Chapter 1: Introduction to purchasing and supply management
Introduction
Progressive purchasing approaches and strategies can help a company maintain or improve its
competitive position. Not so long ago, purchasing was not so difficult, but nowadays companies use
purchasing to improve their competitive position. Global competition is the main reason for this.
A new competitive environment
The new millennium features increasing world-class competition, that forces companies to improve their
selves. Customers want price reductions, higher quality and faster delivery, because of abundance of
competitors and more knowledge. In the 1960s and 1970s companies focused on creating and capturing
customer loyalty. In the 1980s companies became for flexible, because customers want new products. In
the 1990s companies realized that material and service inputs from suppliers had a major impact on
their ability to meet customer need, this led to an increased focus on their supply base and
responsibilities of purchasing. Also product quality wasn’t enough, you had to bring it at the right time,
cost, place, right conditions and quantities to the customer. The twenty-first century created time-
reducing information technologies and logistics networks to meet new challenges. The availability of low
cost alternatives led to a shift toward outsourcing and offshoring. All these changes make it clear that it
is important to manage your supply base. This led to the concepts of supply chain and supply chain
management.
Several factors drive an emphasis on supply chain management:
- The cost and availability of information resources among entities in the supply chain allow easy
linkages that eliminate time delays in the network.
- The level of competition in both domestic and international markets requires organizations to be
fast, agile, and flexible.
- Customer expectations and requirements are becoming much more demanding.
- The ability of an organization’s supply chain to react rapidly by managing risk minimizes
disruptions in both supply and downstream product or services to mitigate the impact on lost
sales.
Companies compete on supply chains nowadays.
Why purchasing is important?
- Increasing value and savings. Purchasing is a great part of total cost, so savings could be easily
made and supplier capabilities could help to differentiate your products, and so increase the
value.
- Building relationships and driving innovation. A new approach so save costs, is to build
relationships with your suppliers to jointly pull costs out of the product or service and expect
suppliers to contribute innovative ideas that add value to a firm’s products and services.
- Improving quality and reputation. Companies seek to increase the proportion of parts,
components, and services they outsource in order to concentrate on their own areas of
specialization and competence.
, - Reducing time to market. Purchasing, acting as the liaison between suppliers and engineers, can
also help improve product and process designs.
- Generating economic impact. The power of organizational purchasers as a group is significant.
The ISM report on business is one of the most closely followed indicators of economic activity.
- Contributing to competitive advantage. Effective purchasing has become a critical way to gain
competitive advantage.
Purchasing and supply management
Purchasing is a functional group(formal entity on the organizational chart) as well as a functional
activity(buying goods and services). Purchasing has been referred to as doing the five rights: (1) quality
(2) quantity, (3) time, (4) price and (5) source.
Supply management is a strategic approach to planning for and acquiring the organization’s current and
future needs through effectively managing the supply base, utilizing a process orientation in conjunction
with cross-functional teams to achieve the organizational mission.
Supply management…
- Requires pursuing strategic responsibilities, which are the activities that have a major impact on
longer-term performance of the organization. These should be aligned with the mission and
strategies. Routine is excluded, because they are not strategic.
- Is a progressive approach to managing the supply base that differs from a traditional arm’s
length or adversarial approach with sellers. It requires purchasing professionals to work directly
with those suppliers that are capable of providing world class performance and advantages to
the buyer.
- Often takes a process approach to obtaining required goods and services. We can describe it as
the process of identifying, evaluating, selecting, managing and developing suppliers to realize
supply chain performance that is better than its competitors.
- Is cross functional, which means that it involves purchasing, engineering, supplier quality
assurance, the supplier, and other related functions working together as one team. It focuses on
the long term.
Supply chains and value chains
A supply chain orientation is a higher-level recognition of the strategic value of managing operational
activities and flows within and across a supply chain.
A supply chain is a set of three or more organizations linked directly by one or more of the upstream or
downstream flows of products, services, finances, and information from a source to a customer.
Supply chain management, then, endorses a supply chain orientation and involves proactively managing
the two-way movement and coordination of goods, services, information and funds from raw material to
end user.
Supply chain management can be seen as composed of processes. This makes sense because:
- Processes usually move across functional boundaries, which aligns well with a supply
management and supply chain orientation.
, - Well-communicated processes accelerate learning as participants become familiar with a defined
process.
- Formal supply chain processes can build in best practices and knowledge that enhance the
chance of success.
- Organizations can document, measure, and improve their supply chain processes.
A value chain is composed of primary and support activities that can lead to competitive advantage
when configured properly. The differences with the supply chain are:
- All personnel are part of the value chain, not of the supply chain.
- The value chain is broader than the supply chain, because it includes all activities in the form of
primary and support activities.
- The original value chain concept focused primarily on internal participants, whereas a supply
chain, is both internally and externally focused.
Extended value chain/extended enterprise states that success is a function of effectively managing a
linked group of firms past first-level suppliers or customers. It recognizes that competition is no longer
between firms, but between coordinated supply chains or networks of firms.
Supply chain management activities
- Purchasing.
- Inbound transportation. Larger organizations usually have a specialized traffic and transportation
function to manage the physical and informational links between the supplier and the buyer.
- Quality control. Supplier quality prevent quality problems, rather than detecting it.
- Demand and supply planning. Demand planning identifies all the claims on output. Supply
planning is the process of taking demand data and developing a supply, production, and logistics
network capable of satisfying demand requirements.
- Receiving, materials handling, and storage.
- Materials and inventory control. The material control group is responsible for determining the
appropriate quantity to order based on projected demands and then managing materials
releases to suppliers. The inventory control group is responsible for determining the inventory
level of finished goods required to support customer requirements.
- Order processing. This helps to ensure that customers receive material when and where they
require it.
- Production planning, scheduling, and control. This involves determining a time-phased schedule
of production, developing short-term production schedules, and controlling work-in-process
production.
- Warehousing/distribution.
- Shipping. This involves physically getting a product ready for distribution to the customer.
- Outbound transportation. Fewer organizations own the transportation link to the customer. Full-
service transportation providers called third party logistics providers(3PLs) are designing and
managing entire distribution networks for their clients.
- Customer service. This includes a wide set of activities that attempt to keep a customer satisfied
with a product or service.
,Four enablers of purchasing and supply chain management
Firms that achieve real benefits separate from those that fail to reap any benefits separate themselves
by the commitment to the four enablers. These enablers provide the support that makes the
development of progressive strategies and approaches possible.
1.Capable human resources
The key to success is the quality of your employees. Gaining access to the right skills will require a sound
human resources strategy that includes internal development of high-potential individuals, recruiting
talent from other functional groups or companies, and hiring promising college graduates. This occurs to
satisfy the following objection: ensuring that qualified participants are available to support purchasing
and supply chain requirements.
2. Proper organizational design
Refers to the process of assessing and selecting the structure and formal system of communication,
division of labor, coordination, control, authority, and responsibility required to achieve organizational
goals and objectives, including supply chain objectives.
3. Real-time collaborative technology capabilities
The development of information technology software and platforms that support an end-to-end supply
chain, allow enhanced collaboration between the parties in the supply chain. Two primary supply chain
applications involved in supply chain collaboration that involve purchasing are supply chain planning and
supply chain execution. Planning software seems to improve forecast accuracy, optimize production
scheduling, reduce working capital costs, shorten cycle times, cut transportation costs, and improve
customer service. Execution software helps obtain materials and manage physical flows from suppliers
through downstream distribution to ensure that customers receive the right products at the right
location, time and cost.
4. Right measures and measurement systems
Unfortunately, there are many roadblocks between measurement and improved performance:
(1) Too many metrics, (2) debate over the correct metrics, (3) constantly changing metrics, and (4) old
data. These roadblocks can be fixed by knowing what to measure, a process to measure it, and
accessibility to the right data. The next step is taking action on the data. And in the end, the targets are
revised to reflect the realities of the marketplace, competition, and changing goals.
Measurement is important because…
- Objective measurement supports fact-based rather than subjective decision making.
- It is an ideal way to communicate requirements to other supply chain members and to promote
continuous improvement and change.
- When suppliers know their performance is measured, they are likely to perform better.
- To improve future supplier performance, and to recognize excellent performance.
- It conveys what is important by linking critical measures to desired business outcomes.
- It helps to determine if new initiatives are producing the desired results.
, - It may be the single best tool to control purchasing and supply chain activities and processes.
The evolution of purchasing and supply chain management
Period 1: The early years(1850-1900)
Railroads were vital to move goods from the more developed Eastern and Midwestern markets to less
developed Southern and Western Markets. In 1866, the Pennsylvania Railroad had given the purchasing
function departmental status, under the title of Supplying Department. Later on the chief purchasing
manager had top managerial status, and reported directly to the president of the railroad. The first book
about the purchasing book was written, the handling of railway supplies- their purchase and disposition.
Major contribution to purchasing history consisted of early recognition of the purchasing process and its
contribution to overall company profitability.
Period 2: Growth of purchasing fundamentals(1900-1939)
The industrial purchasing function began appearing with increasing regularity outside the railroad
journals. Engineering magazines in particular focused on attention on the need for qualified purchasing
personnel and the development of materials specification. Also the basic purchasing procedures and
ideas were developed. The second book on purchasing was published, the book on buying. Purchasing
gained importance during World War I, because of its role in obtaining vital war materials. The central
focus of purchasing was on the procurement of raw material versus buying (semi)finished goods.
Period 3: The war years(1940-1946)
The number of courses related to purchasing and the amount of members of the National Association of
Purchasing Agents increased. The emphasis on obtaining required(and scarce) materials during the war
influenced a growth in purchasing interest.
Period 4: The quiet years(1947-mid 1960s)
During this period procurement was regarded as a negative function, and a simply inescapable cost of
doing business which no one could do much about. Articles began to appear describing the practices of
various companies using staff members to collect, analyze, and present data for purchasing decisions.
The value analysis(VA) technique was developed. It concentrated on which materials or changes in
specifications and design would reduce overall production costs. The emphasis during the postwar years
and throughout the 1960s was on satisfying consumer demand and the needs of a growing industrial
market.
Period 5: Materials management comes of age(mid 1960s – late 1970s)
A dramatic growth of the materials management concept. External events directly affected the operation
of the typical firm. The overall objective of materials management was to solve materials problems from
a total system viewpoint rather than the viewpoint of individual functions or activities. Suppliers were
rarely seen as a value-adding partner. Multiple sourcing was emphasized. Price competition was
important.
Period 6: The global era(late 1970s – 1999)
