1212 /t Analysis 1. The role of Purchasing in the Supply Chain

1212 /t Programme Changes in the business context and its impact on strategies and structures The role of purchasing in the Supply Chain Definition of concepts Importance of the purchasing function Classification of purchasing goods The changing landscape in purchasing and supply Conclusions

1212 /t Changes in the business context 1. Globalisation of trade Resulting from: Deregulation in many industries Intercultural homogenisation and the resulting homogenisation of consumer preferences The forming of trade blocks (NAFTA, GATT, EEC) Improved transportation facilities More sophisticated information and communications technology

1212 /t 2. The information society Growing economic value from generating, using and selling information Advanced retail and manufacturing information systems; improved capabilities for tracking and tracing Xerox: ‘pay for production’ 3. Changing consumer patterns Customers increasingly demand convenience of purchase, after-sales service, relaibility, uniqueness, quality etc. Customers take charge; they tell the manufacturers what they want, when, how and what they are willing to pay This leads to constant innovation and service offerings Changes in the business context

1212 /t Impact on strategies & structures 1. Value Chain Management Every firm can be considered basically as a collection of primary and supporting value activities that are performed to design, produce, market, deliver and support products that are valuable for customers (Porter). Competitive advantage depends primarily on the art of positioning a company in the right place of the value chain vis-à-vis its: –Customers –Competitiors –Suppliers Companies should focus on their core competencies

1212 /t Impact on strategies & structures 2. Process orientation Shift from functional organisation to process organisation Process means in this case the set of activities that produce a value to a customer 3. Outsourcing and managing best-in-class supplier networks Often specialist suppliers can perform the outsourced activities at lower cost and with higher value-added than the buyer Best-in-class suppliers are then needed

1212 /t The role of Purchasing inbound logistics operations outbound logistics marketing & sales Margin Supportactivities Primary activities p r o c u r e m e n t technology development firm infrastructure human resource management service

1212 /t The role of Purchasing AspectsBuying for primary activities Buying for support activities Product assortment Number of suppliers Purchasing turnover Number of Purchase orders Average order size Control Decision-making unit Limited to large Limited, transparent Very large, considerable Considerable High Depends on type of production planning Engineering, manufacturing specialists dominant Very large Limited Very Large Small Limited, forecast-related or project-related planning Fragmented, varies with product or service

1212 /t Definition of concepts purchasing function tactical / initial ordering/ operational Sourcing Supply Buying Procurement Internal customer Supplier Ordering Follow up/ evaluation Expediting and evaluation Speci- fication Contracting Selecting

1212 /t Definition of concepts Purchasing: All activities for which the company receives an invoice from outside parties. Differentiation between: –Purchasing function –Purchasing department Procurement: All activities that are required in order to get the product from the supplier to its final destination. Sourcing: Finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of supply and gathering knowledge of procurable resources.

1212 /t Definition of concepts Purchasing Management All activities that are required to manage supplier relationships. Supply Chain Management The management of all activities, information, knowledge and financial resources associated with the flow and transformation of goods and services up from the raw materials suppliers, component suppliers and other suppliers in such a way that the expectations of the end users of the company are being met or surpassed

1212 /t Importance of the purchasing function Admin. Services Capex Spares Trade- items RetailersComputers Consumer electronics Automotive Pharma Service industry Typical structure Produc tion parts

1212 /t DuPont analysis: RONA Capital turn-over ratio Margin × Amounts in mln Euro Other costs Purchased mat. & serv. + Total costs Sales - Total assets Interest free liabilities - Sales Net assets / Income before tax Sales / 105 mio 145 mio 95 mio 50 mio 2.1 x 105 mio 40 mio 60 mio 100 mio 5 mio 4.7 % 9.9 %

1212 /t DuPont analysis: RONA Capital turn-over ratio Margin × EC million Other costs Purchased mat.& serv. + Total costs Sales - Total assets Interest free liabilities - Sales Net assets / Income before tax Sales / 105 mio 145 mio 95 mio 50 mio 2.1 x 105 mio 40 mio 60 mio 100 mio 5 mio 4.7 % 9.9 % - 2 % % !!

1212 /t Classification of Purchasing goods Raw materials; materials which have undergone no transformation or a minimal transformation and which serve as the basis materials for a production process Supplementary materials; materials that are not absorbed physically in the end product Semi-manufactured products; products that have already been processed once or more times and that will be processed further at a later stage Components; manufactured goods that will not undergo additional physical changes, but which will be incorporated in a system with which there is a functional relationship by joining it with other components

1212 /t Classification of Purchasing goods Finished products; all products which are purchased to be sold, after negligible added value, either together with other finished products and/or manufactured goods Investment goods or capital equipment; products that are not consumed immediately, but which purchasing value is depreciated over a period of time Maintenance, repair and operating materials (MRO items); materials, which are necessary for keeping the organisation running in general and for the support activities in particular Services; labour intensive, non material activities that are executed by third parties on a contract basis

1212 /t The changing landscape in purchasing and supply Co-ordination of purchasing requirements Integration of purchasing and logistics Integration of purchasing in engineering and production planning Make or buy Reciprocity agreements and compensation agreements Total quality control and just-in-time production Environmental issues 1. Seller’s marketBuyer’s market 2. Increasing pressure on sales prices and margins leads to:

1212 /t Conclusions The scope of the purchasing function extends from the purchasing market to inside the company gate The purchasing function is a very important link in the production chain of organisations The purchasing function is concerned with obtaining all goods necessary for running, maintaining and managing the company A distinction should be made between the purchasing function and the purchasing department Purchasing management is the activity aimed at systematising the purchasing process and achieving specific improvements through the management of supplier relationships The purchasing function is subject to many changes