Procurement Principles and Management Overview

Procurement Principles and Management in the Digital Age

• The book, "Procurement Principles and Management in the Digital Age," is the twelfth edition
• The book is published by Pearson
• Authors include Peter Baily, David Farmer, Barry Crocker, and David Jessop
• The text discusses procurement objectives and development, procurement scope and development
• The objectives of the chapter include discussing the scope of purchasing and procurement, the changing role of purchasing and supply, highlighting the evolution of purchasing concepts, identifying procurement cycle, introducing a risk category, key practices in developed strategic procurement, and mini-case studies.

Scope of Purchasing

• Supply materials and services to meet organizational needs
• Ensure continuous supply by maintaining existing and developing new sources
• Efficient and wise purchases through ethical, diverse, sustainable means
• Maintain sound relationships with other departments to ensure effective organizational operation
• Develop staff, policies, procedures and organization to achieve objectives
• Employ digital and analytical tools to add value

Objectives of Purchasing

• Select the best suppliers in the market
• Enhance new product development
• Protect the company's cost structure
• Maintain correct quality/value balance of supply
• Monitor market supply trends
• Negotiate effectively with suppliers for economic benefits
• Adopt environmentally responsible and sustainable supply management
• Promote diversity in the supply chain

Procurement Definition

• Classic Definition: Purchase materials with right quality, quantity, from right source, at right place, time, and price
• Modern Definition: Procurement's purpose is to explore opportunities in the market for supply, implement strategies for best possible supply for organization, stakeholders, customers

Procurement Process

• Basic Steps: Identify need, Define need, Develop contracts, Source market, Evaluate suppliers
• Continued Steps: Invite quotes/tenders, Analyse quotations & select, Negotiate best value, Award contract, Contract management & Supplier Relationship Management (SRM)

Procurement Process (Continued)

• This section details the procurement cycle procedures for key phases
• Procedures include identification of need, notification of authority, requesting quotes, creating a legally-binding contract

Activity (Examples)

• Examples of activities include questions about laptop specifications, budget approval, RFQ content, criteria for supplier selection, contract details, contract management and a question about how procurement helps an organization fulfill obligations.

Risk Management

• Operational Risk: Supplier failure delaying or interrupting the flow of goods potentially impacting revenue
• Quality Risk: Low-cost country sourcing can expose procurement to suppliers with differing quality perceptions and standards from its customers
• Compliance Risk: Increased awareness of social, ethical and sustainability regulations carries risk of legal intervention
• Strategic Risk: Exposure to intellectual property loss, theft, affecting market position and share

Risk Management (Continued)

• Supplier-managed risks: contingency planning, matching resources, contractual relationships, design checks, sufficient capital, life-cycle product support
• Buying firm-managed risks
• Risks managed jointly

Research (Findings)

• Strategic procurement alignment with corporate strategy 85%
• Affecting less-common spend areas (R&D, marketing, legal)
• Increasing collaboration with suppliers and innovation
• Sustainability and diversity in focus
• Strategies implemented post-COVID: improved visibility, supplier switching agility, increased collaboration, inventory increase(just-in-case), and multi-sourcing

Case Study - Ford

• Purchasing and supply management is directly linked to business strategy by Ford Motor Company impacting competitive advantage

Kraljic Procurement Positioning

• Categorizes procurement strategies based on market complexity and spend/profit potential into Leverage, Non-critical, Strategic, and Bottleneck categories

Market Complexity / Risk

• Supply risk = vulnerability to supply unreliability
• Technical risk = risk during/after installation
• Factors affecting technical risk: Reliability of sources, Commodity/service availability, Supplier response, Product quality

Market Complexity/Risk (Continued)

• Supply risk relates to likelihood of commodity/service unavailability and cost resulting from its non-availability.

Examples of Factors Determining Risk

• High risk factors include First-time purchase, demand exceeding supply, many parties, High cost, environmental sensitivity, new innovative design, and complex manufacturing.
• Low risk factors include Frequent purchase, excess capacity, Direct purchase from OEM, low environmental sensitivity, proven design, and simple manufacturing

Examples of Factors Determining Procurement Potential

• High potential considerations include many competing suppliers, high value of spend, spare capacity, identical processes. low or no involvement early buyers agree specifications.
• Low potential considerations include Monopoly or oligopoly, low value, no excess capacity, experienced cross functional teams using contract types with procedures.

Best Practice in Strategic Supply Management

• Aligning procurement strategy with corporate strategy
• Contract and supplier relationship management including lean agile supply, Kaizen TQM, Six Sigma, value added, elimination of waste
• Digitalization, AI, Blockchain, analytics, innovation, CSR, sustainability, diversity, and global sourcing expertise
• Responsive and ready for change

Research by Bain & Company

• World-class procurement reducing cost base 8-12%
• Additional annual savings 2-3% delivered through structure and process alignment for cross-functional teams and expertise
• Talent/skills and digital tools are essential

Strategic Procurement - Definitions of Strategy

• Plan: A course of action with guidelines to deal with situations.
• Ploy: Special maneuvers to outwit opponents.
• Pattern: Consistent actions, intended or not.
• Position: Locating an organization in its environment.
• Perspective: Concept of perceiving the world.

Strategic Procurement - Strategy Formulation

• Vision Statement: Realistic, credible, positive projection of an organization's future state.
• Mission Statement: Answers "What is our business?".
• Objectives: Explicit results desired to achieve.
• SWOT Analysis: Analyzing strengths, weaknesses, opportunities, and threats.

Homework (Example Tasks)

• Research an organization and list three examples for each of the requested categories including strengths, weaknesses, opportunities, and threats.

Stages of Strategy Implementation

• Communicating strategic plans
• Obtaining commitment from stakeholders
• Framing policies and procedures
• Setting operational targets and objectives, assigning responsibilities
• Changing organizational structures
• Allocating resources and budgeting
• Training employees

Homework

• Differentiate strategy formulation and implementation.

Eight Characteristics of Strategy

• Long-term direction
• Competitor advantage
• Scope of organizational activities
• Matching resources to the environment
• Building/stretching resources/competencies
• Major resource changes potentially required
• Impact on operational decisions
• Influence of those with power

Levels of Organizational Strategy

• Corporate Strategy (Top Tier): Defining company business and establishing objectives
• Business Strategy (Middle Tier): Integrating unit strategies and developing core competencies
• Functional/Operational Strategy (Lower Tier): Effective employment of skills and competencies

Activity

• Impact of government legislation on procurement strategies

Self-Assessment Tasks

• Outline the differences between purchasing and procurement.
• Highlight the value-added aspects of procurement processes.