PROCUREMENT MANAGEMENT

PROCUREMENT MANAGEMENT

Blazenka Knezevic, PhD

Assistant Professor Department of Trade

Faculty of Economics and Business University of Zagreb, Croatia

Blazenka Knezevic, PhD

 Office hours: Tuesday and Thursday 12:00-14:00

Pls - refer to web pages!

 2007 - PhD at Faculty of Economics and Business, University of Zagreb, Croatia

 continuous education at institutions in

Austria (WKS, Voitsberg) France (LPU, Strasbourg) Poland (CUE, Cracow)

Blazenka Knezevic, PhD

 research interests: distributive trade, retail information

systems, procurement management and e-commerce.

 coauthor of several books, dictionaries and lexicons,

co-editor of several books, ex. Challenges for the Trade in Central and Southeast Europe, Emerald Publishing Group, 2013

 published papers in academic journals such as British Food

Journal, Journal of Cases on Information Technology, Business Excellence, WSEAS Transactions on Systems etc.

 actively participated at more than 20 international scientific

conferences

 participated at several scientific research projects funded

by Croatian Ministry of Science

Procurement management course

 6 ECTS: 30 (L) + 30 (S) teaching hours  Lectures: Blazenka Knezevic, PhD

 Seminars: Mia Delic, mag. (starting next week)  Method of assessment:

10% in class activity (debates, simulation games and role playing games participation)

20 % team and individual assignments (essays, reviews, online forum participation)

10% case study presentation 60% written exam

 2 preliminary exams (midterms): 27th March and 22nd May! Precondition: active in-class participation

Procurement management course

http://www.efzg.unizg.hr/pm2014

Look for: Procurement management (login: pm2014)

 Facebook group:

Procurement management 2014

Weekly forum debates! /non-mandatory/

Special activities

 Guest lecturer – begining of May – theme: global sourcing

(perspectives, risks and benefits)???

 1 In-field class – visit to a Company – probably outside

Zagreb – end of April - 2012 short report:

http://www.efzg.unizg.hr/default.aspx?id=15931

- 2013 short report:

- http://www.efzg.unizg.hr/default.aspx?id=17693

 min. 1 workshop in computer lab – using Excel in

The Course objectives

 Understanding of procurement position and role in contemporary companies.

 Explanation of procurement impact on overall

business efficiency and competitiveness.

 Demonstration of a critical approach and

research-oriented attitude towards various procurement policies and strategies.

General competences

 research of global and local procurement sources  material planning

 stock management

 cost management

 decision making at operational and strategic level  managing inventories in supply chains

Specific competences

 Knowledge of negotiation procedures in procurement

 Procurement efficiency and effectiveness evaluation  Recognition and elimination of risks in procurement

Required readings

 Baily, P. et. al. (2008); Procurement Principles and Management, Prentice Hall, Harlow, UK

 Mangan, J. et al. (2008); Global logistics and Supply Chain Management, John Wiley and Sons, UK

Additional Readings

 Chopra, S.; Meindl, P (2007); Supply Chain Management –

Strategy, Planning, Operation, Pearson – Prentice Hall, New Jersey

 Blanchard, D. (2007); Supply Chain Management – Best Practices,

John Wiley and Sons, New Jersey

 Piga, G and Thai, K. V. (ed.) (2007); The Economics of Public

Procurement, Palgrave-Macmillan, New York

 Lysons K., Gillinham, M. (2003), Purchasing and Supply Chain

Management, prentice Hall, New Jersey

 Žibret, B. (2007), Strateška nabava, Mate, Zagreb (in Croatian)  Ferišak, V. (2006): Nabava,vlastita naklada, Zagreb (in Croatian)  International Journal of Procurement Management

 Research studies published by Chartered Institute of Purchasing and

Supply (CIPS)

Introductory questions

- Teamwork! -

 When can we say that a certain company is a

“world class company”?

 Count at least 4 basic business functions. Discuss

which is the most important one.

 What is the difference among terms: buyer,

customer, consumer and client?

 Efficiency vs. effectiveness!

 Define what is a process and give a couple of

examples.

 Name 4 steps in a purchasing process.

Time for teamwork: 15 min Discussion: 15 min

Purchasing/Procurement definition

 Process

 Part of a supply or value chain  Dicipline

 Profession

Purchasing as function

 function - unit or department – group of people which use specialized skills, knowledge, resources to perform specialized tasks

 function – the purpose wich a resource is designed (used) for - e.g. function of a pen is to write

 Make distinction between: Purchase function and purchase department!!!

 Purchase (procurement) departmet is an organization unit carrying out the purchasing (procurement) function

 Many organizations - purchasing is still part of segmented, departmentalized structure -

procurement of supplies is a separate activity in the sequence of production operations

 Challenge of global competition – integrated purchasing – purchasing is a part of larger grouping (example: materials and logitics managment) – cross-functional decision making

Purchasing as a process

 Process is a set of subprocesses (stages, activities) directed to achieving an output

 Various tasks/stages are depicted by a process chain

 Purchasing is depicted as sequential chain of events leading to the acquisition of supplies

 Link in the purchasing process chain = information Receive

requisition quotations Solicit

Negotiate with

suppliers Place order

Receive

 Subprocess in the chain is responsible for capturing or processing information - that enables to answer theese two questions: “What are we required to purchase?” and “Where and how can the required supplies be obtained?”

 Process chain relationship = message chain relationship  Messages: internal (e.g. requisitions) and external (e.g.

orders and payments)

 transmitted on paper documents through the post

 electronic transmission has revolutionised the cost & speed of purchasing processes

Purchasing as a part of supply or

value chain

 Purchasing together with such production,

warehousing and transportation is one of the links in the sequence of processes in which materials,

services and other resources are converted into

Purchasing as a discipline

 Purchasing is a discipline reffered to purchasing activities and strategy

 Interdisciplinary – knowledge base of purchasing includes mathematics, economics, law, accounting principles…

 Sub-area of: logistic management, operation

management, marketing, retailing

Purchasing as a profession

 In general, essential features of a profession are:

 A skill based on theoretical knowledge and skill requiring training and education.  The denomination of competence by professional by passing a test.

 Maintenance of integrity by adherence to a code of conduct.  Service provided for the public good.

 The profession is organised!!!

 The difficulties encountered by purchasing in meeting such criteria are:

 No regulation of entry – it is not necessary to have a professional

qualification in purchasing to enter the occupation.

 Purchasing practitioners are at all levels of evolution and formal

education.

 Limited powers to enforce ethical standards.

 The establishment of institutions concerned with promoting the concept of

'professional' purchasing. Examples: the Chartered Institute of Purchasing and Supply (CIPS) in Great Britain and the Institute of Supply

The classic definition of purchasing



5Rs



Purchasing is obtaining of

materials of the right

quality

in

the right

quantity

from the right

source

, delivered to the right

place

at the right

price

.



Discuss conflict of “5Rs”!!!

Purchasing and Procurement

 Purchasing which implies acquisition of goods or services in return for a monetary or equivalent payment.

 Procurement is the process of obtaining goods or services in any way (i.e. by no means) including leasing and even force or pillage.

 Procurement is a more accurate and the word procurement is often used to describe job title such as "procurement manager", "procurement agents" and "head of procurement".

PROCUREMENT

Obtaining required supplies or services by

any means.

Mainly strategic activities including: Strategic bottleneck and leverage items Make/buy/outsourcing decisions

Sourcing and appraising suppliers including global suppliers Rationalising the supplier base

Developing supplier potential Early supplier involvement Negotiation

Supplier relationships including partnerships, co-makeship and supplier associations

Capital equipment purchasing Benchmarking

Monitoring supplier performance Ethical and environmental 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

Procurement and industrial buying

and services for the specific purpose of industrial or agricultural production or for use in the

operation or conduct of a plant, business, institution, profession or service.

 Organisational buyers are those who buy on behalf of an organisation rather than for individual or family use or consumption.

organisation Examples Industrial

/producer organisations

Purchase of goods and services for some tangible production and commercially significant purpose

Manufacturers: primary (extractive) producers - agriculture, forestry, fishing, horticulture, mining Intermediate

organisations

Purchase of goods and services for resale or for facilitating the resale of other goods in the industrial or ultimate consumer markets

Distributors, dealers, wholesalers, retailers, banks, hotels and service traders

Government and public sector organisations

Purchase of goods and services for resale or use by organisations providing a service, often tangible, and not always commercially significant at national, regional and local levels

Central and local

government, public utilities

Institutions Purchase of goods and services for institutions that buy independently on their own behalf

Schools, colleges, hospitals, voluntary organisations

Procurement as external resource

management

 Obtaining from external sources all goods and services which are necessary for running, maintaining and

managing the company's primary and support activities at the most favourable conditions.

 Insuring the correct external resources are in place to

complement the internal resources. Perhaps 'external resource managers' is a term that future purchasing managers will adopt.

Derived, complex (composite) definition

 Procurement is the process undertaken by the

organisational unit which, either as a function or as part of an integrated supply chain, is responsible both for procuring supplies of the right quality, quantity, time and price and the management of the

suppliers, thereby contributing to the competitive advantages of the enterprise and the achievement of corporate strategy.

The stages in the evolution of

purchasing

 a very ancient activity - a cuneiform clay tablet excavated at El-Rash Shamra in Egypt dated about 2800 BC :

 'HST to deliver 50 jars of fragrant smooth oil each fifteen days after [it starting date] and during the reign of AS. In return lie will be paid 600 small weights in grain. This order will continue indefinitely until the purchaser or his sort removes his consent'.

 Read (search for): Quantity, quality, price, dynamics of delivery, validity of the contract

Evolution stages (by Reck and Long)

Stage Definition

Stage 1 Passive

Purchasing function has no strategic direction and primarily reacts to the requests of other functions Stage 2

Independent

Purchasing function adopts the latest purchasing techniques and processes but its strategic direction is independent of the firm's competitive strategy Stage 3

Supportive

The purchasing function supports the firm's competitive strategy by adopting purchasing techniques and

products, which strengthen the firm's competitive position

Stage 4 Integrative

Purchasing's strategy is fully integrated into the firm's competitive strategy and constitutes part of an integrated effort among functional peers to formulate and

implement a strategic plan

Development phases

Stage of development Capabilities Estimated organisational contribution

Stage 1: Infant

Fragmented purchasing None or low

Stage 2: Awakening

Realisation of savings potential Clerical efficiency. Small savings through consolidation 2-5%

Stage 3: Developing capabilities

Control and development of purchasing price/negotiation Cost reduction 5-10% Stage 4: Mature 80/20 recognised Specialist buyers Cost reductions

Commencement of supplier base management Cost reduction 10-20% Acquisition costs 1-10% Stage 5: Advanced Devolution of purchasing Strong central control Supply chain management Leverage buying Global sourcing

Cost reduction 25% Cost of ownership Acquisition cost and supply chain management 30%+

Evolution stages

(by Stannack and Jones)

World class supplier management

 suppliers are regarded as a source of competitive edge responsible for a

major share of product costs.

 World class supplier management is concerned with:

 searching for suppliers with the above characteristics or the potential to achieve them

 providing such suppliers with specifications of the purchaser's expectations relating to products and services and agreeing how supplier performance will be measured against expectations

 recognised outstanding supplier performance by such means as the award of long-term contracts and sharing the benefits of collaborative innovation or performance that enhance the purchaser's competitiveness.

 For a firm to reach world-class standards in serving its own customers,

it is vital to achieve world-class standards in controlling its network

of suppliers.

Importance of Purchasing in the overall

business strategy (quantitative approach)

 The greatest scope for saving lies in the areas of greatest expenditure!!!

 For most organizations the areas of greatest expenditure are purchasing and payments to personnel.

1979 Labour; 45% Bought-out materials, Other costs; 17% 2000 Labour; 20% Other costs; 18%

 Assuming other variables remain constant, every dollar (euro, pound, kuna, …) saved on purchasing is a dollar (euro, pound, kuna…) of profit.

SALES

Then Now Change Extra profit 100,000 $ 120,000 $ +20% of sales 2,000 $*

(*assuming profit as 10% on turnover) PURCHASING

50,000 $ 48,000 $ –4% 2,000 $ (i.e. a saving)

TEAMWORK

(10 min)

 Consider the following figures relating to a company.  Sales: 100,000; Purchases: 20,000; Wages etc. 20,000;

Operating costs 55,000

(a) Outline the cost structure of the company! And calculate profitability ratio.

(b) Assume that there are savings of 5 per cent on purchases and that turnover and operating costs remain constant. What, in absolute value and percentage terms, will be the effect on net profit?

(c) What increase in sales will have to be achieved to obtain similar extra profit at same level of profitability assuming no purchasing savings and the same proportionate cost of sales and operating expenses?

 BUT…

 Since the proportion of expenditure on supplies varies widely between organisations, it follows that there is a corresponding variance in the contribution of purchasing to profitability.

 cost of purchasing in total costs: retail (above 80%) vs. food production (40-70%)

 Purchasing as a factor in profitability is likely to be critical

where:

 bought-out items form a high proportion of total expenditure;  short-run prices fluctuate;

 judgements relating to innovation and fashion are involved;  markets for the finished product are highly competitive.

 Purchasing will be less critical, though still important, where:

 bought-out items form a small proportion of total expenditure;  prices are relatively stable;

Efficiency and effectiveness

 Being efficient is about doing things in the right

manner, while effective is about doing the right things.

Eficcient - oriented to reduction of resource waste (time, money, efforts, inputs)

Effective - oriented towards acomplishment of a purpose, reaching goals or expected results

 The more purchasing becomes involved in

commercial and strategic areas the greater will be its effectiveness and consequent standing within the organisation.

 CASE STUDY