Chapter 1 The role of Purchasing in the Value Chain

1. Chapter 1The role of Purchasing in the Value Chain

2. Program • The role of purchasing in the value chain • Definition of concepts • Importance of purchasing to business • Classification of purchasing goods • New developments in purchasing • Conclusions

3. The role of purchasing in the value chain Primary activities can be divided in five generic categories: • Inbound Logistics • Operations • Outbound logistics • Marketing and sales • Services The procurement function should be able to meet the material requirements related to inbound and outbound logistics, and to operations.

4. firm infrastructure human resource management Support activities Margin technology development p r o c u r e m e n t inbound logistics outbound logistics marketing & sales operations service Margin Primary activities The role of purchasing in the value chain Drawn from Porter, 1985

5. The role of purchasing in the value chain Support activities can be divided in four generic categories: • Procurement • Technology development • Human resources management • Firm infrastructure Procurement activities may be also related to supplying products and services for the other support functions.

6. The role of purchasing in the value chain

7. Definition of concepts Purchasing: All activities for which the company receives an invoice from outside parties. Differentiation between: • Purchasing function • Purchasing department Definition: “Managing the company’s external resources in such a way that the supply of all goods, services, capabilities and knowledge which are necessary for running, maintaining and managing the company’s primary and support activities is secured at the most favorable conditions”. Procurement: All activities that are required in order to get the product from the supplier to its final destination.

8. Definition of concepts Sourcing: Finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of supply and gathering knowledge of procurable resources. Purchasing Management: All activities that are required to manage supplier relationships. Supply Chain Management: The management of all activities, information, knowledge and financial resources associated with the flow and transformation of goods and services up from the raw materials suppliers, component suppliers and other suppliers in such a way that the expectations of the end users of the company are being met or surpassed Value Chain Management: Challenging suppliers to improve the value proposition to the end-customers of the value chain. Usually the supplier works closely together with the customer’s technical and marketing staff to reduce the product’s overall costs and add new designs or features to the product which increase the value for the end-customer.

9. Definition of concepts Different definitions... • Ordering… • Buying… • Purchasing… • Procurement… • Sourcing… • Supply Chain Management… • Value chain management…. Operational, short term, deal and margin oriented Strategic, long term, performance and value oriented Purchasing: relates to every activity the company receives an invoice for…

10. purchasing function ordering/ operational tactical / initial Internal customer Speci- fication Selecting Contracting Ordering Expediting and evaluation Follow up/ evaluation Supplier Sourcing Supply Buying Procurement Definition of concepts

11. Importance of purchasing to business Admin. 5 12 Services 18 Capex 3 Spares 60-85 60-80 50-70 60-80 12 Trade- items Production parts 50 25-50 10-40 Retailers • Computers Consumer • electronics Automotive Pharma Service Typical structure industry adapted from Kluge, 1996

12. Importance of purchasing to business Challengefor managers: how to manage our EXTENDED ENTERPRISE ? Profit 1,5 % Sales: 100% Valueadded: 20 % Question: whatshould managers do? Purchasedmaterials And services: 78,5 % Purchasedmaterials and services have a large impact oncompanyprofitability…

13. Definition of concepts Challenge: how to manage our EXTENDED ENTERPRISE ? Profit 1,5 % Sales: 100% Valueadded: 20 % Question: whatshould managers do? Purchasedmaterials And services: 78,5 % Suppliersdetermine 78,5% of totalcost, innovation, carbon footprint and customervalue…

14. DuPont analysis: Sales 105 mio 105 mio Total assets Capital turn-over ratio / 145 mio Net assets - 2.1 x 50 mio Interest free liabilities 95 mio RONA × Sales 9.9 % 105 mio Income before tax - Other costs 5 mio 40 mio Margin Total costs / + 4.7 % 100 mio Purchased mat. & serv. Sales 60 mio 105 mio Amounts in Euro mio

15. DuPont analysis: Sales 105 mio 105 mio Total assets Capital turn-over ratio / 145 mio Net assets - 2.1 x 50 mio Interest free liabilities 95 mio RONA × 12.4 ---- Sales 9.9 % 105 mio + 25 % !! Income before tax - Other costs 6.2 -- 5 mio 40 mio Margin Total costs / + 5.9 --- 4.7 % 98.8 ---- 100 mio Purchased mat.& serv. Sales 58.8 --- 60 mio 105 mio Amounts in Euro mio - 2 %

16. Classification of purchasing goods (1) The purchasing process may concern a large variety of goods and services. In general, purchased materials and services can be grouped into the following categories: • Raw materials;materials which have undergone no transformation or a minimal transformation and which serve as the basis materials for a production process • Supplementary materials;materials that are not absorbed physically in the end product • Semi-manufactured products; products that have already been processed once or more times and that will be processed further at a later stage • Components; manufactured goods that will not undergo additional physical changes, but which will be incorporated in a system with which there is a functional relationship by joining it with other components

17. Classification of purchasing goods (2) • Finished products;all products which are purchased to be sold, after negligible added value, either together with other finished products and/or manufactured goods • Investment goods or capital equipment;products that are not consumed immediately, but which purchasing value is depreciated over a period of time • Maintenance, repair and operating materials (MRO items);materials, which are necessary for keeping the organization running in general and for the support activities in particular • Services;labor intensive, non material activities that are executed by third parties on a contract basis

18. New developments in purchasing • Leveraged purchasing and supply strategies • Global sourcing • Supplier integration • Early supplier involvement in new product development • Reciprocity agreements and compensation agreements • Corporate Social Responsibility and business integrity 1. Seller’s market Buyer’s market 2. Increasing pressure on sales prices and margins leads to:

19. Conclusions • In short, purchasing represents a business area which is being confronted with many changes and challenges. • Without doubt these challenges will put purchasing and supply chain management more in the spot light in business.