Purchasing and Supply Chain Management PDF

Purchasing and Supply Chain Management Chapter 2: The task of purchasing and supply management 1 LEARNING OBJECTIVES After you have studied this chapter, you should be able to 1 explain the essentials of the management task 2 illustrate, explain and give examples of the diff...

Purchasing and Supply Chain Management Chapter 2: The task of purchasing and supply management 1 LEARNING OBJECTIVES After you have studied this chapter, you should be able to 1 explain the essentials of the management task 2 illustrate, explain and give examples of the different levels of purchasing planning and objectives 3 summarise purchasing and supply planning on a tactical and operational level 4 discuss a centralised purchasing and supply organisational structure for a large organisation, and point out the advantages and disadvantages of the structure 5 discuss a decentralised purchasing and supply organisational structure for a large organisation, and point out the advantages and disadvantages of the structure 2 LEARNING OBJECTIVES (CONT) 6 explain the increasing use of cross-functional teams in purchasing and supply management 7 summarise coordination as a management task in purchasing and supply management, and point out why this task is becoming more important 8 explain the purpose of performance evaluation 9 point out the problems relating to the performance evaluation of the purchasing and supply function 10 summarise and illustrate the process of performance evaluation 11 identify and explain the three different levels of performance evaluation, and indicate appropriate measures 3 INTRODUCTION  Purchasing and supply management is one of the most important management functions  Management is the process of planning, organising, coordinating and controlling all the resources of the organisation effectively and efficiently in order to attain the objectives of the organisation as determined by management (Griffin, 2013: 5)  Tasks of management also relevant in the purchasing and supply function 4 2.1 PURCHASING AND SUPPLY MANAGEMENT AS PART OF BUSINESS MANAGEMENT  Purchasing and supply management is executed as an integrated part of the organisation`s broader general management function  Planning  Organisational structure  Coordination  Control 5 2.1 PURCHASING AND SUPPLY MANAGEMENT AS PART OF BUSINESS MANAGEMENT (CONT)  Purchasing does not operate in isolation  Purchasing and supply planning, part of the firm’s general planning – because continuous supplies are of strategic importance  Organisational structure must form effective link of firm’s overall structure. Purchasing and supply primarily renders service to firm. Therefore need to be compatible with firm’s organisational structure to render effective service  Coordination-aim to harmonise and align purchasing activities and financial, production and marketing functions  Control-ensures that activities are carried out as planned within set parameters (determined by the objectives of planning) 6 2.2 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT THE NATURE OF PURCHASING AND SUPPLY PLANNING  Planning is the continuous process of determining the future position of the organisation and deciding on the strategies required to reach that position  Purchasing and supply planning is the first responsibility of purchasing and supply management  Other management tasks can only be executed after the planning task has been completed 7 2.2 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT (CONT) LEVELS OF PURCHASING AND SUPPLY PLANNING AND OBJECTIVES  Involved at three levels in the organisation  Strategic planning  Top management (long-term or strategic planning)  Tactical planning  Middle management level (medium-term or integrated functional planning)  Operational planning  Lowest level (short-term or operational planning)  Most important part of purchasing and supply planning is the formulation of objectives 8 2.2 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT (CONT) Figure 2.1 The relationship between the management level, the formulation of objectives and the time frame of purchasing and supply planning (pg.23) 9 2.2 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT (CONT) Table 2.1 An example of the different levels of purchasing and supply objectives (pg.23) 10 2.2 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT (CONT) STRATEGIC PURCHASING AND SUPPLY PLANNING  Strategic purchasing involves integrating the purchasing and supply function with other functional disciplines within the organisation See Example 2.1: Foschini planning huge Africa expansion  The time frame for strategic purchasing and supply planning is long term and performed at top management level 11 2.2 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT (CONT)  The following are examples of strategies which can be developed by supply management  Cost reduction strategies  Supply chain support strategies  Environmental change strategies  Competitive-edge strategies  Risk management strategies  More detailed discussion can be found in chapter 4 12 2.2 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT (CONT) TACTICAL PURCHASING AND SUPPLY PLANNING  Executed at middle management level  Implement plans formulated at strategic level  Develop purchasing and supply strategies as part of the broad strategy of the organisation  Plan resource requirements application – the four categories of purchasing and supply planning at middle management level are  Needs (for raw materials)  Purchasing and supply programme planning (provide for estimated needs)  Planning the purchasing and supply system (time scheduling, transport etc)  Extraordinary projects (purchasing of capital equipment) 13 2.2 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT (CONT)  Operational planning is performed at the lowest level  Objectives at operational level are set in concrete and quantitative terms for each of the following categories at middle management level  Planning of specific activities to execute plans of management over the short term for each of 4 categories  Materials requirement planning (MRP): analysing and interpreting master production schedules  Supply planning: calculating economical order quantities (EOQ)  Planning the purchasing and supply system: purchasing and supply manual is compiled  Extraordinary projects: depends on nature 14 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT  The creation of a structure in which tasks can be assigned, to which resources can be allocated and which assists in coordinating activities so that plans can be implemented  Entails creation of structures, assigning tasks and resource allocation  Process involves decision on  the position of the purchasing and supply function  internal organisational structure of function  extent to which activities should be integrated 15 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) POSITION OF THE PURCHASING AND SUPPLY FUNCTION IN THE ORGANISATIONAL STRUCTURE  The position or level of the purchasing and supply function is influenced by the following factors  Extent of monetary value of purchasing expenditure  Perceptual contribution of purchasing and supply function to organisation’s profit  Possibility of increasing organisation’s profitability further  Variety and nature of products purchased and degree of expertise required  Characteristics of supplier market  Extent to enter market quickly  Size of organisation  Management’s commitment to integration, outsourcing and supplier partnering  Importance management attaches to purchasing function 16 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT)  The purchasing and supply function can be organised in a number of ways  Most popular organisational structures  Centralised  Decentralised  Hybrid or combination  Cross-functional teams 17 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Centralised purchasing and supply organisational structure  The authority for the purchasing and supply function is vested in one person or dedicated team  Advantages of a centralised organisational structure  Materials and products are standardised  Negotiating power is increased and volume discounts are made possible  Staff are afforded the opportunity of becoming experts  Control is improved  Administrative costs are reduced  Supplier relations are enhanced  Information systems integration is facilitated  Duplication of efforts is eliminated 18 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT)  Disadvantages of a centralised organisational structure  Slow response time to regional plants  Resentment from geographically dispersed business unit management  Tendency to bypass the central buying office  Less integration with user departments  Top heavy staff structure  Lack of insight into the requirements of dispersed plant units 19 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Figure 2.2 Centralised purchasing and supply in a centralised multiplant organization (pg.28) 20 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Decentralised purchasing and supply organisational structure  Purchasing by different departments, branches or plants, while each of them enjoys an important measure of autonomy on decision-making regarding the purchasing and supply function 21 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Figure 2.3 Decentralised multiplant purchasing and supply organisational structure (pg.29) 22 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT)  Advantages of a decentralised organisational structure  Better relations between decentralised purchasing and other functions  Good service delivery to regional plants  Faster reaction to user departments in emergencies  Goodwill generated by support of local suppliers  Greater autonomy for profit centres  Interdivisional competition for improved purchasing performance 23 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT)  Disadvantages of a decentralised organisational structure  Loss of economies of scale  Confusion among suppliers when dealing with many offices  Duplication of staff and facilities  Difficulties in control over the function  Greater likelihood of communications breakdown  Focus on local units and under-emphasis on strategic issues 24 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Combined purchasing and supply organisational structure  Common requirements are purchased centrally, while individual requirements are purchased on a decentralised basis Figure 2.4 combined organisational structure for purchasing and supply (pg.30) 25 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) INTERNAL ORGANISATIONAL STRUCTURE OF PURCHASING AND SUPPLY  The internal organisation of the purchasing and supply function is directly related to  the activities that have to be performed  Specialist groups within the purchasing function are formed  Factors issues such as the skills required for various activities, the nature of the supplier system, purchasing methods and the interrelationships that are formed as a result, characteristics of internal relationships between groups 26 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Integration with other functions  Certain buyers purchase from certain suppliers only  Certain buyers purchase certain commodities only  Certain buyers perform certain tasks only such as negotiations in multifunctional teams 27 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) CROSS-FUNCTIONAL TEAMS  Comprises of expert personnel from different functional areas within the organisation  May be created on a part-time basis to achieve a specific goal or outcome  Pre-requisites for successful cross-functional teams  Executive sponsorship  Effective team leaders  Qualified team members 28 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Figure 2.5 Cross- functional approach to new product development (pg.32) 29 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Advantages  Different perspectives, inputs and expertise of team members  Responsiveness to user needs  Increased acceptance by users of the products  Understanding by other functions of the range of trade-offs considered in making a final purchase  Reduced time to solve problems or complete an assigned task as a result of synergy  Increased innovation because of informal organisational structures  Joint agreement and ownership of decisions among the members  Enhanced communication between functions and with top management  Overcoming organisational resistance 30 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Challenges  Additional investment in scarce resources may be necessary  Role conflicts may emerge  Overload for key members may develop  Continuity cannot be guaranteed  Senior management may not recognise individual contributions See Case study: 75% of cross-functional teams are dysfunctional (pg.32-33) 31 2.3 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT (CONT) Table 2.3 key characteristics of successful and unsuccessful purchasing and supply teams (pg.34) 32 2.4 COORDINATING PURCHASING AND SUPPLY MANAGEMENT THE NATURE OF PURCHASING AND SUPPLY COORDINATION  There is a relationship of reciprocal, mutual dependence between the activities of the purchasing and supply function, between purchasing and supply and other business functions, and between purchasing and supply and suppliers  The purchasing and supply function’s direct contact with the external business environment also contributes to the complexity of purchasing and supply coordination 33 2.4 COORDINATING PURCHASING AND SUPPLY MANAGEMENT (CONT) COORDINATION BETWEEN PURCHASING AND SUPPLY AND OTHER FUNCTIONAL AREAS  Lateral purchasing and supply coordination has mutual advantages for both the purchasing function and the other organisational functions  The creation of an effective organisational structure and communication channels are particularly important tools or aids for coordination 34 2.4 COORDINATING PURCHASING AND SUPPLY MANAGEMENT (CONT) COORDINATION BETWEEN PURCHASING AND SUPPLY AND THE SUPPLIER SYSTEM  Two dimensions  Whole supplier system  Activities of individual suppliers  Coordination with the supplier system is difficult  Coordinating mechanisms  Open communication  Strategic alliances  Integrated systems  Conscious motivation of suppliers  Standardisation of specifications, purchasing documents and purchasing procedures 35 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION  Control process consisting of a systematic measurement on a quantitative basis and subjective judgement on a qualitative basis of critical dimensions of supply management aimed at a value assessment of the actual performance, and at providing management information to all functional groups linked to the supply chain  Most important is the process of performance evaluation 36 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) OBJECTIVES AND BASIC PRINCIPLES OF PERFORMANCE EVALUATION  The most important objectives for the performance evaluation of the purchasing and supply function:  To improve purchasing and supply performance (the primary objective)  To provide information as a basis for rational decisions  To motivate and enhance personnel  To place the internal reorganisation of purchasing and supply activities on a rational footing  To establish an objective basis for comparing the purchasing and supply performance between different divisions within organisations and also between organisations 37 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Principles  Performance evaluation costs must be weighed up against the benefits derived  Both qualitative and quantitative measures must be used to assess performance  Performance evaluation requires a sound information database  Performance evaluation must continually be adapted to changes in the organisation and its environment  Because of the divergent nature of purchasing and supply activities, there is no generic evaluation system  Performance must be evaluated with the aid of several measures 38 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) DIFFICULTIES RELATING TO THE PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION Difficulties of purchasing performance evaluation  Large number of diverse activities makes it difficult to build up an objectively based overall picture of purchasing and supply performance  Difficult to express the performance of various purchasing and supply activities in quantitative terms 39  2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT)  Difficult to set quantitative standards as control systems may be less precise and meaningful than their quantitative nature would indicate  Traditional purchasing objectives are of little practical value in the performance evaluation of the purchasing and supply function  Performance is directly influenced by both internal and external factors 40 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Figure 2.6 external and internal factors influencing the purchasing and supply function (pg.37) 41 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) STEPS IN THE PROCESS OF EVALUATING THE PURCHASING AND SUPPLY FUNCTION  The following steps are generally accepted in the control process  Determining the objectives of purchasing and supply  Determining appraisal factors and criteria for success  Performing internal audits, self-governance or self- assessment  Exercising managerial control in response to results 42 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Figure 2.7 steps in the evaluation process of the purchasing and supply function (pg.39) 43 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Step 1: Identify objectives and determine the scope of the purchasing and supply function 44 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Step 2: Establishing performance measures and performance indicators (metrics) for evaluation 45 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT)  Greater emphasis is placed on subjective measures such as the following  Human relations  Professionalism  Negotiating ability  Commodity knowledge  Ability to cultivate qualified suppliers  Team building 46 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Level 1: Purchasing and supply management  At the purchasing and supply management level, performance evaluation aims to obtain a picture of how thoroughly the management elements are implemented  Elements evaluated are  planning  organising  coordinating  control  integration  training and  innovation 47  2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT)  Evaluation of the performance of purchasing and supply management level is mostly on a subjective basis with the aid of an evaluation sheet or questionnaire based on the elements of management  The following are a number of qualitative measures and norms for assessing the performance of purchasing and supply management  Development of goals and objectives for the overall function and for individual sub-functions  Personnel training and rotation  Communicating and publicising programme results 48 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Level 2: Supply proficiency  Performance evaluation at the supply proficiency level aims at determining the extent to which the purchasing and supply function achieved the overall objectives for which the function was introduced into the organisation  The most important measures that can be used for performance evaluation at this level are as follows  Pricing proficiency  Supplier performance  Materials flow  Quality 49 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Level 3: Supply efficiency  The underlying objective of performance evaluation is to obtain an indication of the efficiency with which the resources of the purchasing and supply function are utilised  Key measures and metrics  Cost savings  Workload  Administrative performance 50 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Step 3: Measurement of actual performance  Measurement of actual performance differs at the three levels of performance evaluation  At the purchasing and supply management level, evaluation is mainly subjective  At the levels of purchasing and supply proficiency and purchasing and supply efficiency, more objective and quantitative methods of measurement are used 51 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Step 4: Evaluation of actual performance  Evaluation of actual performance consists of analysing the quantitative information resulting from the measuring process, and assessing the importance and causes of deviations from planned performance (objectives) 52  2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT)  Four main approaches of evaluating the actual performance of the purchasing and supply function are  Historical approach  Budget objectives  Quantitative objectives  Benchmarking 53 2.5 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY FUNCTION (CONT) Step 5: Reporting (feedback)  The compilation of an evaluation report is the final step in the evaluation process of the purchasing and supply function  Feedback of the results of the measuring and evaluation steps should also be continuous  Allows for adjustments and corrections (supply-base management or quality improvement programmes) 54 PREPARATION FOR NEXT LECTURE  Work through Chapter 2 together with the slides, textbook and study guide  Read through Chapter 3 in preparation for your next lecture 55