Purchasing

Purchasing organization

- Centralized/decentralized - Organized by: end-product; category (category management); value classification; time horizon (strategic/operative)

Business principles and procurement

- Global sourcing is broadly developed - Regulation regarding labor and environment often limited - Consumers do not accept atrocities in the production - How can purchasers contribute to sustainability? - Companies draw up principles that form a context for doing a business. Some principles: respecting international law, fair competing, integrity.

Procurement functions

- Make or buy assessment - Procurement needs, such as, quality and quantity - Selecting supplier and developing procedures and routines - What contract to use, if any - Issuing purchasing orders - Monitoring and controlling orders - Following up and evaluating suppliers and their performance. Van Weele, 2018 -> Purchasing process model and some related concepts

Project purchasing

Every project is new - new suppliers have to be found for every production order, the products that are to be manufactured must be discussed in detail with suppliers, and intensive consultation between the design and engineering department is necessary. On-time delivery and quality are more important than price. Purchasing must be able to respond to changes in design and project planning quickly.

MTS

Make to stock (central stock). Finished products are kept in stock at the end of the production process and from there shipped directly to many geographically dispersed customers, as in the manufacture of many customer electronics products (e.g. dishwashers, refrigerator)

Competitive bidding (strategy)

Objective: Obtain 'best deal' for short-term. Suitable for: Leverage products (commodities, steel plate, wire) Activities: - Improve product/market knowledge - Search for alternative products/suppliers - Reallocate purchasing volume over suppliers - Optimize order quantity - 'Target-pricing' Decision level: Board level, Purchasing

Category management and e-procurement solutions (strategy)

Objective: Reduce logistic complexity. Improve operational efficiency. Reduce number of suppliers. Suitable for: Routine products (consumables, supplies) Activities: - Subcontract per product group/product family - Standardize product assortment - Design effective internal order delivery and invoicing procedures - Delegate order handling to internal user Decision level: Purchasing, Cross-functional approach.

Secure supply (strategy)

Objective: Secure short- and longterm supply. Reduce supply risk. Suitable for: Bottleneck products (natural flavors, pigments) Activities: - Accurate forecast of future requirements - Supply-risk analysis - Determine ranking in supplier's client list - Develop preventative measures (buffer stock, transportation) - Search for alternative products/suppliers Decision level: Purchasing, Cross-functional approach

Argumentation (Gunnar Lindh, 2019)

Part of the negotiation dance. - Collect information - Build trust - Act and argument solution minded - Avoid controversies - Explore limits - Test limits - Seek balance - Ask questions while arguing - Keep it simple - Summarize - Be aware of prestige traps

Commitment (Gunnar Lindh, 2019)

Part of the negotiation dance. - Confirm in writing - Clear confirmations beneficial for all parties - Value agreements => potential future conflicts - Better to ask questions now than afterwards - Spend enough time and effort on the confirmation

Epilogue (Gunnar Lindh, 2019)

Part of the negotiation dance. - Relations and needs change over time - Competition - Technology - Life cycle cost - Regulations - Performance - Conflicts - Options - Renewal - Exit - Business intelligence

Bidding (Gunnar Lindh, 2019)

Part of the negotiation dance. - Strive for package deals - Avoid salami negotiations - Concession shall be reciprocal - Avoid giving without receiving - Agree on value adding changes before bidding - Explore if counter part can accept your counter demands, before doing any concessions - Strive to lock counterpart - Ensure all deal breakers are presented before you bid - Never give away all your concessions at one time - Test your counter part before accepting - Avoid confirming the first acceptable offer

Preparation (Gunnar Lindh, 2019)

Part of the negotiation dance. - Structure your preparation - Use check-lists - Explore your alternatives - Use scenarios - Get your internal affairs in order before meeting your counterpart(s) - Challenge your preconceptions

Opening (Gunnar Lindh, 2019)

Part of the negotiation dance. - Use an agenda - Don't rush (adjust speed to situation) - Summarize background - Use active listening - Collect information - Create the right atmosphere

Assessment (Gunnar Lindh, 2019)

Part of the negotiation dance. - Use and process all signals from counterpart - Keep connected to your overall plan - Be aware of what signals you communicate - Ask questions - Summarize regularly - Build rapport - Explore counterparts negotiation variables and their respective values - Identify added values - Enhance your overall picture - Who does what? - Third party dependencies?

Initiation (Gunnar Lindh, 2019)

Part of the negotiation dance. - Use positive thinking - Visualize a successful negotiation - Observe your counterpart - Collect information - Don't overreact, but be ready for action!

Closure (Gunnar Lindh, 2019)

Part of the negotiation dance. - Wait until you can agree on the full deal - Use conditioned closures for all parts of full deal - Summarize - Ensure rapport - Use confirmatory questions - Consider different options for closure - Avoid "closing the door"

Category management

Part of the purchasing organization. Definition: Continual monitoring of expenditures and supplier performance in specific buying categories with the intent of driving ongoing cost or supplier performance improvements. Items of similar: - Supplier sources - Production processes - Internal use - Material content/complexity - Specifications - Underlying technology

Model for supplier development

Pedroso et al., 2021. 1. Determine what the underperforming areas in suppliers' TBL results 2. Consider which dimension needs improvements (economic, environmental and social). Supplier give feedback to the buying organization. 3. Prioritize underperforming TBL dimensions. Joint planning of TBL activities with suppliers. 4. Determine what is the nature of the problems suppliers are facing. Suppliers participate in the design of evaluation practices. 5. Implement evaluation practices 6. Determine what type of actions are needed for supplier to perform better. Suppliers participate in the design of managerial/technical practices. 7. Implement support practices (managerial vs. technical). Suppliers give feedback to the buying organization. 8. Determine what are the competences to move forward in the partnership. Suppliers engage in a partnership. 9. Monitor TBL results -> 1.

Enterprise resource planning (ERP)

Refers to a company-wide information system for managing the company's operational, and support processes, its administrative processes, its Human Resources, its material resources and financial resources. Ex. Oracle (Attends)

Commerce

Related to INCO terms. Transactions having the objective of supplying commodities social exchange, esp. of opinions, attitudes, etc.

INCO terms (international commercial terms, 2010)

A series of international sales terms, published by International Chamber of Commerce (ICC) and widely used in international commercial transactions. Terms of trade for the sale of goods. Buyers should consider these terms before the contract of sale is negotiated, or risk being stung by the supplier on the deal, and/or having unnecessary complications to the shipment. - Accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. - Reduce or remove altogether uncertainties arising from different interpretation of such terms in different countries. - Limited to matters relating to right and obligations of the parties to the contract of sale with respect to the delivery of goods sold. - Are used to divide transaction costs and responsibilities between buyer and seller and reflect state-of-the-art transportation practices. Clearly communicate: - Who should pay transportation, insurance and other costs - Where the goods should be transported to - When the risk is transferred from seller to buyer - If unloading is included in the price --- - Buyer/Seller responsibility (INCO terms) Packaging; Loading on truck (carrier); Export-customs declaration; Carriage to port of export; Unloading of truck in port of export; Loading charges in port of export; Carriage to port of import; Insurance; Unloading charges in port of import; Carriage to place of destination; Import customs clearance; Import taxes

Material profile

A-profile: Konvergent. Many items that converge into one end item V-profile: Divergent. A wide variety of different products from fewer raw material resources. X-profile: Modules. A wide variety of products. Combining A and V.

Variables that affect the buying process (Kraljic)

According to Kraljic. - Characteristics of the product (in terms of volume) - Strategic importance of the purchase - Sum of money involved in the purchase - Characteristics of the purchasing market - Degree of risk related to the purchase - Role of the purchasing department in the organization (Purchasing must become supply management, more strategic function within a company, so much value of the company) - Degree to which the purchase product affects existing routines in the organization (supply risk and profit impact, how the item affects our current organization)

Procurement management

All activities that are required to manage supplier relationships in such a way that their activities are aligned with the company's overall business strategies and interests.

ATO

Assembly to order. Only systems elements or subassemblies are in stock at the manufacturing centre and final assembly takes place on a specific customer order. In other words, manufacture of components takes place based on forecasts and final assembly takes place based on customer orders (e.g. cars, computers).

Offshoring

"Relates to the commissioning of work, which was previously done in-house, to a provider in a low-cost country. In many cases, offshoring is concerned with outsourcing of services."

Negotiator profiles

- Accommodating - Avoiding - Competing - Collaborating - Compromising

Purchase price (Corey, 1978)

1. Cost-based pricing The supplier's offering price is directly derived from his cost price. 2. Market-based pricing The price of the product is determined on the market and is generated by market circumstances (demand, supply, stock positions, economic factors etc.) 3. Competitive bidding The price is influenced by market factors as well as cost factors. This situation is most common.

Techniques and tools for supplier assessment

- Spreadsheets: used to systematically compare and assess quotations obtained from suppliers. Important criteria are listed on one axis and the supplier quotations on the other. - Qualitative assessment: used for suppliers with whom exist close business relationships. Specialists who have experience with the suppliers rate them according to an agreed checklist. - Vendor rating: Limited to quantitative data only. Entails measuring the aspects of price, quality and delivery reliability per supplier. - Supplier audit: Entails that the supplier is periodically visited by specialist(s) from the customer. They investigate the production process and quality organization. - Cost modeling: Specialist from the buying company estimate

Linear purchasing process

Critique: 1. The process does not reflect on the make vs. buy option 2. Few purchasing situations start off with a blank page (Greenfield situation). - Company usually has experience with buying certain material or services - Could also be a straight rebuy or modified rebuy 3. It does not reflect that a process starts and ends at the same point, that is, a need is developed by the customer -> the supplier then fulfills that need

Kraljic Matix and CODP-perspective

Forecast-driven / CODP / Customer-order-driven: - Customer generic Customer-order-driven: strategic, bottleneck Forecast-driven: leverage, non-critical - Customer unique Customer-order-driven: strategic, bottleneck, leverage, non-critical Forecast-driven: strategic, bottleneck, leverage, non-critical - Customer order unique Customer-order-driven: strategic, bottleneck Forecast-driven: NONE

General advice on negotiation

General advice: - Practice - Commitment - Establish your own negotiator profile - Don't get emotionally involved - Prepare - you and your team - Use diversified negotiations strategies - Be and stay well connected - Be cooperative & keep guard - Plan for closure

Terms of payment

- Preferred method of payment = performance bond - Advance payments should be covered by bank guarantee where supplier agrees to fulfill their obligations. - Milestone payments are sometimes used when installations or capital goods are purchased

Buyer-supplier relationships over time

- Supplier Relationship characteristic: Operational Time horizon: From order to order. Quality: As requested by producer. Quality control by producer. Logistics: Orders. Contract: From order to order. Price/cost: Price. - Preferred supplier Relationship characteristic: Operational Time horizon: 1 year Quality: As requested by producer. Quality control by producer and supplier. Logistics: Annual agreements and call-off orders Contract: Annual agreement (1 year) Price/cost: Price + rebate - Supply partner Relationship characteristic: Tactical Time horizon: 1-3 years Quality: 'Sign-off' by supplier, Quality assessment by supplier (process quality). Logistics: Periodical scheduling of materials requirement by producer. Contract: Annual agreement (>1 year). Quality agreement. Price/cost: Price + cost-reduction targets - Design partner Relationship characteristic: Strategic Time horizon: 1-5 years Quality: 'Sign-off' by supplier. Early supplier involvement in design. Quality assessment by supplier (design quality). Logistics: Electronic document interchange. Contract: Design contract. Life of type responsibility (product liability) (plikt) Price/cost: Price based on open calculation. Continuous improvement (design, quality, cycle time)

Tactical purchasing

- Supplier selection - Conducting supplier audits - Make framework agreements (one year contract with supplier, send orders tied to this contract)

Classifying supplier relationships

1. Type of contract 2. Length of contract 3. Product/service type - standard, customized 4. Information exchange - open relationship or not 5. Pricing scheme - pay less per piece if we buy more 6. Delivery schedule - once a month, once a year 7. Senior management involvement - affect the relationship that we can have, crucial for deeper levels of interaction 8. Supplier development programs - engaged with supplier in supplier development, collaboration 9. Number of suppliers - if we have a wide supply base we can't handle too many deep relationship, narrow supply base - strategic Internal list of suppliers: - black listed - under review - Vendor - Preferred supplier - Exclusive supplier - Partner

Balancing cost-risk-value

3 noder - value, cost, risk 6 riktade pilar. Value improvement: - Revenue (omsättning) growth through new products - Improving customer value propositions - Early supplier involvement in NPD - Faster new product introduction - Co-branding and advertising Purchasing cost reduction: - Supply base reduction - Product standardization - Global sourcing - Outsourcing and 'offshoring' (motsatsen är onshoring) - Electronic auctions - Contract management Risk management - Single vs. multiple sourcing - Performance-based contracting - Corporate social responsibility - Sustainable purchasing - Supplier auditing (revision) - Supplier quality assurance - Supplier financial position

Purchasing audit

Business environment: - Business system Purchasing needs -> R&D technology -> Operations -> Marketing and sales - Supply chain (part of Operations) Purchasing needs -> Purchasing function -> Materials planning -> Production -> Physical distribution - Purchasing function Purchasing needs -> Non-routine -> routine (purchasing performance) Supplier market. Through this audit, management may assess the extent to which goals and objectives of the purchasing department are balanced with its resources. This audit must be conducted in such a way that people do not feel threatened and in a way that builds trust and generates professionalism. - Preventative: can be compared with periodical check-ups - Corrective: focus on acute problems apparent in the functioning of the department.

Purchaser

Buyers of products

Source (Interaction life cycle model)

Bäckstrand et al. (2019). 1. Expose 2. Explore 3. Elect

Plan (PDCA/Interaction life cycle model)

Bäckstrand et al. (2019). 4. Elaborate 5. Engage 6. Establish

Do (PDCA/Interaction life cycle model)

Bäckstrand et al. (2019). 7. Execute

Pareto Analysis -> Kraljic

Categories can be dimensioned (Pareto) BUT Not just about spend (Kraljic) -> Importance of purchasing: Costs + total costs + value added + profit contribution. Kraljic adds supply market complexity into the importance of purchasing.

Supplier integration

Challenges and changes in purchasing's context. An integrated approach of materials management requires close cooperation between production planning, inventory control, quality inspection and purchasing.

Source

Level 1. Process definition: - Processes that procure goods and services to meet planned or actual demand (2008) - The processes associated with ordering, delivery, receipt and transfer of raw material items, subassemblies, product and/or services (2010).

Insourcing

Opposite of outsourcing.

Purchasing information system

Purchasing requirements, supplier selection (supplier file), quotation, order processing, order monitoring and expediting (supplier evaluation) incoming inspection and quality control (supplier evaluation, invoice processing). Tänk på hur du jobbade på Attends och allt som hände omkring hos lagret och logistik, allt pappersarbete.

Specifying

Specifies the purchase need and captures this in a document. Purchase order specification contains: Functional & technical specifications, Quality, logistics, maintenance, legal and environmental requirements and target budget specifications. Purchasing process, explaining the steps that go into the purchasing and procurement function.

Stages of new product development

Stages: - Idea generation - Concept study stage - Design stage - Product development - Preproduction planning - Pilot production - Start of regular production Purchasing's relationship to the new product development process. Y-axis: Cost/degrees of freedom (low/high) X-axis: Time (product development -> product design -> pre-production planning -> production.

CIP (Carriage and Insurance Paid To)

The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier. Insurance must be covered by the seller (in favor of the buyer) to the place of destination complying with at least Institute Cargo Clauses (C) or similar clauses (further transports by the buyer). Any mode of transportation.

Pricing methods

The following pricing methods can be distinguished: - Mark-up pricing, a fixed percentage is put on top of the cost price. - Target-return pricing, predetermined total profit per product group. The price depends on the fixed costs and the selling volume. - Pricing is based on buyer's perceived value. Base price on what the market can bear, not on the cost price. - Value pricing, high quality offerings for fairly low prices. - Going rate pricing, based on competitor prices. - Auction type pricing, tender where the lowest offer is awarded.

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.

CPT (Carriage Paid To)

The multimodal equivalent of CFR. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier. Insurance to be covered by the buyer (the seller to first carrier). Any mode of transportation.

Performance-based contracts (PBCs)

Type of contract. - Has become increasingly popular - Form of incomplete contract - Emphasis on outputs or outcomes of transaction Less prescriptive and allow more freedom and flexibility regarding specific details of the transaction relevant to the contract. Allow suppliers to a certain degree of autonomy which can in turn foster innovation. Underline the outcome of the transaction rather than prescribing how to deliver it or which resources to use. If performance is above the baseline it is possible to reward the supplier for the extra performance, but such arrangements are scarce.

Service level agreements (SLAs)

Type of contract. - Ways of contracting when buying services - Emphasis on specifying inputs and processes Basic contract: goal, date, period, parties Service definition. Specifications: - Coverage and levels of service (no. of working days, peak workloads, availability, etc.) - Actual sevice: inputs and outputs Manpower and other resources available. Reaction times. Precision. Availability, e.g. for problem solving.

Level of investment in the purchasing process (Novack & Simco, 1991)

Type of purchase in relation to the importance of purchase to the firm. (Novack & Simco, 1991) - New buy of high importance: high level of investment. - New buy of medium/low importance: medium level of investment. - Modified rebuy of medium/high importance: medium level of investment. - Modified rebuy of low importance: low level of investment. - Straight rebuy of medium/high importance: medium level of investment. - Straight rebuy of low importance: low level of investment.

Supplier development portfolio

X: Development risk (low/high). Y: Degree of development, responsibility held by the supplier (low/high) Development risk / Degree of development low / low: Routine development low / high: 'Arm's-length development' high / low: 'Critical development' high / high: 'Strategic development'

Changes over product life cycle

Zone of strategic fit is same in both graphs. Responsiveness / Implied uncertainty spectrum: - Product introduction / Responsive supply chain Change the supply chain setup and make it more efficient, change the suppliers - Product maturity / Efficient supply chain end-of-life - Uncertain demand / Responsive supply chain - Certain demand / Efficient supply chain If you have level volumes or fluctuations. Mainly true for standard parts. Customization - uncertain demand when placing order based on forecast, certain demand based on customer order. Efficient supply chain - forecast Responsive supply chain - customer order

Outsourcing

"The process of having suppliers provide goods and services that were previously provided internally. Outsourcing involves substitution - the replacement of internal capacity and production by that of the supplier." (APICS Dictionary, 2013) or "Activities that initially were performed in-house are transferred to an external party." (Van Weele, 2018) - Transaction cost theory/Transaction cost approach, trying to arrive at the lowest cost possible, comparing wether to perform internally or externally (outsource). Make or buy? Trends that have resulted in more outsourcing: - Supply chain vs. Supply chain: focus on core competences Not uncommon that cost of purchased items make up 50% of the price of the end product. (80-90%). Focus on core competences + outsourcing activities that other can do better and more cost efficient, the company can: - Achieve strategic goals (more focused on core competences) - Reduce cost (control costs and operating costs) - Free up internal resources and/or gain access to resources not available internally - Improve customer satisfaction - Gain access to world class supplier capabilities - Become more flexible

Methods to control supplier's pricing policy

- Closely monitoring the supply market - Monitoring individual supplier financial performance - Make analysis of supplier's cost price - Monitor developments in the supplier's performance on price, quality, delivery, etc.

Prices and terms of delivery

- Competitive bidding/negotiation is used to arrive at a fixed price, both the buyer and supplier are satisfied with. - Financial obligations defined unequivocally (entydigt) - Supplier should accept all risks - Fixed price best for cost control and budget management

Sustainability contracting

- Complex and new challenge Not clear how companies can best include dimensions of sustainability in contracts. Companies need to be aware of global regulations. It is still rare for the CSR or sustainability function to be part of the purchasing contract process. Focus on the process: Service level agreements (SLAs) ? Performance-based contracts (PBCs) ?

Purchasing savings

- Cost avoidance, differences in historical and current prices without a sustainable character - Costs reduction, different supplier or change in specification; sustainable character Cost reduction program: - Clear objectives considering purchasing savings - Eliminate influences on which purchasing has no influence - Difference between expected and actual savings - Independent verification of purchasing savings

Performance attributes

- Customer-Facing: reliability (RL), responsiveness (RS) & agility (Ag). - Internal-Facing: costs (CO) & assets (AM). Perfect order fulfillment, Order fulfillment cycle time, Upside supply chain flexibility, Upside supply chain adaptability, Downside supply chain adaptability, Supply chain management costs, Cost of goods sold, Cash-to-cash cycle time, Return on supply chain fixed assets, Return on working capital.

Types of INCO terms

- EXW: Ex Works (named place of delivery) Insurance to be covered by the buyer. The buyer bears the risk during the whole transport. - FCA: Free carrier (named place) Insurance to be covered by the buyer (the seller up to the named point) - FAS: Free alongside ship (only by sea) Insurance to be covered by the buyer (the seller up to alongside the ship) - FOB: Free on-board (only by sea) Insurance to be covered by the buyer (the seller up to delivered. onboard the ship) - CFR: Cost & freight (only by sea) Insurance to be covered by the buyer (the seller up to delivered onboard the ship) - CIF: Cost, insurance & freight (only by sea) Insurance must be covered by the seller (in favor of the buyer) to the port of destination complying with at least Institute Cargo Clauses (C) or similar clauses (further transports by the buyer) - CPT: Carriage paid to (named place of destination) Insurance to be covered by the buyer (the seller to first carrier). - CIP: Carriage and insurance paid to (named place of destination) Insurance must be covered by the seller (in favor of the buyer) to the place of destination complying with at least Institute Cargo Clauses (C) or similar clauses (further transports by the buyer) - DAP: Delivered at place (named place of destination) Insurance to be covered by the seller to the place of destination (further transports by the buyer) - DAT: Delivered at terminal (named terminal at port or place of destination) Insurance to be covered by the seller to the terminal (further transports by the buyer) - DDP: Delivery duty pay (named place of destination) Insurance to be covered by the seller. The seller bears the risk during the whole transport.

Negotiation and contracting

- Elaborate (cost break down) - Engage (supplier relations, what do you want to accomplish? What type of relationships? - Establish (contracts, contract management) (Examine: contract management and Evaluate) After a supplier is selected the contract is drawn up. It can refer to specific additional terms and conditions. The technical contents of a purchase agreement is project/product specific. There is only limited use of standard purchase contracts due to the fact that commercial and legal terms vary by contract. Differences are caused by: - Purchasing policy - Company culture - Market situations - Product characteristics etc.

Types of contracts

- Fixed price contracts (risk placed on supplier) Fixed price with escalation (basic price and will add 1% every year), fixed price redetermination (fixed price for 2 years and then will reevaluate), fixed price with incentives (price per piece, more pieces if you buy more to a lower cost) - Cost based contracts (risk placed on buyers) Cost plus incentives (supplier performance), cost sharing (product development, R&D), time and materials contract (pay for non-fixed part of the cost), cost plus fixed fee (cost + revenue the seller wants to make)

Advantages of outsourcing (Van Weele, 2018)

- Freeing up of cash: investments can be concentrated on core activities - Optimal use of knowledge, equipment and experience of third party. - Increased flexibility: fluctuations in the workload can more easily be absorbed. - Leads to easier and more focused primary processes in the organization. - Input through an independent party's point of view, which reduces the risks of introvert shortsightedness in the organization.

The cost of quality

- IBM defines quality as: Quality is the degree in which customer requirements are met. We speak of a quality product or quality service when both supplier and customers agree on requirements and these requirements are met. - Quality control: making sure that the requirements are met and being able to demonstrate this objectively. 1. Prevention costs: the costs of preventing quality errors 2. Assessment costs: the costs related to the timely recognition of quality errors 3. Correction costs: the cost that result from (rectifying) mistakes -Internal error costs - result from mistakes noticed in time -External error costs: are result of flaws identified by the customer

Types of outsourced activities

- IT - Distribution and transportation (inkl. warehousing) - Engineering - Marketing - Customer service

Performance measurement summarized

- In purchasing, needs to be considered as part of the purchasing management process - Assessing purchasing varies between companies depending on the view of management towards purchasing - Purchasing performance measurement is important as it leads to greater visibility and recognition by all other business functions - When measuring purchasing performance it's best to focus on purchasing effectiveness (extent previously agreed goals are met) and efficiency (resources needed to realize predetermined plans/goals) - Purchasing audits can be used to analyze the purchasing organization - Performance measurement is part of procurement governance. Without effective procurement governance it is impossible to control the purchasing processes.

Disadvantages of outsourcing (Van Weele, 2018)

- Increased dependence on suppliers - Continuous follow-up and monitoring of the supplier relationship is necessary - Risks of communication and organizational problems during the transfer of activities to a third party - Risk of leakage of confidential information - Depending on balance of power between parties, inability to execute contractual performance incentives and penalties - Risk of losing essential strategic knowledge

Reasons explaining effects of the learning curve

- Labour efficiency - Standardization, specialization, and methods improvement - Technology-driven - Better use of equipment - Changes in the resource mix - Product redesign - Network-building and use-cost reductions - Shared experience effects

Contracts

- Law and ethics (who and how?) Oral contracts, power of attorney - Short or long term - Blanket order Call-offs - Delivery terms - Payment terms (how many delivery days) - Penalty clauses and warranty conditions The essentials: - Intention - Agreement (finite terms, delivery and payment decided first) - Consideration (both interests are regarded) - Form - Definite terms - Legality Use standard contract (general form) whenever possible: - Add as little own text as possible - There are contracts for each trade

Ordering

- Once a contract is arranged the ordering can take place - In some situations, such as a new buy situation. the contract itself may constitute the order. - In other situations, the contract provides the framework for frequent routine purchases. - Ordering increasingly takes place through electronic systems - The information in an order should leave no room for ambiguity (tvetydighet) The information in the order should include: Order number; brief description of the product/service; unit price; number of units required/volume; expected delivery time; address Purchasing process, explaining the steps that go into the purchasing and procurement function.

Products to purchase

- Raw material - Components - Assemblies - Trade items - Commodities - Consumables (supplementary materials)

CSR tools, techniques and activities

- Supplier sustainability codes Support the general codes of conduct and business values of the corporation, most large companies have specific codes. - Supplier sustainability assessments Supplier self assessments or sustainability audits performed by the buyer of outside experts. - Supplier sustainability follow-up Ensure corrective actions are put in place by supplier to prevent the trend among suppliers in low-cost countries signing the agreement without any changes - External sustainability standards - Based on external standards and norms (UNGCP is a popular choice).

Towards a sustainable environment

- Sustainability has different aspects - Most of the time it is referred to as corporate social responsibility (CSR) - Sustainable purchasing is about buying for a better future world - The traditional shareholder focus has made way for a stakeholder focus - Sustainable profitability can be achieved if the company is able to balance the interests of customers, employees, society, the environment and its shareholders.

Supplier relationship models

- The Cox-model (stepladder) Transaction cost theory, resource based theory - The Bensaou-model Product, market and supplier characteristics

Define lead time

- True lead time: Origin of need -> Use or consumption - User's view of lead time: Requisition -> In user's possession - Purchasing lead time: Order sent -> Receipt - Seller's lead time: Order received -> Manufacture completed - Maker's lead time: Manufacture commenced -> manufacture completed

Performance Measurement

- What you measure is what you get - What gets measured gets done - What gets measured is only what gets done - What gets measured gets managed - What gets measured gets improved A good measure: - quantitative - easy to understand - encourages appropriate behavior - Identified and mutually understood - Encompasses both outputs and inputs - Measures only what is important - Multidimensional

Competitive priorities

Hayes and wheelwright: - Quality - Lead-time (delivery) - Cost - Flexibility New: Innovativeness (orderwinners & orderqualifiers)

Supplier development

Actions for development of suppliers: - Supplier suggestions program: actively ask for suggestions for improvement of suppliers - Supplier development Ask questions like: What is going well in the cooperation? What could or must get better? What is needed for improvement? How to measure the improvements? - Supplier satisfactory survey Collaborative relationship between business partners requires that expectations between all stakeholders involved are made explicit. Summary: - Pricing and cost structures of suppliers are interrelated, but the effect they have on one another is not always clear. - The prices of goods and services can be based on market factors or on cost factors (or combination of both). - Suppliers can be differentiated into strategic suppliers, preferred suppliers and competitive suppliers. - When doing business with a supplier, it is important that the buyer is aware of his financial performance.

Sourcing

Activities involving searching markets for sources of goods and services. At the opposite end of the supply chain from marketing. Van Weele, 2018. "Sourcing is finding, selecting, contracting and managing the best possible source of supply on a worldwide basis". "The activity relates to developing the most appropriate supplier strategy for a certain commodity or product category". Strategic sourcing is the attempt to make sure everything is being sourced as efficiently as possible. Van Weele, 2018. "Strategic sourcing identifies for a certain category from how many suppliers to buy, what type of relationship to pursue, contract to negotiate for, and whether to source locally, regionally or globally."

Value chain management

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.

Supplier relation purchase volume fluctuation over time

Anticipated volume. But the volume fluctuates over time - Low volume: safe in level demand, no fluctuation in purchase volume, integration relationship - we have promised and will always purchase a certain amount form this supplier, very efficient manufacturing, even demand for supplier, good price and setup on supply chain - Increase in volume: volatile, collaborative relationship, we will only purchase from the supplier when we have a volume fluctuation, pay higher price for flexibility - Increase in volume: not possible to forecast, need to find purchase a lot form different suppliers, we purchase only what we need, transaction relation

Supplier relationship

Appropriate level of supplier interaction: - Transaction: one-off, short-term - Collaboration: long-term, partnership - Integration: joint venture, strategic alliance, partnership Linkages between your company and the supplier. Follow the peripheral - 20% of the suppliers will deliver 80% of the value to our company. We need a closer relationship with the 20% of suppliers. Relationship: shallow / deep Number of suppliers: single / multiple 4 quadrants: Danger, cash burn, OK, OK Depth of collaboration: limited / exclusive Number of relationships: many / few 4 quadrants. Limited + many = transactional collaboration -> cooperative collaboration Exclusive + few = coordinated collaboration -> synchronized collaboration Upper right corner: not viable Lower left corner: low return About half of your supply base there should be a combatitive relationship, very competitive, arms-length relationship. Cooperate - select a few that you're in a partnership with and one partner which is your super collaborative

Trust, integrity and ethics

As companies become more dependent on each other, trust becomes important. - In a research project by the Centre of Advanced Purchasing Studies (CAPS) it was found that real partnerships among the over 300 companies that were investigated were less than 1% of the total number of supplier relationships. Purchasing is sensitive through contacts with suppliers. Code of conduct: - Increasing importance because of e-auctions - NEVI's code of conduct.

Check (PDCA/Interaction life cycle model)

Bäckstrand et al. (2019). 8. Examine 9. Expense 10. Evaluate

Act (PDCA/Interaction life cycle model)

Bäckstrand et al. (2019). If Exit, then Exchange (back to Source stage, Explore). If Echo, then Execute (back to Do stage) and Evolve (back to Plan stage)

Corporate social responsibility (CSR)

CSR. Challenges and changes in purchasing's context. Apart from environmental issues there is a growing pressure from the public that products should be clean, and originate from countries with free trade. Sustainability: Finding solutions without harming the needs of future generations. Focus from shareholder to stakeholders: - People: labour circumstances - Planet: Usage of natural resources - Profit: Financial development Weigh decisions based on these three criteria. A high priority item on the management agenda. - Raw material scarcity An environmental or social scandal may quickly ruin a company reputation. Large manufacturers require that the first tier suppliers will transfer their environmental policies to their second tier suppliers. - This encourages supply chain integration which can only be built upon constructive, long-term supplier relationships.

Strategic purchasing

Centralized. Led from the organizations headquarters. Long-term, performance and value oriented. - Develop guidelines for operational purchasing - Develop supplier audit programs - Strategic decision making (make or buy, single sourcing or multi-sourcing, backward integration (buy their suppliers)) - Establish long-term contracts Handfield et al. - Manage relationship to strategic suppliers - Develop e-systems - Implement companywide best practice - Negotiate companywide contracts - Manage critical material

Global sourcing

Challenges and changes in purchasing's context. Components are increasingly being sourced from foreign, low cost countries, a reason why large manufacturing organizations have set up International Purchasing Offices (IPOs) in different regions of the world.

Leveraged procurement and supply strategies

Challenges and changes in purchasing's context. In companies with several manufacturing plants, important purchasing advantages can be realized by combining common purchasing requirements.

Resource scarcity

Challenges and changes in purchasing's context. This poses new challenges towards purchasing professionals who need to develop a much more forward outlook on how to secure the company's future requirements for critical materials and products.

Balanced Scorecard (Kaplan & Norton, 1992)

Check phase of PDCA. Interaction life cycle. Measures both cost and softer attributes. Kaplan & Norton (1992) based on the use of four topic areas: - Financial: how we look at our shareholders? - Customer: how do customers see us? - Internal business processes: what must we excel at? - Learning & growth: can we continue to improve and create value? Vision & Strategy. Critique: - The topic areas were selected with small to medium sized commercial organizations in the USA in mind. - They are not always helpful to other kinds of organizations, and much of what has been written on Balanced Scorecard since has, in one way or another, focused on the identification of alternative headings more suited to a broader range of organizations. - 1st Generation design: The original 'measure in boxes' type design (Kaplan & Norton). - 2nd Generation design: Designs that include a 'strategy map' or 'strategic linkage model' (e.g. the Performance Prism, the Performance Driver model). - 3rd Generation design: Designs that augment the strategy map/strategic linkage model with a separate document describing the long-term outcomes sought from the strategy (the "Destination Statement" idea)

Negotiation Dance

Circular model (Gunnar Lindh, 2019): Initiation -> Preparation -> Opening -> Argumentation -> Assessment -> Bidding -> Closure -> Commitment -> Execution -> Epilogue

Dutch Windmill

Combination of customer portfolio analysis (seller perspective) and purchasing portfolio analysis (buyer perspective. Extended version of Kraljics Matrix - including not only buyers perspective, but also the supplier. Instrument to structure purchasing strategy. Financial impact / Attractiveness account (X-axis). Competitive position / Supply risk (Y-axis). Relationship? Strategy? Buyer & seller. Leverage (Financial impact, competitive position): - Exploitable: Adversarial relationship, check power balance, consider other sources. - Core: Sound position - Nuisance: Mismatch, accept short-term, change supplier - Development: Supplier development opportunities, encourage participation Strategic (Attractiveness account, competitive position): - Exploitable: Great caution, raise mutual dependency, seek competition - Core: Good match, potential long-term relationship - Nuisance: Very high risk, seek competition, raise attraction - Development: Potential match, work closely together to develop business. Routine (Financial impact, supply risk): - Exploitable: Moderate risk, monitor price trend, seek alternatives. - Core: Strong position, maintain relationship, offer other opportunities. - Nuisance: Possible mismatch, passive relationship, seek alternative supplier. - Development: Good supplier interest, offer incentives, raise mutual dependency. Bottleneck (Attractiveness account, supply risk): - Exploitable: Moderate cost risk, closely monitor price and service - Core: Good match, intensify relationship, maintain long-term relationship. - Nuisance: High service risk, change supplier, offer incentives. - Development: Potential risk, raise mutual dependency, offer inducements. At least 16 different situations that can happen between a buyer & seller. Partnership? -> strategic segment + core segment

E-procurement systems

Concentrate large volumes of small purchases with a few suppliers, using e- catalogues available to the organization's users. Result in a significant reduction of the traditional order-to-pay cycle. Digital order-to-pay cycle: 1. Search catalogue 2. Fill in electronic shopping list 3. Get budgetary approval 4. Get another approval 6. Order delivery 7. Delivery to internal customer 8. Electronic invoice matching and payment Traditional order-to-pay cycle: 1. Search catalogue 2. Fill in requisition form 3. Get budgetary approval 4. Get another approval 5. Send requisition form to purchasing department 6. Check requisition and approvals 7. Prepare purchase order 8. Send order to supplier 9. Order confirmation 10. Order delivery 11. Delivery to internal customer 12. Receipt of invoice 13. Invoice matching to payment

Buyer's role

Continues after the new product has been taken into production or the installation has been put into operation. - Compare invoice with the original order - Solve delivery issues - Supplier assessment: keep track of supplier's quality, delivery record, competitiveness and innovativeness

Improve

DMAIC Make it happen. - Identify "To-Be" process and test possible solutions Will you fulfill the goal with selected solution? Identify possible solutions to address key contributors, Evaluate cost/benefit of solution, Perform solution risk analysis, Test solution - Plan and implement solution How do you implement this with people commitment? Mobilize broad commitment, Plan implementation, Allocate competence and resources, Create & follow-up process & IT demands, Execute implementation plan, Embed changes in management system - Monitor progress How do you track progress? Monitor improvement progress & people commitment "Proud people perform"

Analyze

DMAIC. - Identify root-causes. What are the key root-causes or contributors? Analyze gap to wanted position, Assess change capabilities - Verify influence on goal How do they influence the goal fulfillment? Verify root-cause influence on goal "Study the past, shape the future"

Control

DMAIC. Make it stick. - Validate results Has the goal been fulfilled? Validate improvement effect, Evaluate lesson learned - Secure sustainability Will the solution stick? Anchor & handshake solution ownership, Ensure competence capability for new way of working/solution, Ensure mechanism for continuous monitoring and improvements - Transfer good practice Can someone else benefit from your experiences? Communicate results, transfer good practices, celebrate achievements. "The secret of success is constancy to purpose"

Measure

DMAIC. Understand reality. - Understand "AS-IS" process What is the current way of working? Build "AS-IS" process map, Understand barriers to change, Setup potential cause & effect relationships, Benchmark - Measure "AS-IS" process How can we measure this? Plan and perform data collection, Validate measurements "What gets measured gets done"

Define

DMAIC. Understand the need of change. - Create shared need Why do we need to change? Identify sponsor & change leader, State problem/opportunity, Calculate business case, Evaluate change readiness. - Define wanted position What's the goal? Define Goal statement, Perform risk analysis, Benchmark similar improvement initiatives. - Mobilize commitment Who needs to be involved? Perform stakeholder analysis, Define communication/involvement plan, Involve key stake holders to make change happen, Complete improvement charter. "A problem well stated is a problem half solved" SMART goals - specific, measurable, achievable, realistic, time-bounded

Operative purchasing

De-centralized. Managed by the different sites. Short-term, deal and margin oriented. - Send purchase orders - Expediting inbound deliveries - Day-to-day problem solving (fire fighting) - Monitor supplier performance Handfield et al. - Manage transactions with suppliers - Use e-systems to obtain standard material - Source items that are unique to the site - Signal material availability - Provide supplier performance feedback

Purchasing performance

Defined as the extent to which the purchasing function is able to realize its predetermined goals at the sacrifice of a minimum of the company's resources (i.e. costs). The result of two elements: - Effectiveness: results actual / results planned (e.g. material costs, quality, logistics, innovation) - Efficiency: cost actual / cost planned (e.g. administrative lead times, orders per purchaser) Factors of influence: - Requirements: that the corporate system lays down for the purchasing function - Changes in the supply chain: of the company - Opportunities provided bu the supplier market: to fulfill the materials requirements.

Kraljic's Purchasing Matrix (1983)

Definite number of resources. Certain number of purchasers that can spend their time. - Pareto's law X-axis: Supplier market complexity (low / high) Y-axis: Business impact (low risk / high risk) Low complexity / low risk: Non-critical items Low complexity / high risk: Leverage items High complexity / low risk: Bottleneck items High complexity/ high risk: Strategic items How Kraljic described it: The original matrix takes the buyers perspective. X-axis: Supply risk (low / high) Y-axis: Profit impact (low risk / high risk) 1. Low Supply risk / low Profit impact: Non-critical items (Purchasing management) 2. Low Supply risk / high Profit impact: Leverage items (Materials management) 3. High Supply risk / low Profit impact: Bottleneck items (Sourcing management) 4. High Supply risk/ high Profit impact: Strategic items (Supply management) Each of these four categories requires a distinctive purchasing approach. Please observe that shifts in supply or demand patterns can alter a material's strategic category. - Phase 1 Classification - Phase 2 Market analysis (strategic items) - Phase 3 Strategic positioning (exploit, balance, diversify) - Phase 4 Action plans

Type of purchase

Dependent on the level of investment needed in the procurement process and the importance of purchase to the firm. -> Type of purchase - New buy, modified rebuy, straight rebuy Ex. If the importance of purchase to the firm is high you invest highly in a 'new buy'. If the importance of purchase to the firm is low you will not invest a lot and you purchase a 'straight rebuy'..

Product structure

Different depth (x-axis) and breadth (y-axis) as a structure. - Deep product structure: ex. Processed steel into a needle or a bolt - A wide product structure (breadth): ex. assembled product - bolts, rivets, handles etc. - Complex product structure - ex. radio with many constituent parts

Purchasing process

Different steps according to different authors - Lyson & Farrington - Jonsson -> Materials procurement process - Van Weele (most important) -> Purchasing process model - Jenny Bäckstrand

Price/cost

Dimension of purchasing performance. Continuous monitoring and evaluation of prices and price increases as they are announced by suppliers (e.g. materials budgets, price inflation reports) Continuous monitoring and evaluation of activities initiated to reduce costs in a structured way (e.g. searching new suppliers, value analysis, substitute materials)

Organizational dimension

Dimension of purchasing performance. Includes the major resources used to achieve goals and objectives off the purchasing function. - Purchasing staff: Related to background, level, training and development, and competencies of purchasing personnel and its costs. - Purchasing management: The way the purchasing department is managed. Related to quality and availability of purchasing strategies, action plans and reporting procedures. Related to management style and communications structure. - Purchasing procedures and guidelines: availability of procedures and working instructions for purchasing staff and suppliers to make sure all work is done in the most efficient manner. - Purchasing information systems: Efforts made to improve these systems to support purchasing staff and other employees in daily activities and to generate management information on activities and performance.

Supplier relationship dimension

Dimension of purchasing performance. Operational measures: monitor the operational relationship with the supplier (e.g. supplier price vs targeted price, supplier quality, supplier delivery reliability, supplier invoice processing. Strategic measures: monitor the company's position vs its suppliers. Internal customer satisfaction in working with specific suppliers. Supplier satisfaction in working with the company (on-time payment, quick responses to info requests, ease of getting new business, customer integrity)

Product/quality

Dimension of purchasing performance. Refers to purchasing's responsibility to secure that products and services are delivered by suppliers in conformance with specifications and requirements. New product development: number of man hours spend by purchasing on innovation projects, number of technical change orders and initial sampling reject rate. TQM: Reject rates on incoming goods, number of approved/certified suppliers

Logistics

Dimension of purchasing performance. Refers to purchasing's role to contribute to an efficient incoming flow of purchased materials and services. Control of the timely and accurate handling of materials requisitions. Control of timely delivery by suppliers. Control of quantities delivered. Supplier evaluation and vendor rating are techniques used to monitor and improve supplier performance in terms of quality and delivery reliability.

Customer value: Quality

Dimensions: - Performance - ex. a computer, race car - Features (functionality) - cellphones - Reliability - items in healthcare, machines with lifesaving abilities - Conformance - to requirements, a key and an extra key, identical - medicine, pills - Durability - building industry, last a long time - Serviceability (maintainability) - find spare parts so we don't need to buy a new one - Aesthetics - loud speakers - Perceived quality - one customer, Mercedes doors, closing the door should sound like shutting a vault, security Additional dim.: - Availability (can't purchase), price (high price can signal better quality), customer specifications (conformance, according to specifications)

Customer value: Cost

Dimensions: - Productivity - Efficiency - Effectiveness

Customer value: Delivery (lead time)

Dimensions: - Speed - Precision - Dependability Additional info: - Production lead time: Product initiated -> customer order received (CODP, customer order decoupling point) -> customer order delivered - Delivery lead time: Customer order received -> customer order delivered - Planning based on forecast: Production initiated -> customer order received, CODP - Planning based on customer order: CODP -> customer order delivered

Customer value: Flexibility

Dimensions: - Volume - Product-mix - Changeover - Modification - Rerouting - Material - Sequencing

Purchase performance indicators

Each of the five dimensions below can be measured and evaluated at different levels of aggregation: -Line item level -Individual supplier level -Level of the individual buyer -Department level -Overall company level Purchased materials prices and costs: - Purchased materials cost control Continuous. Materials budgets, variance reports, price inflation, reports, purchasing turnover. - Purchased materials cost reduction Continuous.. Purchasing cost saving and avoidances, impact on return and investment Product/quality of purchased materials: - Early purchasing involvement in design and development Incidental. Time spent by purchasing on design and engineering projects, initial sampling reject rate (%). - Incoming inspection quality control and assurance Continuous. Reject rate (%), line reject rate (%), quality costs per supplier. Purchasing logistics and supply: - Monitoring requisitioning Continuous. Purchasing administrative lead-times, order backlog (per buyer) Supplier relationship: - Delivery reliability (quality and quantitive) Continuous. Rush orders, delivery reliability index per supplier, material shortages, inventory turnover ration, JIT deliveries. - Supplier operational performance Continuous. Supplier quality cost, supplier reject rate, OTIF (On Time in Full) score. - Supplier relationship Incidental. Supplier satisfaction score. Purchasing staff and organization: - Training and motivation of purchasing staff Incidental. Time and workload analysis of purchasing department, purchasing budget, purchasing and supply audit. - Purchasing management quality Incidental. - Purchasing systems and procedures Incidental. - Information systems Incidental.

The role of suppliers

Early supplier involvement. - Suppliers are an increasingly important source of innovation Fuel injection by Bosch, sun protecting and security glass by Saint Gobain - Academic results are controversial - Some problems in early supplier involvement Conditions for cooperations not always present; conflicts considering intellectual property - Overestimation of the developing skills of supplier - How to reward the supplier for the efforts

Extended purchasing model (Weele)

Enabling activities of the model: Stakeholder management & riskmanagement. Three key processes: - Source Spend & demand analysis, supply market analysis, sourcing strategy development, tendering & supplier selection, contracting & implementation - Purchase Search product/service, requisition & approval, purchase order submission, order fulfillment & logistics - Pay Invoicing & payment

ETO

Engineer and make to order. There is no stock at all. The purchase and order of materials takes place on the basis of the specific customer order and the entire project is carried out for this one specific client. As a result, this type of production structure results in long lead-times (e.g. oil platforms, luxury yachts)

Influence of internal and external factors on price

Environmental factors. External (economic, socio-political, technological.) -> Internal (logistics, technical, organizational) -> Blackbox (supplier: try to raise the price. Buyer: try to reduce the price) -> Influences on the price

Interaction life-cycle (Bäckstrand, 2010)

Expose, Explore, Elect -> Elaborate (match supply with demand), Engage (negotiate) -> Establish -> Execute the purchase -> Examine, Expense, Evaluate -> Echo or Exit -> If Echo, then Evolve PDCA - continuous improvements and quality work Operational purchasing is connected to the Do-stage and examine in the Check-stage Strategic purchasing is connected to the Plan-stage

Purchasing audit management tool

Goal orientation: - What are the purchasing department's goals? - What are the purchasing department's responsibilities? - To what extent are the purchasing department's tasks stated in objective and verifiable terms? Client orientation: - Does the purchasing department communicate efficiently with its internal customers? - Is there adequate reaction to the requirements and wants of the internal customers? - Is the purchasing department sufficiently aware of new internal developments and changes in the supplier market? Risk: - What are the major risks with regard to price behavior of high-value items and with regard to availability of critical material? - Is purchasing sufficiently aware of these risks and what measures have been taken in order to cope with them? - In general, is continuity of supply and purchasing operations sufficiently guaranteed? Resources: Results and resources: - To what extent does purchasing meet its tasks and objectives? - Is the purchasing department adequately equipped in terms of people and systems to be able to meet expectations? - What measures are taken in order to improve on results on the one hand and systems and human resources on the other hand? Flexibility: - Does purchasing adequately react to changing materials requirements and internal customer needs? - Is purchasing sufficiently interested in and pursuing new technology? - What important changes have taken place in the service and organization of the purchasing department? Management: - Is teamwork within purchasing department sufficiently developed? - Is the purchasing department a well-respected partner for discussion of internal customer problems? - What measures have been taken in order to keep the quality of Human Resources up to date?

Product

Goods & services 1. Core product: Core benefit of service 2. Actual product: Packaging, features, quality, styling, brand name 3. Augmented product: Warranty, after sales service, installation, delivery and credit

Purchasing portfolio management

Helps companies to decide which strategy to pursue in what supplier relationship and supplier segment. Helps companies to decide whether to go for a collaborative relationship or competitive relationship. Shorter or longer contracts. How to keep track and how to organize this multitude of activities with a condensed staff of people. Priorities. Helps you change your priorities. Not all suppliers are of equal importance. Make sure that you pay sufficient attention to the important ones and that you don't spend to much time on those suppliers that are of limited value to your company. - ABC-analysis (Pareto's law) A-items: 20% of items - 80% of spend B-items: 30% of items - 15% of spend C-items: 50% of items - 5% of spend Disadvantage: you only look at spend as item and there are many more considerations when designing a purchasing strategy.

Sand-cone theory

How the competitive priorities relate to each other. Pyramid: Top - Cost Below (1) - Speed Below (2) - Dependability Bottom - Quality You have to start at the bottom of the sand-cone in order to compete with cost in order to qualify as a supplier.

Kraljic's Portfolio Analysis

If you want to develop a strategy towards suppliers you need to take into account: financial impact (size of the spend in relation to spend), supply risk (dependence of the company of a certain supplier and it's ability to change from that supplier) A practical tool to segment categories within your spend portfolio. Structure purchasing operations and supplier segments. Five key ideas: 1. Strategy, not just 'deals' 2. Not just leverage - different strategies are needed for different categories 3. Risk and opportunity - spend, cost, value 4. Consider supply markets - not just supplier, categories and spend values 5. From storeroom to boardroom - purchasing inputs strategically, what is our total value chain and what is our risk position. Importance of purchasing (Y-axis): Low / high Supply market complexity (X-axis): Low / high - Market structure - Rate of market change - Barriers to entry - Market complexity Non-critical, leverage, bottleneck and strategic items. Non-critical: Low impact/low risk (routine products), easy to source, supply exceeds demand, low business impact. Seller perspective & buyer perspective. Bottleneck: Low impact, high risk, hard to source, complex market, big business impact (non-availability, poor quality, market shortages, market distortions). Seller perspective & buyer perspective. Leverage (not only concern): High impact/low risk, easy to source, supply exceeds demand, competitive market. Seller perspective & buyer perspective. Strategic: High impact/high risk, hard to source, complex market, big business impact. Seller perspective & buyer perspective. Strategy: change in thinking, behavior and change in capability

Closed innovation

Implies that companies try to develop new products and processes b ased on the idea that the company itself has the best possible knowledge and resources for innovation.

DMAIC

Improvement Management Process, "Drive change with excellence". - Define - understand need of change Why do we need to change? What is the goal? Who needs to be involved? - Measure - understand reality What's the current way of working? How do we measure this? - Analyze - identify root-causes What are the root causes? How do they influence the goal fulfillment? - Improve - make it happen Will you fulfill the goal with selected solution? How do you implement this with people commitment? How do you track progress? - Control - make it stick Has the goal been fulfilled? How to secure that the implementation will stick?

Field expediting

In case of delivery of complex investment goods, it may be necessary to visit the supplier several times during production and assembly.

Financial indicator

Indicators for assessing a supplier's financial position: Profitability - earnings before tax and depreciation/net capital employed - operational profit/net capital employed - operational profit/production value - earnings before tac and depreciation/equity Equity/debt relationship - interest coverage rate - cash flow/investments - long-term debt/fixed assets - equity/total assets Cash management - turnover ratio of net capital employed - average payment terms debitors - average payment terms creditors - inventory turnover ratio - inventory/sales turnover

Innovation funnel

Innovation managed as a process marked with stage gates. 1. Idea generation 2. Idea selection 3. Concept study 4. Product design 5. Prototyping and testing - There are interfaces between purchasing, new product innovation and quality assurance. - Competition forces companies to speed up their innovation processes. The challenge, however, is how to mobilize a supplier's innovation potential. - A question to consider is what supplier to involve at what stage of the new product development process. - Buyers are important scouts when it comes to spotting new technological developments that occur in the supplier market. - The product design is the basis for product quality

Changing role of purchasing

Internal organizational factors: - The level and percentage of purchased goods and services ** - Structural changes - Performance measurements External organizational factors: - Fewer but larger suppliers - Increasing environmental awareness - Competitor activity - Customer demands - Advancing technologies - Finite resources - Increasing proportion of revenue spend externally ** - Innovation - E-commerce - Globalization

Evaluating

Involves evaluation of the performance of the goods or services that have been delivered, and following up on problems. Increasingly, companies need to conduct audits (revision) that specifically focus on sustainability. - Supplier audits to evaluate and verify social, safety and environmental compliance. Not to terminate suppliers that do not meet CSR requirements, instead opting to help non-complying suppliers to improve. Purchasing process, explaining the steps that go into the purchasing and procurement function.

MMS

Make and send to stock. Products are manufactured and distributed to various distribution points which are dispersed and located close to the customer. Manufacturing is based upon forecasts and on the expected stock turnover at the points of distribution.

The learning curve

It was discovered that the cost price per unit decreased at a fixed percentage as experience (the cumulative production volume of a type of aircraft) increased. The learning effects result from: - Reduced supervision as experience with production growth - Increased profits, from improved efficiency through streamlining the process - Reduced defects and line rejects rates during production - Increased batch sizes (less time spent on resetting machines) - Improved production equipment (after a while) - Improved process control - Reduced engineering changes

How to measure performance

KPI - key performance indicators

Purchasing portfolio analysis

Kralic's portfolio analysis. Buyers perspective. Supply risk (X-axis), Impact on financial results (Y-axis). Non-critical: Low impact/low risk (routine products), easy to source, supply exceeds demand, low business impact. Buyer perspective: E-Procurement solutions and e-catalogues. -> Reduce number of suppliers, one distributer and standardize product assortment, digitally ordered, reduce transaction costs. Reduce number of suppliers. Bottleneck: Low impact, high risk, hard to source, complex market, big business impact (non-availability, poor quality, market shortages, market distortions). Buyer perspective: Secure supply and search for alternatives. -> to reduce your dependency on a specific supplier. Supplier-dominated segment Leverage (not only concern): High impact/low risk, easy to source, supply exceeds demand, competitive market. Buyer perspective: Competitive bidding -> Play the market rather fiercely for these products because these are commodities. Go for the lowest price. Buyer-dominated segment. Strategic: High impact/high risk, hard to source, complex market, big business impact. Buyer perspective: Performance based-collaboration -> Kind of partnership but performance based, trying to work out improvements with suppliers. Balance of power may differ among buyer-supplier.

Customer portfolio analysis

Kralic's portfolio analysis. Sellers perspective. Attractiveness account (X-axis), Competitive position relative to other suppliers (Y-axis). Non-critical: Low impact/low risk (routine products), easy to source, supply exceeds demand, low business impact. Seller perspective: Nuisance segment. Give little attention to customer. If not profitable: say goodbye to customer. System contracting and e-commerce solutions. Simplify and reduce administrative costs. Bottleneck: Low impact, high risk, hard to source, complex market, big business impact (non-availability, poor quality, market shortages, market distortions). Seller perspective: Development segment. Pamper customer. Provide new ideas and new products. Secure supply and search for alternatives. Secure continuity of supply. Leverage (not only concern): High impact/low risk, easy to source, supply exceeds demand, competitive market. Seller perspective: Exploitation segment. Change premium price. Beware of losing customer. Competitive bidding. Strategic: High impact/high risk, hard to source, complex market, big business impact. Seller perspective: Core segment. Provide superior service and quality. Keep customer at all costs. Performance-based partnership.

Strategic items (Kraljic's Purchasing Matrix, 1983)

Kraljic's Purchasing Matrix, 1983. High importance of purchasing (Y), High complexity of supply market (X) Supply management. Procurement focus: Strategic items Key performance: Long-term availability Typical sources: Est. global suppliers Time horizon (contracts): Up to 10 years Items purchased: Scarce or high-value Supply: Natural scarcity Decision authority: Centralized Main tasks: Accurate demand forecasting, detailed market research, development of long-term supply relationships, make-or-buy decisions, contract staggering, risk analysis, contingency planning, logistics, inventory and vendor control. Required information: Highly detailed market data, long-term supply and demand trend information, good competitive intelligence, industry cost curves. Decision level: Top level (e.g. Vice President, purchasing)

Leverage items (Kraljic's Purchasing Matrix, 1983)

Kraljic's Purchasing Matrix, 1983. High importance of purchasing (Y), Low complexity of supply market (X) Materials management. Procurement focus: Leverage items Key performance: Cost/price and flow Typical sources: Multiplie suppliers Time horizon (contracts): 12-24 months Items purchased: Commodities and specified materials Supply: Abundant Decision authority: Mainly decentralized Main tasks: Exploitation of full purchasing power, vendor selection, product substitution, target pricing strategies/negotiations, contract/spot purchasing mix, order volume optimization Required information: Good marked data, short to medium-term demand planning, accurate vendor data, price/transport rate forecasts. Decision level: Medium level (e.g. chief buyer)

Bottleneck items (Kraljic's Purchasing Matrix, 1983)

Kraljic's Purchasing Matrix, 1983. Low importance of purchasing (Y), High complexity of supply market (X) Sourcing management. Procurement focus: Bottleneck items Key performance: Cost, reliable sourcing Typical sources: Global new suppliers with new technology Time horizon (contracts): Variable Items purchased: Specified materials Supply: Production based scarcity Decision authority: Decentralized but coordinated Main tasks: Volume insurance (at cost premium if necessary), control of vendors, security of inventories, backup plans. Required information: Very good market data, medium-term supply/demand forecasts, inventory costs, maintenance plans. Decision level: Higher level (e.g. department heads)

MTO

Make to order. Only raw materials and components are kept in stock. Every customer order is a specific project (e.g. manufacturing of production equipment)

Non-critical items (Kraljic's Purchasing Matrix, 1983)

Kraljic's Purchasing Matrix, 1983. Low importance of purchasing (Y), Low complexity of supply market (X) Purchasing management. Procurement focus: Non-critical Key performance: Functional efficiency Typical sources: Est. local suppliers Time horizon (contracts): 12 months or less Items purchased: Commodities Supply: Abundant Decision authority: Decentralized Main tasks: Product standardization, order volume, monitoring/optimization, efficient processing, inventory optimization. Required information: Good market overview, short-term demand forecast, economic order quantity inventory levels Decision level: Low level (e.g. buyers)

Contract management

Later on in the interaction life-cycle. But also part of the planning phase. - Post-contract performance measurement Follow-ups - Definition: The activities of a buyer during a contract period to ensure that all parties to the contract fulfill their contractual obligations. - Managing the relationships in the most efficient way to ensure that the contract meet the optimum combination of cost, time and quality. Typical measures: Finance shareholders, people, processes, delivery to customers/suppliers How well have you satisfied this? A performance measurement system plays an important role in managing a business as it provides the information necessary for decision making and action. Examine -> Evaluation (check, interaction life-cycle) Basis for decision making in the act-phase (interaction life-cycle)

Hierarchical process model

Level 1 (top of pyramid). Within scope of SCOR. Defines scope and content of a supply chain. The basis-of-competition performance targets for a supply chain are set. Process types (scopes): Plan, source, make, deliver, return and enable. Level 2 Within scope of SCOR. Defines the operations strategy. The process capabilities for a supply chain are set (Make-to-stock, make-to-order). Process categories (configuration): MTS, MTO, ETO, defective products, MRO products, excess products. Level 3 Within scope of SCOR. Defines the configuration of the individual processes. The ability to execute is set. The focus in on the right: - Processes; Inputs and outputs; process performance; practices; technology capabilities; skills of staff Process elements (steps): Schedule deliveries, receive product, verify product, transfer product, authorize payment. Level 4 (base of pyramid) Not in scope. Describes the activities performed within the supply chain. Companies implement industry-, company-, and/or location-specific processes and practices to achieve required performance. Activities (implementation): Industry-, company-, location- and/or technology specific steps.

Outsourcing matrix

Level of competitiveness relative to suppliers (Y-axis), Strategic importance of competence, non-core & core activities (X-axis). High competitiveness / low strategic importance: - Maintain/invest (opportunistically) Competencies are not strategic but provide important advantages; keep in-house as long as these advantages are (integrally) real. Low competitiveness / low strategic importance: - Outsource Competencies have no competitive advantage. High competitiveness / high strategic importance: - In-house/invest Competencies are strategic and world-class; focus on investments in technology and people; maximize scale and stay on leading edge. Low competitiveness / high strategic importance: - Collaborate/maintain control Competencies are strategic but insufficient to compete effectively; explore alternatives such as partnership, alliance, joint-venture, licensing, etc.

Supply management

Purchasing, expediting, inventory management, delivery and receipt of goods and quality control.

Basic logistics structure

Matching supply and demand. Many companies have order-based production instead of forecast-based production. - Customer-order controlled manufacturing, production and materials planning are derived directly from the customer order. Every order is customer specific and therefore requires individual handling. Each sales order in fact represents a unique project. In such a situation, the project approach to production is much more effective than an approach based on the MRP method. In other words, the application of MRP systems is limited to (small and large) series and process production.

Key performance indicators (KPIs)

Measurement for the quality of incoming goods and services: - percentage rejected deliveries related to the number of total deliveries made - percentage rejected, but repaired goods - cost related to repair if incoming goods and services - line reject rate, due to inferior quality of components - cost related to quality inspection - number of credit notes to suppliers - number of quality claims to suppliers and amounts involved

Assessing supplier quality

Methods for assessing a supplier's capabilities: - Product audit Provides an image of the degree in which a company succeeds in making everything run perfectly by inspecting final products - Process audit A systematic investigation of the extent to which the (technical) processes are capable of meeting the standards - Systems audit Compares the quality system to external standards (e.g. ISO 9001)

CSR & supply chain relationships

Most major companies today have CSR integrated in their mission statement and business strategies. Companies that operate downstream in their value chains, i.e. consumer goods manufacturers and retailers seem to emphasize product safety and environmental friendliness in their stakeholder relationships. First and second tier suppliers, which operate more upstream in their value chains, seem to.

Selecting

Narrowing down the number of suppliers. The supplier(s) selected depend on: - Request for information (RFI) - Supply market research - Request for quotation (RFQ) Purchasing process, explaining the steps that go into the purchasing and procurement function.

Types of purchasing situations

New task situation: - completely new product from unknown suppliers - high uncertainty regarding outcome - (e.g. acquisition of capital goods) Modified rebuy: - New product from known supplier - Existing product, new supplier - Moderate uncertainty regarding outcome Straight rebuy: - Known product from known supplier - Low certainty regarding outcome - (e.g. consumable items like MRO)

Partnership (strategy)

Objective: Create mutual commitment in long-term relationship Suitable for: Strategic products Activities: - Accurate forecast of future requirements - Supply-risk analysis - Careful supplier selection - 'Should cost' analysis - Rolling materials schedules - Effective change-order procedure - Vendor rating Decision level: Board level, Cross-functional approach

Purchasing performance measurement

One of the most important factors that influences the way in which purchasing results are measured, is how management looks upon the role and importance of the purchasing function. - Operational and administrative activity: Management evaluates purchasing operations primarily on parameters such as order backlog, administrative lead-time, number of orders issued, number of requests for quotations issued, adherence to existing procedures, etc. Position of purchasing: low in organization Performance measures: number of orders, order backlog, purchasing administration lead-time, authorization, procedures etc. - Commercial activity: Management is aware of the savings potential which purchasing may represent. Parameters being used here are the total savings reported by purchasing, number of quotations issued, variance reports, inflation reports, etc. Position of purchasing: Reporting to management Performance measures: savings, price reduction, ROI-measures, inflation reports, variance reports Dimensions: - Price/cost - Product/quality - Logistics - Supplier relationship - Organizational dimensions Purchasing's strategic contribution should translate into superior operational performance. This performance relates to flawless purchasing and business processes that are operated at the lowest possible cost. Purchasing's operational performance is demonstrated by superior material cost control and production, superior supplier delivery performance, superior supplier delivery lead times and superior supplier product quality.

Onshoring (Nearshoring)

Outsourcing of activities to providers which are operating in the same country or close to.

Functional specification

Part of 'Specifying' in the purchasing process. - Provides an overall global specification - Leaves details to supplier - Encourages supplier innovation

Detailed specification

Part of 'Specifying' in the purchasing process. - Specifies the product/service with no ambiguity - Discourages supplier innovation but avoids misunderstanding

Requisitioning and ordering

Part of purchasing information system. By means of purchasing requisitions the internal users within the company express their requirement regarding goods and services to be purchased. These requisitions can be generated directly by MPS (master production scheduling), but they can also be generated manually. This is often the case for non-recurring purchases (e.g. investment goods). The purchasing requisition lists the article code (SKU number), provides a general description of the item, the quantities required, the desired delivery date and the data necessary for finance and administration (budget number, account number, etc.)

Invoice handling and payment

Part of purchasing information system. Normally, the invoice will be sent to finance and administration who will match it with the original order and the delivery document. When matching is possible, the invoice will be paid according to the agreed payment terms. Sometimes, matching is not possible. In that case the invoice is sent for approval to purchasing, who will investigate why the invoice does not match with the order. After the differences are cleared, the invoice will be sent to finance and administration for final handling.

Delivery

Part of purchasing information system. Quantity + time. At delivery, the supplier will produce a delivery document (freight bill), which needs to be signed by personnel of incoming inspection. They will check the delivered goods against the (electronic) order copy. Both quantity and quality are inspected. When approved, a copy of the document is sent to finance and administration. At the same time, the goods are released and shipped to warehousing or t he user. When the shipment by the supplier does not match the original order, a complaint form is filled in. Complaints may relate to quality, delivered quantity or packaging. These data are again put into the system. These are the basis of vendor rating system, which records the performance of a supplier in a given period. Complaint reports are sent to purchasing who will discuss the problems with the suppliers.

Order follow-up

Part of purchasing information system. Subsequently the order must be monitored (order follow-up or expediting). Delivery of the goods by the supplier in accordance with the agreement must be checked. To ensure effective monitoring, the buyer uses numerous exception reports. One of the most important of these I the delivery overdue list, which lists the products that should be delivered by a certain date but which have not yet been delivered. Another important list is the incoming inspection report, which lists the products that at delivery have been rejected by quality control. Of course, in these cases the buyer will need to take immediate corrective action (this activity is referred to as 'trouble shooting'. Some advanced purchasing systems allow the buyer to assign a code to purchase orders, strategic materials and unreliable suppliers. -> Signaling reports The buyer can take preventative action: those suppliers are usually requested via email to confirm and restate that they will meet the required delivery dates.

Product, contract and supplier database

Part of purchasing information system. The data on the purchasing requisition are then transferred by purchasing to a purchase order document. Here, specific supplier and product data are added, such as the price per unit and the address where the order should be delivered. In the case of a frame agreement the purchase order number, which should be used by suppliers in all future correspondence and documents. The purchase order is the basis for delivery. Without it, a supplier should neither deliver, nor get paid. Some manufacturers require their suppliers to confirm their orders prior to delivery (by means of an order confirmation).

Execution (Gunnar Lindh, 2019)

Part of the negotiation dance. - Balance relation <-> agreement - Both parties must benefit - Keep in mind that a defeated party is likely to seek revenge - Information and communication!

Classification (Kraljic's Purchasing Matrix, 1983)

Phase 1. Kraljic's Purchasing Matrix (1983). Profit impact of a given supply item can be defined in terms of: - Volume purchased - Percentage of total purchase cost - Impact on product quality - Business growth Usually focus is on the value of the item/product. Supply risk is assessed in terms of: - Availability - Number of suppliers - Competitive demand - if high, supply risk is high - Make-or-buy opportunities - supply risk goes down - Storage risks - Substitution possibilities

Market analysis (Kraljic's Purchasing Matrix, 1983)

Phase 2. Kraljic's Purchasing Matrix (1983). In this phase the supply market is reviewed and the availability of strategic materials in terms of quality and quantity is assessed. The relative strength of existing vendors is also assessed by comparing a number of criteria. Supplier strength: Market size (vs.) supplier capacity; Market growth vs. capacity growth; Capacity utilization or bottleneck risks; Competitive structure; ROI and/or ROC, Cost and price structure; Break-even stability; Uniqueness of product and technological stability; Entry barrier (capital and know-how requirements); Logistics situation Company strength: Purchasing volume vs. capacity of main units; Demand growth vs. capacity growth; Capacity utilization of main units; Market share vis-a-vis main competition; Profitability of main end-products; Cost and price structure; Cost of non-delivery; Own production capability or integration depth; Entry cost for new sources vs. cost for own production; Logistic

Strategic positioning (Kraljic's Purchasing Matrix, 1983)

Phase 3. Kraljic's Purchasing Matrix (1983). Company strength (low, medium, high, Y-axis), Supply market strength (low, medium, high, X-axis). Balance: Diversify: Make the risk lower Exploit: Make the most out of the suppliers Company low + Supply low = Balance Company medium + Supply medium = Balance Company high + Supply high = Balance Company medium + Supply low = Exploit Company high + Supply low = Exploit Company high + Supply medium = Exploit Company low + Supply medium = Diversify Company low + Supply high = Diversify Company medium + Supply high = Diversify Symmetrical graph.

Action plans (Kraljic's Purchasing Matrix, 1983)

Phase 4. Kraljic's Purchasing Matrix (1983). The three strategic thrusts have different implications on the purchasing strategy in terms of: - Volume - Price - Contractual coverage - New suppliers - Inventory policy - Own production (Make-or-Buy) - Material substitution - Value engineering - Logistics A range of supply scenarios are explored in order to secure long-term supply and for exploring short-term opportunities. This results in a set of strategies for the critical purchasing materials where the timing and criteria for future purchasing action are defined.

Product life cycle

Physical perspective: - Raw material extraction - Materials processing - Manufacturing - Usage Material recycling, reused for remanufacturing or another end user - End-of-life Market perspective: Sales volume over time (graph) - Introduction - Growth - Maturity - Saturation - Decline

Role of purchasing in the value chain

Primary activities and support activities. - Should be able to meet the material requirements related to operations management and inbound and outbound logistics - May also be related to supplying products and services for the other support functions

Postpurchase/Make performance evaluation (Novack & Simco)

Procurement activity 10. (Novack & Simco). Once the service has been performed or the product delivered, the supplier's performance must be evaluated to determine if it has truly satisfied the user's needs. This is also the "control" activity. If supplier performance did not satisfy the user's needs, the causes for this variance must be determined and the proper corrective actions implemented. Not part of the sourcing process, but rather the order function (operational purchasing, Van Weele), ordering, evaluating and follow-up.

Deliver product/performance service (Novack & Simco)

Procurement activity 11. (Novack & Simco). This activity occurs with the first attempt by the supplier(s) to satisfy the user's needs. The completion of this activity also begins the generation of performance data to be used for the next activity. Not part of the sourcing process, but rather the order function (operational purchasing, Van Weele), ordering, evaluating and follow-up.

Identify or reevaluate needs (Novack & Simco)

Procurement activity. (Novack & Simco) A procurement transaction is initiated in response to either a new or existing need of a user, usually an individual or department within the buyer's firm. It would make little sense to purchase something for which there is no need. In some instances, existing needs must be reevaluated because they change. In either case, once the need is identified, the procurement process can begin. - A need can be a response to either a new or existing need of a user. - Existing needs may have to be re-evaluated because of change - Once the need is identified, the process can begin

Conduct market analysis (Novack & Simco)

Procurement activity. (Novack & Simco). A source of supply can operate in a purely competitive market (many suppliers), an oligopolistic market (a few large suppliers), or a monopolistic market (one supplier). Knowing the type of market will help the procurement professional determine the number of suppliers in the market, where the power/dependence balance lies, and which method of buying might be most effective - negotiations, competitive bidding, etc. Exploring markets: - How many suppliers are there - Where power/dependence balance lies - What type of buying used on the market, e.g. negotiation, competitive bidding etc.

Decide to Make or Buy (Novack & Simco)

Procurement activity. (Novack & Simco). Before outside suppliers are solicited, the buying firm must decide on whether it will make or buy the product or service to satisfy the user's needs. Even with a make decision, however, the buying firm will have to purchase some types of inputs from outside suppliers. Type of make-or-buy decisions: - Strategic (core competence) What products to make; What investments to make; R&D. - Tactical Temporary imbalances in demand or capacity - Component Made at the design-phase for a specific component

Define and evaluate user requirements (Novack & Simco)

Procurement activity. (Novack & Simco). Once the need has been determined, its requirements must be represented by some type om measurable criteria. Using these criteria, the procurement professional can communicate the user's needs to potential suppliers. Early Supplier Involvement, ESI. Potential benefits: - Advice on ideas and on materials employed - Methods of manufacture - Materials availability - Alternative technologies and materials - Concurrent engineering Possible disadvantages: - Risk of leakage - Competition may be reduced or eliminated - May lose ownership or control of technology - Valuable information from other sources may become unavailable

Evaluate remaining supply base (Novack & Simco)

Procurement activity. (Novack & Simco). The possible pool of suppliers reduced to those that can meet the user's demands, it is now possible to determine which supplier(s) can best meet the user's negotiable requirements, or desires. This activity is often accomplished through the use of competitive bidding. - In open competitive bidding, the sealed bids are opened in full view of all who may wish to witness the bid opening. - In closed competitive bidding, the sealed bids are opened in presence only of authorized personnel. Determine which supplier(s) can best meet the user's negotiable requirements or desires.

Identify type of purchase (Novack & Simco)

Procurement activity. (Novack & Simco). The type of purchase necessary to satisfy the user's needs will determine the amount of time needed for and the complexity of the procurement process. The three types of purchases, from least amount of time and complexity, are (1) a straight rebuy or routine purchase, (2) a modified rebuy which requires a change to an existing supplier or input, and (3) a new buy which results from a new users need. The interaction life-cycle (Bäckstrand, 2010), PDCA Strategic, tactical or operational purchase. Level of investment vs. importance of purchase.

Identify all possible suppliers (Novack & Simco)

Procurement activity. (Novack & Simco). This activity involves the identification of all possible suppliers that might be able to satisfy the user's needs. Important to this activity is the inclusion into the pool of possible suppliers those that the buying firm has not used previously. - Single source: there are many actors on the market but only one supplier in contracted - Sole source: there is only one actor on the market and this supplier delivers the part - Multiple sources: there are many actors on the markets and several suppliers deliver the same part. How to: - Internet: online trade directories, online publications, online catalogue library - Reputation - Appraisal - Internal records: approved list, recorded performance - Sourcing services - Representatives - Exhibitions - Colleagues - other Buyers - Agents - Organizations promoting trade

Choose supplier (Novack & Simco)

Procurement activity. (Novack & Simco). This activity requires that the choice of supplier(s) be made. The choice of supplier(s) also determines the relationship that will exist between the buying and supplying firm(s) and how the "mechanics" of this relationship will be structured and implemented. This activity also determines how the relationships with the non selected suppliers will be maintained. After the competitive bidding, supplier(s) have to be selected. The choice determines the relationship. Also, the relationship with the non-selected supplies should be determined.

Prescreen all possible suppliers (Novack & Simco)

Procurement activity. (Novack & Simco). When defining and evaluating user requirements (as described in the second activity), it is important to differentiate between demands and desires. Demands for a product or service are those characteristics that are critical to the user; desires are those that are not as critical and therefore negotiable. This activity reduces the pool of possible suppliers to those that can satisfy the user's demands. This process will reduce the number of suppliers to those that can meet the user's demand (not desires). The 'supply funnel'.

Manufacturing strategies

Production context. CODP. - Supply perspective (SP), forecast driven - Customer perspective (CP), customer-order driven Make to stock, MTS; Assembly to order, ATO; Make to order, MTO; Engineer to order, ETO

Coordination issues between purchasing and logistics

Purchasing and logistics. - Lack of well-defined specifications - Lack of standardization Needlessly complex specifications are sometimes used where standard products would suffice. These limit the buyer's latitude and lead to an expansion of the article assortment. The result is an increasing administrative and logistic complexity and often an excessive dependence on one supplier. - Frequent changes in materials planning - Unreliable planning information Keeping master data, i.e. basic product and logistics information up-to-date is an important task. - Insufficient integration of purchasing in logistics management It takes years to develop a system solution that is satisfactory to both logistics and purchasing managers. Co-ordination of systems may be facilitated when purchasing and logistics activities are reporting to one overall supply chain executive, which explains the growing popularity of this function.

Purchasing materials budget

Purchasing materials budget: - often determines over 50% of the cost price of end-products - planning and control instrument - forecasting volumes of goods and prices - frequent meetings purchasers and production planners Purchasing budget indirect materials: - maintenance equipment, spare parts, office supplies - based on historical usage plus a certain margin Investment and tooling budget: - responsibility of management, purchasing has a supporting role - based on production plan Departmental budget: - organizational costs based on a fixed amount of employees

Contracting

Purchasing process, explaining the steps that go into the purchasing and procurement function. - Contracts are essential in order to avoid the risk of non-compliance yet the extent to which extensive formal contracts are required depends on the circumstances. - Terms and conditions are at the heart of contracts, which concern, for example, terms of payment and delivery. - Purchasing should insist that the supplier guarantee the quality and delivery of the work as specified. - Contracts should include penalty clauses

Van Weele (2018)

Purchasing process, explaining the steps that go into the purchasing and procurement function. 1. Specifying Define specification. P&S role: get specification Elements: functional specification, technical changes, bring supplier knowledge to engineering Documents: functional specification, norm/spec control. 2. Selecting Select supplier(s). P&S role: assure adequate supplier selection Elements: pre-qualification of suppliers, request for quotation Documents: supplier selection proposal 3. Contracting Contract agreement. P&S role: prepare contract Elements: contracting expertise, negotiating expertise Documents: contract 4. Ordering P&S role: establish order routine Elements: develop order routines, order handling Documents: order 5. Expediting P&S role: establish expediting routine Elements: expediting, 'trouble-shooting' Documents: exception report, due date listings, invoices 6. Evaluating P&S role: assess supplier Elements: supplier evaluation, supplier rating Documents: preferred supplier list, supplier ranking scheme

Time horizon

Purchasing situation: - Strategic purchase: long term - Tactical purchase: non-strategic items - Operational purchase: call offs

Resource-based view to stakeholder theory

Resource-based view: the traditional management practice. - Purpose was to create as much profit as possible for owners by capitalizing on resources. - Internally oriented and only embeds supplier resources and capabilities when structuring, bundling and leveraging resources to obtain competitiveness. - Resource dependence theory Stakeholder theory: - Each stakeholder represents different values that the focal firm should try to realize. - Aims to satisfy a broad array of stakeholder groups based on their specific demands. - Results in firm competitiveness, increase innovation and deal with the changing environment better.

Enable sourcing (SCOR)

SCOR. - ES1: Manage sourcing business rules - ES2: Assess supplier performance The process of measuring actual supplier performance against internal and/or external standards. Providing feedback to achieve and maintain the performance required to meet the customers' business and/or competitive needs. - ES3: Maintain source data - ES4: Manage product inventory - ES5: Manage capital assets - ES6: Manage incoming product - ES7: Manage supplier network The process of defining and maintaining a unique network of suppliers to deliver a specific product set. This includes establishment of a new supplier or maintaining an existing supplier and all the tasks and activities associated with identifying and qualifying the supplier and finalizing the sourcing terms and conditions. The management of a supplier certification process, which includes certifying new suppliers and maintaining the current status of existing suppliers. - ES8: Manage import/export requirements - ES9: Manage supplier agreements

Plan source (SCOR)

SCOR. P2.1: Identify, prioritize and aggregate product requirements. P2.2: Identify, assess and aggregate product resources. P2.3: Balance product resources with product requirements. P2.4: Establish sourcing plan Metrics: - RS: Order fulfillment cycle time - RS: Plan source cycle time - CO: Cost to plan cycle time - AM: Cash-to-cash cycle time - AM: Return on supply chain fixed assets - AM: Return on working capital

Sourcing SCOR (MTO, ETO, MTS)

SCOR. Make-to-stock. Make-to-order. S1: Source stocked product - S1.1: Schedule product deliveries - S1.2: Receive product - S1.3: Verify product - S1.4: Transfer product - S1.5: Authorize supplier payment Metrics for source, MTS: - RS: Order fulfillment cycle time - RS: Source cycle time - AG: Additional source volumes obtained in 30 days - AG: Current purchase order cycle times - AG: Demand sourcing-supplier constraints - CO: Cost to source - CO: Product acquisition costs - AM: Return on supply chain fixed assets - AM: Return on working capital - AM: Days payable outstanding - AM: Inventory days of supply - raw material Engineer-to-order. S3: Source ETO product - S3.1: Identify sources of supply - S3.2: Select final supplier(s) and negotiate - S3.3: Schedule product delivery - S3.4: Receive product - S3.5: Verify product - S3.6: Transfer product - S3.7: Authorize supplier payment Connected to the interaction life cycle. Plan and check.

CFR (cost and freight)

Seller must pay the costs and freight to bring the goods to the port of destination. Risk is transferred to the buyer once the goods have crossed the ship's rail. Maritime transport only and insurance for the goods is NOT included. Insurance is at the cost of the Buyer. Insurance to be covered by the buyer (the seller up to delivered onboard the ship). Rules for sea and inland waterway.

Supplier

Seller or vendor

Customer value: Innovativeness

Singular dimension: Product introduction

Penalty clauses and warranty conditions

Supplier guarantees goods are of good quality, new and without defects. Important decision is which legal system contract will be subjected to. Agreement made with supplier about performance of goods delivered. - If goods do not meet requirements corrective measures can be discussed. - If these don't work any resulting costs are met by the supplier. A penalty clause may not be effective in certain circumstances. Can only limit damages after execution or delivery, not solve problems before these stages. Period which the supplier is liable for reliability and adequate functioning of goods should be established in contract. Investment goods are a special case and often the supplier will be responsible for maintaining the product during its lifespan.

Extended purchasing and supply process model (Weele)

Supplier relationship management & performance management. Source: - Spend & demand analysis - Supply market analysis - Sourcing strategy development - Tendering & supplier selection - Contracting & implementation Purchase - Search product/service - Requisition & approval - Purchase order submission - Order fulfillment & logistics Pay - Invoicing & payment Before you embark on the simple process model. This model useful for categories that are of a strategic importance to the company. Structure purchasing decision making process. Best delivery and performance from suppliers.

SCOR model

Supply Chain Operations Reference. Standard language to describe the performance, configuration, activities, practices and workforce assets of a supply chain. Check phase. Evaluate, Examine. Five distinct management processes: Plan -> -> Suppliers -> Source, Make, Deliver-> Customers <- <- Return MTS, MTO, ETO products The reference model consists of 4 key pillars: 1. Performance: metrics help to describe the performance of the supply chain. Key performance indicators (KPI) 2. Processes: help explain how the supply chain is configured (what activities are taking place). 4. Practices: are unique ways to configure supply chain processes 4. People: assess needs, availability and gaps of skills in the supply chain workforce.

Supplier audit

Techniques and tools for supplier assessment. Entails that the supplier is periodically visited by specialist(s) from the customer. They investigate the production process and quality organization. Orientation: Focus on future Application: New and current suppliers Nature: Mainly qualitative Scope: Broad, many aspects Work: Time-consuming Data processing: Subjective manually Relation with suppliers: Co-operation required

Vendor rating

Techniques and tools for supplier assessment. Limited to quantitative data only. Entails measuring the aspects of price, quality and delivery reliability per supplier. Orientation: Based on historical data Application: Current suppliers Nature: Mainly quantitative Scope: Limited, few aspects Work: Standard data Data processing: Factual, computerized Relation with suppliers: Based on internal administrative data

Purchasing processes

The nature of the purchasing process varies significantly depending on the situation. The nature of the process depends on what you buy. Three types of purchase situations: Robinson et al. (1967) / Novack & Smico (1991) 1. New purchase / New-task situation 2. Modified purchase / Modified rebuy 3. Straight repurchase / Straight rebuy - SCOR-model Suppliers -> Plan (Source -> Make -> Deliver) & Return -> Customer Sourcing is more interesting. MTS, MTO, ETO - Supply chain business processes, GSCF Information flow -> suppliers, manufacturer, customer, consumer/end-customer Logistics, Purchasing, Marketing, Finance, Production, R&D - Materials procurement process (Jonson) Material requirement -> purchase requisition -> procurement -> purchase order -> delivery monitoring -> delivery reception -> follow up and evaluation (invoice) - Van Weele (2010) Procurement; Purchasing function: Tactical purchasing + order function; Sourcing; Supply; Buying 1. Determining specification 2. Selecting supplier 3. Contracting 4. Ordering 5. Expediting and evaluation 6. Follow-up and evaluation

Supplier assessment

The need for objective assessment of suppliers increases as the role of the supplier in the business chain grows. Supplier assessment may take place at four different levels: 1. Product level. Focuses on establishing and improving the supplier's product quality. 2. Process level Not the product, but the supplier's production process is closely investigated. 3. Quality assurance system level The entire supplier quality organization is subject of investigation by the customer. 4. Company level Besides quality aspects also financial aspects are taken into consideration. Also auditors want to get an idea of the quality of management (how competitive is the supplier in the future?) - Subjective methods: are used when companies evaluate suppliers through personal judgements. - Objective methods: attempt to quantify the supplier's performance

Transition phase (Van Weele, 2018)

The outsourcing process within a purchasing process. Contract negotiation -> Project execution and transfer. How to run the outsourced activity: - Contracting and start of a long-term relation (often) - The contract sets the baseline for the relationship

Operational phase (Van Weele, 2018)

The outsourcing process within a purchasing process. Project execution and transfer -> Managing the relationship -> Contract termination. How to manage the outsourced activity: - The managing of the relationship might be the most critical stage in the outsourcing relationship - Who does what? Shift in mindset, supplier says what they want, and the supplier says what they want, and the supplier how to achieve these results.

Strategic phase (Van Weele, 2018)

The outsourcing process within a purchasing process. Competence analysis -> Assessment and approval -> Contract negotiation. - Why should we outsource it (motives)? - What should be outsourced? - Whom (who) to outsource to?

Customer order decoupling point (CODP)

The point in the supply chain where a production order becomes customer specific. Downstream this point activities are planned based on customer order and further downstream activities are planned upon forecast.

Modern definition of purchasing

The process undertaken by the organizational unit that, either as a function or as part of an integrated supply chain, is responsible for procuring or assisting users to procure in the most efficient manner the required supplies at the right time, quality, quantity and price and the management of suppliers, thereby contributing to the competitive advantage of the enterprise and the achievement of its corporate strategy.

Purchasing and supply process model (Weele)

The purchasing function (tactical/strategic purchasing and operational purchasing): Customer -> Determining specification -> Selecting supplier -> Contracting -> Ordering -> Expediting and evaluation -> Follow-up and evaluation -> Supplier -Tactical/Strategic purchasing: Determining specification (without over-specifying, 10-25% cost savings potential)-> Selecting supplier (5-10% cost savings potential) -> Contracting (closing the deal, 2-5% cost savings potential) Biggest savings potential. Can save up to 40% of its purchasing spend. -Operational purchasing: Ordering (purchase order numer) -> Expediting (avsändning, monitor and follow up on the delivery and specification) and evaluation -> Follow-up and evaluation (compare invoice with shipment) Highly important that each of these steps is marked by a decision document. Invoice + delivery document + purchase order (traced to a contract): keep control of your purchasing administrative process and delivery/payment. The procurement function (buying, sourcing, supply): Determining specification -> Selecting supplier -> Contracting -> Ordering -> Expediting and evaluation -> Follow-up and evaluation -Sourcing Selecting supplier -> Contracting -Supply Ordering -> Expediting and evaluation -> Follow-up and evaluation -Buying (sourcing + supply)

Classification of purchased goods

The purchasing process may concern a large variety of goods and services. In general, purchased materials and services can be grouped into the 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. - 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) Materials which are necessary for keeping the organization running in general and for the support activities in particular. - Services Labour intensive, non-material activities that are executed by third parties on a contract basis.

Open innovation

The purpose of open innovation is to create close collaboration on R&D, new product design and development and market introduction with parties that share the company's business interests in such collaboration.

Expediting

The role of expediting (avsända) is to secure the quality and timely delivery of goods and components. Exists in several levels: - Production control: the expediter inspects to see if the production complies with the required standards. - Quality control/assurance: the expediter checks to see if the goods (or components or materials) function as required and if they meet the required standards. - Packaging/transport: the expediter checks that the goods are properly packaged and transported to avoid damage during delivery. Three types: - Exception expediting: buyer only takes action when the organization sends out signals of material shortages. - Routine status check: preventing materials supply and quality problems - few days before promised delivery, the buyer contacts the supplier to confirm delivery date. - Advanced status check: for critical purchase parts - a detailed production plan will be handed over to the buyer and during the process the buyer will carry out periodic checks. Purchasing process, explaining the steps that go into the purchasing and procurement function.

CIF (cost, insurance, freight)

The same as CFR except that the seller must in addition procure and pay for insurance for the buyer. Maritime transport only. Insurance must be covered by the seller (in favor of the buyer) to the port of destination complying with at least Institute Cargo Clauses (C) or similar clauses (further transports by the buyer). Rules for sea and inland waterway.

FCA (Free Carrier)

The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place. This term is suitable for all modes of transport, including carriage by air, rail, road and containerized / multi-modal transport. Insurance to be covered by the buyer (the seller up to the named point). Any mode of transportation.

EXW (ex works)

The seller makes the goods available at his premises. The buyer is responsible for all charges. This trade term places the greatest responsibility on the buyer and minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included. EXW means that the seller has the goods ready for collection at his premises (Works, factory, warehouse, plant) on the date agreed upon. The buyer pays all transportation costs and also bears the risks for bringing the goods to their final destination. Note! This term requires that the buyer must be able to carry out export formalities in the country of supply, these days almost impossible. Therefore in the vast majority of cases where terms are quoted EXW they actually intend the seller to carry out export formalities, which means that the correct term is FCA (Seller's premises). Insurance to be covered by the buyer. The buyer bears the risk during the whole transport. Any mode of transportation.

FOB (Free Onboard)

The seller must load the goods on board the ship nominated by the buyer, cost and risk being divided at the ship's rail. The seller must clear the goods for export. Maritime transport only. It also includes Air transport when the seller is not able to export the goods on the schedule time mentioned in the letter of credit. In this case the seller allows a deduction of sum equivalent to the carriage by ship from the air carriage. Insurance to be covered by the buyer (the seller up to delivered onboard the ship). Rules for sea and inland waterway.

FAS (free alongside ship)

The seller must place the goods alongside the ship at the named port. The seller must clear the goods for export; this changed in the 2000 version of the Incoterms. Suitable for maritime transport only. Insurance to be covered by the buyer (the seller up to alongside the ship). Rules for sea and inland waterway.

Procurement

The totality of acquisition starting from the identification of a requirement to the disposal of that requirement at the end of its life. It therefore includes pre-contract activities e.g. sourcing, and post-contract activities, e.g. contract management, supplier relationship management activities. However, it does not include stores management and logistics that are aspects of the wider subject of Supply Chain Management. Generally relates to goods, works and service(s) requirements. Van Weele, 2018. "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 secured at the most favorable conditions covering the materials, information and money flows up to the point of consumption."

Management and purchasing

The way purchasing activities are measured and judged will differ for every company considered; this makes it almost possible to develop one uniform method or system for performance measurement in purchasing. - Part of integrated logistics: Management becomes aware that price hunting has its drawbacks and may lead to sub-optimization. Evaluation is aimed at quality improvement, lead-time reduction and improving supplier delivery reliability. Position of purchasing: Purchasing integrated with other materials-related functions Performance measures: savings, cost reduction, supplier delivery reliability, reject rates, lead-time reduction - Strategic business area: Purchasing is actively involved in deciding the company's core business. Management evaluates purchasing on i.e. the number of changes in its supply base and its contribution to the bottom line in terms of savings realized. Position of purchasing: Purchasing represented in top management Performance measures: 'Should cost' analysis, early supplier involvement, make-or-buy, supply base reduction

Identification of procurement activities

These activities assume that the procurement process cuts across both functional boundaries (intrafirm) and organizational boundaries (interfirm) and cannot be effectively completed without input from all parties involved in the transaction. Finally, the successful completion of these activities is contingent upon maximizing value for both the buying and selling organizations, thereby maximizing value for the supply chain. 1. Identify or Reevaluate needs 2. Define and evaluate user requirements 3. Decide to make or buy 4. Identify type of purchase 5. Conduct market analysis 6. Identify all possible suppliers 7. Prescreen all possible sources 8. Evaluate remaining supply base 9. Choose supplier 10. Deliver product/performance service 11. Postpurchase/Make performance evaluation All of the activities identified in this section are subject to influences beyond the control of the procurement professional. These influences can determine how effective each activity is performed. These influences, referred to as the environment. Every manager and management process is affected by the environment. The environment is that which affects what we do but over which we have little or no control.

DAT (Delivered at Terminal)

This is like DAP, but the passing of risk does not occur until the goods have been unloaded at the port of destination. Insurance to be covered by the seller to the terminal (further transports by the buyer). Any mode of transportation.

DAP (Delivered at Place)

This term means that the seller delivers the goods to the buyer to the named place of destination in the contract of sale. The goods are not cleared for import or unloaded from any form of transport at the place of destination. The buyer is responsible for the costs and risks for the unloading, duty and any subsequent delivery beyond the place of destination. Insurance to be covered by the seller to the place of destination (further transports by the buyer). Any mode of transportation.

DDP (Delivered Duty Paid)

This term means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term "Free Domicile". The most comprehensive term for the buyer. Insurance to be covered by the seller. The seller bears the risk during the whole transport. Any mode of transportation.

Early supplier involvement

Three parallell processes: 1. Strategic management processes Create infrastructure for future technological collaboration 2. Operational management processes Individual development process. For which technology areas do we want to get suppliers involved. 3. Collaboration processes Cooperate with external parties. Challenges and changes in purchasing's context. As more and more innovations in industry come from suppliers, getting them involved early in the new product development process becomes an issue of prime concern. Involving buyers in development processes at an early stage can result in contribution of new knowledge and better understanding of: - Construction - Suitable materials - Suppliers - Supplier knowledge Involving the supplier in new product development can also result in considerable savings.

Classic definition of purchasing

To buy materials of the right quality, in the right quantity from the right source delivered to the right place at the right time at the right price.

Reshoring

To move activities formally offshore, so that they are performed by providers closer to home.

Supplier-partnering hierarchy

Top of pyramid (1) -> Base of pyramid (6) 1. Conduct joint improvement activities Exchange best practices with suppliers. Initiate kaizen projects at supplier's facilities. Set up supplier study groups. 2. Share information intensively but selectively Set specific times, places and agendas for meetings. Use rigid formats for sharing information. Insist on accurate data collection. Share information in a structured fashion. 3. Develop suppliers' technical capabilities Build suppliers' problem-solving skills. Develop a common lexicon. Hone core suppliers' innovation capabilities. 4. Supervise your suppliers Send monthly report cards to core suppliers. Provide immediate and constant feedback. Get senior managers involved in solving problems. 5. Turn supplier rivalry into opportunity Source each component from two or three vendors. Create compatible production philosophies and systems. Set up joint ventures with existing suppliers to transfer knowledge and maintain control 6. Understand how your suppliers work Learn about suppliers' businesses. Go see how suppliers work. Respect suppliers' capabilities. Commit to co-prosperity.

Pareto's law (80:20-rule)

Vilfredo Pareto X-axis: Percentage of items Y-axis: Percentage of value 80% of the value to the company can be identified through about 20% of the effort from your purchasers or from your 20% of suppliers. Identify the 20 % suppliers that will deliver this high volume value. 20% of the input accounts for 80% of the output and vice versa. Typical spend portfolio: - Small number of categories = majority of total spend portfolio - Majority of categories by number + majority of transactions + majority of suppliers = small proportion of total value Pareto analysis: - Purchasing strategy 1, 2...? Problems with Pareto: - Prioritizing tool, not strategy tool - Pay attention to the vital few - not as much attention to the long tail of low value spends, may be showstoppers in low value spends that causes problems unless we manage them carefully Ex. tax advice - 10 times more tax than budgeted