THE ROLE OF

PURCHASING IN THE
VALUE CHAIN
 INTRODUCTION
■ As business is becoming (now) more and more competitive, purchasing and supply
chain management are increasingly recognised by top managers as key business
drivers.
■ Since most companies today spend more than half of their sales turnover on purchased
parts and services, efficient and constructive relationships with suppliers are key to the
company’s short-term financial results and long-term competitive position.
■ Many companies (focus on) cannot escape from exploiting the huge potential that
purchasing and supply chain management represents to them today.
 LEARNING OUTCOME 1
Explain the role and importance of the
purchasing and supply function in the value
chain.
THE ROLE OF PURHASING IN THE
VALUE CHAIN
■ In many business strategies, the concept of value chain management plays a central role.
■ The value chain is composed of value activities and a margin which is achieved by these
activities.
■ Value activities can be divided into physically and technically different groups of activities.
Porter differentiates between primary activities and support activities.
■ Primary activities are those which are directed at the physical transformation (from raw to
processed) and handling of the final products that the company delivers to its customers.
Distribution/ (delivery) to the customer and providing services are part of these primary
activities.
■ Support activities enable and support the primary activities. They can be directed at supporting
one (1) of the primary activities as well as (or) supporting the whole primary process.
 Primary activities
Porter differentiates between five generic categories of primary activities:
■ Inbound logistics. These activities are related to receiving, storing and
disseminating inputs to the production process.
■ Operations. Activities associated with transforming inputs into the final
product.
■ Outbound logistics. These are activities associated with collecting, storing
and physically distributing the final product to customers.
■ Marketing and sales. These activities relate to advertising, promotion, sales,
distribution channel selection, the management of channel relations and
pricing.
■ Services. Activities associated with providing services to customers to
enhance or maintain the value of the product.
 SUPPORT ACTIVITIES
Support activities are grouped into four categories:
■ Procurement. Relates to the function of purchasing inputs used in the firm’s value
chain. These may include raw materials, supplies and other consumable items as well as
assets such as machinery, laboratory equipment, office equipment and buildings.
■ Technology development. Porter’s view every activity embodies technology, be it
know-how, procedures or technology embodied in processes, systems or product
designs. Most value activities use a technology that combines a number of different sub-
technologies involving different scientific disciplines.
■ Human resources management. These are all the activities directed at recruiting,
hiring, training, developing and compensation of all types of personnel on the
company’s payroll, active in both primary and support activities.
■ Firm infrastructure. The whole company is the customer of these activities.
Infrastructure does not support one or more primary activities; rather it supports the
entire set of company processes.
 PROCUREMENT(PURCHASING)
SUPPORT: PRIMARY ACTIVITIES
Primary activities. The procurement function should be able to meet the material
requirements related to operations management and inbound and outbound logistics.
Usually manufacturing processes can be characterized according to the following
categories. –
■ Make (and distribute) to stock (MTS). Standard products are manufactured and
stocked, and customers are serviced from an end product inventory. Production is on
dedicated machinery, often in large batches.
■ Make to order (MTO). Products are manufactured from raw materials or the purchased
components inventory after a customer order has been received and accepted and are,
hence, made to order.
■ Engineer to order (ETO). All manufacturing activities from design to assembly and
even procurement of the required materials are related to a specific customer order.
 PROCUREMENT(PURCHASING)
SUPPORT: SECONDARY ACTIVITIES
Support activities. Procurement activities may also be related to supplying products and services for the
other support functions.
Some examples are the buying of:
● laboratory (lab) equipment for research and development; (finding new information)
● computer hardware and software for the central IT department;
● lease-cars for the sales force and senior management;
● office equipment for administrative staff;
● beverages and foods for the canteen;
● cleaning materials for housekeeping;
● machinery and equipment for the production department.
 THE IMPORTANCE OF THE
PURCHSING AND SUPPLY FUNCTION
If a cost structure of manufacturing companies is done, the importance of purchasing can
directly be seen.
The effect of purchasing saving (more efficient purchasing) on the company’s return on
capital employed or return on investment (ROI) will be shown in the following calculation.
THIS WILL BE SHOWN IN A SEPARATE SLIDE SHOW WHICH WILL BE UPLOAD
ON EFUNDI UNDER RESOURCES
 LEARNING OUTCOME 2

Understanding the difference between concepts such as:

■ ordering,
■ buying,
■ procurement,
■ sourcing,
■ supply chain management
■ value chain,
and how they are interrelated.
 ORDERING

The term ordering refers to:

■ the placing of purchase orders
■ with a supplier against previously arranged
conditions.
 BUYING

Buying relates to:

■ the commercial activity
■ of soliciting competitive bids
■ from a limited number of suppliers
■ and negotiating
■ a final contract with the lowest bidder (or best).
 PROCUREMENT

Procurement includes:
■ all the activities required
■ to get the product
■ from the supplier
■ to its final destination.
■ It encompasses (involve) the purchasing function, stores,
traffic and transportation, incoming inspection, quality control
and assurance.
 SOURCING

Sourcing relates:
■ to developing
■ the most appropriate supplier strategy
■ for a certain commodity or product
category.
 SUPPLY CHAIN MANAGEMENT
Supply chain management can be described as:
■ the management of all activities,
■ information,
■ knowledge and
■ financial resources
■ associated with the flow
■ and transformation of goods and services
■ from the raw materials suppliers, component (particles) 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
Value chain implies that:
■ suppliers are challenged to improve the (buying) company’s
value proposition to its customers.
■ Usually the suppliers work closely with the (buying)
company’s technical and marketing staff to reduce the
product’s overall costs, come up with new designs or add new
features to the product which are attractive for the end
customer and that make the product sell better.
 LEARNING OUTCOME 3
Recognise new developments in purchasing
and supply practices of organisations.
 DEVELOPMENTS IN PURCHASING
AND SUPPLY PRACTICES
The following (these) are some new developments (changes) in Purchasing
and Supply:
■ Global sourcing (include international);
■ Leveraged (influential) procurement and supply strategies;
■ Corporate social responsibility and business integrity;
■ Resource scarcity;
■ Supplier integration (involvement);
■ Early supplier involvement in new product development.
 Global sourcing

The following are some new developments (changes) in Purchasing and

Supply:
■ Global sourcing;
■ Leveraged procurement and supply strategies;
■ Corporate social responsibility and business integrity;
■ Resource scarcity;
■ Supplier integration;
■ Early supplier involvement in new product development.
 Global sourcing
■ As the companies’ competitive position (beyond boarders) is directly
related to the competitiveness of its supply base, companies have adopted
a global scope towards sourcing issues.
■ Components and (IT-)services are increasingly sourced from foreign, low-
cost countries, a reason why large organizations have set up International
Procurement Offices (IPOs) in different regions of the world.
■ Procurement professionals, hence, are forced to adopt an international
scope towards their supply markets.
■ Supplier bench- marking, being able to deal with (incorporating) different
cultures effectively, being able to negotiate in different languages have
become prerequisites for today’s procurement professional.
 Leveraged procurement and supply strategies

■ In companies with several manufacturing plants, important savings

can be realised by combining common materials requirements.
■ A trend towards leveraged or coordinated procurement strategies is
apparent in many large European companies, across national
borders.
■ Traditionally this was already common for raw materials, which
most of the time were contracted at a corporate level.
■ At present, however, a similar approach is used for the purchase of
computer hardware and software, capital goods and components.
 Corporate social responsibility and business
■
integrity
These issues pose new and important challenges to purchasing. Environmental problems in many
countries also South Africa are becoming more and more prevalent.
■ National governments have become stricter in their regulations on this point.
■ All superfluous packaging needs to be avoided (e.g. blister packaging); aluminium cans are, in some
countries, charged for and need to be collected.
■ Manufacturers of packaging will increasingly be held responsible for its disposal after use and recycling.
■ Large car manufacturers design and construct their cars in such a way that the different parts and
components can be easily disassembled and reprocessed at the end of the car’s lifespan.
■ Apart from environmental issues, there is a growing pressure from the public that products should be
clean and originate from countries with free trade (less or no exploitation).
■ Child labour (banning or boycotting) has become an issue of particular concern, implying that
procurement professionals should ensure that the products (from such countries) they buy come from
sources of high integrity.
 Resource scarcity

■ As the world population is expected to grow to 9 billion by 2050, this

will lead to unprecedented demand for basic resources such as water,
agricultural land and food products as well as oil, gas and energy (as
population increase think & preserve for future generation).
■ Resource scarcity will become manifest in unstable demand and
supply situations, high price volatility of the commodities involved
and (to avoid sever scarce resource)shortages of supply.
■ This poses new challenges for procurement professionals who need to
develop a much more proactive outlook on how to secure the
company’s future requirements for critical materials and products.
 Supplier integration
■ Modern information technology enables companies to improve their materials
planning and supply systems internally and also in their relationships with
suppliers.
■ Information technology significantly improves productivity within materials and
supply chain activities.
■ An integrated approach towards materials management requires close co-operation
(in the whole systems) between production planning, inventory control, quality
inspection and purchasing.
■ To achieve (for) successful integration, system standardisation is a prerequisite.
■ Next, suppliers should be seamlessly integrated within these applications.
■ Hence, the capability of a supplier to link up with the buyer’s manufacturing and
planning systems becomes a much greater concern in order to be able to
successfully apply concepts like total quality control, quick response logistics and
JIT scheduling.
 Early supplier involvement in new product
development
■ As more and more innovations in industry come from suppliers, getting them involved
early in the new product development process becomes an issue of prime concern.
■ In doing so, procurement professionals need to alter their traditional ways of working and
their relationships with suppliers (never take anything for granted).
■ It should be decided at an early stage what part of the development process will be done
in-house and what part will be delegated to suppliers (be strategic: outsource if its
cheaper to buy outside and localize what co. can do cheaper).
■ Being able to work in cross-functional development teams and having a sound technical
background also become important prerequisites.
■ Procurement professionals should be able to solve the issue of how to reward innovative
suppliers for their contributions and ideas on new product development.
■ Gain and risk-sharing agreements replace the traditional price negotiations and
agreements, enabling a more intensive and long-term relationship with these suppliers.
 CONCLUSION

This learning unit explained the role of purchasing in the

value chain as well as how (and) importance of the
purchasing function is for the success of the business. The
purchasing function is constantly confronted with making
important decisions to help save money to increase the profit
of the business. The next learning unit will touch on these
decisions.