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Summary Purchasing Management 2017
Detailed summary (104 pages) of the course purchasing management including the content of all presentations and the relevant book chapters. Result of exam: 8.
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Summary Purchasing ManagementThe purchasing process
What is purchasing?
- There are many definitions of purchasing + all of them are true, but most of them are incomplete
- We define purchasing as “everything associated with an incoming invoice”
o Invoices are not only associated with buying, but with renting and leasing as well
o Definition does not distinguish between the kinds of items that are purchased (applies to
goods and services)
o Both purchases for primary and supporting processes are considered
o Implies that total purchasing expenses can be obtained from the financial administration
- Primary purchasing: BOM (Bill of Material) purchasing e.g. raw materials, production machines
and maintenance
- Indirect purchasing: MRO (Maintenance, Repair and Operations) or NOR (Non Product Related)
e.g. catering services, office automation
- Note: Plenty of purchasing categories that can be either primary or indirect purchases depending
on their intended use
Direct Indirect
Goods Materials Office Supplies
Services Temporary labour Cleaning
Works Factory Head Office
Issues not viewed as ‘purchasing’, but in the realm of purchasing
o Outsourcing of entire tasks or departments
o Investments
o Contract extensions
o Consultants, auditors, lawyers
o Fixed costs
o Expenses
o Fixed cost such as taxes + obligatory government dictated (e.g. social security fee) are usually left
out
Basic purchasing process (Van Weele’s model)
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,1. Specifying
Most determining step with regards to the success of purchasing, simply because this stage defines
what is going to be purchased
Provides basis for everything that follows
By far the largest portion of the total costs of purchasing are born in this stage
Changing specifications costs time & money, buying the wrong item is even more expensive!
Specification of need is a result of:
o Challenging demand (=Volume/year * price =spend/year) can contribute a lot
o Supply = market possibilities, based on (among other things) a Request for Information (RfI)
o Demand = what is necessary to fulfil the need? – based on (among other things) a spend analysis
o Specification is input for an RfP (Request for proposal) and/or an RfQ (Request for quotation)
Who writes the specifications?
o Customer, sales/marketing, engineering/R&D/Design, production, supplier, purchasing or a multi-
disciplinary team?
Scoping
o Scoping is the first part of specification in the purchasing process. Scoping aspects:
a) (Re) defining jobs: determines the market the potential suppliers are in, thus who are the
supplier level + intensity of competition etc.
b) Aggregating/disaggregating jobs in separate lots or not: lots can be defined by the buyer
(virtually no restrictions), by defining the lots you can influence who wins, defining
separate lots could be by type (e.g. chairs, tables, desks), by use (e.g. office, canteen,
reception), by location (e.g. city A, B office etc.)
Advantages of more (smaller) lots Disadvantages
o More potential suppliers o Managing the various lots + their
o Also smaller/local suppliers (SME’s) interactions yourself
o Potentially better conditions from specialized
suppliers
o Buying in lots is usually cheaper
EXAM: When we split a tender in separate lots we have:
o Just more work: no benefits. We have to do more tenders + we also have to make sure that the
interactions between the various lots are managed well.
o Less suppliers that will bid, since the smaller lots are not so interesting as a larger job.
o Bidding process takes more time and is more complicated for all these small lots.
o The possibility to save money if the integration of the various does not require much effort.
c) Technical/functional specifications
Functional: describes what the good or service actually has to do or provide;
relatively easy to compare; can cost a lot if done incorrectly – risk lies with the buyer
2
, Technical: describes in a very detailed manner product or service is looked for;
allows innovative solutions by suppliers, more possible suppliers more
competition?; difficult to compare, tend to be over specified
Nellore et al. (1999) dimension of purchasing specifications for products
1. Product requirement: What should be the physical dimensions? Should a particular material be
used?
2. Process requirements: How should the purchased product be produced?
3. Customer requirements: customer = ultimate user of the purchased product; e.g. purchaser can
investigate what ultimate user values about steering wheel in car
4. Choosing appropriate mode of communication with the supplier(s): writing specifications entirely
done by buying company; information exchange between supplier and buyer, supplier modifies
the initial specification
5. Functional requirements: counterpart of the dimension of the product requirements, state what the
product should do, the problem it is supposed to solve or the outcome that should result from
using the product
Wynstra (2002) four specific bases for specifying services e.g. cleaning service
1. Input: focus on resource + competences of supplier e.g. which cleaning materials should be used,
1 hour of cleaning
2. Throughput: focus on processes/ production of services e.g. where and how to use the cleaning
materials e.g. all seats have to be vacuumed twice a year
3. Output: focus on performance of service – SLA/PI e.g. once this room has been cleaned, no more
than 100 bacteria
4. Outcome: what must a service provide for me? Focus on value in economic terms for the user e.g.
pleasant environment to learn
o Traditionally, services were specified in terms of the required input and throughput, nowadays
have started to focus more on the output and/or outcome
- supplier is free to do what he wants to do as long as he meets the agreed upon level
Service-Level-Agreements
o form of the specifications: drawings is widely used of the purchased item or product
o Main issue: select a level and do not mix levels suppliers will go for minimum
o General terms & conditions Those are followed who ever mentions them first, no explicit
refusal thereof means acceptance purchaser should refer to his conditions first + explicitly
reject other side’s conditions
o Purchasers must decide to what extent the specification can or should make use of standard
specifications advantage: removing uncertainty for the supplier, increased reliability of the
delivered product, saving of time + money in writing + communicating the specification
Multiple levels of purchasing specification
EXAM: What would be an advantage of going more to the left/right hand side of the picture?
o Right
- Innovation usually occurs at the right
- you avoid cost of assembly (buy assembled products already)
- More expensive
- Deal with 1-2 suppliers only
o Left:
- More suppliers are needed (due to more work)
3
, o Ultimate far right: buy a service with it e.g. Philips taking care of the lights at the Amsterdam
airport
Result of the specifying step:
Program of Requirements: listing all requirements a supplier has to meet in its offer (not only
about product, but also about relationship + additional services such as maintenance + supply of
spare parts)
Common mistake: over-specification which is often done out of insecurity of the organization
about getting the right offer
Last part of the specification stage: draw up selection criteria against which supplier proposals will
be evaluated in a later stage
2. Selecting of suppliers
Chances of receiving good offers are set by the initial selection of suppliers
In governmental environment above certain financial thresholds: obligatory to make a public
announcement of planned purchases so that all interested suppliers can submit their proposal
Other option is to invite suppliers – either past and current suppliers or unknown to the company
Can be a good idea to perform a market research to make a proper initial supplier selection
Suppliers are invited to compose their proposal based upon the Program of Requirements + all
other relevant information such as a description of purchaser’s organization, the proposed legal
terms and conditions + desired format for the offer
To make the initial selection it is necessary to define supplier selection criteria which are derived
from the Program of Requirements
The evaluation of proposals is done by judging them against the award criteria
Selection criteria: relate to the supplier + its organization e.g. size, geographical presence+
experience
Award criteria: relate to the content of the proposal like quality and price of the offer
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