Strategic procurement B L A Ž E N K A K N E Ž E V I Ć, P H D Management philososphy in general is shifting towards more holistic views concerning the integration of material and information flows Procurement therefore is becoming proactive business function! Reduces wastes and costs Increasing (adding) value throughout managing supplier involvement Has integrative role in business strategy 1
Management Philosophy Time line Advantage EOQ 1915 Minimisation of inventory cost for independent demand MRP 1965 Minimisation of inventory costs for dependent demand MRP II 1970 Integrated financial and marketing planning with production planning JIT 1975 Elimination of waste by reducing inventory levels and improving process TQM 1980 Focus on quality and continuous improvement of process TOC 1985 Focus on constraints to improve throughput TBC 1990 Efforts to shorten supply chain Focus on time as competitive advantage variable SCM 1995 Expansion of focus to include suppliers and customers Disadvantage Not suited for independent demand Required precise information Very difficult to implement Required extensive hardware, software and computer expertise Primarily cost reduction strategy and within factory focus ; Heavy dependence on timely supplier deliveries Within factory focus; lack of focus on external process improvement Limited focus on constraints within the factory Limit to how much chain can be shortened; Competitors rapidly adopt similar strategy EOQ - economic order quantity; MRP- materials requirement planning; MRP II - manufacturing resource planning, JIT - just-in-time TQM - total quality management; TOC - theory of constraints; TBC - time-based competition; SCM - supply chain management Scope of the purchase function Strategic level Purchasing research Long-range planning Policy determination Supplier relationship development etc. Tactical level (Managerial level) Buying methods selection Negotiation Budgeting Interface development Staff development Contracting Cost reduction techniques implementation etc. Operational level Enquiries/ RFQs Requisition Requisition handling Records and systems maitenance Invoice clearing Expediting Price determination etc. 2
Traditional organizations Allocate resources and organize work on a functional basis Each function attempt attempt to achieve its objectives regardless of the others Leads to suboptimization Modern organizations Process (streamline) approach (Multifunctional) team approach to a problem solving getting the job done Integrated management approach Porter s 5 forces and barganing power in purchasing processes 3
The supplier has high power if there is concentration of suppliers (oligopoly or monopoly) the switching costs from one supplier to another are high there is a possibility of suppliers to integrate forward the supplier s customers and their long-term future are of little importance to supplier The buyer has a high power if there is a concentration of buyers (high volume of purchases) there are alternative sources of supply if the component or material cost is a high percentage of their total costs (they are likely to shop around and squeeze the suppliers) there is a threat of backward integration by the buyer 4
Discuss in pairs: Who has the power? Cheese producer has to purchase: Milk Emulgators and additives Packaging paper 1 Pasteurisateur 3 Refrigerators 4 PC-s (standard office configuration) Discuss in pairs for which purchasing object the cheese producer can anticipate the highest negotiation power the lowest negotiation power explain your answer in detail! 15 min + 10 min Developing purchasing strategy First: DRAW IDEA(S) HOW TO REACH A GOAL!!! The goal is: Increase profit by reducing purchasing costs! suggest 4 options to reduce purchasing costs (10 min) 5
This is just one example Increase profits -> Reduce purchasing costs Pay less for purchasing objects Reduce costs of purchasing process Merge order quantities Improve negotiation with suppliers Buy more (increase quantities) Reduce supplier base (fewer suppliers) Improve ordering and inventory management systems Increase straff efficiency Offer long-term contracts Share information on inventories/ demand Adopt joint approach to customers TQM JIT Electronic data exchange (EDI or sth simmilar) The book, page 52, Figure 2.15 (structure of cost reduction sources), short comment (5 min) Second: EVALUATE IDEAS (OPTIONS)!!! Suitability is the idea suitable under current (or future) circumstances in operation at your company Feasibility can strategy be operative within organizational culture and environment; detailed examination of resources and strategic capabilities; ranking against agreed criteria; decision tree Acceptability expectation of performance vs. expectation of stakeholders; tools: funds flow analysis; break-even analysis; resources deployment analysis 6
Third: SELECT AND IMPLEMENT!!! What influences the choice of a purchasing strategy? Position of a company in its supply chain Is company closer to raw materials or to consumers? Are there many competitors at the same level in supply chain Number of effective sources in the supply market The pace of technological development The volatility (change, dynamics, unstability) of the supply and/or end market The degree of government involvement in the marketplace The quality of staff available to control and manage assessments 7
Types of organizations and purchasing strategic potentials Extractive industry No raw material purchases High capital expenditures (equipement) Important maitenance and spares needs Often in remote locations Examples: mining, oil extraction, lumbering, hunting, farming, fishing Process industry High volume of raw material purchased Continuity of supply is vital (or ensuring continuous process at least) Buying worldwide Category specialists Examples: chemicals, pharmaceuticals, petroleum, ceramics, base metals, plastics, rubber, textiles 8
Major manufacturing Materials are high proportion of cost Continuity of supply is important Strong professional approach is needed Head of procurement will be at board level Well structured department with experts in particular field Examples: production of aircraft, household appliances, automobiles, computers, clothes, shoes, food Retail industry Goods are bought to be sold; Customer-related Buying around 80% of total expense Choice and control of stock extremely important Net profit margins below 5% - buying expertise is vital Purchasing is represented at high management levels 9
Centralized vs. Decentralized procurement Advantages of decentralization: The unit will develop closer relationship with local suppliers The unit will be more responsive shorter lines of communication, awareness of local circumstances; quicker response to emergency requirements The unit has better control because it is usually operating as a profit center- If local manager has no control over sources, how can he be responsible for outputs? Advantages of centralization: Ecnonomy of scales purchasing power increases due to large quantities ordered Avoiding price anomalities between units Better overall stock management and material utilization Economy of staffing and administrative costs reduction Uniformity od procedures, forms, standards and specifications 10
Usually companies combine cenralization and decentralization to obtain optimal results However, at past 30 years the percentage of companies utilizing centralized purchasing is growing EFFICIENT COMBINE = EFFICIENT HARVESTING! Discuss purchasing characteristics LEFT SIDE (choose one) Hotel Restaurant chain (5 restaurant) Hair dresser chain (10 salons) Car repair workshop (a certified part of a multinational network) Bank RIGHT SIDE (choose one) Hospital School Ministry of science Major s office Parliament (1) Aim of purchasing; (2) purchasing objects - goods; products; services to be purchased (give at least 4 examples) together with (a) cruitial characteristic to be extra monitored when coosing supplier and (b) wanted dinamics of delivery; (3) isolate at one purchasing object for which you will have high negotiation power, explain why!; (4) explain would you centralise or decentralise purchasing in particular organization (give arguments to support your statement) Also, discuss important characteristics regarding purchasing issues at: SMEs Multinationals 11