Chapter 1 The role of Purchasing in the Value Chain

Program The role of purchasing in the value chain Definition of concepts Importance of purchasing to business Classification of purchasing goods New developments in purchasing Conclusions

The role of purchasing in the value chain Primary activities can be divided in five generic categories: Inbound Logistics Operations Outbound logistics Marketing and sales Services The procurement function should be able to meet the material requirements related to inbound and outbound logistics, and to operations.

The role of purchasing in the value chain inbound logistics operations outbound marketing & sales Margin Support activities Primary activities p r o c u r e m e n t technology development firm infrastructure human resource management service Drawn from Porter, 1985

The role of purchasing in the value chain Support activities can be divided in four generic categories: Procurement Technology development Human resources management Firm infrastructure Procurement activities may be also related to supplying products and services for the other support functions.

The role of purchasing in the value chain Aspects Buying 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

Definition of concepts Purchasing: All activities for which the company receives an invoice from outside parties. Differentiation between: Purchasing function Purchasing department Definition: “Managing the company’s external resources in such a way that the supply of all goods, services, capabilities and knowledge which are necessary for running, maintaining and managing the company’s primary and support activities is secured at the most favorable conditions”. Procurement: All activities that are required in order to get the product from the supplier to its final destination.

Definition of concepts Sourcing: Finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of supply and gathering knowledge of procurable resources. 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 Value Chain Management: Challenging suppliers to improve the value proposition to the end-customers of the value chain. Usually the supplier works closely together with the customer’s technical and marketing staff to reduce the product’s overall costs and add new designs or features to the product which increase the value for the end-customer.

Definition of concepts Different definitions... Ordering… Buying… Purchasing… Procurement… Sourcing… Supply Chain Management… Value chain management…. Operational, short term, deal and margin oriented Strategic, long term, performance and value oriented Purchasing: relates to every activity the company receives an invoice for…

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

Importance of purchasing to business 5 Admin. 12 Services 18 Capex 3 Spares 60-85 60-80 50-70 60-80 12 Trade- items Production parts 25-50 50 10-40 Retailers Computers Consumer electronics Automotive Pharma Service Typical structure industry adapted from Kluge, 1996

Importance of purchasing to business GITP International BV 19/04/2017 Importance of purchasing to business Challenge for managers: how to manage our EXTENDED ENTERPRISE ? Sales: 100% Profit 1,5 % Value added: 20 % Question: what should managers do? Purchased materials And services: 78,5 % Purchased materials and services have a large impact on company profitability… [vul documentcode in] 12

Definition of concepts GITP International BV 19/04/2017 Definition of concepts Challenge: how to manage our EXTENDED ENTERPRISE ? Sales: 100% Profit 1,5 % Value added: 20 % Question: what should managers do? Purchased materials And services: 78,5 % Suppliers determine 78,5% of total cost, innovation, carbon footprint and customer value… [vul documentcode in] 13

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

DuPont analysis: × / - 12.4 ---- + 25 % !! - 6.2 -- / + 5.9 --- Sales 105 mio 105 mio Total assets Capital turn-over ratio / 145 mio 2.1 x Net assets - 50 mio Interest free liabilities 95 mio RONA × 12.4 ---- 9.9 % Sales 105 mio + 25 % !! Income before tax - Other costs 6.2 -- 5 mio 40 mio Margin / Total costs + 5.9 --- 4.7 % 98.8 ---- 100 mio Sales Purchased mat.& serv. 58.8 --- 60 mio 105 mio Amounts in Euro mio - 2 %

Classification of purchasing goods (1) The purchasing process may concern a large variety of goods and services. In general, purchased materials and services can be grouped into the following categories: 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

Classification of purchasing goods (2) 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 organization running in general and for the support activities in particular Services; labor intensive, non material activities that are executed by third parties on a contract basis

New developments in purchasing 1. Seller’s market Buyer’s market 2. Increasing pressure on sales prices and margins leads to: Leveraged purchasing and supply strategies Global sourcing Supplier integration Early supplier involvement in new product development Reciprocity agreements and compensation agreements Corporate Social Responsibility and business integrity

Conclusions In short, purchasing represents a business area which is being confronted with many changes and challenges. Without doubt these challenges will put purchasing and supply chain management more in the spot light in business.