alignment is crucial!
Purchasing is related to quality insurance, operations, accounting, engineering, legal, marketing, etc.
Purchasing process problems in practice
o Supplier or brand specifications: most buyers are involved only to a minor extent in the specification
phase…specifications of the user are often designed ‘towards’ a particular supplier
o Inadequate supplier selection: suppliers insufficiently screened on financial status and strengths…and
capabilities….
o Insufficient contracting expertise: in many cases insufficient legal contracts in place…
o Too much emphasis on price: strong price orientation leads to suppliers delivering inferior quality….
o Administrative organization: order to pay cycle insufficiently organized…leading to invoices that are paid
without sufficient control on products delivered…
Service purchasing à intangible, can’t be stored, simultaneous production/consumption, etc. (however, exceptions!)
Difficulties:
1. Describing the service (specification)
2. Evaluating the service in advance of the purchase (complicates selection), or even in hindsight (performance
evaluation)
3
