THE ROLE OF

PURCHASING IN THE
VALUE CHAIN
STUDY UNIT 1 (THEORY)
 INTRODUCTION
As business is becoming more and more competitive
Purchasing and supply chain management are increasingly
recognised by top managers as key business drivers.
■ Since most companies today spend more than half of their sales turnover on
purchased parts and services, efficient and constructive relationships with suppliers
are key to the company’s short-term financial results and long-term competitive
position.
■ Many companies cannot escape from exploiting the huge potential that purchasing
and supply chain management represents to them today.
 LEARNING OUTCOME 1
Explain the role and importance of the
purchasing and supply function in the value
chain.
 THE ROLE OF PURHASING IN THE
VALUE CHAIN
■ In many business strategies, the concept of value chain management plays a
central role.
■ The value chain is composed of value activities and a margin which is
achieved by these activities.
■ Porter differentiates between primary activities and support activities.
■ Primary activities are those which are directed at the physical
transformation and handling of the final products that the company
delivers to its customers. Distribution to the customer and providing services
are part of these primary activities.
■ Support activities enable and support the primary activities. They can be
directed at supporting one of the primary activities as well as supporting the
whole primary process.
 Primary activities
PORTER DIFFERENTIATES BETWEEN FIVE GENERIC
CATEGORIES OF PRIMARY ACTIVITIES:
■ Inbound logistics - These activities are related to receiving, storing and
disseminating inputs to the production process.
■ Operations - Activities associated with transforming inputs into the final
product.
■ Outbound logistics - These are activities associated with collecting, storing
and physically distributing the final product to customers.
■ Marketing and sales - These activities relate to advertising, promotion,
sales, distribution channel selection, the management of channel relations
and pricing.
■ Services - Activities associated with providing services to customers to
enhance or maintain the value of the product.
 SUPPORT ACTIVITIES
SUPPORT ACTIVITIES ARE GROUPED INTO FOUR
CATEGORIES:
■ Procurement - Relates to the function of purchasing inputs used in the firm’s value
chain. These may include raw materials, supplies and other consumable items as well
as assets such as machinery, laboratory equipment, office equipment and buildings.
■ Technology development - Porter’s view every activity embodies technology, be it
know-how, procedures or technology embodied in processes, systems or product
designs. Most value activities use a technology that combines a number of different sub-
technologies involving different scientific disciplines.
■ Human resources management - These are all the activities directed at recruiting,
hiring, training, developing and compensation of all types of personnel on the company’s
payroll, active in both primary and support activities.
■ Firm infrastructure - The whole company is the customer of these activities.
Infrastructure does not support one or more primary activities; rather it supports the
entire set of company processes.
 PROCUREMENT(PURCHASING)
SUPPORT: PRIMARY ACTIVITIES
PRIMARY ACTIVITIES - The procurement function should be able to meet the material
requirements related to operations management and inbound and outbound logistics.
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.
■ 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.
■ 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.
 PROCUREMENT(PURCHASING)
SUPPORT: SECONDARY ACTIVITIES
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 and senior management;
● office equipment for administrative staff;
● beverages and foods for the canteen;
● cleaning materials for housekeeping;
● machinery and equipment for the production department.
 THE IMPORTANCE OF THE
PURCHSING AND SUPPLY FUNCTION
If a cost structure of manufacturing companies is done,
the importance of purchasing can directly be seen.
NB!! - The effect of purchasing saving (more efficient
purchasing) on the company’s return on capital employed
or return on investment (ROI) will be shown in the
calculations.
• THIS WILL BE ILLUSTRATED IN A SEPARATE PRESENTATION
WHICH WILL BE UPLOADED ON EFUNDI UNDER LESSONS –
STUDY UNIT 1 - CALCULATIONS!
 LEARNING OUTCOME 2

Understanding the difference between concepts such

as:
■ ordering,
■ buying,
■ procurement,
■ sourcing,
■ supply chain management
■ value chain - and how they are interrelated.
 ORDERING

The term ordering refers to:

■ the placing of purchase orders
■ with a supplier against previously arranged
conditions.
 BUYING

Buying relates to:

■ the commercial activity
■ of soliciting competitive bids
■ from a limited number of suppliers
■ and negotiating
■ a final contract with the lowest bidder.
 PROCUREMENT
Procurement includes:
■ all the activities required
■ to get the product
■ from the supplier
■ to its final destination.
■ It encompasses the purchasing function, stores, traffic
and transportation, incoming inspection, quality control
and assurance.
 SOURCING

Sourcing relates:
■ to developing
■ the most appropriate supplier strategy
■ for a certain commodity or product
category.
 SUPPLY CHAIN MANAGEMENT
Supply chain management can be described as:
■ the management of all activities, information,
knowledge and financial resources
■ associated with the flow
■ and transformation of goods and services
■ from the raw materials, suppliers, component suppliers
and other suppliers
■ in such a way that the expectations of the end-users of
the company are being met or surpassed.
 VALUE CHAIN
Value chain implies that:
■ suppliers are challenged to improve the (buying)
company’s value proposition to its customers.
■ Usually the suppliers work closely with the (buying)
company’s technical and marketing staff to reduce the
product’s overall costs, come up with new designs or add
new features to the product which are attractive for the
end customer and that make the product sell better.
 LEARNING OUTCOME 3
Recognise new developments in
purchasing and supply practices of
organisations.
DEVELOPMENTS IN PURCHASING
AND SUPPLY PRACTICES
THE FOLLOWING ARE SOME NEW DEVELOPMENTS
(CHANGES) IN PURCHASING AND SUPPLY:
■ Global sourcing;
■ Leveraged procurement and supply strategies;
■ Corporate social responsibility and business integrity;
■ Resource scarcity;
■ Supplier integration;
■ Early supplier involvement in new product development.
 Global sourcing
■ As the companies’ competitive position is directly related to
the competitiveness of its supply base, companies have adopted
a global scope towards sourcing issues.
■ Components and (IT-)services are increasingly sourced from
foreign, low-cost countries, a reason why large organizations
have set up International Procurement Offices (IPOs) in different
regions of the world.
■ Procurement professionals, hence, are forced to adopt an
international scope towards their supply markets.
■ Supplier bench- marking, being able to deal with different
cultures effectively, being able to negotiate in different languages
have become prerequisites for today’s procurement professional.
 Leveraged procurement and supply strategies

■ In companies with several manufacturing plants, important

savings can be realised by combining common materials
requirements.
■ A trend towards leveraged or coordinated procurement
strategies is apparent in many large European companies,
across national borders.
■ 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 the
purchase of computer hardware and software, capital goods
and components.
 Corporate social responsibility and business
integrity
■ These issues pose new and important challenges to purchasing. Environmental problems in
many countries also South Africa are becoming more and more prevalent.
■ National governments have become stricter in their regulations on this point.
■ 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 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.
■ Apart from environmental issues, there is a growing pressure from the public that products
should be clean and originate from countries with free trade.
■ Child labour has become an issue of particular concern, implying that procurement
professionals should ensure that the products they buy come from sources of high integrity.
 Resource scarcity

■ As the world population is expected to grow to 9 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.
■ This poses new challenges for procurement
professionals who need to develop a much more
proactive outlook on how to secure the company’s
future requirements for critical materials and products.
 Supplier integration
■ Modern information technology enables companies to improve their
materials planning and supply systems internally and also in their
relationships with suppliers.
■ Information technology significantly improves productivity within
materials and supply chain activities.
■ An integrated approach towards materials management requires close co-
operation between production planning, inventory control, quality inspection
and purchasing.
■ To achieve successful integration, system standardisation is a
prerequisite.
■ Next, suppliers should be seamlessly integrated within these applications.
■ Hence, the capability of a supplier to link up with the buyer’s
manufacturing and planning systems becomes a much greater concern
in order to be able to successfully apply concepts like total quality control,
quick response logistics and JIT scheduling.
 Early supplier involvement in new product
development
■ As more and more innovations in industry come from suppliers, getting them
involved early in the new product development process becomes an issue of
prime concern.
■ In doing so, procurement professionals need to alter their traditional ways of
working and their relationships with suppliers.
■ It should be decided at an early stage what part of the development process
will be done in-house and what part will be delegated to suppliers.
■ Being able to work in cross-functional development teams and having a sound
technical background also become important prerequisites.
■ Procurement professionals should be able to solve the issue of how to reward
innovative suppliers for their contributions and ideas on new product
development.
■ Gain and risk-sharing agreements replace the traditional price negotiations
and agreements, enabling a more intensive and long-term relationship with these
suppliers.
 CONCLUSION

This learning unit explained the role of purchasing in

the value chain as well as how important the
purchasing function is for the success of the
business. The purchasing function is constantly
confronted with making important decisions to help
save money to increase the profit of the business.
The next learning unit will touch on these decisions.