General Introduction
o Understand how Purchasing Management works
o Analyse purchasing buying behaviour and decision making in purchasing processes
o Understand the strategic context of purchasing management
o Get insight in performance based contracting
o Create insight in circular purchasing and innovation
Why is Purchasing Management of importance?
We are talking about managing business performance and facility innovation in this semester
o Because professional purchasing differs a lot from consumer buying
o Because professional purchasing within an organization can save costs and add value
o Because facility managers are spending extensive amount on products and services
o Because insight in what you spend and how you spend it is important management information
Link between Purchasing Management and Operations Management:
o Core processes of Operations Management (order fulfillment process, customer relation
process, supplier relation process and product and service development process)
o 4 V’s (Volume, Variety, Variation, Variability)
o Order Winners and Order Qualifiers
o Inventory Management and Capacity Management
o Supply Chain Management
o Quality Management and Performance Management
o Adding value and cost awareness
Difference between ordering, buying, purchasing management, sourcing and supply chain management
o Cost price of a printer → what does one copy cost (the ink cartridge is most expensive)?
Purchasing Process Model
Purchasing is a tactical function:
• Specification: what do you want?
• Selection: from who?
• Contracting: how do you want it?
What might be of importance while purchasing?
The market, criteria, risks, legal aspects, trends and developments, product or service, organization,
process and suppliers
,Lecture 1: Purchasing in Organizational Perspective and Buying Behaviour in Purchasing
Purchasing Management = 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 → focused
on structuring and improving purchasing processes within the organization and between the
organization and its suppliers
o Purchasing is important because of adding value and cost reduction
Importance of Purchasing: Adding Value
o Every firm has primary and supporting value activities, performed to design, produce, market,
deliver and support products that are valuable for customers (Porters Value Chain)
o To improve your competitive position, you need to focus on your core activities, on the needs
and requirements of their customers
o Therefore, non-core activities are increasingly outsourced to specialist suppliers
o Often specialist suppliers can perform the outsources activities at lower cost and with higher
value-added than the buyer
o So actually professional purchasing these services and products can help your organization to
perform better
Porters Value Chain = a useful strategic management tool by breaking organisation's activities down
into strategically relevant pieces (primary and secondary)
• What is the difference between support
activities and primary activities?
• What is the relationship with Operations
Management? Order Winners (cost, quality,
dependability, flexibility, speed)
Buying for primary or supporting activities:
Aspects Buying for primary activities Buying for support activities
Product assortment Limited to large Very large
Number of suppliers Limited, transparent Very large
Purchasing turnover Very large, considerable Limited
Number of purchase order Considerable Very large
Average order size High Small
Control Depends on type of production Limited, forecast-related or project-
planning related planning
Decision-making unit Engineering, manufacturing Fragmented, varies with product or
specialists dominant service
Importance of Purchasing: Cost Reduction / Saving Costs
o In average approximately 50% of the cost of sold goods are taken up by purchased materials
and services
o When you include other business costs (office, supplies, services, lease cars etc.) it can be 68%
o A small reduction of purchasing costs can increase the return on investments (ROI) significantly
o So that is why managing directors have lunch with their purchasing manager as well nowadays
(not only with the sales manager)
, DuPont Analysis = a framework for analysing fundamental performance, widely used to compare the
operational efficiency of two similar firms → a useful technique used to decompose the different drivers
of return on equity (ROE)
Cost saving is not only about finding the lowest price, but checking your purchasing processes is just as
important, so analyse is!
Return on Investment (ROI) = the total amount utilized to make profit → purchasing contributes to
improving Return on Investment in three ways:
• Reduction of all direct materials costs (improving sales margin by using less materials used,
less suppliers, standardization)
• Reduction of net working capital employed (improving capital turnover by paying your bills a bit
later, less inventory via JIT or leasing equipment)
• Improving revenue generating potential (think of innovation on products and processes,
challenge your suppliers)
Purchasing Analysis
How can value be added and costs be reduced? It all depends on the purchasing analysis:
• Classification (WHAT) = an analysis of purchasing goods and services (what are you buying)
→ raw materials (coffee beans, iron ore), semi manufactured products (steel, plastic foil),
components (batteries, electronic parts), maintenance (lubricants, detergents, copier paper) and
repair materials and services (security, cleaning, catering, integrated Facility Management)
Thinking in categories leads to better spend management, knowing what you spend is crucial
• Type of purchasing (HOW): what kind of purchases are we talking about and how do we do it
→ repetitive purchasing or straight rebuy (think of routine items or bulk products), changed or
modified purchasing (new product of same supplier or the other way around, new purchasing
situation (high degree of uncertainty extensive decision making process)
• The role of the purchasing department in an organization (WHO): who is in charge, who
decides, who is signing the contract → sort of product (complexity versus commercial value)
and sort of organization (size, culture, spend control methods)
Type of purchasing:
New task situation Modified rebuy Straight rebuy
• Completely new product • New product from • Known product from
from unknown suppliers known supplier known supplier
• High uncertainty • Existing product, new • Low uncertainty
regarding outcome supplier regarding outcome
• Acquisition of capital • Moderate uncertainty • Consumable items like
goods regarding outcome MRO
The role of the purchasing department: sort of product
Fisher’s Decision Model
Product Complexity
Low High
• Standard product • Differentiated product
• Existing product • New product
• Purchased earlier • First purchase
• Easy to install • Specialised installation
• No service required • Service required
Commercial Value
Low High
• Small investment • Large investment
• Small order • Large order
• Short-term commitment • Long-term commitment
• Small impact on profitability • Large impact on profitability
• Effect is predictable • Effect difficult to predict
