Purchasing & Supply Process

Topic 2

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Learning Objectives
• Learn about purchasing objectives
• Understand the responsibilities of the purchasing function
• Identify and assess improvements in the Procure to Pay process
• Learn about strategic supply management roles and responsibilities

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Introduction
• As an individual, “Why can’t I just go and buy it – just like I buy it
online or from a shop?”
• Purchase process is a lot more complicated
• Process – simple in nature, but controls, people in charge are
constantly rewriting guidelines… and changing

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Roles: Strategic Vs Tactical
OVERALL GOALS
Supply Continuity
Manage purchasing process
Supply Base Management
Engage stakeholders
Develop sourcing strategies

TACTICAL
STRATEGIC GOALS RESPONSIBILITIES
Demand Management Forecast requirements
Commodity strategies Supplier identification, selection
Contract Management Contract / PO preparation
Procure to pay improvement Receipt, inspection
Invoice settlement, payment

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PURCHASING OBJECTIVES

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1. Supply continuity
• Purchasing performs a number of activities to satisfy operational
requirements of internal customers
• Purchasing supports engineering, technical groups (such as IT)
• Relevant especially during new product / service development
• Hence, key roles
Source products, services at right price

Source from the right source

Source them at right specifications

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2. Manage the sourcing process efficiently and
effectively
• Determining staffing levels
• Developing, adhering to administrative budgets
• Providing professional training, growth opportunities for employees
• Introducing improved buying processes to facilitate transparency,
spend visibility, efficient invoicing, payment

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3. Develop supply base management
• Constant lookout for suppliers who are competitive
• Identify new / start-up suppliers who could evolve into mature,
established ones
• Improves existing suppliers

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4. Develop aligned goals with internal
stakeholders
• Interactions with marketing teams, meeting their requirements
• Interfacing with manufacturing lines who use the purchased items /
components

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Strategic Roles & Responsibilities
• Purchase function carries out certain duties on behalf of the
organization
• We refer to this as a function’s responsibility or span of control
• Span is control is established through senior management policies and
governance
• We discuss some areas where purchase has a major role to play

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1. Spend Analysis
It is the process of collecting historical data by
commodity, relative to demand from the lines of
business The output of the spend analysis is used
to drive demand management,
For example, in a bottling plant, the spend analysis commodity management, risk
may involve management strategies
1. Spends by packaging department (cardboard,
polythene, etc.)
2. Spends by fruit pulp purchase department, etc.

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2. Demand Management & Specifications / SOW
• Is the process whereby UNIT and RATE consumption levels are used
to forecast and estimate future consumption in an internal functional
customer
• Provide guidance on how to optimize usage,
• Educate the user on trade-offs
• For services, the term used is Statement Of Work (SOW): also within
the purchase department’s span of control

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…
• What kind of questions can the purchase team ask?
• Whether a lower cost material can still meet an engineer’s stress tolerances
• Can challenge the rate charged by a consultant or a maintenance provider
• Can review specifications as and when newer materials (that provide the same
functionality) or technologies that provide better services come up

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3. Category Management in purchasing
• Is the process of developing external industry intelligence and
analysis,
• Assessment of internal demand, supply base capabilities along with
• An alignment strategy between the organization’s requirements and
the market’s offerings
• However, in practice, firms mostly segment and deploy resources to
tackle purchase related activities

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…
Example: At an apparel buying and selling firm

Kids wear
• Evaluating supplier base –
rationalizing, focusing on
strategic suppliers
Category Management Mens wear
• Developing new suppliers
• Negotiating purchase and RTV
(Return to Vendor agreements)
Ladies Wear

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4. Contract Management
• How to award purchase contracts? Decided by the purchase contract
• If purchasing takes a competitive bidding approach, how many
suppliers will it request to bid?
• The department can lead or coordinate negotiations with suppliers
• “Contract management is a process associated with defining the
contract, defining roles and responsibilities of both parties, and
advising when to modify and ensure appropriate escalation”

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5. Cost Management
• Often involves decision support tools and databases that help
understand
• Cost of a commodity
• Identifying the business case (e.g. is it a reasonable expense after we deliver it
to the customer?)
• Total cost of offering the service, including all of the elements of receiving,
use and disposal over the life cycle of the offering

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The Procure to Pay process

Internal
Projects Operations
Customers
START START

Forecast and Need Supplier Approval / Receive Settle, Pay and

plan clarification / identification / Contract / PO Material and Measure
requirement requisition selection Generation Documents performance

Supplier Need
Fulfilment

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Purchasing: MRO
• Maintenance, Repair and Operating items include support items (That
do not go directly into an organization’s product
• Yet, they are necessary for business operations
• MRO items are purchased in reactive manner (when a user sends a
requisition)
• Most current organizations: perform the ordering mostly on auto-
replenishment mode

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…
• Or, they outsource
• For example, FedEx has outsourced the function to Staples
• Staples maintains a website listing all products
• Users can select and order, observing the prices, quantity available
• For production support items
• Examples such as pallets, boxes, master shipping containers
• These support the organization’s products directly (for instance, packaging)
and thus they are different from MRO items

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What about capital equipment purchases?
• These refer to machines, large equipment such as a Flexible
Manufacturing System (FMS), office furniture, etc.
• Bought and remain in use for 10 to 20 years
• Often quite sensitive to prevailing economic conditions

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Strategic Perspectives,
Orientation

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Observations by A.T. Kearney
• In the 21st century, 90% of normal procurement transactions will be
eliminated
• 99% of the remaining will be automated
• Non-value adding transactional activities would be curbed
substantially

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…
• Hence procurement leaders would

Transition day-to-day activities to

suppliers or delegate them to suppliers

Cut waste (MUDA) from routine

transactions

Re-deploy procurement people onto

high value added activities

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Leadership practices & performance

• Are information systems

limiting the ability to
achieve results?
• Can process improvements
for replenishment systems
save more?

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Observations from Capgemini survey
• Procurement function participated in innovative process, in a limited
way
• The involvement was limited to key resources, dedicated teams of
people drawn from various functions
• The information gathering exercise was termed as the World Café
session

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…

• Supplier innovation
was categorized under
1. Dedicated
innovation sourcing
2. Virtual teams
3. Cross-function
teams

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…

• Role of procurement in
innovation

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