Module 1: The Role of Purchasing:

Purchasing in the Value Chain o All activities for which the company
receives an invoice from outside
The Role of Purchasing in the Value parties. Differentiation between:
Chain  Purchasing function
Primary activities can be divided in  Purchasing department
five generic categories:
 Inbound Logistics
 Operations Definition:
 Outbound logistics “Managing the company’s external
 Marketing and sales resources in such a way that the supply
 Services of all goods, services, capabilities and
The procurement function should be knowledge which are necessary for
able to meet the material running, maintaining and managing the
requirements related to inbound and company’s primary and support activities
outbound logistics, and to is secured at the most favorable
operations. conditions”.

Procurement:
o All activities that are required in order
to get the product from the supplier to
its final destination.
Sourcing:
o Finding sources of supply,
guaranteeing continuity in supply,
Support activities can be divided in ensuring alternative sources of supply
four generic categories: and gathering knowledge of
 Procurement procurable resources.
 Technology development Purchasing Management:
 Human resources management o All activities that are required to
 Firm infrastructure manage supplier relationships.
Procurement activities may be also Supply Chain Management:
related to supplying products and o The management of all activities,
services for the other support information, knowledge and financial
functions. resources associated with the flow and
transformation of goods and services
up from the raw materials suppliers,
component suppliers and other
suppliers in such a way that the
expectations of the end users of the
company are being met or surpassed
Value Chain Management:
o Usually the supplier works closely
Definition of Concepts together with the customer’s technical
 and marketing staff to reduce the
product’s overall costs and add new
designs or features to the product
which increase the value for the end-
customer.
Challenge: How to manage our
Different Definitions EXTENDED ENTERPRISE?
 Ordering
Operational, short
 Buying term, deal and
 Purchasing margin oriented
 Procurement
Operational,
 Sourcing short term,
 Supply Chain Management deal
 Value Chain Management margin

Purchasing:
o Relates to every activity the company
receives an invoice for

Importance of Purchasing to Business

Classification of Purchasing Goods

The purchasing process may concern a
large variety of goods and services. In
general, purchased materials and
services can be grouped into the
following categories:
Challenge for managers: How to manage o Raw Materials: materials which have
our EXTENDED ENTERPRISE? undergone no transformation or a
minimal transformation and which
serve as the basis materials for a
production process
o Supplementary Materials:  Global sourcing
materials that are not absorbed  Supplier integration
physically in the end product  Early supplier involvement in new
o Semi-manufactured Products: product development
products that have already been  Reciprocity agreements and
processed once or more times and compensation agreements
that will be processed further at a  Corporate Social Responsibility and
later stage business integrity
o Components: manufactured goods
that will not undergo additional Conclusions
physical changes, but which will be o In short, purchasing represents a
incorporated in a system with which business area which is being
there is a functional relationship by confronted with many changes and
joining it with other components challenges.
o Finished Products: all products o Without doubt these challenges will
which are purchased to be sold, after put purchasing and supply chain
negligible added value, either management more in the spot light
together with other finished products in business.
and/or manufactured goods
o Investment Goods or Capital
Module 2: Industrial Buying
Equipment: products that are not
consumed immediately, but which Behavior: Decision Making in
purchasing value is depreciated over a Purchasing
period of time Organizational Buying Behavior:
o Maintenance, repair and o Professional Purchasing:
operating materials (MRO items): professional buyers with education
materials, which are necessary for and experience who know their tasks
keeping the organization running in and responsibilities
general and for the support activities o Derived Demand: developments in
in particular
industrial markets are often related to
o Services: labor intensive, non-
changes in the end-user markets
material activities that are executed upstream in the value chain
by third parties on a contract basis o Inelastic, Fluctuating Demand:
due to the derived demand, price-
elasticity in industrial markets is
frequently lower than in consumer
New Developments in Purchasing
markets
o Geographical Concentration: many
industrial markets are geographical
concentrated (e.g. Silicon Valley)
o Large order quantities and large
amounts of money involved
 Leveraged purchasing and supply
o Limited Number of Customers:
strategies
industrial suppliers often supply only a
 few companies compared to
companies that deliver directly to
consumers

Aspects of the Purchasing Process

o Business needs are leading:
Business needs and requirements are
the input for the purchasing process
model
o Process Approach: the various steps
in the model are closely connected
and the quality of the output of the
preceding steps determines to a large
extent the quality of the subsequent
steps
Models of Industrial Buying Behavior o Defining the Interfaces: the output
Variables that affect the buying of each phase has to be clearly
process: defined, preferably with a document
 Characteristics of the product o Determining Responsibilities:
 Strategic importance purchasing is considered to be a
 Sums of money involved cross-functional responsibility.
 Characteristics of the purchasing market Therefore, the tasks, responsibilities
 Degree of risk and authority of the parties involved
 Role of the purchasing department in the should be clearly indicated in each
organization phase
 Affect of purchase on existing routines o Combining Different Skills,
 Task variables Different types of Knowledge and
- Relate to tasks, responsibilities Expertise: key question is how to
and competences assigned to a combine the different types
person making the decision knowledge, skills and expertise in
 Non-task variables such way that all parties involved
- Relate to the professional’s arrive at an optimal solution for the
personality company

The Purchasing Process The Purchasing Process

The added value of the professional
buyer lies in the ability to act as a
facilitator for the supply process:
- Identifying new, potential
suppliers and business partners for
 the company’s changing business - Known product from known
needs supplier
- Being involved in new product - Low uncertainty regarding outcome
development and investment - (e.g. consumable items like MRO)
projects
- Supporting internal customers in Examples of Purchasing Situations
defining purchasing specifications
- Preparing and carrying out
contract negotiations, setting up
requisitioning and ordering routines
(e.g. through electronic buying
catalogues, e-Procurement) in such a
way that users can place orders
themselves
- Setting up requisitioning and
ordering routines in such a way that
the users can place orders themselves The Specification Phase
Functional
- Place orders at suppliers and Purchase order specification
Specifications
maintain and monitor orders, contains
Technical

contracts and supplier files

- Monitoring outstanding orders  Quality specifications
and financial obligations  Logistics specification
- Follow up and evaluation of  Maintenance specification
supplier performance and  Legal and environmental requirements
maintaining relevant supplier  Target budget
documentation
Supplier Selection and Assessment
The selection step contains a number of
separate steps:
Purchasing Situations 1. Determine the method of
Three types of purchasing subcontracting
situations: 2. Preliminary qualification
 New task situation draw up bidders list
- Completely new product from 3. Prepare request for quotation and
unknown suppliers analysis of the bids
- High uncertainty regarding 4. Supplier selection
outcome
- (e.g. acquisition of capital goods) Negotiation and Contracting
 Modified Rebuy o Fixed-price plus incentive fee: This
- New product from known supplier type of contract is designed to
- Existing product, new supplier motivate suppliers by means of
- Moderate uncertainty regarding rewards to execute the work above
outcome the agreed standard.
 Straight Rebuy
o Cost-plus contract: Cost-plus sends out signals of material
contracts are used in situations where shortages
the work cannot be specified  Routine Status Check: preventing
adequately, or when a fixed price materials supply and quality
constitutes too big a risk for both the problems – few days before promised
supplier and the buyer. delivery, the buyer contacts the
o Cost-reimbursable: This type of supplier to confirm delivery date
contract is usually based on fixed  Advanced Status Check: for critical
hourly rates for labor and equipment. purchase parts – a detailed
Without a bonus or penalty clause production plan will be handed over
these contracts provide little incentive to the buyer and during the process
to minimize labor hours or costs. the buyer will carry out periodic
o Agreement with price-adjustment: checks
This type of contract is used mainly
for agreements with a long-term
delivery, or when very specific, Follow up and Evaluation
market-sensitive materials are The buyer’s role continues after the
processed. new product has
been taken into production or the
Fixed-price or cost-reimbursable? installation has been
The decision for fixed-price or cost- put into operation.
reimbursable  Compare invoice with the original
contracts concern the following order
factors:  Solve delivery issues
- Comprehensiveness of the  Supplier assessment:
specification, absence of - Keep track of supplier’s quality,
specifications make a fair delivery record, competitiveness
comparison impossible. and innovativeness
- Available time, is there enough
time for a tender procedure and E-Procurement Solutions
price negotiations?  Electronic market places: make
- Technical expertise, when searching for suppliers easier like
specialized knowledge and skills are www.chemconnect.com for chemicals
required a cost-reimbursable and plastics or
contracts is often preferred. www.aeroxchange.com for the
- Degree of knowledge of the aviation industry
industry, about methods and price  Electronic auctions: the electronic
arrangements trade exchange is the most popular
e-solution
Ordering and Expediting  Electronic catalogue and
Three types of expediting: ordering systems: offer buyers
 Exception Expediting: buyer only greater opportunities for more
takes action when the organization efficient order handling.
 - Efficient order processing, logistics
and payment systems
- Transactions without human Major Bottlenecks and Problems
interference  Too detailed specification: The
- Substantial cost reduction because specifications of the user are
of a.o. transaction costs sometimes written to the capabilities
Forms of E-auctions: of specific suppliers
 Open Request for information  Inadequate supplier selection:
(RFI) / request for proposal Failure to check the supplier's (bank)
(RFP): references, can produce very
- Qualification before auction unpleasant surprises like bankruptcy
- Supplier is invited based on the  Personal relationships: Purchase
offer orders are placed with suppliers with
 Reversed auction whom the user has a friendly
- input price determined by buyer relationship; As a result such
- offers are visible, suppliers can see suppliers may not be as competitive.
how far away they are from the  Contract are too general,
best offer incomplete, drafted up by the
 Forward auction: supplier or not present at all.
- Vendor determines the price  Too much emphasis on price:
- Several buyers announce their Especially buying capital
offer to the auctioneer equipment buying decisions need to
 Most popular method under buyers is be based upon total- cost-of-
the reversed auction: ownership (TCO) rather than on price
- High volumes to cover the auction only.
costs  Poor administrative processes:
- Sufficient competition Putting a sound administrative
- Equal opportunities for all suppliers system in place could lead to
- The buyer has to be interesting for significant savings.
the supplier  Problems in delivery phase: over
time or incomplete delivery, quality
 Generally, e-auctions realize a cost problems can put the continuity of
reduction between 5% and 40% the business process in danger.
 Suppliers do not like these methods  Suppliers are not systematically
because their margins will decrease assessed: This results in
unprofessional suppliers and
repeating problems.

Conclusion
 Industrial buying behavior was
discussed from different perspectives:
- Organizational perspective
- Models that regard the interaction
between two or more parties
 Purchase process model offers
organizations a tool for structuring
their purchasing processes.
 E-procurement solutions offer the
purchasing professional many Standard Purchasing Procedure
opportunities to deal with problems. 1. Send an offer of collaboration to
the best companies, the offer contains
Module 3: The Purchasing the specifications and final reply date
Management Process (confidential)
2. Reject offers delivered after the
Primary Tasks and Responsibilities deadline
 Secure timely and undisturbed 3. Proceed with an opening session of
availability of purchased goods the letters
and services 4. Countersign the offers
 Control and reduction of all 5. Draw up a comparative table of costs
purchasing-related spend 6. Proceed with a consistency check on
 Reduction of the company’s risk technical level
exposure in relation to its supply 7. Check debit-equity ratio of the
markets companies
 Contribution to product and 8. Preselect the two best proposals
process innovation, the (quality and costs)
development task 9. Check the references
Changing Purchase Agenda 10. Draw up assessment grid of recent
realizations
11. Compare costs and renegotiate
item by item
12. Recommend a final choice
13. Maintain contact with the other
supplier (avoid monopoly)
14. Draft the contract with legal
department
15. Write to the companies not chosen
to notify them of refusal
16. Regularly sound out the
competition
Primary Tasks and Responsibilities 17. Preserve our partners’ long-term
motivations

Professionalizing Purchasing
Major principles of purchasing
policies:
 Business Alignment
- Develop a purchasing and supply
strategy
 Integrated, cross-functional o Make-or-buy analysis - analysis of
approach savings opportunities by eliminating
- Purchasing decisions cannot be particular production activities and
made in isolation, and should not buying the required products from
be aimed at optimization of third parties; buy or lease may be
purchasing performance only considered as an alternative.
 Performance Driven o Integration between purchasing
- Purchasing engages in a healthy and other functional areas - plans
debate with its internal customers aimed at removing interface problems
between purchasing and materials
Purchasing Management Process management, pure engineering, and
 Purchasing and supply (market) between purchasing and financial
research administration or treasury
- Purchasing and supply (market) o Setting up a purchasing
research refers to the systematic information and control system -
study of all relevant factors which analysis of purchasing information
may affect supply and demand of needs and design of an automation
goods and services, for the purpose plan; possibilities of linking this
of securing the company’s current system with existing information
and future requirements. systems in other functional areas.
 Purchasing and supply o Centralized or decentralized
objectives, strategy and planning purchasing - balancing cost benefits
- Based upon the company's overall and strategic considerations related to
objectives, purchasing objectives a centralized or decentralized
will relate to cost-reduction, organization of purchasing
improving product quality, lead o Standardization - determining
time reduction etc. Through these possibilities to achieve standardization
objectives the company directs, in order to reduce product and
manages and controls its supplier variety; balancing savings
purchasing activities and supplier and risks.
strategies. Management can focus
on different areas for action: Purchasing Management Process
Implementation of Purchasing Policy
Examples of Areas for Actions in
Purchasing
o Sourcing policy - determining
dependency on suppliers and
designing plans to reduce this
dependency.
o Direct versus indirect buying -
determining the (possible) cost
benefits of buying from importers and
distributors, or buying directly from Development of Purchasing Over
the manufacturer. Time
Step-wise development of
purchasing on the following
characteristics:
 Integrated final stage
- Management is actively involved in
purchasing strategies and tactics,
organized around team-based Purchasing and Supply Development
structures Model
 Organizational status of Stage 1: Transaction Orientation
purchasing - The primary task of purchasing is to
- Centralization often leads to some find appropriate suppliers for raw
form of coordinated purchasing materials and supplied components.
 Supplier management There is no explicit purchasing
- From reactive purchasing, via strategy in place.
proactive purchasing, to Stage 2: Commercial Orientation
relationship management - Purchasing strategy at this stage is
 Supplier relationships characterized by a sharp focus on low
- Reduced number of (preferred) prices. The culture is that of playing
suppliers and closer relationships hard negotiations with many
suppliers.
Drivers of Development Stage 3: Co-ordinated Purchasing
 Business context - Led by a strong central purchasing
- More competition, more mature department to implement uniform
technology used more pressure buying policies and systems, the
towards purchasing emphasis here lies on cross unit co-
 Company strategy ordination and compliance with
- More explicit about goals and nationally negotiated contracts.
objectives, more formalized planning Stage 4: Internal Integration
process greater chance purchasing - The emphasis is on cross-functional
is integrated in company strategy problem solving with the objective of
 System development reducing total life cycle cost and not
- Information and communication just the unit cost of components.
technologies are important enablers Stage 5: External Integration
for modern purchasing concepts - An explicit outsourcing strategy is
 Top management commitment combined with extra attention to
- Functional leadership collaborate with supply chain
partners on product development and
Purchasing and Supply Development preproduction planning.
Model Stage 6: Value Chain Orientation
- Delivering value to the end customer
in order to satisfy the needs in end-
customer markets. Subcontractors
seek for support among their
suppliers.
- This model should be used carefully,
for all stages may not be relevant for
all types of commodities, companies
and industries.

Conclusions
 Most companies have a large
potential for improvement in the
area of purchasing management.
 The systematic approach of the
purchasing management process
can help make this potential visible
and accessible.
 However, it takes time to put all
the elements of the purchasing
management process in place.