Chapter 1
The role of Purchasing in the
Value Chain
The role of purchasing in the value chain
The role of purchasing in the value chain
Primary activities can be divided in five generic
categories:
Inbound Logistics
Operations
Outbound logistics
Marketing and sales
Services
The procurement function should be able to meet
the material requirements related to inbound
and outbound logistics, and to operations.
The role of purchasing in the value chain
Support activities can be divided in four generic
categories:
Procurement
Technology development
Human resources management
Firm infrastructure
Procurement activities may be also related to supplying
products and services for the other support functions.
The role of purchasing in the value chain
Definition of concepts
Purchasing:
All activities for which the company receives an invoice from outside parties.
Differentiation between:
Purchasing function
Purchasing department
Definition:
Managing the companys 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 companys primary and support
activities is secured at the most favorable conditions.
Procurement:
All activities that are required in order to get the product from the supplier to its final
destination.
Definition of concepts
Sourcing:
Finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of
supply and gathering knowledge of procurable resources.
Purchasing Management:
All activities that are required to manage supplier relationships.
Supply Chain Management:
The management of all activities, information, knowledge and financial resources associated with
the flow and transformation of goods and services up 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 Management:
Challenging suppliers to improve the value proposition to the end-customers of the value
chain. Usually the supplier works closely together with the customers technical and marketing
staff to reduce the products overall costs and add new designs or features to the product which
increase the value for the end-customer.
Definition of concepts
Different definitions...
Ordering
Buying
Purchasing
Procurement
Sourcing
Supply Chain Management
Value chain management.
Operational,
Operational,short
short
term,
deal
and
term, deal and
margin
margin
oriented
oriented
Strategic,
Strategic,long
long
term,
performance
term, performanceand
and
value
value
oriented
oriented
Purchasing: relates to every activity the company receives an invoice for
Definition of concepts
Importance of purchasing to business
Importance of purchasing to business
Challenge for managers: how to manage our EXTENDED ENTERPRISE ?
Sales:
100%
Profit 1,5 %
Value added: 20 %
Question: what should
managers do?
Purchased materials
And services: 78,5 %
Purchased materials and
services have a large impact
on company profitability
Definition of concepts
Challenge: how to manage our EXTENDED ENTERPRISE ?
Sales:
100%
Profit 1,5 %
Value added: 20 %
Question: what should
managers do?
Purchased materials
And services: 78,5 %
Suppliers determine 78,5%
of total cost, innovation,
carbon footprint and
customer value
DuPont analysis:
Capital turnover ratio
2.1 x
RONA
9.9 %
Sales
105 mio
Margin
4.7 %
145 mio
Interest free
liabilities
95 mio
Sales
105 mio
Income
before tax
5 mio
/
Sales
105 mio
Amounts in Euro mio
Net assets
50 mio
Total assets
Total costs
100 mio
Other costs
40 mio
+
Purchased
mat. & serv.
60 mio
DuPont analysis:
Capital turnover ratio
2.1 x
Sales
105 mio
Net assets
Total assets
50 mio
RONA
12.4 ---9.9 %
105 mio
Income
before tax
6.2 --5 mio
/
Sales
105 mio
Amounts in Euro mio
Interest free
liabilities
95 mio
Sales
+ 25 % !!
Margin
4.7 %
5.9 ---
145 mio
Total costs
98.8 ---100 mio
Other costs
40 mio
+
Purchased
mat.& serv.
58.8 --60 mio
-2%
Classification of purchasing goods (1)
The purchasing process may concern a large variety of goods and services. In
general, purchased materials and services can be grouped into the following
categories:
Raw materials; materials which have undergone no transformation or a minimal
transformation and which serve as the basis materials for a production process
Supplementary materials; materials that are not absorbed physically in the
end product
Semi-manufactured products; products that have already been processed
once or more times and that will be processed further at a later stage
Components; manufactured goods that 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
Classification of purchasing goods (2)
Finished products; all products which are purchased to be sold, after
negligible added value, either together with other finished products and/or
manufactured goods
Investment goods or capital equipment; products that are not
consumed immediately, but which purchasing value is depreciated over a
period of time
Maintenance, repair and operating materials (MRO items);
materials, which are necessary for keeping the organization running in
general and for the support activities in particular
Services; labor intensive, non material activities that are executed by
third parties on a contract basis
New developments in purchasing
1. Sellers market
Buyers market
2. Increasing pressure on sales prices and margins leads to:
Leveraged purchasing and supply strategies
Global sourcing
Supplier integration
Early supplier involvement in new product development
Reciprocity agreements and compensation agreements
Corporate Social Responsibility and business integrity
