PROCUREMENT MANAGEMENT

Transcription

1 PROCUREMENT MANAGEMENT Blazenka Knezevic, PhD Assistant Professor Department of Trade Faculty of Economics and Business University of Zagreb, Croatia Blazenka Knezevic, PhD Room B411 (north, 4th floor) Office hours: Tuesday and Thursday 12:00-14:00 Pls - refer to web pages! 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) Lithuania (VGTU, Vilnius) 1

2 Blazenka Knezevic, PhD research interests: distributive trade, retail information systems, procurement management and e-commerce. coauthor of several books, dictionaries and lexicons, coeditor 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 2

3 Procurement management course Official web page 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 short report: short report: - min. 1 workshop in computer lab using Excel in Procurement Management 3

4 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 researchoriented 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 using modern ICT in procurement. 4

5 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 5

6 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 6

7 Purchasing/Procurement definition Function 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 7

8 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 Solicit quotations Negotiate with suppliers Place order Receive supplies Make payment 8

9 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 finished goods that satisfy the needs of customers 9

10 Purchasing as a discipline Discipline = department of knowledge 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 Management in the USA 10

11 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". 11

12 PROCUREMENT Obtaining required supplies or services by any means. SUPPLIER MANAGEMENT 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 Organisational buyers are those buyers of goods 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. 12

13 Types of organisation Industrial /producer organisations Intermediate organisations Government and public sector organisations Institutions Characteristics Purchase of goods and services for some tangible production and commercially significant purpose Purchase of goods and services for resale or for facilitating the resale of other goods in the industrial or ultimate consumer markets 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 Purchase of goods and services for institutions that buy independently on their own behalf Examples Manufacturers: primary (extractive) producers - agriculture, forestry, fishing, horticulture, mining Distributors, dealers, wholesalers, retailers, banks, hotels and service traders Central and local government, public utilities 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. HRM is a part of procurement function??? 13

14 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 14

15 Evolution stages (by Reck and Long) Stage Stage 1 Passive Stage 2 Independent Stage 3 Supportive Stage 4 Integrative Definition Purchasing function has no strategic direction and primarily reacts to the requests of other functions Purchasing function adopts the latest purchasing techniques and processes but its strategic direction is independent of the firm's competitive strategy The purchasing function supports the firm's competitive strategy by adopting purchasing techniques and products, which strengthen the firm's competitive position 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 Stage 3: Developing capabilities Stage 4: Mature Stage 5: Advanced Realisation of savings potential Control and development of purchasing price/negotiation 80/20 recognised Specialist buyers Cost reductions Commencement of supplier base management Devolution of purchasing Strong central control Supply chain management Leverage buying Global sourcing Understanding and practice of acquisition cost and cost of ownership Clerical efficiency. Small savings through consolidation 2-5% Cost reduction 5-10% Cost reduction 10-20% Acquisition costs 1-10% Cost reduction 25% Cost of ownership Acquisition cost and supply chain management 30%+ 15

16 Evolution stages (by Stannack and Jones) Purchasing is changing rapidly 16

17 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 Other costs; 17% Other costs; 18% Labour; 20% Labour; 45% Bought-out materials, components etc; 38% Costs of a manufacturing company 1979 Bought-out materials, components Costs of the same company etc; 62% in

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? 18

19 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; there is an absence of innovation in operations. 19

20 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. 20

21 CASE STUDY Hawthorne Engineering 21