Chapter 1: Introduction to purchasing and supply chain management
The book looks at the way that organizations buy their materials. The flow of
materials through an organization is that an organization buys materials (raw
materials, components, equipment, information, money etc.) from suppliers,
which then are produced by the operations (manufacturing, serving, transporting
etc.) into products for customers. Both manufacturing organisations as service
organisations follow these principles, which are broadly:
1. Acquiring various types of materials (buy)
a. Materials are: all the diverse mix of things that an organization
needs to perform its operations.
2. Using these in operations to make products (make)
3. Delivering finished products to customers (sell)
The focus of the book is on point number 1: the way that organizations acquire all
the materials they need.
Logistics is the broad function responsible for all aspects of the movement and
storage of materials on their journey into, through and out of an organization.
Logistics occur in many locations. Logistics involves the following:
- Purchasing
- Inward transportation (from supplier into organization)
- Receiving
- Warehousing
- Stock control
- Order processing (orders of customers)
- Order picking
- Packing
- Material handling
- Outward transport
- Recycling (pallets, boxes), returns (broken products, wrong deliveries) and
waste disposal (chemical waste) Generally called reversed logistics
Next to this physical flow, there is also an associated flow (communication) of
information about products, customer demand etc.
Supply Chain Management
A supply chain consists of activities and organizations that materials (and
information) move through on their journey from initial supplier through to final
customers.
There are upstream activities that are the tiers of suppliers in front of an
organisation moving materials in, but also downstream activities that are the
tiers of customers after an organisation receiving its products.
, There is a typical supply chain around a manufacturer (the organization):
- Third tier supplier; material supplier
- Second tier supplier; component maker
- First tier supplier; sub-assembly providers
- First tier customer; wholesaler
- Second tier customer; retailers
- Third tier customer; end-users
Each product within a supply chain, has its own supply chain. Therefore, supply
chains come in huge variety of configurations and length.
Different terms
A supply network and supply web are alternative names for supply chains.
A supply chain can be described as a process when they emphasize the
operations, a logistics channel when they emphasize marketing, a value chain
when they look at the added value, and a demand chain when they consider
customer satisfaction.
Porter’s value chain (1985) considers the series of value-adding activities that
leads to satisfied customers and draws a distinction between primary activities
(inward logistics, operations, outwards logistics, marketing and sales, and
customer service) and supporting activities (business infrastructure, HRM,
technology development and purchasing).
The model can be criticized for:
- Limiting the role of operations
- Separating customer service
- Excluding key functions
- Not reflecting the real flow of materials
- Focus on a single organisation, even though it is part of a network.
Purchasing
Purchasing is responsible for acquiring all the materials needed by an
organization. It consists of the related activities that organize the flow of goods,
services and other materials from suppliers into an organization. Purchasing can
be better referred to as the acquisition of materials, or more commonly
procurement. Procurement involves a broader meaning and includes different
types of acquisition (leasing, rental, contracting) as well as the associated work of
identifying and selecting suppliers, negotiating, agreeing terms etc.
Strategic purchasing
Purchasing was seen as rather short-term, however it can be seen strategic.
Procurement has a major impact on an organization’s long-term performance and
survival.
Why purchasing is important
Purchasing forms an essential link between organizations and gives the trigger
for moving materials through supply chains. Purchasing has to be done right,
otherwise performance declines (bad quality, delivery not in time, wrong products
etc.) Next to that, a firm’s operations can also depend on the services offered by
suppliers. Moreover, lowering the costs of purchasing can result in a significant
increase in ROA.
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