6.

Role of Procurement,
Sourcing and Purchasing in
supply chain
Unit 6.1 : Fundamentals of
Procurement

2
Objectives of Procurement
The Supply Chain Umbrella

• Purchasing
• Inbound transportation
• Quality control
• Demand and supply planning
• Receiving, materials handling, and storage
• Material or inventory control
• Order processing
• Production planning, scheduling, and control
• Warehousing/distribution
• Shipping
• Outbound transportation
• Customer service
4
A New Competitive Environment

• Increasing numbers of world-class competitors

• Sophisticated customer base
• More performance at a lower cost
• Widely available information sources
• Balance of power between buyers and suppliers
• Greater outsourcing

5
 Figure 1-2

Impact on Net Income

• Increased Sales:
• Faster to Market
• Improved Quality
• Pricing Flexibility
• Innovation

• Lower Total Cost:

• Acquisition Cost
• Processing Cost
• Quality Cost
• Downtime Cost
• Risk Cost
• Cycle Time Cost
• Conversion Cost
• Non-value Added Cost
• Supply Chain Cost
• Post Ownership Cost 1-6
Why Purchasing important

• Leverage factor
• In the current context leverage is the power of purchasing to enhance the
profitability
• Purchasing is the greatest expenditure in any industry – almost over
50% of the total
• When purchases form a high proportion of the total costs, a modest
saving on bought-out items will result in a similar contribution to
profits as would a substantial increase in sale
The Role of Supply Management in an
Organization
Purchasing or Procurement??
Procurement Definition

• To define procurement broadly, “Procurement” is the overarching

function that describes the activities and processes to acquire goods
and services.
• Importantly, and distinct from “purchasing”, procurement involves the
activities involved in establishing fundamental requirements, sourcing
activities such as market research and vendor evaluation and
negotiation of contracts.
• It can also include the purchasing activities required to order and
receive goods
Purchasing

• The term “Purchasing” refers to the process of ordering and receiving

goods and services.
• It is a subset of the wider procurement process.
• Generally, purchasing refers to the process involved in ordering goods
such as request, approval, creation of a purchase order record (a
Purchase Order or P.O.) and the receipt of goods.

Procurement By Nature Is Proactive; Purchasing by Nature Is Reactive

Purchasing Rights
• Determining purchasing specifications
• right quality
• right quantity
• right time (delivery)
• right place (delivery)
• Selecting supplier
• right source
• Negotiating terms and conditions
• right price
• Issuing and administering purchase orders
• Right documentation (Record keeping/ Transparency)
Purchasing
“the process of buying”
Requires input from:
• Marketing
• Engineering
• Manufacturing
• Manufacturing Planning and Control
• what materials to order
• when to order them
Relationship between Procurement, Supplier
Management and Purchasing

Supplier Management

Procurement
Management (Mainly strategic activities)

(obtaining required suppliers or Purchasing

services by any means

(Mainly transactional and

commercial activities)
Supplier Management

• SM is a progressive approach to managing supply base and the supply chain.

• Mainly strategic activities including
• Strategic Bottleneck and leverage Items; Making/buy/sourcing decision;
• Sourcing and appraising suppliers
• Relationship with supplier base
• Developing supplier potential
• Early supplier involvement
• Negotiation
• Supplier relationships
• Capital equipment purchasing
• Benchmarking
• Monitoring supplier performance
• Ethical and Environment Issues
Purchasing

• Mainly transactional and commercial activities including

• Non-critical (low profit impact, low supply risk ) items
• Ordering or calling off suppliers/services
• Expediting
• Maintaining inventory
• Receipt and storage of supplies
• Arranging payment
Appropriate Strategy
• Depends on:
• type of products the firm is purchasing
• level of risk
• uncertainty involved
• Issues:
• How can the firm develop an effective purchasing strategy?
• What are the capabilities needed for a successful
procurement function?
• What are the drivers of effective procurement strategies?
• How can the firm ensure continuous supply of material
without increasing its risks?
Functional vs. Innovative Products

Functional Products Innovative Products

Product clockspeed Slow Fast

Demand Predictable Unpredictable
Characteristics
Profit Margin Low High
Product Variety Low High
Average forecast Low High
error at the time
production is
committed
Average stockout Low High
rate
Supply Chain Strategy
Procurement Strategy for the Two Types
6.2 Procurement process
Purchasing Process
1. Assessing Need or (Need analysis)
2. Receive and analyse purchase requisitions
3. Select suppliers, issue quotations
4. Determine the right price
5. Issue purchase orders
6. Follow-up to assure correct delivery
7. Receive and accept the goods
8. Approve invoice for payment
9. Maintaining record (Post purchase feedback)
Purchasing Process
1. Assessing Need or (Need analysis)
2. Receive and analyse purchase requisitions
3. Select suppliers, issue quotations
4. Determine the right price
5. Issue purchase orders
6. Follow-up to assure correct delivery
7. Receive and accept the goods
8. Approve invoice for payment
9. Maintaining record (Post purchase feedback)
Receiving and Analyzing Requisitions
Selecting Suppliers
Requesting Quotations
Determining the Right Price
Issuing a Purchase Order
Follow-up and Delivery
Receiving and Accepting Goods
Approving Invoice for Payment
6.3 Challenges faced by modern
procurement professionals
 Most Common Procurement Problems
Procurement Problems ranging from organizational inadequacies to human mistakes
can again deliver adverse effects to a business procurement and purchasing
capability.
1) Allowing Poor Quality for Lower Costs 10) Accidental Orders
2) Providing Unclear Specifications & Requirements 11) Continue Working with Inflexible Suppliers
3) Not doing Supplier Assessment Before Doing 12) Not Having a Dedicated Development Plan for
Business Buyers/Procurement Managers
4) Not Fully Understanding Supplier Capabilities 13) Lack of accurate data
5) Not Agreeing on Important KPI 14) Continue focus on Cost Reduction
6) Lack of Transparency 15) Not Knowing Which Supplier to Develop or Which
to Replace.
7) Lack of Trust
16) Ignoring the Costs of Time
8) Doing Business Without a Formal Contract
17) Tolerating Unnecessary Risk
9) Not so Clear Business Procurement Function
Processes
Read More about these problems and their solutions
3
http://www.scmdojo.com/procurement-problems-solution/ 3
6.4 Lean purchasing
Lean Purchasing – The Basics

• Lean purchasing, inspired by lean

management, is not a new concept.
• Lean purchasing is based on a method used in
Japan in the 1950s to boost the economy in
the difficult post-war period.

The idea was to produce enough to meet the

country's needs, but by using minimal
resources.

3
5
Key Focus
• The benefits of applying Lean Principles for procurement managers
and purchasing activities can dramatically affect a company’s cash
flow and its bottom line.
• APPLYING LEAN TO QUESTIONS LIKE THESE CAN ENSURE A
COMPETITIVE EDGE:
• How do you prevent production disruptions due to inventory or material shortages and still
remain flexible to meet changes in customer demand or cope with market volatility?
• How does a company reduce its working capital investment in carrying inventory at the right
levels while at the same time maximizing reaction time?
• How does a company optimize buying quantity?
• How can a company move from reactive to proactive purchasing operations?

3
6
Lean purchasing: Definition and
philosophy
• Lean purchasing is a method that involves identifying sources of
unnecessary spending by reviewing the value chain and focusing all
resources on high added-value tasks for the procurement
department.
• This philosophy is based on two major factors:
• Buying less: carefully controlled and optimised consumption in line
with the real needs of both the company and internal customers
• Buying better: simplification and standardisation of processes,
optimisation of productivity and services (deadlines, punctuality etc.)

3
7
Lean purchasing: The results
Overall, this method improves the productivity and performance of procurement
departments. However, lean purchasing also offers qualitative benefits, in
particular enabling companies to:

• Create more value for the end customer

• Improve the quality of products and services
• Create synergies between various company departments
• Benefit more readily from supplier innovation
• Pick up on the company's shortcomings more quickly

Ultimately, this means strengthening the legitimacy of the procurement

department and giving it greater recognition within the company.

3
8
Source: Wisner et al. (2012 p.44)
http://dspace.vnbrims.org:13000/jspui/bitst
ream/123456789/4491/1/Supply%20Chain
%20Management.pdf

Copyright © 2016 Pearson Educati 3

on, Inc. 9
Source: Wisner et al. (2012 p.44)
http://dspace.vnbrims.org:13000/jspui/bitstream/123456789/449
1/1/Supply%20Chain%20Management.pdf

Copyright © 2016 Pearson Educati 4

on, Inc. 0