PuSm Lecture 3 Chapter 3 Slides Online

Graz University of Technology
1 Institute of Business Economics and Industrial Sociology

Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk
Purchasing and Supply Management

Lecture 3.
The purchasing management process
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives
After this lecture you should understand the following:

• What it takes to professionalize purchasing (across industries)
as key business driver.
• The major tasks and responsibilities of purchasing.
• The basic principles on which purchasing policy can be
based.
• The key elements of the purchasing management process.
• The major policy areas in purchasing.
• How purchasing and supply management may develop over
time as a business function.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
3 Introduction: Case study – Shell Houston
*Note:
The full text of this case study you may find in the primary literature for this
course, the textbook “Purchasing and Supply Management“ written by Arjan
van Weele (2018), 7th edition, p. 55.
4 Introduction: Case study – Shell Houston (remarks)
The introductory case shows that …

• … when a purchasing organization is unable to secure delivery on
time, its credibility within an organization will suffer.
• … careful materials planning by maintenance staff and project
managers (who respect supplier lead-times) is mandatory to
achieve operational excellence.
 Operational excellence is one of the key tasks of any procurement
organization.
 It should be made every effort to ensure that the best products are
delivered at the right time, at the best possible quality at the best price
to satisfy the needs of internal customers.
→ If the purchasing organization fails to do this, internal customers will

undertake the purchase themselves and order the materials directly
from the suppliers…
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 55.
5 Primary tasks and responsibilities (1/2)
The following four tasks and responsibilities are considered to be

the core to the purchasing function in any organization.
(1) Operational excellence.
This is about securing timely and undisturbed availability of
purchased goods and services, both in the short and long term.
(2) Cost control and reduction of all purchasing-related spend.

Having secured supply, purchasing needs to make sure that
goods and services are supplied at the lowest total cost of
ownership or best value.
6 Primary tasks and responsibilities (2/2)
(3) Risk management.

Purchasing has to strive for reducing the company’s risk exposure
in relation to its supply markets. If possible, the company should
avoid becoming too dependent on one or a few suppliers, both in
terms of supply and technology (e. g. in the past Nissan reduced
its number of steel suppliers to just two companies – with short
term advantages and major disadvantages in production).
(4) Innovation and continuous improvement.

Suppliers are often a source of new products and production
technologies. In many industries, technological development take
place at such a rate that even large enterprises, such as Philipps
or IBM, are unable to generate all the investments needed to keep
up with the technology development in every area (e. g. the
Senseo coffee concept, which was originally developed by Sara
Lee DE in co-operation with Philips).
7 Primary tasks and responsibilities: “Steel shortage at Nissan”
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 57.
8 Changing purchasing agenda: Becoming an “attractive business partner”
A fair and open attitude towards the customer markets, the financial
community as well as to suppliers can help companies to create a
positive image and to position itself as an attractive business partner.
• Clear Procedures. It is important to meet all contractual obligations

towards suppliers. Therefore, purchasing has to operate according to
a minimum of set of purchasing procedures (note: which are simple to
use and easy to communicate) which describe …
 … how orders are placed,
 … who is authorized to make purchasing decisions,
 … how the purchasing process is structured, and
 … when and how payments to suppliers will be made.
• Clear Communication. The importance of a (i) code of conduct (how
to deal with supplier relationships) and a (ii) professional (internal and
external) communication on the companies purchasing policies is
increasingly important and recognized by larger companies.
9 Changing purchasing agenda by balancing cost-risk-value: Example
*Note:
The full text of this memo you may find in the primary literature for this course,
the textbook “Purchasing and Supply Management“ written by Arjan van Weele
(2018), 7th edition, pp. 58-59.
10 Changing purchasing agenda by balancing cost-risk-value
11 Purchasing processes need structure: Organization of purchasing tasks
and responsibilities to create uniformity (internally & externally)
Process
Tasks
Responsibilities
12 Standard purchasing procedure (1/2): Rules and guidelines on how to
operate in detail with decision-making processes & supplier relationships
Before starting the procedure: Choose the best companies according to their
reputation, references, quality of service, competitiveness, motivation and
dynamism.
1. Send an offer of collaboration to the preselected suppliers on the
same day, enclosing the specifications and final reply date (strictly
confidential).
2. Reject offers delivered after the deadline.
3. Proceed with an opening session of the letters, in the presence of
the
 financial management
 purchasing management
 management functions concerned with the purchase
4. Jointly countersign the offers; send a copy of these to those
concerned
5. Draw up a comparative table of costs.
13 Standard purchasing procedure (2/2): Rules and guidelines on how to
operate in detail with decision-making processes & supplier relationships
6. Proceed with a consistency check on a technical level.

7. Preselect the two best proposals (quality and costs).
8. Check the references.
9. Draw up assessment grid of recent realizations.
10. Compare costs and renegotiate item by item.
11. Recommend a final choice (favorite quality, price, security).
12. Maintain contact with the other supplier (avoid monopolies).
13. Draft the contract with legal department.
14. Write to the companies not chosen to notify them of refusal.
15. Regularly sound out the competition.
16. Preserve our partners’ long-term motivations.
14 “True” business orientation of purchasing professionals is needed…
Purchasing professionals need to support the company‘s business

managers in realizing their business objectives and goals.
Therefore, ...
• … buyers should spend a substantial part of their time in contact with
internal users, such as marketing, operations, product development and
engineering.
• … bureaucracy and too strong emphasis on price aspects are incompatible
with a true business orientation in purchasing and should be avoided.
15 Professionalizing purchasing
Purchasing policies should be based on the following major principles:

• Principle 1: Business alignment
– Develop a purchasing and supply strategy that fits to overall business
policy.
– Example: Creating a win-win at “Center Parcs”
• Principle 2: Integrated, cross-functional approach
– Purchasing decisions cannot be made in isolation, and should not be
aimed at optimization of purchasing performance (based on optimizing
TCO or creating the maximum value) only.
– Example: Lowest total cost vs. lowest price for equipment
• Principle 3: Performance driven
– Purchasing acts like a internal business partner and engages in a healthy
debate with its internal customers.
– Example: Packaging at a European fruit juice supplier
16 Purchasing management process (1/7)
→ Purchasing and supply management strategies and operations

need to be aligned with company’s overall product/market strategies
in a dynamic way.
• To achieve this, purchasing managers need to consistently adapt

their purchasing management routines.
• Analogous to the management cycle, the following successive
elements are identified in managing purchasing and supply:
 Purchasing and supply market research
 Defining purchasing and supply objectives
 Identifying purchasing and supply strategies
 Planning / setting of purchasing and supply actions
 Implementation of purchasing and supply policy
 Control and evaluation
• Purchasing and supply (market) research

Purchasing and supply (market) research refers to the
systematic study of all relevant factors which may affect supply
and demand of goods and services, for the purpose of securing
the company’s current and future requirements.
• Purchasing and supply objectives, strategy and (action) planning

Based upon the company's overall objectives, purchasing
objectives will relate to cost-reduction, improving product quality,
lead time (note: the time between the initiation and completion of
a production process) reduction etc.
Through these objectives the company directs, manages and
controls its purchasing activities and supplier strategies.
-> Purchasing management focuses on different areas for
action (Figure 3.5).
• Implementation of purchasing policy
21 Purchasing management process (6/7): Communication policy
• Control and Evaluation

 Results and activities which have been planned must be realized
within the available financial resources.
 Actual performance must be periodically checked against
purchasing plans.
 Reports are required about the …
 … savings and costs reductions realized through (cross-functional)
purchasing activities.
 … performance of suppliers that should be checked periodically (vendor
performance reports).
 Reports have to be generated, passed on and evaluated through a
consistent procedure. Thus, the assessment of the overall
purchasing performance is possible.
 Finally, …
 … the purchasing management process is in fact a close loop.
 … control & evaluation procedures are in practice often ill-structured.
23 Characteristics: Development of purchasing over time
Most authors assume a step-wise development of purchasing and supply

management within organization, with the following characteristics:
– Integrated final stage
• Management is actively involved in purchasing strategies and tactics,
organized around team-based structures.
• All improvement efforts should be directed towards a “final excellence stage”.
– Organizational status of purchasing
• Purchasing ranks rather low in the organizational hierarchy.
• Centralization often leads to some form of coordinated purchasing.
– Supplier management
• From reactive (“opportunity driven”), via proactive (“supplier performance
improvement driven”) purchasing, to relationship management (“partnership”).
– Supplier relationships
• Starting with handling many suppliers at “arm’s length”.
• Next, managing a reduced number of (preferred) suppliers and develop closer
relationships.
24 Major drivers of purchasing development over time
• Business context
– More competition, more mature technology used  more pressure
towards purchasing.
• Company strategy
– More explicit about goals and objectives, more formalized planning
process  greater chance purchasing is integrated in company strategy.
• System development
– Information and communication technologies (ICT) are important
enablers for modern purchasing concepts.
• Top management commitment
– This relates to the degree to which top management shows active interest
and involvement in purchasing and supply management issues.
• Functional leadership
 This relates to the personality of the purchasing manager, his or her
management style and prominence.
25 Purchasing and supply development model (1/4)
Stage 1: Transaction orientation

– The primary task of purchasing is to find appropriate suppliers for
raw materials and supplied components. There is no explicit
purchasing strategy in place.
Stage 2: Commercial orientation
– Purchasing strategy at this stage is characterized by a sharp focus
on low prices. The culture is determined by hard (price)
negotiations with many suppliers.
Stage 3: Co-ordinated purchasing
– Led by a strong central purchasing department to implement
uniform buying policies and systems, the emphasis here lies on
cross unit co-ordination and compliance with nationally negotiated
contracts.
Stage 4: Internal integration

– The emphasis is on cross-functional problem solving with the
objective of reducing total life cycle cost and not just the unit cost of
components.
Stage 5: External integration
– An explicit outsourcing strategy is combined with extra attention to
collaboration with supply chain partners. The goals are e.g. joint
product developments and a collaborative preproduction planning.
Stage 6: Value chain orientation
– Delivering value to the end customer is recognized as most important
for success. To satisfy the needs in end-customer markets,
subcontractors seek for support among their suppliers.
Final note: This model should be applied carefully; all stages may not
be relevant for all types of commodities, companies and industries.
29 Bief summary
• Purchasing objectives should be aligned with corporate

strategies.
• The systematic approach of the purchasing management
process can help make its potential visible and accessible.
• It takes time to put all the elements of the purchasing
management process in place.
• Purchasing automation has improved and freed up the buyers
from administrative and operational duties.
• Purchasing has become more integrated with other business
domains, such as operations management and supply chain
management.
• Business context, company strategy, system development, top
management commitment and functional leadership can be
considered as the major drivers of purchasing development
over time.
30 Lecture 3: Self-assessment (Individual work)
Preliminary remark:
The aim of this exercise is to reflect on the content presented in this
lecture and to prepare for the final exam at an early stage.
Work order:
1. Answer the self-assessment questions given on the following slide(s).
2. Take approx. 15 minutes per question.
Final note: To answer/discuss/reflect on the questions on the following slide(s), please

consult the primary as well as the relevant literature of this course we have listed for you on
the TUGrazTeachCenter learning platform (see: course-detailed view -> further information ->
recommended reading). Of course, you are also welcome to use further sources.
31 Lecture 3: Self-assessment (1/2)
3.1 In this lecture/chapter five major tasks and responsibilities have

been described which can be attributed to purchasing and supply
management. What would you consider to be the most important
task of purchasing and supply professionals? Why?
3.2 Discuss in what ways purchasing and supply professionals could

contribute to cost reduction. Next, what would you consider to be the
most important risks of continuously pressing for cost reductions in
supplier relationships?
3.3 A popular measure in purchasing cost down programmes is to

reduce the number of suppliers. What would you consider the most
important benefits related to supply base reduction? What major
obstacles may you expect from within your company if you were
going to reduce the number of suppliers? Discuss.
32 Lecture 3: Self-assessment (2/2)
3.4 A reporting structure has been presented as an essential part of

the purchasing management process. If you were a purchasing
manager, what would you report to your superiors on a monthly
basis? Would you report the same thing to your production and
logistics manager? Discuss.
3.5 This lecture/chapter discussed a six-stage purchasing

development model. It suggests that purchasing as a discipline in
companies moves from one stage to another, purchasing managers
need to prepare for resistance from the organization. What kind of
problems and/or resistance may purchasing managers expect when
companies move from stage 1 to stage 2, from stage 2 to stage 3
and so on?
Graz University of Technology
33 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk
Purchasing and Supply Management

Lecture 3.
The purchasing management process
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition

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Graz University of Technology

1 Institute of Business Economics and Industrial Sociology

Purchasing and Supply Management

Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

After this lecture you should understand the following:

The introductory case shows that …

→ If the purchasing organization fails to do this, internal customers will

The following four tasks and responsibilities are considered to be

(2) Cost control and reduction of all purchasing-related spend.

(3) Risk management.

(4) Innovation and continuous improvement.

• Clear Procedures. It is important to meet all contractual obligations

6. Proceed with a consistency check on a technical level.

Purchasing professionals need to support the company‘s business

Purchasing policies should be based on the following major principles:

→ Purchasing and supply management strategies and operations

• To achieve this, purchasing managers need to consistently adapt

• Purchasing and supply (market) research

• Purchasing and supply objectives, strategy and (action) planning

• Implementation of purchasing policy

• Control and Evaluation

Most authors assume a step-wise development of purchasing and supply

Stage 1: Transaction orientation

Stage 4: Internal integration

• Purchasing objectives should be aligned with corporate

Final note: To answer/discuss/reflect on the questions on the following slide(s), please

3.1 In this lecture/chapter five major tasks and responsibilities have

3.2 Discuss in what ways purchasing and supply professionals could

3.3 A popular measure in purchasing cost down programmes is to

3.4 A reporting structure has been presented as an essential part of

3.5 This lecture/chapter discussed a six-stage purchasing

Purchasing and Supply Management

Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

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