SUPPLY

CHAIN MANAGEMENT
Procurement Management
AIMS:

*  To have clear view of the subject of procurement

management and supply in the context of supply
chain
*  How to develop procurement processes
*  To have clear understanding of procurement
management objectives and functions
*  To look at procurement management strategically
*  To recognise differences of procurement for primary
activities vs. supportive activities

Supplier A
Supplier A
Supplier A
Supplier A
Supplier A Goods & Services
Customer
FLOW

INFORMATION

Supply Chain
Management

Supply Demand

Procurement
Management
 What is the main objective of
purchasing by different firms?

*  “to acquire the right quality of material, at the right

time, in the right quantity, from the right source, at
the right price”
Quality

Price Time

Right

Place Quantity

(Farmer et al., 2008, p. 4)


Organisation Supply flow of services, goods and materials

Steadiness and continuity Existing sources vs. alternative sources

Wise and efficient How to purchase more wisely and
efficiently for what organisations spend

Keep close connection with departments Share information, effective operations

Develop Strategies, rules, methods and staffs

(Farmer et al., 2008)

 Additionally
Best
Suppliers

Effective
Cost Development
Structure
of products

Procurement
Management

Market Quality ó
trends Value balance

Negotiate
with
suppliers

(Farmer et al., 2008)

 What is the main objective of
procurement management?

*  “The management of the company’s external

resources in such a way that the supply of all goods,
services, capabilities and knowledge which are
necessary for running, maintaining and managing the
company’s primary and support activities is secured at
the most favorable conditions” (VAN WEELE, 2005, p. 12)
 What is the difference between
‘Procurement’ management,
‘Purchasing’ management ?

*  Some authors believe that ‘Purchasing’ management in a

subsection of ‘Procurement’ management but there is no
agreement among them and these terms are being used in
similar ways (interchangeably) in practice.

(VAN WEELE, 2005)

 Main functions of Purchasing and
Procurement Management:

*  Sourcing Procurement:
Analysing Analysis
Analysing Analysis risk Selecting the
market and supplier
requirements associated supplier
industry relationships

*  Operational Procurement:
Managing Assessing
Improving quality Supplier Paying Delivering Ordering Contracting
performance
 Value Chain
Support Activities

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT

SER
VIC
INBOUND OUTBOUND MARKETING & ES
OPERATIONS
LOGISTICS LOGISTICS SALES

Primary Activities

Redrawn from (PORTER, 1985, p. 38)

 Types of Products and Services

Goods &
Services

Maintenance
Supplementary Semi- Capital and repair
Raw Materials Materials manufactured Components Trade Products equipment Services
material

e.g. soya, e.g. lubricating e.g. Engine e.g. office e.g. cleaning
coffee oil e.g. plastic foils Parts e.g. Car Radio e.g. CNC supplies services

(VAN WEELE, 2005)

 Spend Analysis

*  Strategic analysis is the beginning point to source procurement

strategically and a lens to increase transparency of the money which
is spent for procurement activity and also to improve spend control
and compliance. Different types of information can be arranged
such as information about procurement, chain of suppliers,
arrangement of commodities and the amount which has been spent
*  This analysis is with purpose of:
*  Discovering how much every category spends
*  Recognising sourcing opportunities more strategically by aggregation of
demands and sourcing to best suppliers
*  Recognising expense reduction where it is possible
*  It can decrease total spend from 2 to 25%

(PANDIT and MARMANIS, 2008)

Strategic procurement operation

*  “A proactive strategic procurement operation can

give the organisation it represent a competitive
advantage by reducing waste in the value chain”
*  Such as:
*  Reducing total cost rather than price in short term
*  Adding value
*  Supporting activity roles

(Farmer et al., 2008, p.37)

Breaking down Return on Equity
(RoE)

Net Income
RoE =
Equity

- Does this give us much to manage?

 Breaking down Return on Equity
(RoE)

Net Income Sales

RoE = X
Equity Sales
Profit Margin Equity turnover
Net Income Sales
= X
Sales Equity
-  Multiply it out to make things more meaningful
 Breaking down Return on Equity
(RoE)

NI Sales Total Assets

RoE = X X
Equity Sales Total Assets
Profit Margin
NI Sales Total Assets
= X X
Sales Equity Total Assets
Equity turnover
-  Multiply it out to make things more meaningful
 Breaking down Return on Equity
(RoE)

NI Sales Total Assets

RoE = X X
Equity Sales Total Assets
NI Sales Total Assets
= X X
Sales Total Assets Equity
Profit Margin Total Asset turnover Equity multiplier
-  Multiply it out to make things more meaningful
Apple Inc

http://financials.morningstar.com
Apple Inc

NI Sales TA
RoE = X X
Sales TA Equity

RoE = 9.58 x 1.42 x 1.55

= 21.09

- Everything is connected, so
optimisation has to be seen
in a wider context!

http://financials.morningstar.com
Apple Inc

https://www.stock-analysis-on.net/NASDAQ/
Apple Inc

https://www.stock-analysis-on.net/NASDAQ/
Apple Inc

https://www.stock-analysis-on.net/NASDAQ/
 Dupont Analysis

https://www.youtube.com/watch?v=pR4ln3_JgRI
 Dupont Analysis

https://www.youtube.com/watch?v=pR4ln3_JgRI
How can cost reduction be strategic?

*  Let see how 5% reduction in the price of raw materials

which are directly being processed and used in final
product is reflected on the total gain by a company

*  We use DuPont analysis to see its reflection on Return

of Investment (ROE)
 Dupont Analysis
Other Current
Fixed assets Operating income
assets

+
+ /
Inventory

+ Current assets Assets Asset turnover

Accounts
receivable

+
Cash and
equivalents x Return on assets

Operating income

- Earning before
Profit Margin
interest and tax
Operating
expenses
- %
+
Non-operating
income Fixed Expenses Operating income
 Operating
Other Current Fixed assets
income
assets £50,000
£200,000
£50,000

+ + /
Inventory
£10,000 Current assets Assets Asset turnover
£90,000 £140,000 1.43
+
Accounts
receivable
£20,000
Return on
+ x assets
Cash and 7.15%
Operating
equivalents
income
£10,000
£200,000
Earning before
- interest and Profit Margin
tax 5%
Operating
expenses £10,000
£175,000
- %
+
Non-operating Operating
Fixed expenses
income income
£15,000
£0 £200,000
 Operating
Other Current Fixed assets
income
assets £50,000
£200,000
£50,000

+ + /
Inventory Assets
Current assets Asset turnover
£10,000 £140,000
£90,000 1.43
+
Accounts
receivable Return on
£20,000 assets
+ x 13.44%
Cash and
Operating
equivalents
income
£10,000
£200,000
Earning before Increase
- interest and Profit Margin
by 6.3%
9.4%
Decrease Operating
expenses
tax
£18,750
by 5% £166,250

- % 13.44 – 7.15 = 6.3%

+
Non-operating
Operating
income Fixed expenses
income
£0 £15,000
£200,000
 Value Chain
Support Activities

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT

SER
VIC
INBOUND OUTBOUND MARKETING & ES
OPERATIONS
LOGISTICS LOGISTICS SALES

Primary Activities

Redrawn from (PORTER, 1985, p. 38)

Support Activities

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT

SER
VICE
INBOUND OUTBOUND MARKETING & S
OPERATIONS
LOGISTICS LOGISTICS SALES

Primary Activities
Support Activities

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT

SER
VICE
INBOUND OUTBOUND MARKETING & S
OPERATIONS
LOGISTICS LOGISTICS SALES

Primary Activities
 Procurement for primary activities vs. support activities

Aspects Primary Activities Support Activities
Redrawn from
Table 1.1, “Main
differences
between buying
Product assortment Limited to large Very large
for primary
activities and
buying for
support
activities” , p. 12 Number of suppliers Limited, transparent Very large
By VAN WEELE, A.
J. 2005.
Purchasing turnover Very large, considerable Limited

Number of purchase
orders Considerable Very large

Average Order size High Small
Depends on type of Limited, forecast-related
Control production planning or project related

Decision-making unit Engineering, Fragmented, varies with

manufacturing specialist product or service
dominant
 Resources

*  FARMER, D., CROCKER, B., JESSOP, D. & JONES, D. 2008.

Procurement, Principles and Management. 10th ed. Essex, Pearson
Education.
*  SOLLISH, F. & SEMANIK, J. 2007. The Procurement and Supply
Manager's Desk Reference. Hoboken, NJ, John Wiley & Sons.
*  PORTER, M. E. 1985. Competitive advantage: Creating and
sustaining superior performance. New York, The Free Press.
*  VAN WEELE, A. J. 2005. Purchasing and supply chain management:
Analysis, strategy, planning and practice. 4th ed. London, Thomson
Learning.
*  PANDIT, K. & MARMANIS, H. 2008. Spend analysis: The window
into strategic sourcing. Fort Lauderable, FL, J. Ross Publishing.