Purchasing Management PDF

PURCHASING MANAGEMENT Dr. Ghada W. El-tazy LEARNING OUTCOME  Challenges and changes of the procurement context  Changing purchasing roles: reactive and proactive buying  Classification of purchased goods  Procurement process  CHALLENGES AND CHANGES OF THE PROCUREMENT CON...

PURCHASING MANAGEMENT Dr. Ghada W. El-tazy LEARNING OUTCOME  Challenges and changes of the procurement context  Changing purchasing roles: reactive and proactive buying  Classification of purchased goods  Procurement process  CHALLENGES AND CHANGES OF THE PROCUREMENT CONTEXT  Global sourcing: As the company’s competitive position is directly related to the competitiveness of its supply base, companies have adopted a global scope towards sourcing. For example, food ingredients, electronic components and IT services are increasingly sourced globally, a reason why large organizations have set up international procurement offices (IPOs) in different regions of the world.  CHALLENGES AND CHANGES OF THE PROCUREMENT CONTEXT  Sustainable sourcing: Corporate social responsibility, business integrity and environmental and climate related challenges are becoming more and more prevalent. National governments have become stricter in their regulations on this point. Procurement professionals should ensure that the products and services they buy come from sources of high integrity.  CHALLENGES AND CHANGES OF THE PROCUREMENT CONTEXT  Involvement of suppliers in new product development: As more and more innovations in industry come from suppliers, getting them involved in the new product development process becomes an issue of prime concern. Early supplier involvement (ESI) “Situation where the supplier is involved by the buyer at an early stage of the new product development process”. This forces the procurement professionals to alter their traditional ways of working with suppliers. They should decide at an early stage what part of the development process will be done in-house and what part will be delegated to suppliers.  CHALLENGES AND CHANGES OF THE PROCUREMENT CONTEXT  Emerging digital technologies: (e.g. e-sourcing, big data, artificial intelligence, robotic process automization) not only enable companies to improve their procurement processes internally but also their relationships and collaboration with suppliers across their supply chains. Hence, the capability of a supplier to link up with the buyer’s systems (sometimes referred to as ‘e-readiness’) becomes a much greater concern for procurement professionals when selecting new suppliers.  CHALLENGES AND CHANGES OF THE PROCUREMENT CONTEXT  Resource scarcity: As the world population is expected to grow towards 10 billion by 2050, this will lead to unprecedented demand for basic resources such as water, agricultural land and food products as well as oil, gas and energy. This poses new challenges for procurement professionals who need to develop a much more proactive approach on how best to secure the company’s future requirements for critical materials and products. CHANGING PURCHASING ROLES: REACTIVE AND PROACTIVE BUYING CLASSIFICATION OF PURCHASED GOODS  Raw materials. Raw materials are materials which have undergone no transformation or only minimal transformation, and they serve as the base materials for a production process. We may differentiate between physical raw materials natural raw materials Such as iron ore, copper ore…etc. Such as soya, coffee…etc. CLASSIFICATION OF PURCHASED GOODS  Semi-manufactured products. These products have already been processed once or more, and they will be processed further at a later stage. They are physically present in the end product. Examples are steel plate, and plastic foils.  Supplementary materials. These are materials which are not absorbed physically in the end product; they are used or consumed during the production process. Examples of this type of product are lubricating oil and polishing materials. CLASSIFICATION OF PURCHASED GOODS  Investment goods or capital equipment. These are the products which are not consumed immediately, but whose purchasing value is depreciated during its economic life-cycle. Investment goods can be machines used in production, but they also include computers and buildings. These examples illustrate the varied character of this category of goods. CLASSIFICATION OF PURCHASED GOODS  Maintenance, repair and operating materials (MRO items). These products, sometimes referred to as indirect materials or consumable items, represent materials which are necessary for keeping the organization running in general, and for the support activities in particular. These products are often supplied from stock; examples are office supplies and cleaning materials, but also maintenance materials and spare parts. CLASSIFICATION OF PURCHASED GOODS  Services. Services are activities which are executed by third parties on a contract basis. Services can range from providing cleaning services and hiring temporary labor to having a new production facility for a chemical company designed by a specialized engineering firm (a contractor).  PROCUREMENT PROCESS  This is the linear model which provides guidance to simple procurement projects: Step 1) The specification phase Step 2) Supplier selection and assessment Step 3) Negotiation and contracting Step 4) The ordering process Step 5) The expediting process Step 6) Follow-up and evaluation  STEP 1) THE SPECIFICATION PHASE  During this first stage of the procurement process, the requirements are determined and the company is also faced with the ‘make-or-buy’ question. If buy:  In general, procurement managers differentiate between functional specifications and technical specifications.  Functional specification Describes the functionality which the product must have for the user.  Technical specification describes the technical properties and characteristics of the product as well as the activities to be performed by the supplier.  The advantages of working with functional specifications is clear. First, potential suppliers are given the best possible opportunity to apply their expertise. Second, new technologies can be used, technologies that the buyer is not familiar with, but the supplier is.  STEP 2) SUPPLIER SELECTION AND ASSESSMENT  After the procurement requirements have been defined and translated in functional and/or technical specifications, the buyer can start conducting supply market research.  In practice, these steps are intertwined. When drawing up the technical specifications, the practical feasibility and the costs are estimated. The selection of basic technologies – through which the product design will have to be realized – is frequently made with the names of a few suppliers in mind.  In practice, the step of ‘selection’ contains three steps (bidding mentioned in the functions)  STEP 3) NEGOTIATION AND CONTRACTING  After the supplier has been selected, a contract will have to be drawn up.  Specific commercial and legal terms and conditions will vary per contract, differences being caused by, for example, procurement policy, company culture, market situation or product characteristics. This limits the use of standard purchase contracts.  Here are several important aspects of the purchase agreement: 1. PRICES AND TERMS OF DELIVERY. 2. TERMS OF PAYMENT. 3. PENALTY CLAUSES 4. WARRANTY CONDITIONS. STEP 4) THE ORDERING PROCESS  After the terms and conditions of the contract have been agreed and recorded, the order can be placed. In some cases, the contract is in fact the purchase order. In other cases, for example in the case of a routine buy, buyers will negotiate a framework, i.e. a call-off agreement, covering the materials and products needed for a longer period (one year or even longer).  Next, purchase orders are placed against this agreement. In these cases, contracting and ordering are separate activities.  Routine buy Relates to the acquisition of a known product from a known supplier (identical to straight rebuy). STEP 5) THE EXPEDITING PROCESS  Expediting demands a lot of the buyer’s attention and is often conducted on the basis of an overdue list which records all deliveries that are late. STEP 6) FOLLOW-UP AND EVALUATION  The buyer’s role continues even after the products and/or services have been delivered and the invoices have been paid. For example, warranty claims and penalty clauses need to be settled.  Next, all procurement and supplier files need to be updated and archived.  Finally, supplier evaluations need to be finalized and filed. THANK YOU