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Summary Chapter 9 Van Weele Strategic Sourcing
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Summary purchasing and supply chain management 7th edition - chapters 1,2,4,6,14,15,16,17,18, 9781473749443
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Purchasing Management Master Supply Chain ManagementPurchasing and Supply Chain Management Author: Andreas S. Melisse
Purchasing and Supply Chain
Management
SECTION I – CORE CONCEPTS
1. The role of purchasing in the value chain
Introduction
Purchasing relates to all activities for which invoices are received. Purchasing is the management of 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 under the most favourable conditions. Supply includes at least purchasing, materials management,
incoming inspection and receiving. Supply is used in relation to buying based upon total cost of ownership in a
manufacturing environment.
The role of purchasing in the value chain
Value Chain Management are all stakeholders belonging to the same value chain are challenged to improve the
(buying) company’s value proposition to its final end-customers. The value chain of Porter (1985) is taken as a
term of reference. Here, Porter differentiates value activities between primary activities and support activities.
Primary activities are those activities that are required to offer the company’s value proposition to its customers:
o Inbound logistics. These activities are related to receiving, storing and disseminating inputs to the production process.
o Operations. Activities associated with transforming inputs into the final product.
o Outbound logistics. These are activities associated with collecting, storing and physically distributing products to consumers.
o Marketing and sales.
o Services. Activities associated with providing services to customers to enhance or maintain the value of the product.
Support activities are those value activities that are required to support the company’s primary activities, those
activities aimed at maintaining the firm’s infrastructure:
o Procurement. Relates to the function of purchasing inputs used in the firm’s value chain.
o Technology development. Most value activities use a technology that combines a number of different sub-technologies
involving different scientific disciplines.
o Human resources management.
o Firm infrastructure. Infrastructure does not support one or more primary activities; rather it supports the entire set of
company processes.
Facilities management relates to the management (planning, execution and control), and the realization of
housing and accommodation, the services related to these, and other means in order to enable the organization
to realize its mission.
The procurement function should be able to meet the material requirements related to operations management
and inbound and outbound logistics. Usually manufacturing processes can be characterized:
- Make (and distribute) to stock (MTS). Standard products are manufactured and stocked, and customers are serviced
from an end product inventory.
- Make to order (MTO). Products are manufactured from raw materials or the purchased components inventory after a
customer order has been received and accepted and are, hence, made to order.
- Engineer to order (ETO). All manufacturing activities from design to assembly and even procurement of the required
materials are related to a specific customer order.
Direct procurement is the procurement of all materials and products that are used for manufacturing a
company’s end products. Some of the purchases to be made are routine purchases. Other purchases may have
a ‘project character’ and may be unique and high valued. These are called indirect procurement. Indirect
procurement is the procurement of all materials, components and services that are used to support the
company’s infrastructure and back-office activities. Investment goods or capital equipment are products which
are not consumed immediately, but whose acquisition value is depreciated during its economic life-cycle.
1
Purchasing and Supply Chain Management – Van Weele, A.J. (7th edition, Cengage Learning, Hampshire, United
Kingdom, 2018)
, Purchasing Management Master Supply Chain Management
Purchasing and Supply Chain Management Author: Andreas S. Melisse
Aspects Buying for primary activities Buying for support activities
Product assortment Limited to large Very large
Number of suppliers Limited, transparent Very large, not transparent
Purchasing turnover per supplier Very large, considerable Limited
Number of purchase orders Considerable Very large
Average order size High Small
Control Depends on type of production planning Limited, forecast-related or project-related buying
Decision-making unit Engineering, manufacturing specialists dominant Fragmented, varies with product or service
Definition of concepts
Procurement is the management of 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 favourable conditions covering the materials, info and money
flows up to the point of consumption.
The picture illustrates the main activities within the
procurement function. This picture is referred to as the
(linear) procurement process model. The procurement
function does not include the responsibility for MRP,
materials scheduling, inventory management, incoming
inspection and quality control. Quality: total of features
and characteristics of a product/service that have a
bearing on its ability to satisfy a given need. It is meeting
(internal or external) customer requirements that have
been formally agreed between customer and supplier.
Expediting: following up on purchase order to make sure that supplier is going to perform as it has confirmed in
purchase order confirmation. Three types: routine status check, advanced status check and field expediting.
Procurement function covers activities aimed at determining the procurement specifications based upon ‘fitness
for use’. Procurement management relates to all activities necessary to manage supplier relationships in such a
way that their activities are aligned with the company’s overall business strategies and interests.
Ordering refers to the placing of purchase orders with a supplier against previously arranged conditions. Buying
relates to the commercial activity of soliciting competitive bids from a limited number of suppliers, and
negotiating a final contract with the lowest bidder. Purchasing relates to situations where buyers engage in
discussions with internal users about the degree to which the specifications for products to be purchased are
really fit for purpose. Procurement is based on TCO. Total cost of ownership relates to the total costs that the
company will incur over the lifetime of the product that is purchased. Sourcing is finding, selecting, contracting
and managing the best possible source of supply on a worldwide basis. This activity relates to developing the
most appropriate supplier strategy for a certain commodity or product category (a group of products which can
be substituted for one another by a consumer). Sourcing strategy identifies for a certain category from how
many suppliers to buy, what type of relationship to pursue, contract duration, type of contract to negotiate for,
and whether to source locally, regionally or globally.
Aspects Purchasing Procurement
Focus Price versus functionality Total cost of ownership
Scope Purchasing process Purchasing process + supply chain optimization (first-tier suppliers)
Orientation Commercial Commercial + supply chain
Sector Manufacturing companies Project and process based activities
Importance of purchasing to business
In general, the largest part of the cost of goods sold (COGS) or sales
revenues appears to be taken up by purchased materials and services.
The effects of purchasing savings on the company’s return on capital
employed (ROCE) are illustrated through the DuPont chart. Capital
employed can be defined as equity plus loans that are subject to interest.
It represents the total amount of capital that has been utilized for generating profits.
2
Purchasing and Supply Chain Management – Van Weele, A.J. (7th edition, Cengage Learning, Hampshire, United
Kingdom, 2018)
, Purchasing Management Master Supply Chain Management
Purchasing and Supply Chain Management Author: Andreas S. Melisse
The DuPont analysis is a financial diagnostic tool to calculate the company’s return on investment based upon
sales margin and capital turnover ratio. Used to assess the effect of a 2 per cent procurement saving on the
company’s ROI. This analysis shows that procurement contributes to improving the company’s return on net
assets (RONA) in three ways:
1) Through reduction of all direct material costs. Will lead to improvement of sales margin, affect RONA positively.
2) Through a reduction of the net working capital employed by the company. Work out positively on the capital turnover ratio.
3) Through improving the company’s revenue-generating potential.
Examples of measures which will lead to a lower capital employed are: longer payment terms, reduction of
inventories of base materials through JIT agreements with suppliers, supplier quality improvement and leasing
instead of buying equipment. The conclusion is that as the purchasing to sales ratio increases, purchasing
decisions will have a more profound impact on the company’s returns. A higher capital turnover ratio will lead
to a greater leverage purchasing of savings on direct materials costs.
Classification of purchased goods
In general, purchased materials and services can be grouped into the following categories:
o Raw materials.
o Supplementary materials. Materials which are not absorbed physically in the end product; they are used or consumed
during the production process.
o Semi-manufactured products. Products that have already been processed and they will be processed further at a later
stage again.
o Components. Manufactured goods which will not undergo additional physical changes (lamp units and batteries).
o Finished goods. These encompass all products which are purchased to be sold, after negligible added value, either together
with other finished products or manufactured products.
o Investment goods or capital equipment. Products which are not consumed immediately, but whose purchasing value is
depreciated during its economic life-cycle.
o Maintenance, repair and operating materials (MRO items). Sometimes referred to as consumable items or indirect
materials, which are necessary for keeping the organization running in general.
o Services. Activities which are executed by third parties, or other business units of the company, on a contract basis.
Indirect materials are all purchased materials and services that do not become part of the company’s value
proposition. May be classified into MRO supplies, investment goods (also referred to as capital expenditure, or
CAPEX) and services (identical to non-BOM materials or non-production materials).
Challenges and changes in the procurement context
The purchasing and supply strategies of industrial companies have undergone major changes:
o Global sourcing. Global sourcing is proactively integrating and co-ordinating common items and
materials, processes, designs, technologies and suppliers across worldwide procurement, engineering
and operating locations.
o Leveraged procurement and supply strategies.
o Corporate social responsibility. CSR explains how to contribute to a better world, a better environment
and better labour conditions. The idea is to develop business solutions in such a way that requirements
of the current world population are met without doing harm to the needs of future generations.
o Resource scarcity. It will become manifest in unstable demand and supply situations, high price volatility
of the commodities involved and shortages of supply.
o Supplier integration.
o Early supplier involvement. ESI is the situation where the supplier is involved by the buyer at an early
stage of the new product development process.
Summary
Supply Chain Management is the management of all activities, information, knowledge and financial resources
associated with the flow and transformation of goods and services from the raw materials suppliers, component
suppliers and other suppliers in such a way that expectations of end-users of the company are met or surpassed.
Value chain is the composed of value activities and a margin which is achieved by these activities. Value activities
can be divided into primary activities and support activities. The margin represents the value that customers
want to pay extra for the company’s efforts compared with the costs that were required for these.
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Purchasing and Supply Chain Management – Van Weele, A.J. (7th edition, Cengage Learning, Hampshire, United
Kingdom, 2018)
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