Chapter 1 –
The scope and influence of
procurement
LOG
O
Learning outcomes
How to define procurement
Strategic roles of procurement
The strategic scope of procurement
Procurement and change
2
Learning outcomes
World-class procurement
The status of procurement and
supply management (PSM)
Reflections on procurement
positioning in business
3
What is procurement?
4
Procurement vs Purchasing
PROCUREMENT PURCHASING
m p r e h ensive term n tactical
am o r e c o r e fo c u s e d o
mo o o ds &
acquisition of g of plans
cution
more focused
on services & exe
p m e n t o f s t r ategies a n d As ia, the term
develo In Eu r o p e
> only
A m e r ic a the term ‘purchasing’ = esses
r th roc
In N o
in g ’ = > s o m etimes transactional p
‘purch a s
o le p r o c u r e m e nt
the w h
5
How to define procurement
Business management function
Strategic
Manage objective
Identification Sourcing Access s
ment
of the external
resources
6
How to define procurement
• the best
to
implemen possible supply
tresourcin outcome
g
strategies
to explore
supply
market
opportunities
Procurement
exists
7
How to define procurement
applies the science &
art of
external resource & supply
management through
a body of knowledge
interpreted
by competent
practitioners &
professionals.
8
How to define procurement
To enable
world-class
To ensure a organisational
continuing performance.
A pro-active, supply of
strategic goods
corporate and services
activity
9
How to define procurement
Cost and price
Quality
models
Other
Effective
essential
negotiation of
supply
contracts Supply chain characteristics
risk
managemen
t
10
How to define procurement
right
quality
What
about
right right 07 Rs in
source quantity Logistic
05 s?
Rights
right right
price time
11
P2P process (Procurement cycle)
Procure-to-Pay
cycle
Needs Contract
Forecasting Contract Receipt & Payment
Clarific Sourcing Administ
& Planning Approval Inspection & SRM
ation ration
An example for this: baking a cake for birthday
Sarah is the party planner = planning team You are cake maker
= procurement + production team
How many Inform People --> Decide how many
people? and ingredients.
How much food decide When --> prepare and deliver
needed? people at the right time
When & where involved 13 Where --> at the right place
14
matrix
Procurement vs Purchasing
The Krajic portfolio
Figure 1.1 The relationship
between procurement, supplier
management and purchasing
Strategic roles of procurement
Due diligence Risk Supplier Continuous
management relationship improvement
management
Investment in Investment in Investment in
‘right first inventory procurement
time’ know-how
15
Strategic roles of procurement
Due diligenece
■ financial robustness, including
working capital
■ competence & availability of key
personnel resources
■ reliance & extent of sub-contracting
■ history of legal disputes & litigious
actions
16
Strategic roles of procurement
Due diligenece
■ experience of partnering
relationships
■ existence of a robust 5-year
business plan
■ history of insurance claims
■ IT system robustness
17
Strategic roles of procurement
Risk management of the supply chain
3 categories of supply chain
1 Those risks that only the supplier can
manage
risks:
2 Those risks that only the buying
organisation can manage
3 Those risks that must be jointly managed
by the supplier and the buying organisation.
18
Strategic roles of procurement
Supplier relationship management
❖ ■ conducting regular blame free reviews of
contracts
❖ ■ a joint commitment to continuous improvement
❖ ■ sharing long-term business goals
❖ ■ active involvement of senior people at both
organisations
❖ ■ negotiations based on genuine business
objectives (lesson 7)
❖ ■ the provision of accurate and timely business and
contract management data.
19
Strategic roles of procurement
Continuous improvement of supplier
performance
❖
20
Strategic roles of procurement
The supplier’s investment in
‘right first time’
Profound Analysis
Specified
Pre- Bidder’s quality
quality
qualification management
satisfied or
processes attributes
exceeded
21
Strategic roles of procurement
The supplier’s investment in
inventory
22
Strategic roles of procurement
The supplier’s investment in
procurement expertise
Investment
in
Procurement procurement
operation know-how?
contributing
to a
Examine the competitive
potential advantage?
supplier
23
The strategic scope of procurement
Managing
obstacles to Finance
change
Strategic
Technology scope of Legal
procurement
Supply chain
Operational
risk
24
The strategic scope of procurement
FINANCE
25
The strategic scope of procurement
LEGAL
26
The strategic scope of procurement
SUPPLY CHAIN RISKS
27
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The strategic scope of procurement
OPERATIONAL
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The strategic scope of procurement
TECHNOLOGY
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The strategic scope of procurement
MANAGING OBSTACLES TO CHANGE
30
Procurement and change
Procurement & change
1.Challenge to manage escalating purchasing
costs
2.Public sector focus on driving out inefficiencies
3.Increasing trend of outsourcing
4.Recognition of procurement significant
contribution to efficiency
5.Positive impact of global sourcing
6.Enhanced use of information technology & e-
procurement
7.Redressing of procurement power
8.Challenge to outdated traditional practices
31
09/09/20
1. Challenge to manage escalating costs
22
in purchasing goods and services
Volatility in the cost of oil => increasing supply
chain costs
Continuing escalation of acts of terrorism,
culture tensions, displacement of people from
Africa, tensions in the EU
The related impact on the cost of living &
consequent demands for wage increases
Retail sector cannot escape the pressure on
costs
Difficulties in financial services sector => making
cost & availability of capital a factor in investment
decisions & availability of working capital.
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09/09/2022
2. Public sector focus on driving out
inefficiencies in public expenditure
In the 1990s & early • large amounts of spend in
in 21st century central & local
=> greatest government => tackled
changes/significant through the aggregation of
improvements in requirements.
public expenditure.
• Procurement => have to
=> remaining adapt across departmental
challenges => boundaries
further improve • Procurement => have to
value for money. abolish classic silos [pháo
đài]
33
09/09/2022
3. Increasing trend to outsource
manufacture and services
A rapidly growing
trend to outsource
a wide range of
manufacturing &
service delivery
• tender processes
=> has challenged • due diligence
procurement • negotiation with
departments to different cultures
improve their • managing
management of outsourced
contracts
34
4. Recognition of significant 09/09/2022
procurement contribution to corporate
efficiency
Ex. long-range business planning requiring input on
longrange costs
availability of strategic materials & supplies
supply chain developments
trends in service delivery => ex. voice recognition
technology as an anti-fraud measure.
35
09/09/2022
5. Positive impact of global sourcing
The retail sector’s
Challenges for
long-standing
International procurement =>
expertise in global
airlines using how to structure
sourcing & coping
global sources their
with long-range
organisation.
supply issues:
not
1/ responding to uncommon
fashion changes for retailers
=> provide => set up a
2/ a cycle of equipment & buying &
product selection services supply
for the seasons of organisation
the year. in the Far
East.
36
09/09/2022
6. Enhanced use of information
technology & e-procurement
Drivers for • each tender document
change in weighed > 6 kgs
procurement =>
eradicating paper
Secure networks
facilitating a • => a far-reaching
whole e- objective for the global
procurement economy
system =>
payment
• relatively few reverse
E-procurement in auctions, electronic
relative infancy: tendering & knowledge
storage & gathering
strategies.
37
7. Redressing of procurement power
Growth of suppliers by Procurement profession
acquisition • unsuccessful
• power assumption counterpower
• => affected buyer’s • => ex. countering
pricing, output power by forming
allocation & other effective buying clubs
restrictive practices. (ex. consortia set up
by public sector)
38
09/09/2022
8. Challenge to outdated traditional
practices
Ex. in the
construction
Keeping sector =>
stakeholders in surveyors
Movement the dark => by handle the
from denying them complete
Outdated transactional access to procurement
traditional => strategic information cycle to the
practices => activities => (ex. status of total exclusion
must be desirable in tendering of procurement
challenged organisations processes) specialists
=> => must be
unprofessional refused to
accept.
39 Presented by Phan Vu Ngoc Lan ©
2020 Pearson UK
09/09/2022
World-class procurement
12 characteristics of world-
class supplier management:
3 characteristics of world-
class suppliers
World-class supplier
management
40
World-class procurement
09/09/2022
12 characteristics of world-class
supplier management:
1. ■ Commitment to total quality management (TQM).
2. ■ Commitment to just-in-time (JIT).
3. ■ Commitment to total cycle time reduction.
4. ■ Long-range strategic plans
5. ■ Supplier relationships
6. ■ Strategic cost management
7. ■ Performance measurements
8. ■ Training and professional development
9. ■ Service excellence
10.■ Corporate social responsibility
11.■ Learning
12.■ Management and leadership
41
World-class procurement
09/09/2022
3 characteristics of world-class
suppliers:
1. ■ continuous improvement
❖ have a formal and proven commitment
to achieve year-on-year products and process
improvements
2. ■ technology and innovation
❖ technology leaders in their respective industries,
providing customers with next-generation technologies
and a ‘leg-up’ on their competition
3. ■ adaptability
❖ willing to invest in new equipment, develop
new technologies and rework their businesses to better
support the strategies of their customers.
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09/09/2022
World-class procurement
World-class supplier management
Searching for suppliers with the above
characteristics or the potential to achieve them
Providing such suppliers with specifications of the
purchaser’s expectations relating to products &
services
Agreeing how supplier performance measured
against expectations
Recognising outstanding supplier performance by
award of longterm contracts
Sharing the benefits of collaborative innovation or
performance => enhancing purchaser’s
competitiveness.
43
The status of procurement and
supply management (PSM)
Focus
Professional
Leverage
ism
Status of
PSM
44
The status of procurement and
09/09/2022
supply management (PSM)
LEVERAGE
❖ Leverage of procurement = enhancing profitability
▪ relevant in manufacturing/purchase for resale
▪ irrelevant for central & local government
procurement
❖ Where professional buyers must demonstrate their
effectiveness?
▪ => areas of greatest expenditure (labour &
materials) => greatest scope for savings/obtaining
value for money
▪ labour outside scope of procurement (except
outsourcing activities)
▪ Ex. outsourcing call centres to the Far East =>
reduced by more than 20 per cent of labour costs for
European-based organisations.
45
The status of procurement and
supply management (PSM)
LEVERAGE
For ■ assuming other variables remain constant,
organisati every pound saved on procurement => a
ons driven pound of profit
by the
profit
motive
■ increased defects or poorer deliveries => a
pound off the purchase price => not
necessarily represent a pound of profit
■ when purchases form a high proportion of
total costs => a modest saving on bought-out
items => a similar contribution to profits as a
substantial increase in sales => however,
must be used carefully
46
The status of procurement and
supply management (PSM)
LEVERAGE
47
The status of procurement and
09/09/2022
supply management (PSM)
LEVERAGE Be careful!
■ Cost reduction can be counter-profitable if =>
lower quality or higher expenditure on production
■ Total cost of ownership (TCO) approach =>
considering all costs associated with acquisition,
use & maintenance beside purchase price
■ proportion of expenditure on supplies & complexity
of bought-out items => varies widely from
organisation to organization
=> a corresponding variance in the contribution of
procurement to profitability.
48
The status of procurement and
supply management (PSM)
LEVERAGE Be careful!
insignificant profit significant profit
contribution contribution in the motor
pharmaceutical industry vehicle industry where
where • high proportion of
• low proportion of material costs to total
ingredients of a patent factory costs
medicine to marketing
costs
49
The status of procurement and
supply management (PSM)
LEVERAGE
Procurement as a critical factor in
profitability where:
• ■ a high proportion of total expenditure =
bought-out items
• ■ fluctuating short-run prices
• ■ involved judgments relating to innovation &
fashion
• ■ highly competitive markets for finished
product
50
The status of procurement and
09/09/2022
supply management (PSM)
LEVERAGE
Procurement as less critical, though
still important factor where:
• ■ a small proportion of total expenditure =
bought-out items
• ■ relatively stable prices
• ■ an absence of innovation in operations.
51
The status of procurement and
supply management (PSM)
FOCUS: 3 approaches
• procurement importance within an
1st approach organisation indicated by its focus:
by Syson whether transactional, commercial
or strategic
2nd • 3 laws to determine important
approach by
internal status of procurement
Farmer
• procurement importance both
3rd empirical organisationally & within the supply
approach chain indicated by structural &
influential factors
52
The status of procurement and
supply management (PSM)
FOCUS: 1st approach by Syson
Procurement
importance indicated
by its focus
Transactional Commercial Strategic
area area area
greater
effectiveness &
standing
53
The status of procurement and
supply management (PSM)
FOCUS: 1st approach by Syson
Efficiency Effectiveness
a measure of
1/ how
a measure of how appropriate/correct
well/productively the focus/goals the
resources are used organisation is
to achieve a pursuing
goal. 2/ the degree to
which those goals
achieved.
54
The status of procurement and
09/09/2022
supply management (PSM)
FOCUS: 1st approach by Syson
Figure 1.4 Positioning graph
strategies/policies
55
The status of procurement and
supply management (PSM)
FOCUS: 1st approach by Syson
Figure 1.5 Positioning graph:
measures of performance.
56
The status of procurement and
supply management (PSM)
FOCUS: 2nd approach by Farmer
3 laws to determine important internal status
of procurement
3 Whenever the
organisation
1 The shorter 2 When the
spends a
product organisation
significant
lifecycle times interacts
proportion of its
the more significantly
income on
important with a unstable
procurement
procurement market(s)
goods &
services
57
The status of procurement and
supply management (PSM)
FOCUS: 3rd empirical approach
structural
factors
internal & external
status of PSM
influential
factors
58
The status of procurement and
09/09/2022
supply management (PSM)
FOCUS: 3rd empirical approach
Struct ■ the job title of the executive responsible for
ural PSM
factor
s
■ to whom and at what level the executive in
charge of PSM reports
■ the total spend for which PSM is
responsible
■ the financial limits placed on PSM staff to
commit the undertaking without recourse to
higher authority
■ the committees on which PSM staff
represented.
59
The status of procurement and
supply management (PSM)
FOCUS: 3rd empirical approach
Infl Network a high position in a status hierarchy
uen centrality
tial (Formal varying degrees of access to & control
fact authority) over valued resources
ors
a key activity in materials management
& central in supply chains (chap 3)
Power sources of power & use of power (ability
to affect outcomes) (chap 4)
Innovative technical innovators: introduction of
involvemen new products, services & production
t technologies
administrative innovations: changes in
structure & administrative processes
60
The status of procurement and
09/09/2022
supply management (PSM)
FOCUS: Conclusion
Status of PSM
Recognition Able to
Ability to
by PSM of the market that
impact
value of its contribution
positively =>
contribution => top
bottom line of
=> management
corporate
profitability & & other
strategic
competitive supply chain
planning
advantage members.
61
The status of procurement and
supply management (PSM)
PROFESIONALISM
Profes ■ skill based on theoretical knowledge
sionali
sm
■ prolonged training and education
■ demonstration of competence by
means of tests and examinations
■ adherence to a code of professional
ethics.
62
The status of procurement and
supply management (PSM)
PROFESIONALISM: Academic content
A hybrid =>
subject Irrelevant
‘Unscientific’ => A proactive,
contemporary scientific
academic work approach to the
academic study
of procurement
63
The status of procurement and
09/09/2022
supply management (PSM)
PROFESIONALISM: 10 relevant
procurement areas
❖ 1 Management of supply chain risks
2 Access to latest technology
3 Competitive purchase prices
4 Effective supplier relationship management
5 Timely decision making
6 Cash flow
7 Demonstrable procurement skills
8 Forecasting of forward procurement prices
9 Zero defects on incoming goods and services
10 Contribution to corporate strategy
64
The status of procurement and
09/09/2022
supply management (PSM)
PROFESIONALISM: 7 categories of 32
skills
❖1 Strategic
2 Process management
3 Team
4 Decision making
5 Behavioural
6 Negotiation
7 Quantitative.
65
The status of procurement and
09/09/2022
supply management (PSM)
PROFESIONALISM: 7 categories of 32
skills
Examples of strategic,
quantitative skills:
behavioural and
66
The status of procurement and
09/09/2022
supply management (PSM)
PROFESIONALISM: Name change of
procurement/purchasing
“logistics”
“external
“strategic resource
supply” “distribution manage
functionality ment”
”
“supply
manage
“sourcing ment”
managem
ent”
68
09/09/2022
Reflections on procurement
positioning in business
Can make Question the progress being made by
things a procurement and its positioning in business.
lot better.
In control ‘The awarding of business to a supplier is
of its one of the most important decisions made
destiny. by Volvo Purchasing.’ (Volvo)
Aspects of Highest standards of professional practice
success:
Personal standards of procurement staff
Delivering positive corporate change
69
Homework
70
LOG
O
