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Summary - Purchasing and Supply Chain Management
Why are purchasing and supply chain management so important for companies?As business is becoming more and more competitive, purchasing and supply chain management are increasingly recognized 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.
What are the roles of purchasing and supply chain management within a company?
- To secure the supply for all projects and shipyards. Component deliveries should be made by suppliers and subcontractors on time and their quality should be flawless.
- Prices of purchase materials should be within the project budget, in order not to jeopardize project and company profitability.
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 securred under the most favourable conditions.
Supply includes at least purchasing, materials management, incoming inspection and receiving. Supply is used in relation to buying based upon total cost of ownership in a manufacturing environment.
1.2 The role of purchasing in the value chain
What is value chain management (mostly used in business strategies)?All stakeholders belonging to the same value chain are challenged to improve the (buying) company's value proposition to its final end - customers, i.e. consumers. A value chain consists of primary activities and support activities.
What are primary activities?Primary activities are those activities that are required to offer the company's value proposition to its customers. They consist of inbound logistics, operations, outbound logistics, marketing and sales, and customer activities.
What are support activities?Those value activities that are required to support the company's primary activities. These include purchasing, technology development, human resources management and facilities management (those activities aimed at maintaining the firm's infrastructure)
What is facilities management?Relates to the management (planning, execution and control), and the realization of housing and accomodation, the services related to these, and other means in order to enable the organization to realize its mission.
What's the difference between direct and indirect procurement?Direct procurement: procurement of all materials and products that are used for manufacturing a company's end products. (buying for primary activities)
Indirect procurement: Procurement of all materials, components and services that are used to support the company's infrastructure and back- office activities. (buying for support activities)
1.3 Definitions of concepts
Define the procurement functionCovers activities aimed at determining the procurement specifications based upon 'fitness for use':
- selecting the best possible supplier and developing procedures and routines to be able to do so;
- preparing and conducting negotiations with the supplier in order to establish and agreement and to write up the legal contract;
- placing the order with the selected supplier or developing efficient purchase orders and handling routines;
- monitoring and control of the order to secure supply (expediting);
- Following up and evaluating (settling claims, keeping product and suppliers files up-to-date, supplier ratings and supplier ranking).
What's the difference between purchasing and procurement?Procurement is a somewhat broader term. It includes all activities required to get the product from the supplier to its final destination. It encompasses the purchasing function, stores, traffic and transportation, incoming inspection, and quality control and assurance. Many firms also consider recycling to be part of this. Procurement is based on total cost of ownership- thinking.
Define total cost of ownershipRelates to the total costs that the company will incur over the lifetime of the product that is purchased.
Define sourcing.Finding, selecting, contracting and managing the best possible source of supply on a worldwide basis.
Define sourcing strategyIdentifies for a certain category from how many suppliers to buy, what type of relationship to pursue, contract duration, type of contract to negotiate for, and whether to source locally, regionally or globally.
Define procurement managementRelates to all activities necessary to manage supplier relationships in such a way that their activities are aligned with the company's overall business strategies and interests.
1.4 Importance of purchasing to business
Why is procurement so important for business?
- 2% increase in procurement spend may lead to a reduction in profitability of 20%
The DuPont analysis shows that procurement contributes to improving the company's RONA (return on assets) in three ways:
- Through reduction of all direct material costs --> lead to improvement in the company's sales margin, which in turn will affect RONA in a positive manner.
- Through a reduction of the networking capital employed by the company. This will work out positively on the company's capital turnover ratio.
- Through improving the company's revenue - generating potential challenging suppliers for new product ideas and process improvements may lead to new customer value propositions that in turn lead to higher margin new products.
What's a DuPont analysis?Financial diagnostic tool to calculate the company's return on investment based upon sales margin and capital turnover ratio. Used to assess the effect of a 2% procurement saving on the company's return on investment (ROI).
Latest added flashcards
- Raw material, spare parts, routine products or new products
Strategic importance of the purchase
- The higher the importance the higher the involvement of management (Is not only determined by the amount of money involved)
Sums of money
- More money involved = more involvement of management
Characteristics of the purchasing market
- Monopolistic or oligopolistic (Harder negotiations) vs. Free market (Easier)
Risk related to the purchase
Role of the purchasing department
To what extend the purchased product influences existing routines in the organization.
- Not spending their own money -> Less careful
- Rely on opinions and references from others
- Long lasting relationships with supplier
- Inelastic prices - not gonna change supplier because of small price changes
- Spending their own money -> More careful
- Elastic prices - consumers change their product preference very fast if the price changes
- development of codes of conducts (internally and/or for suppliers)
- ethical training programmes (e.g . via role plays)
- top management commitment (”example behaviour” of top executives)
- reporting of cases of unethical behaviour (and a ssociated sanctions)
- preventive measures (e.g. by rotating purchasing staff)
The book describes the well- known pyramid model of Carroll, also discussed in class. In this model, ethical responsibilities build on a basis of economic and legal responsibilities. The top of this pyramid is
formed by responsibilities to be a good corporate citizen, often operationalized in the form of the three P’s (people, planet, profit). In this sense, the Carroll implies that ethical responsibilities form a sort of
prerequisite for a company’s CSR efforts.
The main RQ elements are trust, commitment and (economic and non-economic) satisfaction.
Since ethical behaviour doesn’t “stop” at the company borders, from a purchasing perspective it is important that suppliers also conform to codes of conduct set by the buying company. This conformance
is arguably facilitated by higher degrees of the RQ elements trust & commitment.
The following types of unethical behaviour exist:
- personal buying
- accepting supplier favours
- sharp practices
- financial conflicts of interests
The example appears to belong to the type ‘financial conflicts of interests’ since the purchasing manager uses inside information (a huge order) to obtain financial benefits him/herself.
Basically, there are three types of risks associated with unethical beha viour:
- there may be legal penalties (e.g. if it is seen as corruption)
- the purchaser’s personal, professional reputation may be at stake, thus limiting career opportunities
- the company’s reputation could be at risk (e .g. resulting in customer “strikes”)
Appropriate for the work that is difficult to define, has long lead time, and will be extremely costly -> Cannot be done by one company.
Less visibility on the subcontracted work. -> Vulnerable to disruptive events in upstream supply chains.
Low term specificity and pay-for-performance.
In power-by-the-hour contracts, aircraft engine maintenance service providers are paid based on the hours that the aircrafts are operating without mechanical problems. The activities that the service provider has to do is not specified in detail.