Lecture 3

Procurement as a Business Function

• Managing the procurement agenda involves multiple tasks, including procurement management, professionalizing procurement, and achieving business objectives.

Objectives of Procurement Function

• Primary tasks and responsibilities of procurement managers include:
  • Operational excellence: securing supplies from reliable suppliers at a reasonable cost
  • Cost control and reduction of procurement-related spend
  • Risk management: avoiding too few suppliers and spreading risk
  • Innovation and continuous improvement: product and process innovation through supplier partnerships

Procurement Management

• All activities necessary to manage procurement, aligned with the company's overall business strategies and interests
• Example: Procter and Gamble's procurement function, which involves 90,000 suppliers and 400 key partners

Value vs. Price

• The importance of balancing value and price: paying too much or too little can have negative consequences
• The concept of Total Cost of Ownership (TCO) includes direct material costs and indirect costs

Purchasing/Procurement Objectives

• Work closely with other departments
• Conduct purchasing operations to enhance community and employee relations
• Support all corporate objectives and policies
• Define the conduct of purchasing personnel, including ethics policy and reciprocity policy

Business Alignment

• Developing a purchasing and supply strategy requires a thorough understanding of the company's overall business policies and values
• Important aspects to consider:
  • Who is the end user?
  • Market developments and competition
  • Material price movement
  • Company product operations and IT investments

Integrated Approach

• Procurement decisions should not be made in isolation and should consider the effects on various departments (Operations, Marketing, Logistics, etc.)
• Balance is crucial, and it's essential to see the big picture of involved costs

Procurement Development Model

• Stage 1: Transaction orientation - serve the factory
• Stage 2: Commercial orientation - lower price orientation
• Stage 3: Synergy orientation - coordinated procurement
• Stage 4: Internal integration - cross-functional procurement
• Stage 5: External integration - supply chain management
• Stage 6: Value chain orientation - delivering value to the end customer

Observations

• Creating a closed loop between process elements is crucial for effective procurement
• Objectives and targets for procurement are often missing, making it difficult to measure or monitor procurement performance
• Procurement digitalization has improved, allowing for more integration with other business domains