Lecture 3

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Questions and Answers

What is the primary objective of procurement management?

To innovate and continuously improve products and processes

To reduce all procurement-related spend without considering total cost of ownership

To secure supply from reliable suppliers of a consistent quality and at a reasonable cost (correct)

To manage 90,000 suppliers and 400 key partners

What happens if the procurement department does not fulfill its role?

The company will outsource its procurement function

Suppliers will not provide goods and services

Departments will take care of procurement themselves (correct)

The company's overall business strategies will be affected

What does Total Cost of Ownership (TCO) include?

Direct material costs and all indirect costs (correct)

Only indirect costs

Only direct material costs

Neither direct material costs nor indirect costs

Why is it important to avoid having too few suppliers?

To spread risk Signup and view all the answers

What can suppliers often provide?

New products and production technology Signup and view all the answers

What is an example of a partnership between a company and a supplier?

Ikea's partnership with Sonos speaker Signup and view all the answers

What is the primary risk when paying too much?

Losing a little money by overpaying Signup and view all the answers

What is the objective of procurement in Stage 2 of the procurement development model?

To focus on low prices Signup and view all the answers

What is the importance of understanding business alignment in procurement?

It helps in developing a purchasing and supply strategy Signup and view all the answers

What is the primary task of procurement in Stage 1 of the procurement development model?

To find appropriate suppliers for raw materials and supplied components Signup and view all the answers

What is the characteristic of Stage 3 of the procurement development model?

Led by a strong central procurement department Signup and view all the answers

What is the importance of a performance-driven approach in procurement?

It results in a better product, possibly at a lower cost Signup and view all the answers

What is the characteristic of Stage 6 of the procurement development model?

Delivering value to the end customer Signup and view all the answers

What is the risk when paying too little?

Purchasing something unusable Signup and view all the answers

What is the objective of procurement in Stage 4 of the procurement development model?

To reduce the total life cycle cost Signup and view all the answers

What is the importance of an integrated, cross-functional approach in procurement?

To see the big picture of involved costs Signup and view all the answers

What is the objective of procurement in Stage 5 of the procurement development model?

To combine an explicit outsourcing strategy with attention to collaborate with supply chain partners Signup and view all the answers

Study Notes

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

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