Procurement Principles And Management In The Digital Age PDF

Procurement Principles and Management in the Digital Age Twelfth Edition Part 1 Procurement objectives and development Chapter 1 Procurement scope and development...

Procurement Principles and Management in the Digital Age Twelfth Edition Part 1 Procurement objectives and development Chapter 1 Procurement scope and development © 2022 Pearson Education Limited. All Rights Reserved.  Objectives of this chapter To discuss the scope of purchasing and procurement To discuss the changing role of purchasing and supply To highlight the evolution of concepts relating to purchasing development and the emergence of procurement To identify the procurement cycle concept To introduce a category of risks, including fraud and corruption risks To identify key practices encountered in developed strategic procurement To provide mini-case studies demonstrating how companies are developing their procurement functions © 2022 Pearson Education Limited. All Rights Reserved.  The scope of purchasing To supply the organisation with materials and services to meet its needs. To ensure continuity of supply by maintaining effective relationships with existing sources and by developing other sources of supply either as alternatives or to meet emerging or planned needs. To buy efficiently and wisely, obtaining the best value for every pound spent through ethical, diverse, and sustainable means. To maintain sound cooperative relationships with other departments, providing information and advice as necessary to ensure the effective operation of the organisation as a whole. To develop staff, policies, procedures and organisation to ensure the achievement of these objectives. To employ digital and analytical tools to add value. © 2022 Pearson Education Limited. All Rights Reserved.  Mini case study – Hertz Buyers have been urged to remember their business’s overall strategy when trying to transform their procurement. If procurement cannot align itself with what the organisation wants to achieve, it will not get the support for what it wants. © 2022 Pearson Education Limited. All Rights Reserved.  More specific objectives of purchasing To select the best suppliers in the market. To help generate the effective development of new products. To protect the company’s cost structure. To maintain the correct quality/value balance. To monitor supply market trends. To negotiate effectively in order to work with suppliers who will seek mutual benefit through economically superior performance. To adopt environmentally responsible and sustainable supply management. To promote diversity in the supply chain. © 2022 Pearson Education Limited. All Rights Reserved. How to define procurement The classic definition To purchase 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. To be contrasted with Modern definition Procurement exists to explore supply market opportunities and to implement resourcing strategies that deliver the best possible Supply the outcome to the organisation, its stakeholders and customers. © 2022 Pearson Education Limited. All Rights Reserved.  CLASS ACTIVITY Procurement often lacks a strategic focus, and is sometimes viewed as an administrative function. Do you agree? Give 2 reasons for your answer. © 2022 Pearson Education Limited. All Rights Reserved. Table 1.1 Some reasons for the increased importance and recognition of procurement © 2022 Pearson Education Limited. All Rights Reserved.  Case study – Astrazeneca Collaborating with suppliers has improved the speed of product development to reduce time to market by reducing the time it takes to swop data by 70 per cent, which has taken weeks out of the process. The supplier development involved has incentivised structures to share gains (Leach, 2011). © 2022 Pearson Education Limited. All Rights Reserved.  Procurement process Identify the need Define the need Develop contract terms Source the market Evaluate suppliers © 2022 Pearson Education Limited. All Rights Reserved.  Procurement process (Continued) Invite quotes/tenders Analyse quotations and select supplier Negotiate best value Award the contract Contract management and Supplier Relationship Management (SRM) © 2022 Pearson Education Limited. All Rights Reserved. Procurement process (Continued) Procurement procedures required for key phases of procurement cycle Requests for Identification Creating a Notification quotation The contract of need and legally of authority (RFQs) and management specification binding to purchase invitations to phase development contract tender (ITTs) © 2022 Pearson Education Limited. All Rights Reserved.  ACTIVITY What are the specifications for a laptop?= Step 1 Who needs to approve the budget?= Step 2 What content would you include when RFQs? Step 3 What criteria will you use to select the laptop supplier? What details would you include in a contract? Step 4 How will you manage the contract? Step 5 © 2022 Pearson Education Limited. All Rights Reserved.  ACTIVITY How does the procurement procedure help the procurement function to fulfil the corporate obligations? © 2022 Pearson Education Limited. All Rights Reserved.  Research Leading procurement functions are: ‒ 85 per cent aligned with corporate strategy; ‒ influencing less-common areas of spend such as R&D, marketing and legal; ‒ increasing collaboration with suppliers on innovation; ‒ emphasising sustainability and diversity. © 2022 Pearson Education Limited. All Rights Reserved. Figure 1.10 The increasing importance of purchasing and supply in the manufacturing sector © 2022 Pearson Education Limited. All Rights Reserved. Table 1.2 Changing purchasing roles: reactive and proactive buying © 2022 Pearson Education Limited. All Rights Reserved.  ACTIVITY What are the three different types of buyer-supplier relationships? © 2022 Pearson Education Limited. All Rights Reserved. Figure 1.11 The ‘transactional’ relationship © 2022 Pearson Education Limited. All Rights Reserved. Figure 1.12 The ‘mutual’ relationship © 2022 Pearson Education Limited. All Rights Reserved.  Risk management Risks can be categorised as follows: ‒ Operational risk: Operational supplier failure can delay or interrupt the inbound flow of goods and materials, potentially leading to loss of revenue. ‒ Quality risk: Low-cost country sourcing has exposed procurement to new suppliers whose perception of quality and adherence to standards may not match those of its customer or tier-one suppliers. © 2022 Pearson Education Limited. All Rights Reserved.  Risk management (Continued) ‒ Compliance risk: Accordingly, with increased regulations and heightened awareness of social, ethical and sustainability requirements, procurement carries a significant risk of legal intervention, damage to reputation and additional costs. ‒ Strategic risk: The strategic risks arise from commercial exposure to loss or theft of intellectual property (IP), threatening market share and position. © 2022 Pearson Education Limited. All Rights Reserved. Risk Management Risk management Risks that only the supplier can manage ✓Contingency planning ✓Matching resource planning to programme deliverables ✓Contractual relationships with sub-contractors ✓Design, inspection, and testing ✓Sufficient working capital ✓Through-life product support Risks that only the buying firm can manage Risks jointly managed by the supplier and the buyer © 2022 Pearson Education Limited. All Rights Reserved.  Research The following strategies are being pursued post-Covid in order to mitigate risks: ‒ improved visibility into tier two and three; ‒ agility in switching suppliers; ‒ closer collaboration; ‒ increasing inventory (just-in-case); ‒ multi-sourcing. © 2022 Pearson Education Limited. All Rights Reserved.  Case study – Ford Purchasing and supply management for many is now directly linked into their companies’ business strategies and they recognise that it has a real impact on competitive advantage. Ford Motor Company believes that procurement controls the ultimate profitability of the company. © 2022 Pearson Education Limited. All Rights Reserved. Figure 1.13 Kraljic procurement positioning © 2022 Pearson Education Limited. All Rights Reserved.  Market complexity/Risk Risk consists of: Supply risk – risks of vulnerability of the business to unreliability of supply. Technical risk – risks arising during and after installation. The principal factors determining risk are: The reliability of the sources of supply The availability of the commodity or service required The degree of response by suppliers to the company’s requirements The quality of the product in relation to the role which it is required to fulfil. © 2022 Pearson Education Limited. All Rights Reserved. Market complexity/Risk (Continued) Supply risk measures both the likelihood of a commodity or service not being available when it is required and the costs resulting from its non-availability. ‘Non-availability’ does not simply mean that an item is not physically present but also includes failure to be effectively present due, for example, to a quality failure. © 2022 Pearson Education Limited. All Rights Reserved. Table 1.3 Examples of factors determining risk Factor High Risk Low Risk Experience with the product First-time purchase Frequent purchase Supply/demand balance Demand exceeds supply Excess capacity exists Many parties (e.g. OEM, Supply chain complexity agent) Direct purchase from OEM High cost (e.g. lost Financial risks production) Low High in environmentally Safety & environmental risk sensitive area Low at remote location Design maturity New, innovative design Proven design Manufacturing complexity Complex Simple © 2022 Pearson Education Limited. All Rights Reserved. Table 1.4 Examples of factors determining procurement potential Factor High Potential Low Potential Structure of the market Many competing sources Monopoly or oligopoly Value of spend High value Low value Supply/demand balance Spare capacity No excess capacity Efficiency of the Identical process applied to Contract types and procurement process all purchases, little procedures promote automation continuous improvement Development of the Low or no early buyer Experienced cross- procurement process involvement. Users agree functional teams specifications with suppliers © 2022 Pearson Education Limited. All Rights Reserved. Figure 1.17 Best practice in strategic supply management © 2022 Pearson Education Limited. All Rights Reserved.  Research Research by Bain & Company shows that world-class procurement can reduce a company’s purchasing cost base by an average of 8–12 per cent and deliver additional annual savings of 2–3 per cent via the following sets of capabilities : ‒ Structure and process create clear roles for cross- functional teams. ‒ Talent and skills of world-class procurement teams deliver market expertise, analysis and insights. ‒ Digital tools and systems provide spending visibility and track supplier performance, including metrics and a procurement savings dashboard.(Schannon et al., 2020) © 2022 Pearson Education Limited. All Rights Reserved. Strategic procurement Definitions of strategy As a plan, strategy is some sort of consciously intended course of action, a guideline (or set of guidelines) to deal with a situation. As a ploy, strategy is a special manoeuvre intended to outwit an opponent or competitor. As a pattern, strategy is a stream of actions demonstrating consistency in behaviour, whether intended or not intended. © 2022 Pearson Education Limited. All Rights Reserved. Strategic procurement Definitions of strategy (Continued) As a position, strategy means locating an organisation in an environment. As a perspective, strategy concept of perceiving the world. © 2022 Pearson Education Limited. All Rights Reserved.  Strategic procurement Strategy formulation This articulates a realistic, credible and positive projection of Vision statement the future state of an organisation or functions or operations within that organisation Mission statement Answers the question ‘What is our business?’ Explicit statement of the results the organisation wishes Objectives to achieve Application of Strengths, weaknesses, opportunities and threats analysis SWOT analysis  Homework Research any organisation and list up to three examples under each of the following headings: Key strengths Key weaknesses Key opportunities Key threats.  Strategic procurement The main stages of strategy implementation Communicate strategic plans to everyone in the organisation Obtain commitment from those concerned Framing policies and procedures Setting operational targets and objectives Assigning responsibilities and commensurate authority Changing, where necessary, organisational structures Allocation of resources and agreeing budgets Providing training for employees  HOMEWORK Differentiate between strategy formulation and implementation. Strategic procurement Eight characteristics of strategy Concerned with long-term direction Trying to achieve some advantage over competitors Concerned with scope of an organisation’s activities Matching of resources and activities of an organisation to the environment in which it operates Building on or stretching resources and competencies May require major resource changes Likely to affect operational decisions Strategies also affected by values and expectations of those who have power © 2022 Pearson Education Limited. All Rights Reserved.  Strategic procurement Levels of organisational strategy What business should we be in? Corporate strategy Deciding grand strategies Determining values TOP TIER Coordinating and managing major resources Deciding business locations and structures Coordinating and integrating unit strategies Business strategy Developing distinctive competencies MIDDLE TIER Identifying product market niches Monitoring products and markets Functional/operational Ensuring skills and competencies are utilised effectively Integrating activities, e.g. procurement/marketing strategies Providing information and expertise LOWER TIER © 2022 Pearson Education Limited. All Rights Reserved.  CLASS ACTIVITY What impact does government legislation have on procurement strategies? © 2022 Pearson Education Limited. All Rights Reserved.  Self-assessment tasks 1. Outline the differences between purchasing and procurement. 2. Highlight the ways in which procurement can add value. © 2022 Pearson Education Limited. All Rights Reserved.