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PROCUREMENT
AND SUPPLY CHAIN
MANAGEMENT
EIGHTH EDITION
ARJAN J. VAN WEELE AND FRANK ROZEMEIJER
Australia • Brazil • Canada • Mexico • Singapore • United Kingdom • United States
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Procurement and Supply Chain © 2022, Cengage Learning EMEA
Management, Eighth Edition
WCN: 02-300
Arjan J van Weele and Frank Rozemeijer
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Brief contents
SECTION I Introduction and context 1

1 Introducing procurement 2
2 The procurement process 23
3 Procurement as a business function 49
SECTION II Processes and strategies 75

4 Outsourcing 76
5 Category sourcing: developing effective sourcing strategies 98
6 Sourcing business services 127
7 Contracting and contract management 147
8 Public procurement 170
SECTION III Interfaces 209

9 Procurement and supply chain management 210
10 Supplier relationship management 236
11 Innovation sourcing 261
12 Procurement with purpose: driving sustainability in supply chain
relationships 282
SECTION IV Enablers 317

13 Organizing procurement 318
14 Procurement systems 346
15 Managing procurement performance 365
iii
Contents
List of memos ix Step 1) The specification phase 35

Acknowledgements xi Step 2) Supplier selection and supplier
Preface to the eighth edition xii assessment 36
Introduction xiv
Step 3) Negotiation and contracting 38
List of abbreviations xx
Prices and terms of delivery 38
Terms of payment 38
Penalty clauses and warranty conditions 39
SECTION I Other arrangements 40
Introduction and context 1 Step 4) The ordering process 42

Step 5) The expediting process 43
1 Introducing procurement 2 Step 6) Follow-up and evaluation 44
Learning objectives 2 Theory snapshot 2.1: Systems theory 45
Introduction 2 Major bottlenecks and problems 45
Case study: Procurement and supply chain Summary 47
management at Damen Shipyards 3 Assignments 48
The role of procurement in the value chain 4 Additional reading 48
Definition of concepts 6 References 48
Importance of procurement to business 12
Theory snapshot 1.1: The power of theory 16 3 Procurement as a business
Classification of purchased goods 16 function 49
Challenges and changes in the procurement Learning objectives 49
context 18 Introduction 49
Summary 21 Case study: Shell Houston 50
Assignments 22 Primary tasks and responsibilities 51
References 22 Theory snapshot 3.1 58
Managing procurement: a few principles 58
2 The procurement process 23 Business alignment 58
Integrated, cross-functional approach 59
Learning objectives 23
Performance-driven 60
Introduction 23
Procurement management process 61
Case study: Buying a new IT-system in a car leasing Procurement context analysis 62
company 24 Procurement canvas: preparing objectives, strategy and
Organizational buying behaviour: basic actions 63
characteristics 25 Implementation of procurement strategy 64
Models of industrial buying behaviour 27 Procurement control and evaluation 65
Procurement process management 30 How procurement develops over time 66

The linear procurement process model 31 Stage 1 Transaction orientation: serve the factory 66
Stage 2 Commercial orientation: lowest unit price 68
iv
Contents v
Stage 3 Synergy orientation: co-ordinated Reasons underlying cost-savings potential in

procurement 68 procurement 100
Stage 4 Internal integration: cross-functional Category management 102
procurement 69
Setting priorities for category sourcing 103
Stage 5 External integration: supply chain
management 69 Scoping the spend category 106
Stage 6 Value chain orientation 70 Procurement portfolio analysis: principles 106
Some observations from practice 71 Four basic sourcing strategies 110
Summary 72 Developing a sourcing strategy 115
Assignments 73 Category sourcing plan 118
References 73 Getting better results from suppliers 122
Summary 124
Assignments 125
SECTION II Further reading 126
Processes and strategies 75 References 126
4 Outsourcing 76 6 Sourcing business services 127
Learning objectives 76 Learning objectives 127
Introduction 76 Introduction 127
Outsourcing as a business concept 77 Case study: Sourcing marketing services at a

European telecom provider 128
Case study: Outsourcing of IT 78
The increasing importance of services 130
Theory snapshot 4.1: The resource-based view
of the firm 79 Differences between goods and services 131
Definitions and concepts 79 Towards a classification of services 133
Rationales for outsourcing 82 The pre-contractual stage 134

Success of outsourcing as a business strategy 85 Specifying: defining the scope of work for service
providers 134
The outsourcing process 85
Selecting service providers 138
Strategic phase 86
Contracting for services 139
Theory snapshot 4.2: Transaction cost economics
The post-contractual stage 141
(TCE) 87
The transition phase 88 Theory snapshot 6.1: Triads and service
The operational phase 90 deliveries 142
Risk assessment 91 Involvement of procurement in sourcing

services 144
Critical success factors of outsourcing 94
Summary 145
Summary 95
Assignments 146
Assignments 97
References 146
References 97
7 Contracting and contract

5 Category sourcing: developing management 147
effective sourcing strategies 98
Introduction 147
Introduction 98
Case study: What happened at the Amsterdam
Case study: Tesla’s sourcing challenge for lithium 99
subway project? 148
vi Contents
Contract management and contracts: agency Design contest 184

theory 149 Dynamic purchasing system 184
Theory snapshot 7.1: Principal-agent theory Procurement process 185
(Agency theory) 151 Defining specifications 185
The contracting process 153 Supplier selection 186
Pre-contractual stage 153 Soliciting bids and awarding contracts 187
Contractual stage 154 Implications for public procurement 190
Contract execution 154 Summary 191
Post-contractual stage 154
Assignments 192
Problems in contract management 155
References 192
Perspectives on contract management 157
Integrative Case II.1: Procurement of multi-
Contract models 159 functionals in the Blue Lake Hospital 193
Contract building blocks: pricing and payment Appendix 1 196
mechanisms in contracts 160
Appendix 2 197
Pricing mechanisms 160
Payment terms 163 Integrative Case II.2: Technix: material supply
Penalty clauses, liquidated damages and warranty problems in offshore dredging in Rio 198
conditions 163 Appendix 1 201
Subcontracting and project execution 164 Appendix 2 202
Contract governance 165 Appendix 3 206
Summary 168
Assignments 169
References 169 SECTION III
Interfaces 209
8 Public procurement 170
Learning objectives 170 9 Procurement and supply chain
Introduction 170 management 210
Case study: What is good procurement? 172 Learning objectives 210
The nature of public procurement 172 Introduction 210
Public procurement law 175 Procurement and supply chain management:
Scope of the European Directives on public definitions and concepts 211
procurement 176 Case study: Li & Fung 211
Scope 176 Materials requirements planning 217
Framework agreements 178
Basic logistics structures 220
Excluded assignments 178
Threshold values 179 Just-in-time management 222
Characteristics of just-in-time management 222
Notices and public procurement procedures 180
Order quantities and batch sizes 223
Notice 180
Quality and zero defects 225
European procurement procedures 181
JIT and the procurement function 226
Open procedure 181
Advantages and disadvantages for the supplier 227
Restricted procedure 181
JIT and supplier selection 230
Competitive procedure with negotiation 182
Negotiated procedure with prior publication 182 Elements of the procurement information
Negotiated procedure without prior publication 183 system 231
Competitive dialogue 183
Innovation partnership 183
Contents vii
Co-ordination problems between procurement and 12 Procurement with purpose:

supply chain management 233 driving sustainability in supply chain
Summary 234 relationships 282
Assignments 235 Learning objectives 282
References 235 Introduction 282
Case study: Mattel’s reputation at stake through
10 Supplier relationship sourcing in China 284
management 236 Business principles and procurement 286
Learning objectives 236 Towards a sustainable future: ‘people, planet,
Introduction 236 profit’ 287
Case study: IKEA and supplier relationships 237 Theory snapshot 12.1: Understanding sustainability
Supplier relationship management: a thinking: from the resource-based view to
framework 238 stakeholder theory 291
Procurement and quality management 241 Procurement with purpose: towards sustainable
supply chains 292
Supplier quality assurance (SQA) 244
How to drive CSR in supply chain relationships 294
Implementing the SRM framework: supplier
management 246 Circular sourcing 297
Supplier assessment 247 Business integrity and ethics 300
Cost modelling and the learning curve 249 Summary 303
Implementing the SRM framework: supplier Assignments 304

development 252 References 304
Summary 258 Integrative Case III.1: Serving the customer at
Assignments 259 Joycies Products Ltd: from marketing to supply
chain management 305
Further reading 259
Appendix 1 308
References 260
Integrative Case III.2: Legends Car Company: how
to deal with supplier price increases 309
11 Innovation sourcing 261
Integrative Case III.3: Nespresso: creating shared
value in the global coffee value chain 311
Introduction 261
Case study: Boeing Dreamliner 787 262
Procurement and innovation 263 SECTION IV
The role of suppliers in new product
development 265
Enablers 317
Procurement and new product development 269

13 Organizing procurement 318
Conditions for effective co-innovation with
suppliers 275
Introduction 318
Theory snapshot 11.1: Stakeholder and stewardship
theory 276 Case study: Building blocks of change 319
Summary 279 Procurement organization 320
Assignments 280 Factors influencing the position of procurement

in the organization 322
References 280
viii Contents
Levels of tasks, responsibilities and authority 323 15 Managing procurement

Strategic level 323 performance 365
Tactical level 324
Operational level 324
Introduction 365
Organizational structures within procurement 325
Procurement in multi-unit companies 325 Case study: Managing quality improvement 366
Decentralized procurement structure 325 Factors influencing procurement performance
Centralized procurement structure 326 measurement 367
Hybrid procurement structures 326 Why measure procurement performance? 369
Federal procurement model 328
How to assess procurement performance? 370
Co-ordinated procurement model 330
Centre-led procurement model 331 Measuring procurement performance: key
Centralized versus decentralized procurement: some areas 371
criteria to consider 334 Price/cost dimension 373
Procurement organization in single-unit companies 336 Product quality dimension 373
Logistics/delivery and SCM dimension 373
Adapting the procurement organization 336
Sustainability dimension 374
Staffing the procurement organization 338 Procurement organization dimension 374
Procurement competencies 340 Supplier relationship dimension 375
Summary 343 Future performance measurements 375
Assignments 344 Procurement scorecard 378
References 344 Procurement budgets, procurement savings and
other performance measures 379
14 Procurement systems 346 Procurement materials budget 380
Procurement budget indirect materials 380
The investment and tooling budget 381
Introduction 346 Procurement departmental budget 381
Case study: How digitalization redefines Procurement cost savings: definitions and measures 382
procurement 347 Ratios and key performance indicators 383
Contemporary digital solutions for procurement 348 Procurement audit as a management tool 387
Source-to-contract solutions 351 Summary 390
Spend analytics 351 Assignments 391
E-sourcing 353
Further reading 392
E-auctions 353
B2B marketplaces 356 References 392
Purchase-to-pay (P2P) solutions 356 Integrative Case IV.1: International Foods Industries:
heading towards procurement synergy 393
e-SRM solutions 357
Appendix 1 395
Digital solutions for SRM 358
Appendix 2 395
How new IT solutions change the procurement
landscape: emerging digital procurement Integrative Case IV.2: European Airlines: about
technology 359 procurement governance and stakeholder
engagement 397
Drivers and barriers for adapting new digital
procurement technology 362 Integrative Case IV.3: Fred’s Fresh Supermarket:
selecting the best supplier 399
Summary 363
Assignments 364
Glossary 402
References 364
Index 410
List of memos
Memo 1.1 Purchasing versus procurement: what is the right term to use? 9
Memo 1.2 Supplier relationships at Volvo 11
Memo 1.3 Spend management: the foundation for every procurement strategy 15
Memo 1.4 Resources: from future worries to today’s crises 20
Memo 2.1 High speed railway: Amsterdam, Paris and London 36
Memo 2.2 Incoterms 2020 40
Memo 3.1 Fighting over chips 52
Memo 3.2 The changing procurement agenda: managing cost, risk and value 53
Memo 3.3 Value versus price 57
Memo 3.4 Reverse marketing at Philips 65
Memo 4.1 Supply chain disruptions drive companies towards on/nearshoring 81
Memo 4.2 The top ten reasons to outsource 83
Memo 4.3 IBM and Lenovo: from outsourcing to a partnership relationship 93
Memo 5.1 The ‘French fries principle’ in procurement 102
Memo 5.2 It takes two to tango! 113
Memo 5.3 Benefits and pitfalls of global sourcing 117
Memo 5.4 How a supplier switch caused KFC UK to run out of chicken 122
Memo 6.1 A classification of services based on the actual use by the customer organization 134
Memo 6.2 Contracting for road construction 136
Memo 6.3 Selecting service providers using best value procurement and vested outsourcing 139
Memo 6.4 Tensions between service suppliers and buying organizations 143
Memo 7.1 Oracle forgets to terminate rental contract 157
Memo 7.2 How to secure supplier selection and materials supply for projects 166
Memo 8.1 The member states of the European Union 171
Memo 8.2 Public tendering 175
Memo 8.3 Selection and award criteria 186
Memo 8.4 Disproportionality 188
Memo 9.1 Supply chain structures: diverging and converging supply chains 215
Memo 9.2 JIT II 230
Memo 10.1 Developing cost models for procurement 250
Memo 10.2 Cost breakdown of Apple iPhone 11 Pro Max 64GB 253
Memo 10.3 Building deep relationships 257
Memo 11.1 Open innovation in consumer electronics: Senseo Crema 267
Memo 11.2 The value of supplier catalogues 272
Memo 11.3 The supplier involvement portfolio 274
Memo 11.4 Team Creative Climate 277
Memo 11.5 Unilever’s Partner-to-Win programme 278
Memo 12.1 UN Sustainable Development Goals (SDGs) 283
Memo 12.2 Shell general business principles 286
Memo 12.3 Unilever Sustainable Living Plan 290
Memo 12.4 Stages in the adoption of CSR by organizations 294
Memo 12.5 Principles underlying the circular economy 299
Memo 12.6 NEVI guide to procurement ethics 301
Memo 13.1 When a corporate cost reduction project is not aligned with the current procurement
organization… 321
Memo 13.2 Creating corporate advantage in procurement 329
ix
x List of memos
Memo 13.3 Shell’s corporate procurement structure and global service centres 333
Memo 14.1 What problems are solved by e-procurement systems? 348
Memo 14.2 How inefficient administrative procurement procedures can pay off handsomely 350
Memo 14.3 Vizibl: example of an e-SRM tool 358
Memo 14.4 Royal Auping: using a social network to foster supplier innovation 359
Memo 14.5 How Artificial Intelligence (AI) helps Vodafone to boost procurement performance 360
Memo 14.6 Volkswagen reduces supply chain sustainability risk with AI 362
Memo 15.1 How to measure procurement performance 370
Memo 15.2 Making the IKEA catalogue more sustainable 377
Memo 15.3 Supplier quality index: example 384
For Ineke and Marcia
Acknowledgements
The publisher would like to thank the following reviewers for their comments in this and previous editions:
Poul Erik Borg, Aarhus University, Denmark
Ala Pazirandeh Arvidsson, Chalmers Technical University, Sweden
Nigel Caldwell, Heriot Watt University, UK
Alexander Erceg, J.J. Strossmayer University of Osijek, Croatia
Philip Foster, Warwick University, UK
Regina Frei, University of Southampton, UK
Asa Hagberg-Andersson, HANKEN, Swedish School of Economics and Business Administration, Sweden
Peter Holm Andreasen, Copenhagen Business School, Denmark
Alexa Kirkaldy, Warwick University, UK
Douglas Macbeth, University of Southampton, UK
Bryan McNay, The Robert Gordon University, UK
Gideon Nieman, University of Pretoria, South Africa
Sanna Nieminen, JAMK University of Applied Sciences, Finland
Ronald Salters, Fontys University of Applied Sciences, the Netherlands
Safaa Sindi, Coventry University, UK
xi
Preface to the eighth edition
I t is both an honour and pleasure to welcome you on the very first page of this unique procurement book.
The increasing complexity of supply markets and the growing dependency on powerful key suppliers across
supply chains puts higher demands on the procurement function than ever before. This is also true for the professionals
who work in this important business domain, who need to reflect regularly and check whether they work in line with
the contemporary theories, concepts and tools to meet today’s and tomorrow’s business needs. This is exactly what this
new book intends to be. A fresh, profound and complete update on procurement as it should be today, heading for the
challenges of tomorrow. It provides a balanced and structured overview of all the pillars of a performant procurement
function, blended with inspiring business cases and practical insights. It is a must read for every inquisitive student,
ambitious young procurement professional, seasoned procurement manager/leader or visionary board member.
Throughout the book it becomes clear that suppliers are not just supplying their products and services. The supply
base of any organization is, as I have experienced in my career, also an extremely powerful source of expertise. Expertise
that can instantly and constantly contribute to process improvement, product development and competitiveness.
Suppliers often know more about what can be improved than their customers. It is their field of expertise, their
passion and they never stop learning from their collaboration with multiple customers from different industries.
They master best-practices, know the pitfalls, have roadmaps for innovation and are able to share their views on
effective collaboration models. Procurement is more and more about unlocking that supplier expertise to continuously
improve products and processes, set up streamlined end-to-end supply chains, source innovation and last but not
least, implement digital processes to facilitate smart interaction and collaboration. Pure logic and so much to gain!
This requires both effective and efficient procurement processes and tools at the operational, tactical and strategic
level, based upon a clear digital procurement vision and roadmap. Organization models are also transforming in
an organic way. Procurement and supply chain management are heading towards full integration. Procurement
teams show a growing mix of own payroll talent blended with flexible ‘plug and play’ expertise. When all the
right procurement processes and enablers are in place, the procurement department will be able to drive financial
performance, innovation, sustainability and supply risk mitigation. This book is full of inspiration on how to best
develop the procurement function to the highest professional standards.
Authors Arjan van Weele and Frank Rozemeijer have been for many years leading procurement ambassadors
and sources of inspiration on an international scale. What makes them unique is their firm belief in the power
of blending academic research and insights with business cases and industry reality. For this, they continuously
interact with a broad international network of CPOs, procurement executives, industry leaders and board members.
Arjan and Frank are extremely curious to find out about the next development for our procurement profession
and more specifically how to bring that into practice. I have never seen them refuse an opportunity to share their
academic knowledge, including the latest best-practices, and they act as a kind of inspiration engine for procurement
professionals and guide them towards their next growth step.
Arjan impacted strongly on my own professional procurement path starting from reading his books, visiting his
seminars and collaborating for the very first time when delivering a procurement excellence program at Nyenrode
University for an international FMCG company. Frank is far more than a colleague to me. He is a personal friend, a
‘compagnon de route’. We share the same excessive level of passion for procurement and interact in different settings
to mix theory and practice to inspire and support multiple companies in almost any industry. Arjan van Weele and
Frank Rozemeijer: there is no stronger duo I can think of to deliver this excellent book. I wish you a lot of inspiration!
Manu Matthyssens; Founder and Managing Partner SOLVINT Group;
Professor Strategic Procurement at Antwerp Management School; Entrepreneur
xii
Preface to the eighth edition xiii
New to this edition

This eighth edition is a major update and previous edition users may find the following notes useful when making
the transition to the new edition.
To reflect contemporary thinking and practice, the term ‘procurement’ rather than ‘purchasing’ is used throughout
this book, as this term has a broader coverage and depth, and aligns the text with the leading professional body in
the industry.
Chapters have been re-organized into four sections: I Introduction and context, II Processes and strategies, III
Interfaces and IV Enablers. New and updated content is provided on innovation sourcing, procurement with purpose:
driving sustainability in supply chain relationships, supplier relationship management, and procurement systems. As a
result some chapters are new whilst others are renamed to reflect the arrangement of content; the box below provides
a comparison between the 8th and 7th editions. Key changes are as follows:
●● Large parts of the text on ‘Procurement and business strategy’ (Chapter 7 in the 7th edition) have been
integrated in to the new Chapter 3 ‘Procurement as a business function’.
●● A chapter is now dedicated to the important topic of Supplier Relationship Management (Chapter 10).
●● A new chapter is now included on ‘Procurement systems’ (Chapter 14).
●● Chapter 15 on how to drive sustainability in supply chain relationships has been significantly expanded and
updated.
Throughout the book, introductory cases have been replaced and updated, as have many memos and illustrations. A
new feature for this edition is the ‘Theory snapshot’ added to introduce the reader to important theories and academic
perspectives. To facilitate teaching, the eight case studies for classroom discussion have been retained.
Contents overview comparison: Procurement and Supply Chain Management, 8th versus 7th edition
8th edition 7th edition New title

Chapter 1 Chapter 1 Introducing procurement
Chapter 2 Chapter 2 The procurement process
Chapter 3 Chapters 3, 7 Procurement as a business function
Chapter 4 Chapter 8 Outsourcing
Chapter 5 Chapters 7, 9 Category sourcing: developing effective sourcing strategies
Chapter 6 Chapter 4 Sourcing business services
Chapter 7 Chapter 5 Contracting and contract management
Chapter 8 Chapter 6 Public procurement
Chapter 9 Chapter 11 Procurement and supply chain management
Chapter 10 Chapters 10, 14 Supplier relationship management
Chapter 11 Chapters 10, 14 Innovation sourcing
Chapter 12 Chapter 15 Procurement with purpose: driving sustainability in supply chain relationships
Chapter 13 Chapter 12 Organizing procurement
Chapter 14 Procurement systems
Chapter 15 Chapter 13 Managing procurement performance
Introduction
Procurement and supply management on the move

Over the decades, procurement and supply management as a discipline has changed considerably in many companies.
This is reflected in the increased attention this discipline is receiving from business managers and practitioners.
Considering the amount of money generally involved in the preparation and execution of procurement and supply
decisions, this is not a surprise. An effectively and efficiently operating procurement and supply function can make an
important contribution to company results. However, there is more. As a result of the implementation of improvement
programmes in engineering, manufacturing and logistics management, many companies feel the need for improved
relationships with suppliers. These relationships necessarily should result in more innovative products and customer
solutions, a faster time-to-market, just-in-time delivery and zero defects. More than that, these relationships should
result in a better value proposition to the company’s customers. Traditionally, the procurement department acts as
the intermediary which negotiates the agreements and contracts with suppliers and supervises their compliance with
the agreements. This traditional role is, however, changing rapidly as can be seen from the procurement practices
in some major, leading edge companies. Moving away from their traditional operational roles, procurement and
supply managers are assuming more strategic roles in their organizations, focused on active management of supplier
relationships in order to get better performance from them.
These are a few important reasons why management is becoming increasingly interested in procurement and
supply management as a business discipline.
Why this book?

Compared to other management disciplines, relatively little academic research has been undertaken in the area of
procurement and supply management. Although procurement consultancy has prospered and grown immensely,
most consulting firms do not openly share their models, ideas and experience with the outside world. This explains
why there is quite a gap in the development of a solid body of knowledge in procurement compared to other
disciplines in business administration. Fortunately, some new textbooks covering modern procurement practices
have become available in recent years. Most of these, however, have been written from a truly academic background
and insufficiently cover the developments which are at present taking place in the procurement and supply practices
of large, global companies. Practical descriptions of procurement situations, which can serve as a learning vehicle
and study material for students, are few. This contrasts with disciplines such as marketing, financing, organizational
behaviour and other management disciplines, where many student and practitioner textbooks exist.
It is encouraging that an increasing number of business schools and academic institutions have decided to include
procurement and supply management in their curriculum. This initiative has no chance of success, however, if there
is no effective and up-to-date supportive learning and teaching material. This book aims to meet this need.
Intended audience
This book is intended for those who are interested in procurement and supply management in its broadest sense.
Its contents aim to provide an in-depth discussion of procurement and supply issues, both from a strategic and a
xiv
Introduction xv
managerial perspective. Reading this book will neither make you a buyer nor a procurement manager. In this, the
text differs from the more practitioner-oriented literature.
In particular, this book is intended for:
●● bachelor and master students in business administration and industrial engineering, who want to specialize in
business strategy, technology management, operations management or supply chain management
●● professional managers in trade and industry, active in procurement or supply chain management, who are
interested in opportunities for improving the effectiveness and efficiency of the procurement and supply
function in their companies
●● executive students, who participate in management development programmes in the area of strategic
management, technology management, operations management and supply chain management
●● account managers and industrial sales representatives who in their professional capacity regularly meet with
professional buyers, and who are interested in the way these buyers perform their tasks
●● those who supervise procurement staff directly or indirectly, and who come from a non-procurement
background and are interested in the latest developments in the area of procurement.
Framework
The book has been developed using the following principles:
●● Strategic management perspective. In this book, the subject of procurement and supply management is
presented as an essential link in the business system. This business system is only as strong as its weakest link.
The way procurement and supply management is executed or should be executed is presented from a strategic
management perspective. This implies, for example, that attention is given to subjects such as how company
objectives may influence procurement and supply strategies and policies, how procurement and supply
strategies should support overall business strategy, how to develop these strategies, how to execute them, how
to manage the procurement process and how to monitor and manage procurement performance.
●● Practical orientation. Business administration and industrial engineering are concerned with analyzing and
solving practical business problems. For this reason, the various subjects are discussed from a practical point
of view. This book does not aim to transform the reader into a professional buyer. The intention is to introduce
the reader to the discipline and familiarize them with the key concepts. Literature and theory are provided
where we thought it needed to give a broader perspective.
●● Scientific basis. In discussing the subject matter, repeated reference is made to existing theories in management
literature. In this way individual readers can broaden their orientation if they so desire. When necessary, views
on procurement issues are illustrated with research results from national and international specialist literature.
Recent literature references have been used, as well as references from a more mature age where we felt these to
be still relevant to the subject. However, in order to increase the readability of the text, references are kept to a
minimum.
●● Identical structure of each chapter. Every chapter is alike in structure and encompasses:
– the learning objectives
– an introductory case to illustrate the practical relevance of the subject
– an introduction which provides a survey of the most important subjects which will be discussed in the
chapter
– a body text explaining the core concepts and techniques
– practical illustrations and memos to emphasize and illustrate certain subjects in a chapter
– a summary at the end of each chapter
– assignments for classroom discussion, if desired.
xvi Introduction
Structure
The book is divided into four parts, each containing several chapters. The overall structure is presented in the
figure below.
Figure 0.1 Structure of the book
Section I Introduction and context

1. Introducing procurement
2. The procurement process
3. Procurement as a business function
Section II Processes Section III

and strategies Interfaces
4. Outsourcing 9. Procurement and supply
5. Category sourcing chain management
6. Sourcing business services 10. Supplier relationship

management
7. Contracting and contract
management 11. Innovation sourcing
8. Public procurement 12. Procurement with

purpose
Section IV
Enablers
13. Organizing procurement
14. Procurement systems
15. Managing procurement performance
Section I: Introduction and context is aimed at becoming acquainted with the discipline. The key concepts and
terms are presented in these chapters.
Section II: Processes and strategies is about how to decide between make or buy, i.e. when to outsource business
activities and when not. If a decision to outsource is made, the right business partner needs to be selected and
contracted. This includes category sourcing which can be aimed at products, services or solutions buying. Category
sourcing results in contracts with suppliers and service providers which obviously need to be managed.
Section III: Procurement interfaces is about how to manage the relationships between procurement, supply
chain management, other business disciplines and suppliers. These relationships are important in order to drive both
innovation and sustainability in supply chain relationships.
Introduction xvii
Finally, Section IV: Enablers discusses what it takes to get organized for professional procurement, what it takes
to recruit the right staff for procurement jobs, what systems to use to manage the complicated procurement processes
and how to get the best possible performance from a procurement organization.
Let’s have a quick look at each chapter.
Chapter 1 focuses on the role and significance of the procurement function for industrial and service companies.
This is done by describing procurement’s role in the company’s value chain. Further, definitions of important terms
and concepts are provided. We explain why we prefer to use the term procurement rather than purchasing. In
the remainder of the book a clear distinction is made between the activities of the procurement department and
the procurement function. This chapter also discusses the differences between the different kinds of products and
services that can be bought. In doing so, this chapter provides a framework for the rest of the book.
Chapter 2 addresses the buying behaviour of organizations. The major differences between buying behaviour of
consumers and organizations are discussed. Various models of organizational buying decision-making, developed in
the (industrial) marketing literature, are presented. A core model in this chapter is the procurement process model,
which is described in detail. Through this chapter the reader will gain insight into the complexity which characterizes
many procurement decisions in organizations.
The core of Chapter 3 is how procurement may support the company’s business objectives and strategies. In order to
be effective, management needs to give attention to each element of the procurement management process. This starts
by defining procurement and supply goals and objectives and strategies needed to realize these. Procurement goals
and objectives need to be aligned with the company’s goals and objectives. Procurement strategies need to be worked
out into time-phased action plans. Next, the implementation of these action plans needs to be monitored and followed
up. The procurement development model describes how procurement and supply as a business function may develop
over time. In general, six different stages of development may be identified. In this way the procurement development
model may serve as a vehicle to provide guidance for a company on how to professionalize procurement in the future.
Outsourcing and risk management are the prime topics of Chapter 4. Attention is given to the growing trend
towards outsourcing. Many companies decide nowadays to focus on what they can do best and those activities that
provide them with a competitive edge in their end-user markets. Non-core activities are increasingly outsourced to
specialist suppliers. This is, however, not without problems, as companies run the risk of becoming too dependent on
their suppliers. This chapter deals with the issue of how outsourcing may be structured in a company, the underlying
change processes that are required and how companies can reduce their risk profile vis-à-vis their suppliers.
Overall procurement and supply strategies need to be worked out in specific category sourcing strategies and
plans. This is the central topic of Chapter 5, which discusses category sourcing. Here the question is addressed of how
to get the best results from suppliers for different purchased categories and commodities. Key to category sourcing is
to select the right number of suppliers, and to decide about the right type of relationship and the right type of contract
that should be put in place. Building on strategic marketing concepts, a procurement portfolio approach is presented
on which four basic differentiated supplier strategies are based. It will be explained that in order to develop effective
category sourcing strategies, the company also needs to understand its position in the supplier’s customer portfolio.
Chapter 6 deals with how to buy and contract for business services. It will become clear what specific difficulties
may arise when buying services. A classification on how to differentiate between different types of business services
is provided. Next, the implications for how to structure the procurement process and/or sourcing process for business
services are discussed. Specific attention is given to how to specify for services, how to select service providers and
how to contract for their services.
Chapter 7 discusses contracting and contract management. Contracting for investment goods, infrastructural
and civil works is an art itself. It represents a new task-buying situation where many stakeholders are involved. The
varying degrees of complexity are reflected in different contract types such as construction only, design and construct,
engineer–procurement–construct and design–build–finance–maintain contracts. The key characteristics of each of
these contract types are discussed as well as when to apply these contracts.
Chapter 8 describes the specific characteristics of public procurement, i.e. buying for governmental institutions.
We do so, mostly from a European perspective. The text has been adapted to the most recent changes in European
xviii Introduction
procurement law. From this chapter it will become clear that large differences exist between buying for government
and buying for private enterprise. Governmental bodies are not free to choose their procurement procedures.
Therefore, this chapter gives elaborate attention to the most important EU directives on public procurement, its
procurement procedures and how to work with these.
Chapter 9 describes the role of procurement within supply chain management. After providing some key
definitions, the basics of supply chain management are presented. This is achieved by providing a logistics reference
model, which differentiates between several manufacturing situations (ranging from assembly to order to job shop
operations). This model explains why procurement operations within different companies and industries may be
vastly different. Next, it covers a detailed discussion on materials requirements planning, just-in-time management
and the required information technology.
Chapter 10 presents a framework for supplier relationship management (SRM) explaining the different activities
involved in developing and managing supplier relationships. The chapter stresses the human aspect in relationship
building and that it takes time and effort to develop trustful supplier relationships. In doing so, procurement
professionals should aim first at getting the basics right, i.e. getting procurement processes and systems organized
in their company. Part of this is about how to set up a proper supplier quality assurance (SQA) policy and practice
to achieve zero defects delivery from suppliers. SQA will enable buyers to provide timely and actual feedback to
suppliers on how they perform. Next, procurement professionals may discuss with suppliers what will be needed
to consistently improve their performance (i.e. supplier development). This is important as the best performing
suppliers are invited to engage in the company’s innovation and new product development programmes. In this way,
this chapter creates a useful stepping stone to Chapter 11, which deals with innovation sourcing.
In Chapter 11 we present both closed versus open innovation, and the differences between the two. As companies
want to speed up innovation, they need to rely more on outside knowledge and expertise. However, most suppliers are
not willing to share their knowledge freely and at no cost. This chapter therefore discusses what is needed to involve
suppliers early, timely and effectively in innovation and new product development. The development portfolio is
presented as an instrument to help organizations make decisions on how to engage suppliers in their NPD projects.
Chapter 12 contains an updated text on the important subject of how procurement and supply professionals
can contribute to sustainability or ‘people, planet, profit’. This topic is very real today in many large companies and
public organizations. Buyers in Western companies have a great responsibility of buying for a better world. New
material on circular sourcing is presented. Besides corporate social responsibility (CSR), this chapter also deals with
procurement ethics and business integrity. Together, these three concepts create the necessary purpose for every
modern procurement organization.
The subject of how to organize for procurement is covered in Chapter 13. In practice, a large variety of
organizational structures is observed and the most important of these are discussed. There is no one best way to
organize for procurement. Specific attention is given to the issue of how to create procurement leverage in a multi-
plant environment. Here, different structures are discussed through which companies may capture procurement
synergies. Next, the issue of how to organize for efficient procurement at the business-unit level is presented. Finally,
different job profiles and competencies in procurement are discussed.
Chapter 14 is a new chapter and deals with procurement systems. Procurement is about information processing,
communication and data management. In this chapter, we present and discuss the ongoing digitalization of the
procurement function. Contemporary IT solutions in procurement aimed at supporting spend analytics, e-sourcing,
purchase-to-pay, and contract management and supplier management are introduced. Next, we discuss the value of
emerging digital technologies for procurement (e.g. artificial intelligence) and identify how these create procurement’s
future landscape. Chapter 15 deals with procurement performance measurement and governance. The central issue
here is how to measure and assess the performance of the procurement department. Several important methods and
(benchmarking) techniques are presented.
Introduction xix
What instructor’s material is available?

Teachers and instructors who have selected this book as the major textbook for their course work, may use the
teaching materials that are available and further details are provided on the following page ‘Teaching & Learning
Support Resources’. Teaching materials consist of a teacher’s manual, answers for the end of chapter discussion
questions, PowerPoint presentations and case studies. This should enable them to teach their courses in both an
attractive and efficient manner.
List of abbreviations
ATO: Assembly to order

BOM: Bill of materials
CODP: Customer order decoupling point
CPFR: Collaborative planning, forecasting and replenishment
CSR: Corporate social responsibility
EOQ: Economic order quantity
ERP: Enterprise resource planning
ESI: Early supplier involvement
ETO: E
ngineer to order. All manufacturing activities from design to assembly and even procurement of
the required materials are related to a specific customer order
IPO: International procurement office. Large companies operate IPOs in different parts of the world
JIT: Just-in-time
LCC: Low-cost country sourcing
MSS: Making and sending to stock
MRPI: Materials requirements planning
MRP II: Materials resources planning
MPS: Master production scheduling
MRO: Maintenance, repair and operating supplies
MTS: Make (and distribute) to stock
MTO: Make to order
NPR: Non-product-related
OEM: Original equipment manufacturer
PR: Product-related
RFI: Request for information
RFP: Request for proposal
RFQ: Request for quotation
ROI: Return on investment
RONA: Return on net assets
SLA: Service level agreement
SQA: Supplier quality assurance
SRP: Socially responsible procurement
SRM: Supplier relationship management
TCO: Total cost of ownership
VMI: Vendor-managed inventory
xx
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Introduction
and context
1 Introducing procurement
2 The procurement process
SECTION I
3 Procurement as a business function
1 Introducing procurement
Learning objectives
After studying this chapter you should understand the following:
●● The role and importance of procurement in the value chain.
●● The difference between concepts such as ordering, buying, purchasing, procurement, sourcing, supply
management, supply chain management and value chain management, and how these are interrelated.
●● New developments in procurement and supply chain management practices of organizations.
Procurement The
management of the
Introduction
company’s external
As business is becoming more and more competitive, procurement is increasingly
resources in such a
way that the supply of
recognized by top managers as a key driver for business success. Chief Procurement
all goods, services, Officers (CPOs) and their teams can contribute significantly not only to the company’s
capabilities and bottom line but also to its top line (Foerstl, Franke & Zimmermann 2016; Hartmann,
knowledge which are Kerkfeld & Henke 2012). Since most companies today spend more than half of their
necessary for running,
sales turnover on purchased parts and services, efficient and constructive relationships
maintaining and managing
the company’s primary with suppliers are key to the company’s short-term financial results and long-term
and support activities is competitive position (Chen, Paulraj & Lado, 2004; Ellram et al., 2002; Gonzalez-Benito,
secured under the most 2007; Narasimhan and Das, 2001; Paulraj, Chen & Flynn, 2006).
favourable conditions. Many companies cannot escape from exploiting the huge potential that
Supply chain procurement and supply chain management represent to them today. The case
management The study on Damen Shipyards illustrates the complexities that go with these activities.
management of all Procurement and supply chain management have different roles within this company.
activities, information,
First, it is important to secure the supply for all projects and shipyards. Component
knowledge and financial
resources associated deliveries should be made by suppliers and subcontractors on time and their
with the flow and quality should be flawless. Next, prices of purchased materials should be within the
transformation of goods project budget, in order not to jeopardize project and company profitability. Where
and services from the purchases of components can be leveraged across different projects and clusters, this
raw materials suppliers,
is done. However, project-specific purchases are tailored to the project. Deliveries
component suppliers and
other suppliers in such a are made based upon detailed project planning in order to avoid the buildup of
way that the expectations unnecessary inventory and to keep working capital minimal. This all calls for careful
of the end-users of the supplier selection and differentiated sourcing strategies and for highly professional
buying company are procurement and supply chain organization.
being met or surpassed.
Chapter 1 Introducing procurement 3
Case study
Procurement and supply chain management at Damen Shipyards
T
he supply chain department at Damen Shipyards at Gorinchem, the Netherlands, is responsible for purchasing
all ship components, ordering, logistics, warehousing, inventory management, management of the international
purchasing offices in China and Vietnam, technical document control, parts management and materials planning.
In total about 250 specialists are employed in this department. The sales and construction of different types of
vessels are allocated to different business clusters. Every cluster specializes in a specific type of vessel and
employs different building methods. Luxury yachts are built according to customer specification and are usually
one-offs, which means that every purchase is unique for that specific project. However, tugboats, barges and other
heavy-duty vessels may be produced in small series as the bodies and physical characteristics may be common
among different clients. Hence, purchasing concentrates on buying parts for the preplanned production series.
The procurement function is organized around different clusters each with a dedicated procurement manager
and ten specialist buyers who ensure that parts arrive on time, prices are negotiated within the project budgets
and that parts comply with all specifications. Damen Shipyards employs category management across these
clusters for parts that may be common to all clusters (such as ship engines, propellers, instrumentation, safety
equipment), as it makes no sense to source these parts for each project individually. About 20 lead buyers are
responsible for managing these cross-cluster categories, whereas three supply chain managers orchestrate the
respective materials flows. This is characteristic of Damen’s matrix organization: every procurement manager is
not only responsible for managing all purchases for a specific cluster but at the same time leads all purchasing
activities for one or two corporate categories. Careful orchestration of the purchasing spend of about €1.5 billion,
which represents about 68 per cent of sales value, is necessary in order to secure the materials flow of the different
shipyards while at the same time contributing to company profitability. The largest category is ship engines, which
are obtained from Caterpillar, among others. Parts and components are delivered by over 600 suppliers. Building
a ship requires the engagement of about 100 to 200 suppliers who deliver over 3000 components. These are just
a few numbers that illustrate the sourcing and supply chain complexity at this type of company.
Damen Shipyards started as a family-owned business in 1927. When Kommer Damen, the current chairman of
the supervisory board, took over from his father he steered the company on a course of international expansion. In
order to achieve growth and stave off fierce competition, he introduced a new business model. Damen Shipyards
would specifically focus on sales, customer contacts and design, whereas the actual construction and assembly
of ships would be outsourced to specialist suppliers and subcontractors who actually built the vessels using
Damen’s shipyard infrastructures. Through product and component standardization, bodies for smaller vessels
were sourced from low-cost countries in small series and shipped to the specific shipyards where they would
be finished. Here, the customer could choose from a number of standard options that were built into the ships
according to their wishes. Due to standardization Damen was able to offer very competitive prices to customers.
This business model is one reason for the impressive sales growth.
Meanwhile, the company operates over 32 shipyards globally: 15 of these focus on maintenance and repair,
whereas 17 shipyards are focused on building new ships and minor maintenance work. Damen employs about
9000 people, the majority of whom are employed in Vietnam. Damen today is the undisputed market leader of
heavy-duty vessels and tugboats.
In this chapter, we discuss the role and importance of the procurement function.
We will take Porter’s classic value chain as a point of departure to show that we
need to differentiate between direct procurement and indirect procurement. Some
time is spent in defining important terms and concepts, and we elaborate on the
role which procurement professionals may play in cost reduction, and product and
process innovation. The chapter concludes by describing some important trends and
developments which are perceived in the procurement strategies of companies that are
leading edge in procurement and supply chain management. Therefore, this chapter sets
the stage for the remaining chapters in Section I.
4 Section I Introduction and context
The role of procurement in the value chain

Value chain
management All In many business strategies, the concept of value chain management plays a central
stakeholders belonging role. Therefore, this subject is elaborated in this section. When describing the role and
to the same value chain
are challenged to improve
position of the procurement function in industrial companies, the value chain of Porter
the (buying) company’s (1985, p. 37) is often taken as a term of reference.
value proposition to its The value chain is composed of value activities and a margin which is achieved by these
final end-customers, activities. Value activities can be divided into physically and technically different groups
i.e. consumers.
of activities. Porter differentiates between primary activities and support activities.
Value chain Composed Primary activities are those which are directed at the physical transformation and
of value activities and a handling of the final products that the company delivers to its customers. Distribution
margin which is achieved to the customer and providing services are part of these primary activities. Support
by these activities. Value
activities can be divided
activities enable and support the primary activities. They can be directed at supporting
into primary activities one of the primary activities as well as supporting the whole primary process.
and support activities. Porter differentiates between five generic categories of primary activities (1985,
The margin represents pp. 39–40):
the value that customers
want to pay extra for ●● Inbound logistics. These activities are related to receiving, storing and disseminating
the company’s efforts inputs to the production process, such as inbound transportation, incoming
compared with the costs
inspection, materials handling, warehousing, inventory control and reverse logistics.
that were required for
these.
●● Operations. These activities are associated with transforming inputs into the final
product, such as machining, assembly, packaging, equipment maintenance, testing,
Primary activities printing and facility operations.
Primary activities are
those activities that
●● Outbound logistics. These are activities associated with collecting, storing and
are required to deliver physically distributing the final product to customers, such as finished goods
the company’s value warehousing, materials handling, outbound transportation, order processing and
proposition to its scheduling.
customers. They consist ●● Marketing and sales. These activities relate to advertising, promotion, sales,
of inbound logistics,
operations, outbound
distribution channel selection, the management of channel relations and pricing.
logistics, marketing and ●● Services. These activities are associated with providing services to customers to
sales, and customer enhance or maintain the value of the product, such as installation, repair and
service activities. maintenance, training, parts supply and product adjustment.
Support activities Support activities are grouped into four categories:
These are activities that
are required to support ●● Procurement. Relates to the function of purchasing inputs used in the firm’s value
the company’s primary chain. These may include raw materials, supplies and other consumable items
activities. These include
procurement, technology
as well as assets such as machinery, laboratory equipment, office equipment and
development, human buildings. These examples illustrate that purchased inputs may be related to primary
resources management activities as well as support activities.
and facilities ●● Technology development. ‘Technology’ has a very broad meaning in this context,
management (i.e. those
since in Porter’s view every activity embodies technology, be it know-how,
activities aimed at
maintaining the firm’s
procedures or technology embodied in processes, systems or product designs.
infrastructure). Most value activities use a technology that combines a number of different
sub-technologies involving different scientific disciplines.
Raw materials
Materials which
●● Human resources management. These are all the activities directed at recruiting,
have undergone no hiring, training, developing and compensation of all types of personnel on the
transformation or a company’s payroll, active in both primary and support activities.
minimal transformation, ●● Firm infrastructure. The whole company is the customer of these activities.
and they serve as the
Infrastructure supports the entire set of company processes. Examples include
basis materials for a
production process.
management, planning, finance, accounting, legal, government affairs, quality

management and facilities management. In larger companies, which often consist Facilities management
Relates to the
of different divisions and business units, one sees these activities divided among
management (planning,
headquarters and the business units. execution and control),
and the realization
All activities need to be performed in such a way that the total value generated by
of housing and
the company, as perceived by its customers, is more than the sum of its costs. In Porter’s accommodation, the
terms, the total value of the company is determined by the whole of its sales value. The services related to these
value chain, then, relates to all activities, both inside and outside the company, that create (e.g. security, cleaning,
value for the company’s final customers. The margin reflects the rewards for the risks maintenance, catering),
and other means in order
incurred by the company. Porter regards procurement as a support activity that should
to enable the organization
provide support to the following business activities: to realize its mission.
●● Primary activities. The procurement function should be able to meet the material
requirements related to operations management and inbound and outbound
logistics. Operations may have a different structure among manufacturing
companies. 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. Materials requirements
planning (and therefore also planning of purchased products) is based on sales
forecasts. Examples are raw materials and most semi-manufactured products
such as steel plate, tubes, food ingredients and most building materials.
– 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. This is common in situations with very large
or customer-specific product ranges (e.g. packaging solutions for cosmetic products)
or bulk products that are very expensive to stock (e.g. computers and laptops).
– 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. Production is usually on multipurpose machinery, requiring highly skilled
operators. Examples are luxury yachts, special purpose vessels, customer-specific
production equipment and machines.
These contrasting manufacturing situations explain why procurement activities may

be radically different between companies and industries. In some cases, procurement is
focused on supporting diverging materials flows, where raw materials are processed to
manufacture a wide range of products (for example, bakery products). In other cases,
procurement needs to support a converging materials flow, where a large variety of
components is to be assembled into a limited range of final products (for example, car
industry, aircraft industry). Procurement operations for a car manufacturer producing
cars in large batches (e.g. Tesla, Toyota, BMW), controlled by a materials requirements Direct procurement
planning (MRP) system, may differ significantly from those produced in a job-shop Procurement of
environment (e.g. Koenigsegg, Pagani). The latter are more like a shipyard, where every all materials and
products that are used
vessel may be new to the organization and where materials are obtained from a vast,
for manufacturing
frequently changing supplier base. Buying for primary activities will be referred to a company’s end
throughout this book as ‘product related buying’ (PR), ‘buying of production items’ or products.
direct procurement. Usually this area gets most of the attention from management.
●● 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 equipment for research and development
– computer hardware and software for the central IT department
– lease-cars for the sales force
– strategy consultants for senior management
– office equipment for administrative staff
– machinery and equipment for the production department
– maintenance, repair and operations (MRO) supplies for the maintenance
department.
Investment goods or Again, we see that the procurement function aimed at providing supplies and services
capital equipment for the support activities is very different in character. Some of the purchases to be made
Products which are not are routine purchases and may be repetitive and low in value. Other purchases may have
consumed immediately,
a ‘project character’ and may be unique and high valued (investment goods or capital
but whose acquisition
value is depreciated equipment, computer systems, buildings).
during their economic In general, this type of purchase will be referred to as ‘non-production buying (NPR)’,
life-cycle. ‘indirect procurement’ or ‘general expenses’. They may be classified into: MRO supplies,
Indirect procurement investment goods1 and services. The high variety and fragmented nature of this type of
Procurement of all purchase makes it difficult to support these by one uniform procurement procedure.
materials, components As a result, indirect purchases are often done by the internal user departments, who are
and services that are usually lacking professionalism in procurement. This is one reason why international
used to support the
companies, which have set up special professional procurement improvement
company’s infrastructure
and back-office programmes in the indirect area (such as IBM, Shell and Philips), have reported high
activities. savings. Table 1.1 summarizes the most important differences between buying for
primary and for support activities.
Table 1.1 Main differences between buying for primary activities and buying for support activities
Aspects Buying for primary activities Buying for support activities
Product assortment Limited to large Very large
Number of suppliers Limited, transparent Very large, not transparent
Procurement turnover per supplier Very large, considerable Limited
Number of purchase orders Considerable Very large
Average order size High Small
Control Depends on type of production planning Limited, forecast-related or project-related buying
Decision-making unit Engineering, manufacturing specialists dominant Fragmented, varies with product or service
Definition of concepts
The procurement function traditionally encompasses the process of buying. It involves
determining the procurement needs, selecting the supplier, arriving at a proper price,
specifying terms and conditions, issuing the contract or order, and following up to
ensure proper delivery and payment. In the old days it was argued that the procurement
function should obtain the proper equipment, material, supplies and services of the right
quality, in the right quantity, at the right place and time, at the right price and from
1
Also referred to as CAPEX (capital expenditure).
the right source (Aljian 1984, p. 3). In this description, the procurement function was
regarded predominantly as an operational activity, i.e. limited to ordering.
In practice, as well as in the literature, many terms and concepts nowadays are used
in the area of procurement. However, little agreement exists about the definition of these
terms (Ellram et al. 2020). Terms such as purchasing, procurement, sourcing and supply
management seem to be used as synonyms, notwithstanding their differences.
Throughout this book the definition of procurement is:
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 favourable conditions covering the materials, information and money
flows up to the point of consumption.
The procurement function in this definition covers activities aimed at assessing

whether the company should consider make or buy, i.e. secure the incumbent need from
its own resources versus external resources.
●● determining the procurement needs, i.e. specifications (in terms of required quality
and quantities) of the goods, services and solutions that need to be bought
●● selecting the best possible supplier and developing procedures and routines to be
able to do this
●● deciding what contract to put in place, and preparing and conducting negotiations
Expediting Following
with the supplier in order to establish an agreement and to write up the legal contract up on a purchase order
●● placing the order with the selected supplier using efficient purchase order and order to make sure that
follow-up routines the supplier is going
●● monitoring and control of the order to secure supply (expediting) while checking to perform as it has
confirmed through
the suppliers’ invoices against agreed terms and conditions
the purchase order
●● follow-up and evaluation (settling claims and disputes, keeping product and supplier confirmation. There are
files up-to-date, reviewing supplier rating and supplier ranking). three types of expediting,
i.e. routine status check,
Figure 1.1 schematically illustrates the main activities within the procurement advanced status check
function. It shows that these activities are closely interrelated. This figure is referred to as and field expediting.
the (linear) procurement process model.
Figure 1.1 The linear procurement process model and some related concepts
Purchasing function
Tactical purchasing Order function
Expediting Follow-up
Internal Determining Selecting
Contracting Ordering and and Supplier
customer specification supplier
evaluation evaluation
Sourcing Supply
* **
Buying
Procurement
Note: * = USA; ** = UK.
The procurement function does not include the responsibility for MRP, materials
Quality Quality refers scheduling, inventory management, incoming inspection and quality control. However,
to the total of features in order to be effective, procurement operations should be closely linked and interrelated
and characteristics of a
to these materials management activities. In the authors’ opinion, a procurement
product or service that
have a bearing on its
manager should support each of the six activities mentioned earlier. However, this does
ability to satisfy a given not necessarily imply that all these activities should be conducted by the procurement
need (American National department, as illustrated in the following example.
Standards Institute). A buyer who is responsible for MRO supplies is often confronted with the ‘small-order
Quality is meeting
problem’. Many requisitions which they receive from internal departments concern the
(internal or external)
customer requirements need for one (or a few) simple product(s) of low expense. Handling these requisitions
that have been formally and translating these into a purchase order, however, is often a laborious task if that
agreed between a buyer is to issue a purchase order for every requisition. An alternative may be to arrange
customer and a supplier. for a so-called ‘catalogue’ agreement with a specific supplier, for example for the delivery
Procurement of mechanical tools. In this agreement, they may establish the product range which will
department The be bought from that supplier including the list prices per product. They may agree with
department of a company the supplier that the latter will provide a web-based catalogue to their company, enabling
or public organization
employees and technical staff to order electronically directly from the supplier without
responsible for
executing and managing involving the procurement department. Furthermore, they may negotiate a bonus from
procurement processes. that supplier tied to the total procurement turnover for 12 months.
In this example, it is the task of the buyer to develop an overall commercial agreement
Procurement
function Covers
with the supplier and establish an online catalogue and an efficient (electronic) order
activities aimed routine that works for both the supplier and the buyer’s internal customers. In fact, what
at determining happens is that the ordering function is delegated, in a rather controlled way, to the
the procurement internal customer. In this manner, it is possible to combine the buying power of the
specifications based
organization with optimal flexibility and efficiency for the internal user.
upon ‘fitness for use’;
selecting the best From the definition of procurement, it may be derived that its scope covers everything
possible suppliers and for which the company receives an invoice. Hence, the arena of procurement includes
developing procedures inter-company business, counter-trade arrangements, hiring of temporary personnel
and routines (e.g. setting from outside agencies and contracting advertising agencies. However, many of the
up supplier selection
products and/or services for which the company may receive invoices from suppliers
criteria) to be able to
do so; preparing and may be arranged without interference from the procurement department (this will be
conducting negotiations discussed later). Therefore, the scope of the procurement function is usually much
with suppliers in order to broader than that of the procurement department.
establish an agreement The term ordering refers to the placing of purchase orders with a supplier against
and to write up the legal
previously arranged conditions. Furthermore, this term will be used when purchase
contract; placing the
orders with the selected orders are placed directly with the supplier, without questioning the supplier’s conditions
suppliers or developing and without sufficient supplier market testing. Call-off orders fall into this category, as
efficient purchase order well as telephone orders for products bought from a supplier catalogue. Ordering is
and handling routines; considered to be part of the procurement process.
monitoring and control
It is difficult to find a description of buying in management literature. It differs from
of the orders to secure
supply (expediting); procurement in the sense that it does not encompass the first step of the procurement
following up and process (i.e. determining specifications). This is in line with the practice of trading and
evaluating (settling retail companies (e.g. department stores), where the term ‘buying’ is most often applied.
claims, keeping product Here, discussions about the specifications of products to be purchased are less complex
and supplier files up-to-
than for industrial companies, since in many cases the supplier decides these. Buying
date, reviewing supplier
rating and supplier therefore relates to the commercial activity of soliciting competitive bids from a limited
ranking). number of suppliers and negotiating a final contract with the lowest bidder. Several
negotiation rounds may be required before closing a final deal.
Purchasing differs from buying and ordering in one important aspect: while
specifications may be a given in the situation of ordering and buying, these are challenged
when it comes to purchasing. Purchasing relates to situations where buyers engage in
discussions with internal users about the degree to which the specifications for products
to be purchased are really fit for purpose. Features that are not necessary for meeting the
function which the product needs to fulfil are challenged by the buyer and benchmarked
against what is available on the supply market. This often leads to a situation where an
(expensive) supplier branded product is replaced by an identical product from a lesser-
known supplier. However, challenging specifications will not always lead to changes,
since internal users might react emotionally when they are challenged and decide to
push through to get what they want, even if this is more expensive. Also, many buyers
are not even in the position to challenge the specifications, because they are not involved
early enough in the process by the internal users.
As can be seen from Figure 1.1, procurement is a somewhat broader term. It includes
all the activities required to get the product from the supplier to its final destination. It
encompasses purchasing stores, traffic and transportation, incoming inspection, and quality Total cost of
control and assurance. Many firms also consider recycling (as they are related to materials) ownership (TCO)
to be a part of this (refer also to Memo 1.1) because of its growing importance in recent Relates to the total costs
that the company will
years, with the increasing impact of environmental issues. Procurement is based on total
incur over the lifetime
cost of ownership-thinking and considers all direct and indirect costs involved in acquiring of the product that is
goods and services. When buying a copier, it may be more important to look at the price purchased.
per copy (based upon all costs associated), rather than the purchase price of the copier itself.
Memo 1.1
Purchasing versus procurement: what is the right
term to use?
A
s purchasing has evolved as a business function, their purchasing functions into
the terminology to denote this activity in business procurement (e.g. Unilever,
has changed. Over time, procurement seems to have Philips, Apple, Pfizer). Both terms relate to the entire
gained in popularity, at the expense of purchasing. purchasing process, ranging from how to arrive at
What is the right term to use? This is not clear. Some specifications up to securing delivery and supplier
companies avoid the discussion by defining purchasing evaluation. Academically there are slight differences
as ‘third-party spend management’. Clearly, in the public (as shown in the table below).
sector, procurement is the preferred term. However, Whether to use the term purchasing or procurement
in many industrial and service companies, purchasing seems to be a matter of personal preference. Given the
is preferred over procurement. However, during the sliding scales between the two concepts, we will use
2010s, more and more private companies rebranded both terms as synonyms in this book.
Purchasing Procurement
Focus Price versus functionality Total cost of ownership
Scope Purchasing process Purchasing process + supply chain optimization (first-
tier suppliers)
Orientation Commercial Commercial + supply chain
Sector Manufacturing companies Project and process-based activities (construction
(manufacturing, services sector) industry, engineering contractors, chemical industry)
Although the terms are different, purchasing and procurement in business practice are
Sourcing Finding, often used as synonyms. We will use procurement throughout this book (refer to Memo 1.1).
selecting, contracting
A term which has become increasingly popular in the 21st century is sourcing.
and managing the best
possible source of supply
This activity relates to developing the most appropriate sourcing strategy for a certain
for the whole company commodity or sourcing category. A sourcing strategy describes how many suppliers
on a worldwide basis. the company favours for that commodity or category, what type of relationship to pursue
Sourcing category
(arm’s length or as a partner) and what length of contract to negotiate (one year to
A discrete category multi-year). Sourcing is all about finding the best possible supplier for the company on
of goods or services a worldwide basis.
grouped according to the Supply management is somewhat more difficult to grasp because it appears that
function of those goods
there are differences in connotation between North America and Europe. In the United
and services and mirroring
the similar characteristics
States ‘supply’ covers the stores function of internally consumed items such as office
of their specific supply supplies and cleaning materials. However, in the UK and Europe, the term supply seems
markets; examples include to have a broader meaning, which includes at least procurement, stores and receiving
raw materials, chemicals, goods and materials.
components, packaging,
In our view, it refers to all activities necessary to manage supplier relationships in
professional services, and
so on. such a way that first-tier suppliers are aligned with the company’s overall business
strategies and interests. It is focused on structuring and continuously improving
Sourcing strategy
procurement and supply processes within the customer organization and between the
Identifies for a certain
sourcing category
customer organization and its first-tier suppliers. Supply management, hence, has an
how many suppliers to internal aspect and an external aspect. The idea behind supply management is that
contract with, what type if suppliers are not managed by their customers, customers will be managed by the
of relationship to pursue, suppliers. Given the widespread acceptance of marketing management, customer
contract duration, type of
development and strategic account management in business, suppliers are usually in a
contract to negotiate for,
and whether to source favourable position.
locally, regionally or Supply management is related to supply chain management. The latter concept can
globally. be described as the management of all activities, information, knowledge and financial
Partner A (supplier)
resources associated with the flow and transformation of goods and services from the
partner is defined raw materials suppliers, component suppliers and other suppliers in such a way that
as a firm with whom the expectations of the end-users of the company are being met or surpassed. Supply
your company has an chain management differs from procurement in that it also encompasses all logistics
on-going buyer–seller
activities. Moreover, it entails the management of relationships not only with first-
relationship, involving
a commitment over tier suppliers but also with lower-tier (second- and third-tier) suppliers. An example
an extended period, is Ford, which urges its suppliers of exhaust-systems to use one steel contract. Both
a mutual sharing of Ford and its suppliers are buying steel; by combining the contract value of all parties
information and a involved, they can benefit from better terms and conditions provided by Ford’s steel
sharing of risks and
supplier (refer also to Memo 1.2).
rewards resulting from
the relationship. Value chain management, finally, builds on the former concept. Here the idea is that
suppliers and/or supply chains are challenged to improve the (buying) company’s value
Supply management
proposition to its (end-)customers. Usually, the suppliers work closely with the (buying)
Relates to all activities
necessary to manage company’s technical and marketing staff to reduce the product’s overall costs, come up
supplier relationships in with new designs or add new features to the product which are attractive for the end-
such a way that first-tier customer and that make the product sell better. An example here is Microsoft’s X-Box,
suppliers are aligned with which was originally developed by Microsoft, but which actually was at the time that
the customer company’s
it first appeared on the market produced by Flextronics. Flextronics was crucial for
overall business
strategies and interests. the success of the X-Box in that it determined the X-Box’s cost price and, hence, the
consumer price of the product.
Memo 1.2
Supplier relationships at Volvo
PURCHASING WITHIN THE VOLVO GROUP SUPPLIER

Volvo Group2 is the renowned manufacturer of heavy- RELATIONSHIPS
duty trucks and marine equipment. The company Being a Volvo Group supplier means belonging to a
employs one of the largest purchasing departments in global network consisting of 36,000 high performing
the world. During 2015, the total spend on goods and suppliers from countries all over the world adding real
services amounted to approximately €21 billion. In its business value to the Volvo Group. Suppliers should
first tier, the Volvo Group has around 36,000 suppliers deliver state-of-the-art quality with perfect precision
and subcontractors of which about 6000 supply parts right through the supply chain, from project planning
for the Group’s end products. Volvo Group believes that and in production facilities right through to delivery to
behaving responsibly is the only foundation on which a their plants and customers. Volvo Group also expects
sustainable business can be built. For this reason, the aftermarket suppliers to submit offerings for a complete
principles in their Code of Conduct are applied in all product life cycle that minimizes vehicle off-road time,
their procurement processes. and to offer a service level that supports zero incident
Responsible purchasing involves encouraging promises to customers. Next, Volvo Group expects
correct behaviour, managing risks and building long-term committed, pro-active collaboration that helps achieve
relations with suppliers to improve social, environmental cost savings, meets environmental and fuel efficiency
and business ethics in the supply chain. The text below, targets, and develops new innovative technologies.
which is derived from the company’s website, shows
how Volvo Group intends to work with suppliers.
BUSINESS VALUES
Volvo Group Purchasing aims to develop suppliers as
VOLVO GROUP PURCHASING partners. It does this by selecting high performing
Volvo Group Purchasing is the global Group function suppliers that deliver the best possible products and
covering the purchase of automotive products and superior services that add real business value to the
parts including aftermarket, for all truck brands in Volvo Group, on both a global and regional basis.
Volvo Group Trucks. Volvo Group Purchasing has Quality has gradually come to mean more than
SEK120 billion in annual spend, 2550 suppliers in serial quality assurance itself. Volvo’s suppliers must be
production and 1.9 billion parts delivered to the Group able to take complete responsibility for environmental
Truck plants annually. impact as well as a holistic view regarding material
Volvo Group Purchasing also covers the Indirect handling and information exchange. The ability to
Products & Services (IPS) Purchasing. IPS optimizes achieve effective continuous improvement requires
the supplier base and drives standardization and good knowledge of modern tools and methods that
sourcing of all goods and services for the Volvo are offered by quality technology.
Group, including facilities, consumables, production Together with its suppliers, the Volvo Group
equipment, labour, fluids and the Group’s development has a clear responsibility to reduce environmental
service area, and engineering, marketing, sales and impacts from transport and other services. Volvo’s
printing, and travel. suppliers believe in environmental care and actively
Next, Volvo Group Purchasing includes the work with environmental resource management and
purchasing operations for Volvo Construction environmental management systems such as ISO
Equipment (VCE), Volvo Bus and Volvo Penta. 14001 and EPA/SmartWay.
2
Volvo Group is not to be confused with Volvo Cars. The latter is a manufacturer of cars for private and business use. It was
acquired from Ford in 2010 by Geely Corporation, China.
Suppliers and contractors to the Volvo Group deploy When shipping products to any country outside
and respect ethical standards throughout the supply their own, a supplier is responsible for calculating the
chain. Volvo’s commitment and approach to corporate Regional Value Content of its products. Every supplier
social responsibility (CSR), sustainability, environment is required to submit a Certificate of Origin for goods
and safety, in compliance with the principles of its annually, as well as with each shipment in regions
Code of Conduct, are integrated into its policies and where this is required.
implemented through everyday business decisions and Source: © Volvo. Reproduced with permission.
actions with suppliers.
After passing the initial screening, a new supplier
will be enrolled in a Supplier Evaluation where it must
comply with the Key Elements Procedures (KEP).
Importance of procurement to business

An analysis of the cost structure of manufacturing companies immediately shows the
importance of procurement to business. In general, the largest part of the cost of goods
sold (COGS) or sales revenues appears to be taken up by purchased materials and services.
Figure 1.2 shows that the average procurement value, which relate to components that
make up the final product, in relation to COGS is approximately 50 per cent. If the
other business costs which have an important procurement component are added to the
purchasing value, the total procurement value may amount to 60–80 per cent.
Figure 1.2 Purchased goods and services as a percentage of cost of goods sold
5 Admin
12 Services
18 Capex
3 Spares
12 Trade-items
60–85 60–80 50–70 60–80
Production
25–50 10–40 50
parts
Retailers Computers Consumer Automotive Pharma Service Typical

electronics industry structure
The effects of purchasing savings on the company’s return on net assets (RONA) are
illustrated through the DuPont chart in Figure 1.3. Net assets can be defined as fixed
assets plus net working capital. It represents the total amount of capital that has been
utilized for generating profits and for which the company needs to generate an income.
Net working capital equals current assets minus current liabilities. Figure 1.3 shows
how a 2 per cent saving on procurement-related expenditure for a company (in this
case Philips) may lead to an improvement in the RONA of 14.2 per cent. Of course, the
reverse is also true: an unexpected 2 per cent increase in procurement spend may lead
to a reduction in Philips’ profitability of 14.2 per cent. Philips’ procurement leverage is
rather low due to its low capital turnover ratio.
Figure 1.3 Impact of procurement savings on Philips’ return on net assets (RONA) (2019, figures in millions of euros)
DuPont Analysis Philips (2019) Procurement leverage effect: a 2% procurement cost reduction leads to a 14.2% RONA improvement.
(Source: Adapted from data found in Philips Annual Financial Report, 2019, pp. 88–91, p. 115)
Sales turnover
€19,482
Capital turnover Fixed assets

ratio -/- €17,557
0.97
Net assets*
+ Current assets
€20,038
€9,459
Net working
capital** -/-
€2,481
Current liabilities
Philips €6,978
Return on net x
assets (RONA)
7.13% Sales
Procurement
(8.14%) €19,482 Procurement cost to sales ratio****
Income from €10,129 52%
operations -/- –2%
€1,644 + (€9,926)
(€1,847) Total costs*** Employee benefit
Income before expenses
taxes + €17,838
€6,307
€1,428
(€17,635) +
(€1,631)
Sales margin
-/- Financial results Depreciation
7.33%
– €216 €1,402
(8.37%)
Sales
€19,482
Note: *Net Assets = Fixed Assets + Net Working Capital**

**Net Working Capital = Current Assets − Current Liabilities
***Total cost = Total sales − Income from operations
****Procurement to sales ratio: Procurement cost (Spend/ Total Sales)
A higher capital turnover ratio represents a much higher leverage of procurement

savings on the company’s profitability. Retail companies and construction firms
usually have a lower profit margin but a much higher capital turnover ratio. Hence,
procurement savings of 2 per cent will have a larger impact on the respective companies’
RONA. It shows that the impact of procurement savings on the RONA strongly depends
on how a company designs its value chain (e.g. level of outsourcing, level of vertical
integration, procurement-to-sales ratio) and the efficiency of a company to achieve
DuPont analysis
maximum sales with the minimum amount of capital employed (i.e. high capital
Financial diagnostic
turnover ratio). tool to calculate the
The DuPont analysis shows that procurement contributes to improving the company’s company’s return on
RONA in three ways: investment based
upon sales margin
●● Through reduction of all direct materials costs. This will immediately lead and capital turnover
to an improvement in the company’s sales margin, which in turn will affect ratio. Can be used to
RONA in a positive manner. A number of measures may lead to lower direct assess the effect of
procurement savings on
materials costs such as a reduction in the number of suppliers, improved product
the company’s return on
standardization, applying competitive tendering and looking for alternative and investment (ROI).
cheaper materials.
●● Through a reduction of the net working capital employed by the company. This
Payment terms will work out positively on the company’s capital turnover ratio. There are many
Payment terms relate to
measures which will lead to a lower capital employed. Examples are longer
what, how and when the
buyer will pay the invoice
payment terms, reduction of (pipeline) inventories of base materials through
for the products and just-in-time (JIT) agreements with suppliers, supplier quality improvement
services delivered by the (which will lead to less buffer stock required) and leasing instead of buying
supplier. equipment.
●● Through improving the company’s revenue-generating potential. Challenging
suppliers for new product ideas and process improvements may result in shorter
time-to-market and to new customer value propositions that in turn lead to
higher margin new products. Since innovations in many industries today come
from suppliers, procurement managers are challenged to mobilize their suppliers’
expertise and to involve supplier technical experts early in the new product
development process.
It can be concluded that procurement policies contribute to business success in
several ways. First, procurement policies can significantly improve sales margins
through realizing substantial cost savings. One euro saved in procurement is one euro
added to the bottom line. Second, through better planning and scheduling and better
quality and logistics arrangements with suppliers, procurement can contribute to a
reduction of working capital and, hence, the company’s cash position. Third, suppliers
may contribute significantly, when addressed properly, to the company’s innovation
processes. However, as companies become more dependent on their suppliers, the
strategic value of procurement lies in developing a world-class supplier base which is
more competitive than that of the company’s main competitors. Looking for the most
competitive suppliers worldwide and developing effective relationships with them
should therefore be one of the most important concerns of any procurement manager.
As has been demonstrated, even small improvements in the relationship with suppliers
may have a significant impact on the company’s RONA.
The conclusion we can draw from this discussion is that as the procurement to sales
ratio (i.e. procurement quote) increases for a specific company, procurement decisions
will have a more profound impact on the company’s returns. The same goes for the capital
turnover ratio. A higher ratio will lead to a greater leverage of procurement savings
on direct materials costs. It is therefore important that companies keep track of their
procurement expenditure. Next, they need to manage their relationships with suppliers
in a professional way. In order to do that, detailed management information is required.
Obtaining detailed procurement spend information, however, is quite a challenge in
most large companies. Memo 1.3 provides some guidelines on how to proceed on this.
Usually, what companies actually spend on outside suppliers does not automatically
follow from a company’s annual financial statement. Most companies, for unknown
reasons, do not report these figures. As in the example of Philips, these figures need
to be derived from the details and descriptions of each of the financial entities in the
balance sheet and income statement, which in general requires some analytical work.
Those chief financial officers (CFOs) who invest time in calculating the company’s actual
spend often become enthusiastic to learn about what can be saved through smart and
professional procurement, as they quickly realize that any euro saved on procurement
will immediately add to the company’s bottom line and its profitability. This enthusiasm
then often translates into clear targets for the procurement organization to save money
on the company’s budget.
Memo 1.3
Spend management: the foundation for every
procurement strategy
T
he most important objectives of corporate categories. A large problem
sourcing programmes are cost reduction, volume concerns the absence of
consolidation, preventing reinventing the wheel in a corporate-wide, uniform
supplier contract negotiations, generating supply article coding system which can be used to classify
market knowledge and improving supplier performance procurement expenditure.
and business impact. For this reason, spend management has become a
Surprisingly enough, the most difficult part of prime issue. International consultants and IT providers
developing sourcing strategies appears to be the (such as SAP and Oracle) today provide specific
collection of detailed spend information: in many cases software applications to chart purchasing expenditure
corporates do not have a clue what they purchase in detail. Usually, the procurement spend is presented
internationally or what their consolidated spend is. through a so-called ‘spend cube’ (refer to Figure 1.4).
Financial and accounting departments simply are not This spend cube allows a company to allocate
equipped to provide this type of information. Large procurement expenditure from three different angles,
corporates cannot, without significant efforts, assess i.e. product categories, suppliers and internal budget
what they have purchased from a certain supplier, holders or departments. In this way, the procurement
or what money they have spent on the acquisition of spend cube is an indispensable tool for developing
certain materials and services in different sourcing specific sourcing strategies.
Figure 1.4 The procurement spend cube

Spend per supplier
Spend per internal budget

holder (i.e. department,
internal customer)
Spend per sourcing category
Certainly, when sales markets are down, it is often easier to improve profitability
through bigger procurement savings than through bigger sales. However, when CFOs
year after year are chasing their procurement organization for even bigger procurement
savings, it will show quickly that there is an end to this game as you can squeeze
a lemon only once… In such situations, top managers need to change their view on
procurement to allow other and more creative ways to deal with costs and suppliers.
As the financial view on procurement is the dominant one, they find it difficult to change
their perspectives. Still, it is necessary for top managers to adopt alternative perspectives
to allow procurement to develop into a strategic business function (refer to Theory
Snapshot 1.1).
Theory snapshot 1.1

The power of theory
I
n this new edition of the textbook, we present not want to engage in sharing
different theories that can be used to explain their innovations with buyers.
procurement phenomena. In academic research we as TCE may also be insufficient
researchers are increasingly encouraged to explain our to explain why managers are
theoretical perspectives, i.e. theories that we use when sometimes reluctant to work
we research procurement in the real world. with the procurement organization to obtain cost
Different scientists tend to use different theories savings on their budgets. Most managers hate to do
when they set up and embark on their research. Just to this since they know from experience that if they save
illustrate two extremes of the spectrum: in engineering money on their budget, they will get less budget the
and technical disciplines scientists use the insights next year. Here, theories on organizational behaviour
from exact sciences such as mathematics, physics or psychology may be more effective in understanding
and chemistry. The logic that they use is based upon why this happens and what remedies can be developed
principles derived from these sciences. A theory to overcome this.
may explain why we experience the law of gravity or This is why we decided to include several
Einstein’s law of relativity. In the exact sciences things theoretical perspectives throughout this textbook.
only exist if they can be measured. Theories and theoretical perspectives are used as
At the other extreme of the spectrum, we have lenses to look at the world around us. How you look
sociologists and psychologists who use their theories at the world determines what you see. When looking
to explain and forecast human behaviour. Here, we at procurement phenomena it is important to agree
mention the theory of social constructionism that is on what lens (i.e. theory) to use. If people look at the
used by human scientists. This theory holds that truths world from totally different perspectives (for example,
about human behaviour are based upon temporary managing the procurement function from a financial
working arrangements that may change over time if perspective versus from a sustainability perspective),
conditions in which human behaviour manifests itself they may never agree on the key problems. And if they
change. Take for instance the concept of beauty, do not agree on the key problems at hand, they will
where the human scientist’s view is that beauty is a never agree on the solutions to solve these.
highly subjective concept. ‘Beauty is in the eye of the The power of theory is that you may use different
beholder’. What is considered beautiful in one era is theories to solve different problems. When you
considered outdated in the next (think about fashion). learn to look at problems from different theoretical
Human sciences are aware that things exist that may perspectives, this will open up a bigger solution space.
not be measurable. This is important since it was Einstein who once said:
In procurement and supply chain management we ‘We cannot solve our problems with the same thinking
currently do not have one dominant theory that can be we used when we created them’. Many problems in
used to explain all phenomena in our field. Transaction procurement and supply chain management are wicked
cost economics (TCE) may be used to explain why problems that in our view can only be solved if we
buyers always will try to negotiate the lowest price. are able to look at them from different perspectives.
However, this theory cannot explain why suppliers do Theories help you do this.
Classification of purchased goods

The procurement process may concern a large variety of goods and, of course, services. In
general, purchased materials and services can be grouped into the following categories:
●● Raw materials. Raw materials are materials which have undergone no transformation
or only minimal transformation, and they serve as the base materials for a production
process. We may differentiate between physical raw materials, such as iron ore, copper
ore and lithium, and natural raw materials, such as palm oil, soya and coffee.
●● Supplementary materials. These are materials which are not absorbed physically
in the end product; they are used or consumed during the production process.
Examples of this type of product are lubricating oil, cooling water, polishing
materials, welding electrodes and industrial gases.
●● Semi-manufactured products. These products have already been processed once or
more, and they will be processed further at a later stage. They are physically present
in the end product. Examples are steel plate, rolled wire and plastic foils.
●● Components. Components are manufactured goods which will not undergo
additional physical changes, but which will be incorporated in a system with which
there is a functional relationship by joining it with other components. They are built
into an end product. Examples are lamp units, batteries, engine parts, electronic
parts and transmissions. A distinction can be made between specific, customized
components and standard components. Specific, customized components are
produced according to the design or specification of the customer, whereas standard
components are produced according to the specification of the supplier or an
industry standard.
●● Finished products or trade items. These encompass all products which Finished
are purchased to be sold, after negligible added value, either together with products These
encompass all products
other finished products or manufactured products. Examples of this product
which are purchased to
category are accessories which are supplied by car manufacturers, such as be sold, after negligible
navigation systems, roof systems, car stereo systems, alloy wheels and tyres. The added value, either
manufacturer does not produce these products but obtains them from specialized together with other
suppliers. Commercial products and articles sold by department stores are also in finished products or
manufactured products
this category.
(identical to trade items).
●● Investment goods or capital equipment. These are the products which are not
consumed immediately, but whose purchasing value is depreciated during its
economic life-cycle. In general, the book value is stated on the balance sheet
annually. Investment goods can be machines used in production, but they also
include computers and buildings. These examples illustrate the varied character of
this category of goods.
●● Maintenance, repair and operating materials (MRO items). These products,
sometimes referred to as indirect materials or consumable items, represent Indirect materials All
materials which are necessary for keeping the organization running in general, purchased materials
and services that do
and for the support activities in particular. These products are often supplied from
not become part of
stock; examples are office supplies, cleaning materials and copy paper, but also the company’s value
maintenance materials and spare parts. proposition. May be
●● Services. Services are activities which are executed by third parties (suppliers, classified into MRO
contractors, engineering firms), or other business units of the company, on a supplies, investment
goods (also referred to
contract basis. Services can range from providing cleaning services and hiring
as capital expenditure,
temporary labour to having a new production facility for a chemical company or CAPEX) and
designed by a specialized engineering firm (a contractor). services (identical to
non-BOM4 materials
Having defined the most important categories of purchased goods and services we or non-production
now turn to a short description of major new developments going on in the area of materials).
procurement and supply chain management.
Challenges and changes in the procurement context

Many companies are now confronted with diminishing growth opportunities, which
results in a situation where an increase in sales turnover can only be realized at the
expense of the competition and only with a great deal of effort. This leads to increased
pressure on sales prices and consequently on cost prices and margins, which causes
two developments. On the one hand, it results in shifts of power between buyers and
suppliers in many markets. Due to the fact that in many cases the market has changed
from a buyer’s market to a seller’s market, the role of the supplier is now more dominant
than a number of years ago. On the other, the increasing pressure on sales prices and
margins results in an increased pressure on direct materials-related costs. Because the
procurement prices determine the sales prices in the industrial and trade sector to a
large extent, companies will be constantly on the lookout for opportunities to keep these
prices as low as possible. As a result of both developments, the sourcing strategies of
industrial companies have undergone major changes. Several examples of these changes
are presented below:
Global sourcing ●● Global sourcing. As the company’s competitive position is directly related to
Proactively integrating the competitiveness of its supply base, companies have adopted a global scope
and co-ordinating
towards sourcing. For example, food ingredients, electronic components and IT
common items and
materials, processes,
services are increasingly sourced globally, a reason why large organizations have
designs, technologies set up international procurement offices (IPOs) in different regions of the world.
and suppliers across Procurement professionals, hence, are forced to adopt an international scope
worldwide procurement, towards their supply markets. Supplier benchmarking, being able to deal with
engineering and
different cultures effectively and being able to negotiate in different languages have
operating locations.
become prerequisites for today’s procurement professional.
●● Leveraged sourcing strategies. In companies with several manufacturing plants,
business units and/or operating companies, important savings can be realized
by combining common materials requirements. A trend towards leveraged or
co-ordinated sourcing strategies is apparent in many large European companies.
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 sourcing categories like computer hardware and software, business services (e.g.
travel, logistics), capital goods and components.
●● Sustainable sourcing. Corporate social responsibility and business integrity and
environmental and climate related challenges are becoming more and more
prevalent. National governments have become stricter in their regulations on
this point. In Western Europe strict regulations on industrial and consumer
packaging apply. 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, such as Daimler,
BMW and Volkswagen, 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. Volkswagen has even founded its own rework
facilities for this purpose. Apart from environmental issues, there is a growing
pressure from the public that products should be sourced from suppliers that
comply with high ethical and social standards. One of the leading companies
in this area, Unilever, has formulated a clear purpose aimed at making

sustainable living commonplace. It formulated 12 fundamental principles (e.g.
fair wages, health and safety, no child labour, anti-corruption and bribery) that
led its sustainable sourcing and business partnering activities. Procurement
professionals should ensure that the products and services they buy come
from sources of high integrity. This poses new and important challenges to
procurement.
●● Resource scarcity. As the world population is expected to grow towards 10 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. Resource scarcity
will become manifest in unstable demand and supply situations, high price volatility
of the commodities involved and shortages of supply (refer also to Memo 1.4). This
poses new challenges for procurement professionals who need to develop a much
more proactive outlook on how best to secure the company’s future requirements for
critical materials and products.
●● Digitalization. Existing and emerging digital technologies (e.g. e-sourcing, big
data, blockchain, artificial intelligence, robotic process automization) not only
enable companies to improve their procurement processes internally but also
their relationships and collaboration with suppliers across their supply chains.
Digital technology significantly improves productivity in procurement. An
integrated approach towards supply chain management requires close co-operation
between sales and operations planning, inventory control, quality inspection
and procurement. To achieve successful integration, system standardization is a
prerequisite. Next, suppliers should be seamlessly integrated within these digital
applications. Hence, the capability of a supplier to link up with the buyer’s systems
(sometimes referred to as ‘e-readiness’) becomes a much greater concern for
procurement professionals when selecting new suppliers.
●● Supplier involvement in innovation and/or new product development. As more
and more innovations in industry come from suppliers, getting them involved
in the new product development process becomes an issue of prime concern. In
many industries both the rapid development of technology and the cost related
to developing new products force large organizations to work more closely with
their suppliers (i.e. supplier enabled innovation (SEI), early supplier involvement Early supplier
(ESI)). In doing so, procurement professionals need to alter their traditional ways of involvement (ESI)
Situation where the
working and their relationships with suppliers. It should be decided at an early stage
supplier is involved by
what part of the development process will be done in-house and what part will be the buyer at an early
delegated to suppliers. stage of the new product
●● Cross-functional sourcing. Being able to work in cross-functional teams and having development process.
a sound technical background also become important prerequisites. Procurement
professionals should be able to solve conflicting interests between different
departments (e.g. engineering, production, logistics) and come up with clear
solutions on how to reward innovative suppliers for their valuable contributions and
ideas during new product development projects. Gain and risk-sharing agreements
will replace traditional price negotiations and agreements, enabling a more intensive
and long-term relationship with these suppliers.
Memo 1.4 provides an illustration of some of the challenges that lie ahead for
procurement professionals.
Memo 1.4
Resources: from future worries to today’s crises
W
orries over future resource scarcity, most The combination of a
notably in food, minerals, water and electricity, population boom, increasing
have been background issues now for several years, incomes and urbanization
generally highlighted by international institutions. The worldwide, particularly in
challenge is that the future is catching up rapidly with emerging and developing economies, is accelerating
us – tomorrow’s resource worries are becoming today’s the demand for natural resources including water, food,
resource crises – as we start to see the manifestations metal and energy resources. Water could possibly be
of long-term trends. One sign of these pressures is price the ‘new oil’ increasing potential conflicts within and
volatility and supply imbalances in supply markets for between nations over control of water supplies. Metals
key resources, reflecting the growing demands of high and food prices have seen sharp increases, driven
growth economies (e.g. China) and the growing global by long-term trends rather than isolated events, and
middle class. Resource challenges are exacerbated by greater volatility. Energy use continues to rise, and
long-term climate and environmental change impacting meeting future energy challenges requires a rethink.
the distribution of resources. Many governments already have targets for the use of
At worst, we are seeing the start of resource crises renewable and cleaner energies, with the aim of lowering
which could lead to increased poverty, social unrest dependence on more traditional energy sources.
and potentially conflict. At best, the supply–demand Scarcity of valuable resources empowers resource-
imbalances we face are driving us to do more with less, rich countries giving them geopolitical and business
focus on the legacy we hand to the next generations advantages, while major raw material importers most
and to innovate. What does this new age of resource likely will accelerate investments to secure supplies
crises look like in practice? What are the implications from resource-rich countries (e.g. in Africa).
for business? What innovations could help us overcome Source: Adapted from Malnight, T.W. and Keys, T.S (2012) The
the challenge? Global Trends Report, Strategy Dynamics Global Limited.
The challenges and changes in the procurement context described in this chapter show
that procurement represents a challenging business function. Many of the challenges
involve different stakeholders (e.g. suppliers, NGOs, governments, institutions) each with
their own values and interests. Therefore, it is very clear that no individual procurement
professional can provide the solution. It requires intensive interaction, communication
and co-operation with other disciplines inside the organization and with suppliers and
other stakeholders outside the organization. As a result, procurement is developing
increasingly into a cross-functional business function which cuts across other disciplines.
Managing the procurement function requires a thorough understanding of all the
procurement processes that take place within the organization and of the end-to-end
supply chain processes that take place outside. Next, it requires a good understanding of
business strategy and of managing strategic change across multiple stakeholders. Only
then can these challenges be dealt with effectively.
Summary
Globalization of trade, the fast development of digital technology and ever increasing
consumer demands are changing the international competitive landscape. As a result,
companies are adapting their business models. Positioning the company at the right
place within the value chain has become a prime concern for top managers. For this
reason, companies have started to rethink their core and non-core activities. With their
core activities companies try to develop and offer a distinctive value proposition to their
targeted customers. Non-core activities are increasingly outsourced to specialist suppliers.
This has put procurement in the spotlight. Given the high procurement to sales turnover
ratio which can be observed nowadays in many companies, procurement has developed
into one of the key business drivers. Its main purpose is to develop a competitive, world-
class supply base for the company. In order to be able to do so, companies need to adopt
a process orientation rather than a functional orientation towards procurement.
Procurement encompasses everything for which the company receives an invoice.
Based upon this broad scope of procurement, we have differentiated between direct and
indirect procurement. Both are important activity domains within procurement, though
each has a different logic due to their different characteristics. Traditionally direct
procurement has received the most attention. However, this picture is rapidly changing.
Although developed some years ago, Porter’s value chain is still a useful concept
for explaining the role the procurement function has for many companies. Contrary
to Porter’s opinion, we have stressed the strategic relevance of procurement to
organizations. We have explained our view by using the DuPont model. This model
enables procurement managers to demonstrate the sensitivity of their company’s
financial results to procurement savings and to increasing procurement spend. As
we have seen, the leverage effect of procurement can be enormous, depending on a
company’s procurement to sales ratio and capital turnover ratio. Procurement can
contribute in several ways, both in a quantitative and qualitative way, to improve the
company’s bottom line and top line.
In shaping their procurement strategies, companies can use different connotations
and definitions related to the scope of procurement, ranging from ordering, buying
and purchasing to procurement, sourcing, supply (chain) management and value
chain management. As the function goes through each of these definitions, the scope
of procurement broadens as well as its (financial and/or strategic) business impact.
New challenges lying ahead will change the scope and role of procurement within
organizations. The most important ones are global sourcing, involvement of suppliers in
new product development, emerging digital technologies, resource scarcity and socially
responsible procurement. Without doubt these challenges will put procurement more in
the spotlight in many organizations.
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with them on my way south to Dentam. During those two days—for I
flew only two days—I was attacked by a newly fledged hawk, and I
gave him the best defeat of his life. It was in this wise; one morning
as I was flying over the woods below Sikkim, I heard the wind
screech overhead. I knew what that meant now, so I played a trick. I
stopped all on a sudden and the hawk, who was falling upon me,
missed me and fell away down, grazing his wing on a tree-top. I rose
higher and flew fast, but he caught up and then I began to make
circles in the air. I rose high, oh so high that my lungs could not
breathe the air there, and I had to come down again.
"But no sooner had I descended than with an ominous screech and
cry the hawk fell upon me. Fortunately, then and there, for the first
time in my life I tried to tumble as I had seen my father do, and I
succeeded in making a double tumble, then shooting up like a
fountain. Again the hawk missed and rose to attack, but I gave him
no chance. I flew at him. And just as I was passing him, he dipped
down, then up, and clutched at me; again I tumbled, striking him so
hard that he lost his balance. I do not know what happened, but that
very moment I felt something sucking me down down to the depth of
the earth. My wings were powerless. I fell as an eagle falls—heavy
and inevitable—striking the hawk on the head with my full weight. I
think the blow stunned him. He too fell, and was lost in the woods
below, but I was glad to find myself on the branch of an ilex tree.
"I had been sucked down by an air current. Since that first
experience of mine, I have met many others like it but I have never
understood why it was that above certain trees and streams the air
gets very cold and makes a current that draws into itself the bird that
strikes it. I had to learn the lesson of flying in those currents after
being whirled up and down by them. But I do not hate them, since
the first air current I encountered saved my life.
"Sitting on that ilex tree I became so hungry that it drove me to fly
home. Luckily, no soulless hawk obstructed my arrow-like flight.
"But my successful escape from that newly-fledged murderer gave
me back my courage, and as soon as you came home I said to
myself: 'Now that he, my friend, has seen me alive, he will not worry
about me. I must fly anew through the falcon-infested air and test my
courage.'
"Now began my real Odyssey. I went northwards to the eagle's nest,
and stopped at the Lamasery where a holy man had blessed me on
an earlier occasion. There I re-visited Mr. and Mrs. Swift, my old
friends. Moving further north I went past Singalele at last and
reached the eyrie of the eagles who had flown away. So I made
myself comfortable there, but not too happy, for the eagles leave all
kinds of refuse in their nests, and I am afraid they swarm with
vermin. Though I spent my day in the eagle's nest, I decided to
spend the night in a tree, free from horrid insects. After a couple of
days, my going in and out of the eyrie gave me great prestige among
other birds. They feared me, perhaps because they took me for a
sort of eagle. Even the hawks began to give me a wide berth. That
gave me all the confidence that I needed, so early one morning,
seeing a white wedge of birds coming south, flying very high, I joined
them. They did not mind my joining them, they were wild geese
going towards Ceylon and beyond, in the quest of a sunny ocean.
"Those geese, after two hours' flight, as the day became warmer,
descended onto a rapid mountain stream. Unlike the eagles, they
rarely looked downwards, but watched the horizon lines. They spied
a little ribbon of whitish blue far off against the sky, and flew in a
slowly declining straight line till it seemed as if the earth were rising
to meet us, and soon all plunged into the silver stream, for now, the
waters looked more silvery than blue. They floated on the water, but
as I knew that I was not web-footed, I sat on a tree and watched their
antics. You know how flat and ugly the bills of geese are, but now I
saw the reason for it. They used them like pincers on things such as
shells that grew on the side of the banks. Every now and then a
goose would put his bill on a plant or a shell, then wring it out of
position as a butcher would wring a duck's neck. After that it would
devour its victim wholesale, crushing it in its powerful throat, but ere
it passed very far down its size dwindled to nothing. I saw one fellow
do worse than that. He found a fish—as lean as a water snake—in a
hole under the bank; he began to pull it. The more he pulled the
thinner and longer it got. Slowly, after a terrific tug of war, the poor
fellow was dragged from his hole. Then the goose hopped up the
shore and flung it on the ground. His bill had crushed the part it had
held onto, nearly into pulp, so no wonder his wriggling victim was
already dead. Then from nowhere walked up to him another goose.
(By the way, are not geese the most ungainly birds when they are
not flying or swimming? On the water they resemble dreams floating
on pools of sleep, but on land they hobble like cripples on crutches!)
By now the two geese were quarrelling. They pulled one another's
feathers, they slapped with their wings, they kicked each other with
their feet every time they hopped up above the ground. While they
were thus engaged, oblivious of their bone of contention, a cat-like
creature, probably an otter, pounced from among the reeds, grabbed
the dead eel and vanished. Now the geese declared a truce, but too
late! Oh, they have no more sense than, well—geese! Compared
with them, we pigeons seem paragons of cleverness.
"After they had stopped fighting, the chief goose cried—'Cluck, caw,
caw, caw!' That instant all of them paddled hard to gather
momentum. A few extra wing-beats and they were in the air. How
beautiful they looked now! That soft soughing of vast wings, their
necks and bodies like drawings against the sky, making a severe
eye-pleasing wedge. I shall never forget it.
"But every flock has its straggler. One fellow was left behind,
because he was still struggling with a fish. At last he secured it, and
flew up in quest of a tree where he could eat it under cover.
Suddenly from the empty air an enormous hawk attacked him. The
goose rose higher but the indefatigable hawk did not relent. Up and
up they circled, screaming and quacking. Suddenly a faint but clear
echo of a honk was heard. The chief of the flock was calling the
straggler; that distracted him. Hardly knowing what he was doing, he
honked back an answer. That instant the fish fell from his mouth. It
began to fall like a leaf. The hawk dipped, and just as he was going
to pierce it with his talons, down the air came a surge and roar. In a
trice an eagle fell as a rock falls down a high precipice. That hawk
ran for his life, and that gave me a great deal of pleasure to behold.
"Under the eagle's two wings like vast sails, the talons forked out
lightning fashion and grabbed the fish—then the monarch of the air
in his shining armour of brown gold sailed away, the wind ruffling the
feathers above his knees. Far away, the hawk was still running for
his life!
"I am glad he went very far away, for I had to fly about in quest of a
caravan road where I could get some seeds dropped by men. I soon
found some and after a tolerably decent meal, I perched on a tree
and went to sleep. When I woke it was mid-afternoon. I decided to fly
away up, to reach the blessed Lamasery, and visit my friends the
swifts. My flight was unattended by any mishap, for I had learned to
fly carefully by now. I generally went very far up and looked down, as
well as at the horizon. Though I have not as long a neck as a wild
goose, yet I turned and took side glances every few minutes in order
to make sure that nothing was attacking my rear.
"I reached the monastery just in time, as the Lamas were getting
ready to stand on the edge of their chapel in order to pour
benediction upon the world during sunset. Mr. and Mrs. Swift were
flying near the nest where their three youngsters were put to bed. Of
course they were glad to receive me. After their vesper services, the
monks fed me, and the sweet old Lama said something about a
blessing that some one called Infinite Compassion had put upon me.
Then I flew from his hand feeling absolutely fearless. In that state of
mind and body I entered my nest next to the swifts under the eaves
of the Lamasery.
"The nights in October are cold. In the morning while the priests rang
their bells, the little swifts flew about for exercise while their parents
and I had to fly to shake off the chill of the morning. That day I spent
there in order to help them make preparations for their journey south.
I was surprised to learn that they intended to build a nest in Ceylon
or Africa whither they were going. I explained to them that a swift's
nest is not at all an easy thing to construct. Then in order to assuage
my thirst for knowledge they told me how they erect their homes."
CHAPTER VIII
GAY-NECK'S ODYSSEY (Continued)
n order to make clear to you the swift's skill at
architecture, let me first of all draw attention to the
swift's handicaps. He has a small beak fit for
catching flying insects. His mouth is very wide to
enable him to catch his prey while he is on the
wing. Very few insects can escape his wide open
mouth as he comes down on them. As he is very
small, Mr. Swift cannot lift much weight. No wonder his house is built
out of slender materials such as straw and twigs of trees no thicker
than a middle-sized needle.
"The first time I saw a swift he looked paralysed and deformed. All
swifts know that they have wretched legs. The bird has hardly any
legs to balance upon. His small feet, made for sticking on to places
like fish-hooks, emerge right out of his body; his little hooklike claws
seem inflexible. He has not enough leg between his body and his
feet, and this deprives him of the springiness which longer legs
supply to other birds. No wonder he cannot hop nor jump. But that
defect is squared by his one advantage—he can cling to stone
palisades, marble eaves, and alabaster friezes of houses as no other
bird can. I have seen my friend Swift hang on to polished walls as if
they were corrugated surfaces.
"Under these handicaps, all he can do is to choose holes in walls
just under the eaves for his home. But there he cannot lay his eggs,
for they would roll off. So he catches flying straws and small falling
leaves, and glues them to the stone floor of his nest with his saliva.
That is the secret of his skill at architecture. His saliva is wonderful; it
dries and hardens like the best glue of the cabinet makers. When the
nest is made ready, the long white eggs are laid. Among the swifts
women are not so emancipated as amongst the pigeons. Our
women enjoy equal rights with men, but the female swift has always
the larger part of the work to do. For instance, Mr. Swift never sits on
the eggs; he lets his wife do it. Occasionally he brings her food
during the day, but otherwise he spends all his waking hours visiting
male swifts whose wives are similarly occupied. I told my friend Swift
he ought to copy the pigeons and give more freedom to his wife, but
he seemed to think this a pet joke of mine.
"At last our preparations were made and one fine autumn morning
the five swifts and I set out in a southerly direction, piloted by Mr.
Swift. We never went in a straight line, but zig-zagged east or west,
though we held to a general southern course. The swifts eat flies and
gnats that float on rivers and lakes. They go about fifty miles an hour
—a blinding speed for a small bird—and do not like woods because
while their gaze is fixed downwards in search of insects, they may
break their wings on a tree. They prefer open clear spaces above the
waters and with their scythe-like long wings they cleave the air as
swiftly as an eagle falls on its prey. Think of the precision of the
swift's eye and mouth! While he is whirling over the water he snaps
up flying insects with such ease that the space he traverses is
completely cleared of all the gnats and flies who a few moments
before danced in the sunlight.
"Thus we went over streams, ponds and lagoons. By the way, Mr.
Swift eats his food in a hurry and takes his drink the same way. He
flies over the water, skimming up drops as he goes and swallowing
them at a very high rate of speed. No wonder that he hates to fly in a
place crowded with boughs, larches, and saplings.
"But so much flight in open air has its drawbacks. While a swift is
eating insects with such speed, a sparrow hawk may fall on him from
above. Under these circumstances the swift cannot dip down, for
that would mean death by drowning. I must tell you of one such
attack on my friends. They were busy catching their dinner on a vast
lake one afternoon, and while I was flying about keeping an eye on
the younger swifts, down came a sparrow hawk. I who had
undertaken to look after the children had to act quickly even at the
risk of my own life. Without an instant's hesitation I plunged and
tumbled, inserting my body between the enemy and the young ones.
Well, the sparrow hawk had never expected so much nerve from a
member of the dove family, nor did he calculate my weight. I was at
least five ounces heavier than he. He struck my tail with his talons,
tore a few feathers, and thinking that he had got something he
circled the air for a moment or two. Before he realized that he had
only my feathers, all the swifts were safe, clinging to the bark of a
tree out of anybody's reach. But the small sparrow hawk was so
infuriated that he fell on me with the fury of a large one. However, his
body was very small and his talons smaller, and I knew they could
not pierce my feathers and my skin very far. So I accepted his
challenge and tumbled up. He followed. I shot downwards; he too
dived after. Then I began to rise high. He pursued as before. But
those little hawks fear the upper air, and his wings lagged now. To
my two wing-beats he could make but one. Seeing him hopeless and
tired, I planned to teach him the lesson of his life. No sooner had I
conceived than I executed my plan. I shot downwards. He plunged
after. Down, down, down! The water of the lake rose towards us,
higher and higher every second till it looked no farther than the width
of my wing. Then I flung forward a few inches and struck a warm air
current which helped me upwards. As you know, air warmed in the
hollow places and valleys of mountain country has a tendency to
shoot up into cooler regions. We birds look for these currents to help
us when we have need to make a sudden upward flight. Now I
tumbled three times, and when I looked down I found that sparrow
hawk drowning in the water. He had not been able to reach the air
current. After a considerable ducking, he laboriously flew ashore,
and there under thick leaves hid his disgrace. That instant the swifts
came out of their hiding place and flew southwards.
"The next day we met some wild ducks. They had coloured throats
like mine, but otherwise they were white as snow. They were stream
ducks, whose habit is to float down a mountain brook after fish.
When they have gone far, they rise out of the water and fly back to
their starting place. So they spend the day like shuttles going back
and forth. Their bills were flatter than those of the geese, and they
are dented inside, for once they close on a fish the bills never slip.
They did not seem to care much for the shellfish, but that was
probably because the fish in the lake were so plentiful. The swifts did
not like the place because the ducks' wings beat the air continually
and blew away the insects that normally fly over any water surface.
Still they were glad to see ducks that loved and lived on mountain
torrents, never bothering about the calm water so dear to most
ducks.
"It was these ducks who warned us against the owls and other
murderers of the night which infested those regions. So we did our
best to hide in places too small for owls to go into. It was easy to find
holes in a tree small enough for the swifts, but I decided to stay in
the open and take my chances. Night came on apace. Pretty soon
my eyes could serve me no longer. Darkness within darkness like
layers of black cloth lay upon them. I commended myself to the
Gods of my race and tried to sleep. But who could sleep with those
owls who-whoing about? Terror seized me for the night. Not an hour
passed without some bird's shrieking in pain. The owls, too, hooted
in triumph. Now a starling, then a bulbul (the Indian nightingale)
would cry mortally, and die under the owl's grip. Though my eyes
were shut my ears knew the carnage that went on. A crow shrieked.
Then another, then another. Almost a flock flew up in terror and
smashed themselves against trees. But better that kind of death than
to be killed by the searing and tearing beaks and claws of the owls.
Soon to my utter confusion I smelt weasels in the air and then I felt
that death was at hand. That made me desperate; I opened my eyes
to see. A pale white light was shining on all things. There before me,
about six feet away, was a weasel. I flew up, though that increased
the danger of my being killed by the owls. And sure enough, along
came one hooting and screaming. Two more owls followed. I heard
their wing-beats and by the nature of the sounds I knew that we were
flying over the water, for it echoed back even the slightest shiver of
our feathers. I could not fly in any direction very far, since I saw not
more than six feet at a time, so I waited in the air groping for an air
current that sucked the air of the river up above the boughs that
hung over it. Alas, those owls were on me already, but I tumbled,
then swung into a circle. The owls would not give up the chase. I
rose further up. Now the moonlight like water dripped from my wings.
I could see a little more clearly and that brought me back my
courage. But my enemies did not relent. They too rose, and more
light fell on their eyes, blinding them, though not completely.
Suddenly two of them plunged towards me. Up I flew. The owls
missed—lo! they had fallen on each other. Their claws locked
together, their wings flapping helplessly in the air, they screamed like
fiends and fell among the reeds of the river bank.
"Now I looked about carefully and noticed to my surprise that I had
flown towards the dawning of day and not at the moon. My terror-
stricken eyes had not seen truly. But there were no more owls about;
they had begun to seek for places of hiding from the growing
sunlight. Although I felt safe, I kept away from the prodigious
shadows of the tall trees, for even now an owl might lurk there. I
stayed on a slender branch on a tree-top which caught the first flight
of the sun's arrows, transfiguring it into an umbrella of dancing gold.
Slowly the light spread further down till the white torrent below
trembled with colours like a weasel's eyes.
"Just then on the river bank I saw an appalling sight. Two large
crows, blacker than coal, were jabbing and prodding with their beaks
a helpless blinking owl, caught in the reeds. Now that the sun shone,
it could not open its eyes. Of course the night's slaughter done
amongst the crows was large, and it was the crows' turn to avenge
their wrongs, but I could not bear the sight of two of them killing that
trapped owl. So I flew away from the murderers and went to seek my
friends the swifts. I recounted some of my experiences, and the
parents told me that they had heard terrible cries of distress which
kept them from slumber. Mr. Swift asked if everything was safe
outside, and I thought it was. When we came out, I found that poor
owl lying dead, among the reeds!
"Strange to say, that morning we saw no ducks on the stream.
Apparently they had flown very early in the morning in a southerly
direction, and we decided to do the same. We planned not to seek
the company of other birds going our way. For during the season of
migration, wherever flocks of pigeons, grouse and other birds go,
their enemies such as owls, hawks and eagles go after them. In
order to avoid danger and such shocking sights as we had seen
before, we flew to the east and after going eastwards a whole day,
we rested in the village of Sikkim. The next day we flew south for half
a day and again eastward. That sort of round-about journey took a
long time, but it saved us no end of trouble. Once we were overtaken
by a storm, and were blown into a lake country, and there I saw an
amazing sight. I was on a tree-top, when below me I discerned a lot
of domesticated ducks floating on the water with a fish in each one's
mouth. But none of them swallowed his morsel. I had never seen
ducks resist the temptation to eat fish before, so I called the swifts to
behold the sight. They clung to the barks of several trees and looked
at the ducks, but they could hardly believe their eyes. What was the
matter with them? Pretty soon a boat hove in sight, poled by two
men, flat-faced and yellow. On seeing them the ducks paddled to the
boat as fast as they could go. Reaching it, they hopped up, and then
—can you believe it?—they dropped their capture into a large fish
basket, and jumped down into the lake to fish for some more, and
that went on for at least two hours. Apparently those Tibeto-Burman
fishermen never cast nets. They tied a string tightly, almost to the
choking point, around their ducks' necks, and then brought them to
the lake to catch fish. Whatever the latter caught, they brought to
their human masters. However, when their basket became full, they
undid the strings that were around the ducks' necks who then
plunged into the lake, and gorged themselves on fish.
"Now we flew away far from the lakes for a while in quest of harvest
fields. There the swifts fell on the insects that flew about newly mown
grain, and devoured them. I, too, ate to repletion of the grain, though
not of the insects. While sitting on the fence of a rice field I heard
someone hitting something. It sounded very much like a chaffinch
cracking open a cherry stone with his beak in order to get at its
kernel. (Isn't it strange that a little bird's beak has the power of a
nutcracker?) But, when I wandered nearer the place, under the
fence, whence the noise was coming, I found another bird—a
Himalayan thrush. He was engaged not in cracking cherry stones,
but in hitting a slowly moving snail with his beak. Tick, tack; tick, tack
—tack! He hammered on and on until the snail was stunned into
stillness. The thrush raised his head and looked around, poised
himself on tiptoe, opened his wings, took a quick aim and struck
three more blows—tack, tack, tack! The shell broke open, revealing
a delicious snail. He lifted it up with his beak, which was bleeding
slightly; apparently he had opened his mouth too wide and hurt its
corners. After balancing the snail correctly in his grasp, he flew up
and vanished into a tree where his mate was waiting for supper.
"The rest of our journey through the grain fields of Sikkim was
uneventful. The only thing that is worth remembering was the
trapping of peacocks by men in the forests. These birds come to the
hot southern marshes in quest of food and warmth when the snakes
and other creatures whom they eat go into winter quarters in the
north.
"Peacocks and tigers admire one another. The former like to look at
the tiger's skin and he enjoys the beauty of their plumes. Sometimes
at the water hole a tiger will stand gazing at the plumes of a peacock
on a bough, and the peacock will crane his neck to feast his eyes on
the beauty of the striped skin. Now comes man, the eternal
aggressor, on the scene. For instance, a man one day brought a
piece of cloth painted exactly like a tiger's skin, so that no bird could
tell by looking at it that it was not the striped one himself. Then he
set a noose on a branch of a tree nearby, and slunk away. I could tell
by the odour of the painted cloth that it was not a tiger, but peacocks
have no sense of smell worth speaking of. They are victims of their
own eyes. So in a few hours a pair of peacocks came and began to
gaze at the make-believe tiger from a tree-top, coming lower and
lower. They deceived themselves into the belief that the tiger was
asleep. Emboldened by that illusion, they came very close and stood
on the branch near the trap. It did not take them long to walk into it,
but how they both stepped into a single trap I cannot make out. No
sooner were they caught than they shrieked in despair. Then
appeared the trapper, and played another trick on them. He threw up
two large black canvas caps and lassooed them on each peacock's
head, hiding the poor birds' eyes. Once the eyes are darkened, a
bird never resists much. The man now tied their feet so that they
could not walk; then he set one on each end of his bamboo pole.
Slowly he lifted it by the middle, put it on his shoulder and walked off,
the long tails of the peacocks streaming down like cataracts of
rainbow before and behind him.
"There ends my Odyssey. The next day I said goodbye to the swifts.
They went further south, and I was glad to get home, a wiser and a
sadder bird. Now," demanded Gay-Neck, "tell me this. Why is there
so much killing and inflicting of pain by birds and beasts on one
another? I don't think all of you men hurt each other. Do you? But
birds and beasts do. All that makes me so sad."
PART II
CHAPTER I
GAY-NECK'S TRAINING FOR WAR
fter we returned to town the air was filled with
the rumours of a coming war somewhere in
Europe. Now that winter was at hand, I decided to
give Gay-Neck such training as would be
necessary in case he was asked to be a carrier for
the British war department. Since he was used to
the climate of the northeastern Himalayas, he
would be an invaluable messenger for the army in any European
country. Even now, with the aid of wireless telegraph and radio, no
army can dispense with the help of carrier pigeons. All that will
become clear to you as the present story unfolds itself.
In training carriers for war work, I followed a plan of my own which
Ghond approved. By the way, the old fellow came all the way to town
with us. He stayed in our house two or three days, then decided to
leave, saying: "The city is unbearable. I never loved any city, but this
one frightens me with its electric tramway and how-aghari (wind
chariot)—the automobile. If I do not shake the dust of this town off
my feet very soon, I shall be nothing better than a coward. A tiger in
the jungle does not frighten me, but I cannot say the same of an
automobile. One crossing of a modern city street imperils more lives
in a minute than a day in the most dangerous forests. Farewell! I go
where the woods wear stillness for a dress, the air is free of odours
and dust, and the sky, a hollowed turquoise, is not cross-cut and
pierced with poles and telegraph wires. Instead of factory whistles I
shall hear the song of birds; and in the place of thieves and gunmen
I shall have innocent tigers and panthers face to face. Farewell!"
But before he left, he helped me to buy about forty more carriers,
and some tumblers. You may ask me the reason of my preference
for these two kinds. I do not know that I have any exclusive love for
tumblers and carriers, but it is true that fantails, pouters and other
pigeons are more ornamental than useful. In our house we had
some of these varieties but they proved so difficult to keep in
company with the carriers and travelers that I finally bestowed all my
appreciation on pure flyers.
In India we have a queer custom that I do not like. If you sell a carrier
no matter at what fabulous price, and it flies away from its new
owner and comes back to you, it becomes your property again and
no matter what the value, you never refund the price. Knowing that
to be the accepted custom among pigeon fanciers, I had to train my
newly acquired pets before anything else to love me. Since I had
paid for them, I did not wish them to return to their former owners. I
did my very best to make them cherish their new home loyally. But
life is practical. I had to begin with the most necessary steps. The
first few weeks I had to tie up their wings in order to keep them
completely within the bounds of our roof. The art of tying a pigeon's
feathers so that he is prevented from flying is delicate. You take a
thread, and pass one end of it over one feather and under the next,
very near its root, all the way until the entire wing is encompassed.
Then you pass the other end of the thread by the same process
under the first, over the second, and so on to the end of the wing,
where the two ends of the thread are tied. It is very much like
darning. It is an utterly painless form of captivity, for though it
prevents a pigeon from flying, yet he is not kept from opening or
flapping his wings. He can stretch them and can massage them with
his beak. After this I used to put my new pigeons at different corners
of the roof so that they might sit still, and with their eyes take in the
colour and quality of their new surroundings. At least fifteen days
should be allowed for this process.
Here I must record a cunning thing that Gay-Neck did when his
wings were tied in the above manner. I sold him early in November
just to see if he would return to me when his wings were freed from
their chain of threads.
Well, two days after purchasing Gay-Neck, his new owner came to
me and said: "Gay-Neck has run away."
"How?" I asked.
"I don't know, but I cannot find him in my house."
"Did you tie his wings? Could he fly?" I asked.
"His wings were tied." He answered.
That struck terror to my soul. I said: "Oh, you brother of a camel and
cousin of an ass, instead of running hither, you should have sought
for him in your own neighbourhood. Do you not see that he tried to
fly, but since his wings were tied, he fell off your roof? And by now he
has been killed and devoured by some cat. Oh, this is a slaughter of
a pigeon. You have robbed mankind of its diadem of carriers! You
have murdered the glory of pigeonhood!" Thus I reproached him.
My words frightened the man so thoroughly that he begged me to
come with him and hunt for Gay-Neck. My first thought was to
rescue the poor fellow from cats. We spent a whole afternoon, but in
vain. I examined more sordid alleyways in twelve hours, expecting to
find him at bay before some mangy cat, than I have done in all the
rest of my life. Alas, he was not to be found. That night I came home
late, for which I got a good scolding, and went to bed a broken-
hearted boy.
My mother, who understood my state of mind, did not wish me to
enter the world of sleep with hurt and excited feelings. She spoke:
"Your pigeon is safe. Go to sleep in a calm mood."
"Why, Mother?"
She answered: "If you are calm, your tranquil thoughts can help you.
If you are peaceful, your serenity will make him serene. And if he is
serene, his mind will work well. And you know, my beloved, how
keen Gay-Neck's mind is. If he sets to work with tranquillity he will
overcome all obstacles and reach home and safety. Now let us make
a prayer to Infinite Compassion, and calm ourselves." So we sat
surrounded by the silence of night for half an hour, saying: "I am
serene. All that exists is serene. Peace, peace, peace be unto all!
Om Shanti, shanti, shanti!"
As I was going to sleep my mother said: "You will now dream no bad
dreams. Now that God's peace and compassion are kindled in you,
you will have a night of fruitful rest. Peace!"
That it proved to be fruitful, there is no doubt. For about eleven in the
morning, Gay-Neck flew up across the sky. He rode high. How he
freed his wings I shall have to tell you in his own language. Let us
again use the grammar of fancy and the dictionary of imagination.
"O, master of many tongues," began Gay-Neck on our own roof, "I
could abide not more than a day in that man's house! He gave me
insect-infected grain to eat, and made me drink water that was not
fresh. After all, I am a soul; why should I be treated as a stone or
shard? Moreover, he tied my wings with evil-smelling fishing tackle.
Would I stay with such an one? Never! So hardly had he put me on
the white roof of his house and gone downstairs, than I flapped my
wings and flew. Alas! my wings were heavy, and it hurt me to fly. So I
fell on the awning of a shop in the lane nearby. There I sat waiting
and watching for help. I saw some swifts go by; I called to them but
they were not my friends. I saw a wild pigeon; I called, but he too
made no response. Just then I beheld a dark cat coming towards
me. Here was death on four feet. As it drew nearer and nearer, its
topaz eyes burnt with red. It crouched and made ready to spring. I,
too, sprang—clear over his head on to the cornice about five feet
above the awning, where a swift had made his home. Though it was
most difficult, I clung to that spot until the black one vanished. Now I
leaped again. Four or five feet above me was the roof. There I
perched. But my wing hurt. In order to ease my pain I massaged the
roots of my feathers. One by one my beak pressed and rubbed
them, and then something slipped. One small feather I had
succeeded in pressing out of the grip of the fishing tackle which
stank exceedingly. I kept on rubbing and pressing the next feather,
and behold it too was free. Oh, what a glorious feeling! Soon the
entire wing was free. Just then the black cat reappeared on the roof,
but now I was able to fly about ten feet and I reached the cornice of
a high building, where I found a convenient perch. Thence I watched
the deadly cat. He crouched and sprang upon the fishing tackle just
shed from my wing. That told me a new story: it was the stench of
the fishing tackle that had attracted him, and not me. Forthwith I
began to bite and press the cord that bound my other wing. By the
time I had freed half the feathers night came on, and when I had
thrown my last evil-smelling chain away from my wing, I was forced

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Procurement and Supply Chain

Management, 8e - eBook PDF

ARJAN J. VAN WEELE AND FRANK ROZEMEIJER

Australia • Brazil • Canada • Mexico • Singapore • United Kingdom • United States

British Library Cataloguing-in-Publication Data

Cengage Learning, EMEA

Cengage Learning is a leading provider of customized learning

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Printed in United Kingdom, Ashford Colour Press Ltd

SECTION I Introduction and context 1

SECTION II Processes and strategies 75

SECTION III Interfaces 209

SECTION IV Enablers 317

List of memos ix Step 1) The specification phase 35

Introduction and context 1 Step 4) The ordering process 42

Procurement process management 30 How procurement develops over time 66

Stage 3 Synergy orientation: co-ordinated Reasons underlying cost-savings potential in

Processes and strategies 75 References 126

4 Outsourcing 76 6 Sourcing business services 127

Learning objectives 76 Learning objectives 127

Introduction 76 Introduction 127

Outsourcing as a business concept 77 Case study: Sourcing marketing services at a

Definitions and concepts 79 Towards a classification of services 133

Rationales for outsourcing 82 The pre-contractual stage 134

Risk assessment 91 Involvement of procurement in sourcing

7 Contracting and contract

Contract management and contracts: agency Design contest 184

Co-ordination problems between procurement and 12 Procurement with purpose:

Supplier assessment 247 Business integrity and ethics 300

Cost modelling and the learning curve 249 Summary 303

Implementing the SRM framework: supplier Assignments 304

Procurement and new product development 269

Summary 279 Procurement organization 320

Assignments 280 Factors influencing the position of procurement

Levels of tasks, responsibilities and authority 323 15 Managing procurement

New to this edition

8th edition 7th edition New title

Procurement and supply management on the move

Why this book?

Figure 0.1 Structure of the book

Section I Introduction and context

Section II Processes Section III

6. Sourcing business services 10. Supplier relationship

8. Public procurement 12. Procurement with

What instructor’s material is available?

ATO: Assembly to order

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A password-protected area for instructors with,

An open-access area for students including, for

Lecturers: to discover the dedicated teaching digital support

Students: to discover the dedicated learning digital support

Learn more at cengage.co.uk

●● The role and importance of procurement in the value chain.

●● New developments in procurement and supply chain management practices of organizations.

The role of procurement in the value chain

management, planning, finance, accounting, legal, government affairs, quality

These contrasting manufacturing situations explain why procurement activities may

●● Support activities. Procurement activities may also be related to supplying products

The procurement function in this definition covers activities aimed at assessing

Tactical purchasing Order function

PURCHASING WITHIN THE VOLVO GROUP SUPPLIER

Importance of procurement to business

Retailers Computers Consumer Automotive Pharma Service Typical