Plagiarism Statement

FACULTY OF FINANCE, ACCOUNTANCY & BUSINESS

PLAGIARISM STATEMENT

Read, complete and sign this statement to be submitted with your written word

I / We confirm that the submitted work are our own work and are in my own words.

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BEH CHUN KEAT 15WBR10955 ………...……………

Programme: BACHELOR OF BUSNIESS (HONOURS) IN LOGISTICS & SUPPLY

CHAIN MANAGEMENT

Tutorial Group: 2RLM 1

Date: 11th July 2015

1
List of Abbreviations

Page
B2B Business to Business……………………………………………….. 12
COQ Cost of Quality…………………………………………………....... 16
EDI Electronic Data Interchange…………………………………........... 12
ERP Enterprise Resource Planning…………………………………….... 12
MRO Maintenance Repair Operation…………………………………..… 12
VAN Value Added Network……………………………………….…….. 12

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List of Figures

Page
Figure 1: Supply Chain Structure……………………………………. 16

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Table of Contents

Page

Plagiarism Statement…………………………………………………………….. 1

List of Abbreviations…………………………………………………….……...... 2

List of Figures…………………………………………………………………….. 3

Table of Contents……………………………………………………..………....... 4

1.0 Introduction to Procurement………….…………………………………….. 5

1.1 Scope and Objective of Paper………………………………………… 6

2.0 Literature Review…………………………………………………………… 7

2.1 Roles of Procurement Department………………………………………….. 8

2.2 Procurement Process………………………………………………………... 10

2.3 Strategic Sourcing…………………………………………………………... 11

2.4 E-procurement……………………………………………………….……… 12

2.5 Procurement Outsourcing…………………………………………………… 14

2.6 Global Sourcing…………………………………………………………….. 15

2.7 Impacts of Supply Chain Management to Procurement……………………. 16

3.0 Conclusion…………………………………………………………………... 18

4.0 References…………………………………………………………………... 19

4
1.0 Introduction to Procurement

At first glance, people outside may think that procurement and purchasing activities are the
same but for those who are major in supply chain management they can differentiate between
procurement and purchasing. Procurement has been defined as the management of a broad
range of processes that are associated with an organization’s desire to obtain the necessary
goods and services needed for manufacturing a product, transforming inputs to outputs, or
indirectly operating the organization (Walter & Yusen 2014, p. 7). Purchasing has been
defined the transactional function or activity of buying needed goods or services (Walter et al.
2014). These two activities are totally different with each other because purchasing is a
subset of procurement. Procurement is no longer considered a simple business function
accountable for planning, implementing, evaluating and controlling purchase decisions
(Szwejczewski, Lemke & Goffin 2005; Paulraj & Chen 2007). Procurement is also
encompasses the management of resources and suppliers (Ellram & Carr, 1994; Lindgreen,
Vanhamme, J, Van Raaij & Johnston 2013).

The objective of procurement refer to the ability of acquire a product or services and buyers
purchase at the lowest cost at the right source, right quantities, right place and at the right
time. Procurement is often involved strategic sourcing, supplier selection and evaluation,
negotiation of contracts between procurement department and supplier, and setting payment
as well.

In short, procurement is important because it responsible for increasing competitiveness

within an unstable environment (Lawson, Cousins, Handfield & Petersen 2009, p. 2649).
Procurement also influencing positively the organisation profitability (Alinaghian, Aghdasi &
Srai 2011, p. 10) and contributing as much as other functions to business continuity (Andrea,
Arnaldo & Romano 2011; Ellegaard & Koch 2012).

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1.1 Scope and Objective of the paper

This research looked at the way in which the role of procurement department is contributing
effectively to an organisation’s performance and how procurement management plays its role
in the supply chain management.

The objectives of this research are to:

1. Find out the role of procurement department play its role in supply chain management
to an organization.
2. Understand the procurement process of an organization.
3. Evaluate how the relationships of strategic sourcing, outsourcing, global sourcing,
supply chain management to the impact of the procurement department.

6
2.0 Literature Review

Procurement department is important to an organization because it potentially affect the

company in the long run business. Procurement has been defined as the management of a
broad range of processes that are associated with an organization’s desire to obtain the
necessary goods and services needed for manufacturing a product, transforming inputs to
outputs, or indirectly operating the organization (Walter et al. 2014, p. 7). With good
procurement skills it will always bring the organization to the top of market opportunities.
Procurement department also work with other product develop teams to source materials,
finding the best price for the organization and it might contribute in different way to the
organization.

Jin (2013) said that a collaborative buyer‐supplier relationship is more desirable for the
buying firm in the supply market which is full of uncertainty, risk, and turbulence. It argues
that the practices of supplier evaluation must be cooperating to organization in order to
contribute effectively to procurement department. The e-procurement implemented by
Hyundai Motor are contributing effectively to procurement because it reduce paper-based
order, shorter lead time and now Hyundai Motor is now to implement a new system that
directly give innovation to the older system now. The global sourcing and outsourcing in the
organization can or can’t contribute to an organization is depends on the way the organization
implementing it. In addition, a good supply chain management also can positively impact the
organization but it need to maintain a good relationship with supplier in order to become a
world-class supply chain management.

7
2.1 Roles of Procurement Department

Hyundai Motor is a multinational automotive headquarter in Seoul, South Korea and now the
fourth largest vehicle manufacturer in the world. Roles of procurement departments include
supply sourcing, competitive bidding for supplier’s invitation, supplier management, costs
control and legal control. Simultaneously, maximising quality while minimizing costs and
optimising lead times, buyers create value by identifying their suppliers' new techniques,
developments, or inventions (Vlcek 2002). Procurement departments often work with the
product development teams to source raw materials and regulate the cost of the finished
products. Finding the correct price for the correct raw materials can be difficult to and
sometimes may also work with their suppliers in manufacturing the goods they needed.
Hence, cross-functional integration between procurement and other functions is fundamental
to increase visibility of the flows and, consequently, allow for more reliable decision-making
from managers (Chiang, Kocabasoglu & Suresh 2012, p. 50). The purchasing function
contributes in a significant way to company performance and competitive advantage, not only
due to its capacity to reduce costs, but also as a tactical function that needs to adjust itself to
changes in the market and to contribute to innovation (Albrecht, Dean & Hansen 2005, p.
813).

In the other hand, for goods needed in bulks or specialist goods, procurement departments
frequently use competitive bidding to choose a supplier. Next, the procurement department
will then be responsible for all the aspects of bidding process. For example, when the
procurement department of the Hyundai Motor chooses a supplier, it published a public
notice, writes detailed guidelines on the bidding process, agree to take companies onto the
approved list of bidders, handles bid security money, opens and reads the bids publicly and
makes a commendation on which bid to take. Simultaneously looking for supplies and
negotiating contracts for the supplies, procurement departments also taking responsible on
monitoring the supplier’s performance. It is a must in evaluating the supplier’s performance
or material quality control and this including monitoring time on delivery, quality, cost and
performance. Hyundai Motor also often certified their suppliers once they met the
performance targets. Hyundai Motor also often looks at legal controls because it needs to be
aware of the laws from each country applying to the procurement.

8
Roles of procurement are always important it can always affect a company performance and
judgement. For example, Hyundai Motor successfully increased their revenue from
$84,469,721 to $87,307,636 in year 2013 (Hyundai 2014).

9
2.2 Procurement Process

A formal and professional procurement process specifies how the supplier relationships will
be managed and to ensure the highest level of services is received. Procurements for major
projects typically require a great deal of preparation and forethought by buyers (Chamberland
2009, p. 12). For procurement process, it always starts with initiating project and in this stage
it’s all about planning. Brahim, Abada and Muhindo (2014, p. 227) postulates that planning
of purchases is no less important in institutions and government than it is in industrial
organizations. For example, procurement process is important for Hyundai Motor because it
need to implement their procurement process each time they want to purchase goods or
services from their external suppliers. Mohanty and Gahan (2012, p. 320) claims that in the
development stage uncertainty slowly reduces, distance between buyer and supplier also
reduces, commitment level from both the parties started increasing. It helps Hyundai Motor
to manage the relationships with external suppliers and ensure that the problems will be
resolved quickly. Following by identify business needs and analyse the market, Hyundai
Motor consults the stakeholders to get a clear complete picture of the business need and
conducting a market research to help clarify and inform requirements of the market. In short,
it called information gathering to help completing the picture of business.

Next, plan approach to market and evaluation. At this stage, Hyundai motor develops a set of
evaluation form to test their suppliers, interviews, demonstrations and reference check on
suppliers. For evaluation of Suppliers, organisations need to work out their supply chain
partners to develop sources of supply, which support a culture of improvement of social
environmental performance (Kalubanga 2012, p. 4). In addition, it goes to the negotiation and
award contract. In this stage, both Hyundai Motor and their supplier are reaching the
agreement on the terms via negotiation and ensure the time taken for completion of contract
signing and administration are short and fast. Once the contract is signed, Hyundai motor will
pay invoices on time, keep up a positive communication with the suppliers and developing a
suitable relationship with suppliers. In the other hand, suppliers will managing the delivery of
goods or service as per contract term and make sure it reaches to the buyer on time. Last,
Hyundai Motor will conduct a review to check that the benefits are achieved and looking for
any areas that need improvements and suppliers will share their feedbacks about the contract.

10
2.3 Strategic Sourcing

Strategic sourcing is a key that considering about the aspect of supply chain management
involving purchasing budgets, supply market, negotiate with suppliers and constant valuation
of supply transaction. Carr and Pearson (2002, p. 1033) defines strategic sourcing as the
process of planning, evaluating, implementing, and controlling highly important sourcing
decisions in an effort to meet a firm's long‐range plans and goals. Kocabasoglu and Suresh
(2006, p. 5) identify the four key elements of strategic sourcing: elevation of purchasing
function to a strategic level, effective cross‐functional communication and support within an
organization, information sharing with key suppliers, and development of key suppliers. In
strategic sourcing, Hyundai Motor made a considerable effort in developing the buyer-
supplier relationship in order to manage the suppliers as Hyundai’s assets and also integrating
the suppliers in the supply chain. Hyundai Motor is requiring interacting with the suppliers
due to the environment certainties and the developing of this buyer-supplier relationship can
lead to the competitive advantages for Hyundai Motor and suppliers in the marketplace.

Since suppliers now representing a critical resource to Hyundai Motor, the performances of
suppliers in supplying the Hyundai Motor will affect the company directly and indirectly.
Supplier evaluation is a quantification process that is linked to not only the evaluating buyer
company's decision process, but also the evaluated supplying company's behaviour (Hald &
Ellegaard 2011). Jin (2013) said that a collaborative buyer‐supplier relationship is more
desirable for the buying firm in the supply market which is full of uncertainty, risk, and
turbulence. As an important resource of a firm, strategic sourcing drives the firm to access,
acquire, or develop additional resources through buyer‐supplier cooperation. Supply base
strategically managing suppliers from evaluating, recognizing, and tracking suppliers through
supplier certification provides information about the buying firm's perceptions regarding the
supplier's performance, which in turn will influence the supplier's commitment to the buying
firm and the buying firm's effort in supplier development program (Prahinski & Fan
2007; Prahinski & Benton 2004).

The practices of supplier evaluation are to improve the communication between Hyundai
Motor and the suppliers by strengthening the relationships with suppliers so that risks are
reduced. It is also improving the supplier’s performance and their capabilities to meet the
short or long-term supply needs.

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2.4 E-Procurement

Davila and Gupta and Palmer (2003, p. 11) postulates that e‐procurement is also considered
as part of supply chain management and includes: e‐procurement software, business to
business (B2B) market exchanges, B2B auctions, and purchasing consortia. Wu, Zsidisin and
Ross (2007) defined e-procurement as the use of information technologies to facilitate B2B
purchase transactions for materials and services. Knudsen (2003) claims that e‐procurement
included e‐sourcing, e‐tendering, e‐informing, e‐reverse auctions, e‐maintenance repair
operation (MRO) and web‐based enterprise resource planning (ERP).

Hyundai Motor’s e-procurement system consist of three components which is automatic

request, automatic estimation with supplier’s extended Value Added Network (VAN) and
automatic analysis of procurement status. In automatic request, the request process between
the requester and Hyundai’s Motor procurement department are made in an electronic general
materials catalogue. Simultaneously, the printouts of request forms are eliminated and the
physical delivery to the Hyundai’s Motor procurement department is foregone. The
permission of the request to electronically reach the person in charge of the procurement
department must have the approval from the division chief in order to enable it. The second
component is the automatic estimation with supplier’s extended VAN, the routine
procurement are systematized with established suppliers through automating the estimate
request, suppliers selection and ordering process. In the way of automatic estimation it
contains an Electronic Data Interchange (EDI) extension to transfer needed information to
and from Hyundai’s Motor suppliers. The third component is the automatic analysis of
procurement status and the involvement of procurement status across the business units are
given because it provides real-time visibility. Another expectation for this component is to
reduce time needed to analyse the procurement trends from approximately eight to ten days to
shorter day like one or two days.

Next, Hyundai’s Motor also expects the e-procurement system will made them save 30
percent of the procurement cost by analyse the procurement trends that lead to the
adjustments in stock management (Skhynix 2000). Furthermore, Hyundai Motor also
implemented a new e-procurement system that eliminate the unnecessary cost of
communication in individual transaction, storage of documents and overhead cost that related
to paper-based procurement system. Similarly the e‐procurement allows the reduction of
buying costs through order‐pulling, buying centralisation, and negotiations of the buying

12
prices (Wojciech & Zahir 2010, p. 571). In the end, Hyundai Motor can further reduce the
costs of selling production facilities that no longer needed with the deployment of e-
procurement system.

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2.5 Procurement Outsourcing

Most companies are not able to increase revenue due to the expenses for expansion, increased
global competition, cost of raw materials increasing annually and high employment rate.
Quelin and Duhamel (2003, p. 652) defined outsourcing as the operation of shifting a
transaction previously governed internally to an external supplier through a long-term
contract, and involving the transfer of staff to the vendor for the firm. Outsourcing is one of
the ways for companies to reduce cost, increases compliance and quality, strengthen the
companies. In theory, outsourcing for cost reasons can occur when suppliers’ costs are low
enough that even with added overhead, profit, and transaction costs suppliers can still deliver
a service for a lower price (Bers 1992; Harler 2000).

One of the most common motivations behind outsourcing decisions is cost reduction (Yu &
Lindsay 2011; Bustinza, Arias & Gutierrez 2010; Mukherji & Ramachandran 2007; Lau &
Zhang 2006). Firms in the U.S. and elsewhere have increasingly outsourced components,
services and entire business processes to third parties in an effort to benefit from increased
focus on core activities and to lower production costs (Domberger 1998; Quinn 1999).The
reason why Toyota outsources is that Toyota is act as a master of cost reduction internally
and expects its suppliers to master this discipline in self-improving.

The second reason why Toyota outsources is to advance improve the quality management.
Through outsourcing of functional areas into suppliers it can eliminates the poor management
in quality management. The relations with these outside suppliers have in many instances
changed towards more long-term, single source relations, often based on trust, to replace
price-driven adversarial relations (Helper & Sako 1995, p. 77).

For Hyundai Motor, there are enough reasons for Hyundai Motor to adopt the outsourcing
strategy from Toyota to its own goods in contributing to its procurement department. But
there is still some negative impact that implementing outsourcing strategy. For example, the
failures conducted by supplier due to the limitations of business’s confidential information
because suppliers are given all the right and control over the important information. The
future changes in supplier circumstances also might alter the outsourcing relationship but the
risk can be diminished by the inclusion of termination clause in contracts.

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2.6 Global Sourcing

Global sourcing is defined as a centralized procurement strategy for a multinational company,

wherein a central buying organization seeks economies of scale through corporate-wide
standardization and benchmarking (Jiang & Tian 2009). A definition focused on this aspect
of global sourcing is "proactively integrating and coordinating common items and materials,
processes, designs, technologies, and suppliers across worldwide purchasing, engineering,
and operating locations” (Monczka, Trent & Handfield 2005; Monczka, Trent & Petersen,
2008).

Why global sourcing? It’s because some domestic manufacturers unable to supply specific
material for buyers and the most reason is the manufacturers can’t meet the scheduled
delivery time and supplying materials because of poor technologies (Jiang & Tian 2009).
With the materials quality provided by the domestic market may not meet the requirements of
the Hyundai Motor to compete in the international standards but it might also lead to the poor
supplier’s after-sales services. Global sourcing enables Hyundai Motor’s procurement
department to save a lot of cost in buying raw materials because the price set domestic
suppliers is much higher than in other countries. For example, Hyundai Motor importing
body panel to Turkey and engine components and assembly units to Korea. To source
internationally, it might bring the whole company to get access to world-class technologies.

By the way, there are also risks for global sourcing. The transportation and logistics networks
are perhaps not as reliable as in the home country, which may cause unexpected delays (Cho
& Kang 2001, p. 542). The transport cost and duty rate can’t be ignore with global sourcing
because one single component in different conditions can be charged different transport cost
and duty rate in different country.
Global sourcing might also lead to quality problem, if not well managed it can damage the
company’s brand and result in huge financial loss. Following by the different time zone and
different cultures of the countries it may contain hidden costs when Hyundai Motor adopts
the global sourcing for its own goods. The companies should contract with a professional
agency or institute a special international purchasing office to handle these problems (Curtin
1987, p. 47).

15
2.7 Impacts of Supply Chain Management to Procurement
A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer
request and the supply chain not only includes the manufacturer and suppliers, but also
transporters, warehouses, retailers, and customers themselves (Chopra & Meindl 2006).
Figure 1 shows that the supply chain structure.

Figure 1: Supply Chain Structure

Source: Sharma, Garg & Agarwal 2012, p. 194.

The common impact is the poor quality of goods for example the defective products will
directly affects the downstream activities and also profit margin of the company. Ramudhin,
Alzaman and Bulgak (2008, p. 77) worked on incorporating cost of quality in supply chain
network design to ensure the lowest overall cost, because it reduces the probability of defects
and hence the probability of additional cost which might be due to corrective action but
further research could model cost of quality (COQ) at both supplier and plants
simultaneously. A low-cost supplier always promise the equal quality products or superior
quality products so procurement may need to go through the trial and error period, but in the
long run procurement will realize that the other suppliers stand out as offering consistently
superior products. This is why the cultivation of relationship between suppliers and
procurement department happen.

The other impact is the shipping cost of material or goods. When procurement department
selected unreliable suppliers or the suppliers which can’t follow the speed of changes in
demand forecast and this will result in higher freight costs to speed up the orders or rush
shipments to customers. In the other hand, if sourcing in the low cost country like China and
selecting supplier in China, procurement department need to ensure that the longer lead time
wouldn’t deny the initial cost savings.

16
Sharma, Garg and Agarwal (2012, p. 200) claims that supply chain management is key focus
area in the current scenario of global competitive market. Good supply chains will always
positive impact the procurement department to save cost on the goods procure and well
managed in time management. The most important is still the relationship between the
suppliers and procurement department.

17
3.0 Conclusion
From the research that critically evaluates the procurement department contribution to procurement
department, it shows that not all the business functions that will contributing effectively. E-
procurement system will made Hyundai Motor saved 30 percent of the procurement cost by
analyse the procurement trends that lead to the adjustments in stock management. In the cruel
competitions now, Hyundai Motor also implemented a new e-procurement system that
eliminate the unnecessary cost of communication in individual transaction in the other way
round it reduce the costs of selling production facilities that no longer needed with the
deployment of e-procurement system. Hyundai Motor should adopt the Toyota’s outsourcing
strategy because it will bring a lot of benefits to the company. Outsourcing could improve the
quality management and cost reduction to the company. In implementing the outsourcing
strategy Hyundai Motor need to be careful with the suppliers because suppliers are given all
the right and control over the important information.

Global sourcing enable company to make more choices like Hyundai Motor imported body
panel to Turkey and engine components and assembly units to Korea. This made their
business more worldwide and more competitive. The practices of supplier evaluation are to
improve the communication between Hyundai Motor and the suppliers by strengthening the
relationships with suppliers so that risks are reduced. For supply chain management, if a
company selected unreliable suppliers or the suppliers which can’t follow the speed of
changes in demand forecast it definitely make the company pay more cost on freight
forwarding. A company must always select their supplier by practicing supplier evaluation
and supplier selection. As a whole conclude, procurement department can look for different
ways other than the strategies above to contribute more deeply into procurement.

18
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