PLM 324

STRATEGIC PURCHASING
WEEK ONE ➢ Overview of strategic Purchasing

WEEK TWO ➢ Process of developing Procurement strategy

WEEK THREE ➢ The Purchasing organization

WEEK FOUR ➢ Supplier management

WEEK FIVE ➢ Supplier development

WEEK SIX ➢ CONTINUOUS ASSESSMENT TEST ONE (CAT 1)
WEEK SEVEN ➢Methods for everyday purchasing
WEEK EIGHT ➢ Change management
WEEK NINE ➢ Quality management
WEEK TEN ➢ Strategic Supplier relationship management
WEEK ELEVEN ➢ Risk management in Purchasing

WEEK TWELVE ➢ The Supply base

 Week 1
Overview of strategic purchasing
“strategy” refers to an operational framework which is geared to
the attainment of long-term goals.

Procurement strategy relates to the specific actions that

procurement may take to achieve the objectives of the business.

Strategic procurement is the linking of procurement to corporate

or business strategies
Strategic Thinking

Elements of strategic thinking

▪ System perspective
▪ Intent focus
▪ Intelligent opportunism
▪ Thinking in time
▪ Hypothesis driven
Principles of Procurement Strategy
✓ Long-term: Ensures the long term ✓ Strategic fit i.e. proper match
direction of an organization between the organizational
capabilities with the opportunities
✓ Comprehensive and broad i.e. itin the environment.
determines organizational priority
and provides the long term ✓ Achieves competitive advantage by
direction increasing value on the product
that maximizes customer
✓ A mean only: it is only a means to
satisfaction
achieve organizational goals. In
other words, it is not the end itself. ✓ Based on strategic decisions(
decisions are long term managerial
✓ Meets stakeholder's expectation
decisions which are rare,
consequential and directive)-it
determines the scope of an
organization and provide base for
resource allocation.
Forms of Procurement Strategies
Intended Deliberate Realized
Strategy Strategy Strategy

Unrealized Emergent
Strategy Strategy

Mintzberg’s concept of emergent strategy

A firm first sets out its intended strategy hoping for achievement, then a series of
developments occurs that give rise to unplanned or emergent strategies. Emergent
strategies are the unplanned responses to the unseen changes
Levels of Procurement Strategy

Strategic

Tactical

Operational
Why Manage Procurement Strategically
A coherent and well-supported business-wide
procurement strategy will ensure that procurement
practices:
✓ contribute to the organization's vision and objectives
✓ help obtain value for money from all purchasing
activity
✓ help effectively manage supplier markets
✓ effectively manage risks associated with purchasing
activity
✓ enable the best quality of goods and services to be
obtained
✓ are undertaken in a way that ensures probity and
accountability for outcomes.
 Week 2
Process of developing strategy
The method of strategy development follows a logical thought
process and can be divided into different stages
▪ Strategic analysis

▪ Strategy objectives

▪ Strategy development

▪ Tactical realization/implementation

▪ Strategic review
Strategy analysis
▪ Analysis of internal requirement
▪ Business strategy
▪ Product roadmap
▪ Technology planning
▪ Product complexity and quality

▪ Analysis of external requirement

✓Industry structure
✓Supplier structure
✓Economic environment
▪ SWOT analysis
Target setting
Purchasing targets defined with the aid of collected information
and the resulting overview.

Criteria for target setting

• Efficiency-operational targets e.g. Quality, Timeliness and
Cost
• Effectiveness- strategic targets e.g. Risk Management
Strategy development
Define
1. commodity group strategies (portfolio technique)
Impact / supply
opportunity /

Bottleneck Strategic
risk rating

Routine Leverage
Expenditure
2. Supplier strategies-aims at the sources of supply used to
obtain the required procurement objects
Tactical implementation
Stages of strategy implementation
▪ Communicate strategic plans to all who have not been
involved in their formulation.
▪ Obtain commitment from those concerned. This involves
disclosure and discussion in consultative processes, such as
meetings and team briefings.
▪ Framing policies and procedures.
▪ Setting operational targets and objectives and ensuring that
these are related to corporate objectives
Strategy evaluation control & review
Objective of evaluation is to enable procurement managers to
understand both the process and result of strategic planning

Evaluation criteria:
■ Internal consistency
■ Environmental fit
■ Resource fit
■ Communication and implementation
 WEEK 3
The Purchasing Organization
After Strategic Purchasing has defined its targets and the
measures to realize them in the context of the strategic process,
the question is then how to realize these targets. In this context,
strategists then need to take a close look at the Purchasing
organization.

An organization generally is the integration of different elements

in a formally structured system in which the performance of
organization members is geared to a common target.

“organization” describes how tasks, staff, resources, and

information should be subdivided and structured in order to
realize goals in the most efficient way.
Types of purchasing organization

• Structural organization –the hierarchical framework of the

organization within which structures and responsibilities are
defined

• Operational organization -elements are ranged in workflows

and processes in a spatial, chronological and quantitative array.
Centralized purchasing
Advantages Disadvantages

• Bigger volumes • Bureaucracy

• Negotiation power • Spatial distances
• Professionalizing • Target conflicts
• Homogeneous supplier • Poor acceptance
structure
• Unambiguous • Cultural peculiarities
responsibilities
• Efficient procurement
processes
• Uniform control
Decentralized purchasing

Advantages Disadvantages

▪ Spatial proximity ▪ Low market power

▪ Short decision-making paths ▪ Redundancy
▪ Problem solving focus ▪ Less standardization
▪ High flexibility ▪ Ambiguous responsibilities
▪ Different strategies
Lead buyer concept
In this approach, demands of the same kind are aggregated
company wide in uniform material groups.
Tasks of lead buyers.
Total supplier and commodity group management
Development of methods and provision of market knowledge
Negotiation and concluding framework agreements

• Advantages of lead buyer

• Uniform strategy
• Aggregation of demand
• Supplier management
 WEEK 4
Supplier management
Due to the direct influence of a suppliers’ performance on the
competitiveness of the company, the interest in innovative long-
term partnerships is growing. At this point, supplier
management is called for to make use of its tools aiming at a
general design of the supplier–buyer relationship.

Supplier management aims to develop, procure, and produce

products or services better, quicker, and at lower cost.

Supplier strategy determines the general direction for long-term

action plans in the context of supplier policy: It answers the
question from whom and, particularly, in what way products and
services should be bought.
Key questions in supplier management

➢How can the supplier portfolio be managed and formed on a

strategic level?
➢How should the best suppliers be chosen?
➢How efficient is the performance of current suppliers?
➢How can we be sure to buy from the best suppliers?
➢What measures can be taken when flaws have been
identified?
Supplier management process
Process of supplier management
• Supplier selection,
• Supplier evaluation,
• Supplier development, and
• control of suppliers
Supplier evaluation
It is the systematic and comprehensive assessment of the
performance of suppliers with respect to defined criteria.
Supplier evaluation criteria
▪ Delivery performance
▪ Price performance
▪ Quality performance
▪ Complaints
▪ Supplier development
▪ Communication
▪ Risk performance
▪ Quality teamwork
Signs of supplier financial difficulty
• Rapid deterioration in delivery and quality performance
• Senior managers leaving the business within a short period
of time
• Very slow responses to requests for information
• Problems in the supply chain (and/or changes in
subcontractors)
• Chasing payment before it is due.
• Adverse press reports
 WEEK 5
Supplier Development
Supplier development has been defined as:
Any activity that a buyer undertakes to improve a supplier’s
performance and/or capabilities to meet the buyer’s short-term
or long-term supply needs.

Example of supplier development:

✓A buyer wants to use purchasing cards, supplier does not have
capability. The buyer may purchase electronic terminals for the
suppliers concerned
NB: Supplier development should lead to improvements in the
total added value from the supplier in terms of product or service
offering, business processes and performance, improvements in
lead times and delivery etc.
Reasons for Supplier Development
✓Increase Supplier Reliability
✓Increase Quality through resolving serious quality issues
✓Reduce Costs/Price
✓Increase Efficiency
• By decreasing number of suppliers
• By improving supplier performance
✓Developing new routes to supply
✓Improving business alignment between the supplier and the
buying organization
✓Developing a product or service not currently available in the
marketplace
Form of supplier development
✓Training ✓Requiring supplier
✓Providing capital
capability improvements
✓Providing support
✓Providing equipment personnel
✓Enhancing working ✓Agreeing to share the cost
relationships of failure to achieve
predicted sales targets
✓Increasing performance ✓Providing progress
goals (e.g. by reducing payments during the
waste and speeding up development of a project
delivery) or product
Benefits of supplier development activities
✓Reduction in waste along the supply chain, with favourable
impact on the buyer’s profits
✓Improvements in products and services, including reduction
in time to market and new product development
✓Reduction in production and process costs
✓Additional sales arising from improvements to products or
reductions in selling prices
✓Longer-term security of business
Costs of supplier development
✓Management time expended in researching and identifying
potential suppliers
✓Management time spent with the supplier discussing the
relationship and its possible development
✓Cost of equipment and systems designed to run the new
relationship successfully
✓Risks involved in sharing information, eg abuse of intellectual
property, disclosure of trade secrets
✓Restrictions on supplying competitors of the new customer
 WEEK 6

COUNTINOUS ASSESSMENT TEST ONE

(CAT I)
 WEEK 7
Methods and tools for everyday purchasing
Purchasing Market Research : The task of gathering and editing
of information on the market conditions that are relevant for
Purchasing.
Comprehensive and systematic procurement market research is
essential for evaluating the risks and chances of the markets and
for optimally procuring products and services. Thus it is a key
task of a strategic purchaser

Type of purchasing research

• Procurement market analysis- provides a snapshot of the basic
structure of the respective procurement market
• Procurement market investigation- aims at revealing shifts of
the markets
Procurement Market research procedure
➢Decide on which product groups specific procurement
market research should be undertaken.
➢Scrutinize the market structure with respect to the
respective supply and demand situations
➢Investigate the competitive situation with regard to product
in question
➢Analyze demand situation
➢Scrutinized available suppliers to provide key information for
supplier selection
➢Analyze monitor and compare market price levels
Why procurement research
• Uncertainty

• Rapid changes in technology and economic circumstances

• Increased outsourcing of non-core business functions

• The new focus on partnering and evaluation of the benefits

Sources of information
Primary market research consists of directly gathering data
relevant to procurement market research on one’s own.

Primary sources
▪ Requesting supplier self-assessments,
▪ visiting conferences and trade fairs,
▪ talking to sellers
▪ Visiting production facilities
▪ Talking to other buyers of similar products
Sources of information cont’d
Secondary market research draws on information that is already
available
Secondary sources
▪ Publications by the supplier such as its Internet presence,
leaflets describing the product, or company reports.
▪ Specialist journals
▪ Credit rating companies
▪ Trade directories
▪ Market or stock exchange reports,
▪ Internet research have proven helpful
 Week 8
Change management
Every day, companies face changes, such as launching a new
product, or restructuring the organization. ...

Change management is a structured process to move

individuals, teams and organisations to the desired state. Change
Management is now perceived to be a core skill that all
managers and leaders should possess.

Strategic change management is the process of managing

change in a structured, thoughtful way in order to meet
organizational goals, objectives, and missions.
Types of change
■ Technology – such as IT and e-procurement
■ Product or service – procurement, for example, was
traditionally mainly a transactional process, concerned with
obtaining items for production or other internal use, but is
increasingly involved with strategic issues
■ Administrative – the movement from discrete procurement
‘departments’ to cross-functional procedures, such as the
scanning, screening and selection of suppliers by cross-
functional teams, for example
■ People – such as the need for trained procurement
professionals
■ Business relationships –which arise from acquisitions,
mergers, joint ventures and partnership alliances.
Perspectives on change
• Structural change If structure follows strategy, then changes in
strategy will be followed by structural changes. This can be
exemplified by administrative or business drivers resulting in
the decision to outsource.
• Cultural change Culture is an important aspect of change
because changes in organizational strategies usually require
changes in organizational structure.
• Individual change including insecurity, lack of information
regarding proposed changes, the break-up of work groups,
perceived threats to expertise, status or earnings,
inconvenience of new working conditions and changes in
management and supervisory personnel.
The implementation of change
Kurt Lewin, a behavioural scientist, argues that the process of
implementing change involves three basic steps:

1 unfreezing – enabling people or organizations to be willing to

change
2 changing – selection of techniques to implement change
3 refreezing – reinforcing and supporting the change
 Week 9
Quality management
Crosby defines quality as ‘conformity to requirements not goodness’.
For example a product is a quality product only when it conforms to
the customer’s requirements.
According to Munyimi and Chari (2018), procurement quality is the
totality of features and characteristics of a product that bears on the
ability to satisfy stated needs

A quality system is defined as: The organizational structure,

responsibilities, procedures, processes and resources for implementing
quality management.

Total quality management (TQM) A way of managing an organization

so that every job, every process, is carried out right, first time and
every time.
Quality dimension
Product Quality Dimensions
▪ Performance – operating ▪ Conformance – match with
characteristics pre-established standards
▪ Features – important special ▪ Serviceability – ease and
characteristics speed of repair or normal
▪ Flexibility – meeting service
operating specifications over ▪ Aesthetics – how a product
some time period looks and feels
▪ Durability – amount of use ▪ Perceived quality – subjective
before performance assessment of characteristics
deteriorates (product image).
Quality dimensions cont’d
Service Quality Dimensions

Timeliness – performed in Convenience – accessible to

promised time period customers

Courtesy – performed Completeness – fully

cheerfully serviced, as required

Consistency- all customers Accuracy – performed

have similar experiences correctly each time
each time
Principles of TQM
▪ A focus on product improvement from the customer’s viewpoint
– the key ideas in this principle are product improvement and
customer product improvement.

▪ A recognition that personnel at all levels share responsibility for

product quality – the Japanese concept of kaizen, or ongoing
improvement, affects everyone in an organization, at all levels.

▪ Recognition of the importance of implementing a system to

provide information to managers about quality processes that
enable them to plan, control and evaluate performance.
Assessing supplier quality
▪ Product audit Provides an image of the degree in which a
company succeeds in making everything run perfectly by
inspecting final products.

▪ Process audit A systematic investigation of the extent to

which the (technical) processes are capable of meeting the
standards.

▪ Systems audit Compares the quality system to external

standards (e.g. ISO 9000)
Cost of Quality
The cost of quality refers to the costs of conformance plus the
costs of non-conformance or the cost of doing things wrong.
The cost of conformance (COC) is defined as: The cost of
operating the process as specified in a 100 per cent effective
manner. This does not imply that it is efficient or even a
necessary process but rather that the process when operated
with the specified procedures cannot be achieved at a lower
cost.
The cost of non-conformance (CONC) is defined as: The cost of
inefficiency with the specified process, i.e. over resourcing or
excess cost of people, materials and equipment arising from
unsatisfactory inputs, errors made, rejected outputs and various
other sources of waste. These are regarded as non-essential
process costs.
 Week 10
Supplier Relationship Management
A relationship is defined, inter alia, as a ‘connection or
association’.

Supplier Relationship Management (SRM) is an approach

between two parties to work towards the integration of their
organizations, where that integration will bring greater value for
money for the customer and enhanced margin for the supplier
and will assist in meeting the strategic objectives of both.
Benefits of Supplier Relations Management

✓Helps to reduce costs

✓Increase efficiency by establishing communication processes
✓Manages supplier risk and compliance
✓Drives supplier performance in a transparent and
sustainable manner
✓Enables continuous improvement of operations through
long-term relationships with suppliers
✓Fosters business development and innovation
✓Improved quality
The Relationship Spectrum
A relationship with a supplier can be either competitive or
collaborative.
Relationship termination (Causes)
• Product obsolescence • Problems arise with the
• Changes in business relationship (becomes “too
direction(s) cosy” or bureaucratic and
• The supplier is unable to inflexible)
meet service levels
• Instability and inconsistence • Supplier makes a strategic
i.e. change in key personnel shift into other supply
or organizational philosophy markets
• A new supplier enters the
market, offering terms the
existing supplier cannot Classified under three headings:
match ✓ Fulfilled objectives
• Economic factors i.e. supplier ✓ Disputes
at financial risk ✓ One party behaved badly
Relationship termination
Terminations may be amicable or hostile. Campbell and Pollard
refer to the three Ps that can aid in minimizing possible hostility
encountered in the termination process:

■ Positive attitude
■ Pleasant tone
■ Professional treatment
 Week 11
Risk management in Purchasing
The progressively increasing globalization, growing complexity,
and rapid developments in the field of information technologies
offer enormous chances but also entail new risks incessantly

Risk can be understood as the possible occurrence of an event

that will have a negative influence on the realization of targets
that have been defined on the basis of imperfect expectations.

Risk management is a process of recognising the risk and

minimising the likelihood of a given risk from occurring and the
impact to the purchasing organization if the risk does occur.
 Risk Management Process
This involves the following steps required to either mitigate or
minimise the risks from occurring

Identify Determine Assess Investigate Plan,

potential individual overall risk control,
risks likelihood risk reduction reduce
and impact risk
Categories of Purchasing risks
▪ Supplier risk- comprise all risks resulting from failures of the
delivery performance of the supplier
▪ Product risk- comprise all risks concerning quality and
technology.
▪ Logistics risk- comprise all risks concerning the transport as
well as risks arising from failures of the supply chain
▪ Process risk are risks connected to processes or persons
▪ Market and country risk- comprise the risks in the
procurement markets.
 Supply Risk Mitigation Strategies

Low Occurrence, High Impact High Occurrence, High Impact

Implement joint process Begin resourcing
High improvements with suppliers, efforts on these SKUs
have emergency plans, buy redesign product
contingent business or find new suppliers
interruption insurance
Risk
Impact
Low Occurrence, Low Impact High Occurrence, Low Impact
Review and improve Monitor supplier
Low quality assurance process performance

Low High
Risk Occurrence
Purchasing risk control strategies
▪ Risk avoidance
▪ Risk reduction
▪ Transfer of risk
▪ Risk acceptance

Note:
• Risk control determines the organizational framework of the
risk management, supplemented by risk communication.
 WEEK 12
The supply base

The supplier base relates to the number, range, location and

characteristics of the vendors that supply the purchaser.

Supplier bases may be described as broad, lean, narrow, single-

sourced, local, national, international, diversified or specialized.

They can relate to a ‘family’ or related products and suppliers or

the totality of vendors with whom a purchaser does business.
Factors influencing the Supply base
▪ The range of purchases including goods and services
▪ The core competencies of the buying organization
▪ Investment requirements in product/service long-term
capacity
▪ Supply chain risks
▪ Inventory investment
▪ Ability to respond to emergencies and changing market
conditions
▪ Short-term procurement actions or long-term partnering
▪ Miscellaneous factors such as the social responsibilities to
local industry or support of SMEs and third sector.
Supplier base optimization
Supplier base optimization or rationalization is concerned with
determining a strategy that will identify the optimum number of
suppliers required to fulfill the requirements to supply all procurement
categories.
Why rationalization?
▪ Focusing purchases on a limited number of competent and cost
effective suppliers
▪ Requirement to control cost and procurement processes
▪ Generate confidence for suppliers to make long-term investments
▪ Encourage innovation and continuous improvement
▪ Enhance the availability of meaningful management information
▪ Optimize risks in the supply chain.
Approaches to supplier base optimization

▪ Selecting for a single or dual source of supply

▪ An approved or preferred supplier list
▪ Outsourcing a range of services thereby eliminating
individual suppliers to the services
▪ Redesign of products to reduce reliance on those owning
previous IPRs
▪ Aggregating purchases with other buyers to make quantity
feasible to larger suppliers.
Possible risks of a reduced supplier base
▪ Complacency resulting in repetitive actions cutting out
innovation
▪ Reduced competition in the supply market
▪ Exit of marginal supplier reducing available capacity
▪ Threats to supply arising from typical force majeure events
▪ Lack of knowledge of supply market developments and
market intelligence
▪ Inflexibility in contractual obligations.