DPS 304 : Procurement Management Procurement as Purchasing Purchasing has long been considered one of the basic functions common to all organizations

DPS 304 : Procurement Management

Procurement as Purchasing Purchasing has long been considered one of the basic functions common to all organizations. It is believed that the first college textbook that focused on Purchasing was authored by Howard T. Lewis of Harvard University in 1933. Senior management’s interests historically have focused on marketing, research and development, finance and operations while purchasing and materials management have all frequently been subordinated to these similar functions.

Definition of Purchasing Definition One – To buy the right quality, in the right quantity from the right source delivered to the right place at the right time at the right priceCriticism of Def.; 1. What is ‘right’ is contingent on a particular

organization or situation2. Some rights are irreconcilable – implies trade offs3. Def implies purchasing is reactive rather than

proactive4. Implies purchasing is transactional rather than

relational5. Implies purchasing is tactical rather than strategic

Definition of Purchasing Purchasing as Procurement

Procurement is a wider term than purchasing which implies the acquisition of goods or services in return for monetary or equivalent payment.

Procurement is the process of obtaining goods or services in any way including borrowing, leasing and management of quality and supplier relationships

Definition of Purchasing A composite Definition

Purchasing, the process undertaken by the organizational unit that either as a function or as part of an integrated supply chain, is responsible for procuring or assisting users to procure, in the most efficient manner, required supplies at the right time, quality, quantity and price and the management of suppliers, thereby contributing to the competitive advantage of the enterprise and the achievement of corporate strategy.

Definition of Purchasing This definition has the following significant terms:Processes – flow of activities in procuring goods or servicesOrganizational unit – cost or profit centre charged with the responsibility of purchasing.

Function – unit or department in which people use specialised knowledge, skills and resources to perform specialised tasksIntegrated supply chain – absorption of formerly independent functional units such as purchasing, materials management, production and distribution into a continuous flow of interaction.

Perspectives of Purchasing As a function – people use specialized skills & resources to perform specialized tasks.As a process – sequential chain of events leading to the acquisition of suppliesReceive requisition » solicit quotations » negotiate with suppliers » place order » receive supplies » make paymentAs a link in the supply chainAs a relationship – internal & external relationships, long & short-term

Perspectives of Purchasing Externally, relationships with suppliers as shown later, may represent a continuum from arm’s length to supplier alliances. Many organizations now rely on suppliers to design, develop and manufacture items that they would previously produce as Ford et Al. observe:

The main issue facing managers is no longer about ‘buying the right products at the right time at the right price’ but of handling & developing relationships with key suppliers over long periods

Perspectives of Purchasing As problem-solving –Customers are not looking for a product from a manufacturer, instead they seek a solution to a problem from a supplier. Business purchases are problem driven.As a discipline – a branch of Knowledge, an area of study. The academic content of purchasing lacks the clearly defined focus associated with other fields of study such as mathematics, economics & law & draws heavily on other subjects to build its knowledge base eg accounting, economics, ethics, IT, OR etc

Perspectives of Purchasing Purchasing a professionGenerally a an area may be regarded as a profession if the practitioners abide by the followingBody of theoretical knowledgeProfessional body to govern minimum qualifications for entrance, enforce rules and norms of conductCode of professional ethicsProlonged training and education

Perspectives of Purchasing Purchasing a professionWhen you choose to be a professional in this area, you will be expected to have the following qualities: Responsibility to the ProfessionAssist in maintaining the integrity of the profession and participate in its activities. Your conduct toward colleagues and clients should be characterized by courtesy and good faith.

Authority Act with proper authority from your client or institution regardless of good faith and be responsible for any harm caused to clients or institution as a result of acting without authority

Perspectives of Purchasing Purchasing a profession

Integrity You must perform with integrity all responsibilities owed to clients, the institution, other members of the profession and the public. The principle of integrity is a key element of this profession. If personal integrity is lacking, your professional’s usefulness to the client and institution, and reputation within the profession will be destroyed regardless of how competent you may be.

4. Competence and Quality of Service Competence on the part of the professional means the provision of an adequate standard of service, skill and knowledge in planning and management activities on behalf of a client. Competence involves an adequate knowledge of practice and procedures.


The list that follows is illustrative of examples of meeting client’s quality of service: - Keeping the clients, service providers, and staff reasonably informed. Answering reasonable requests from clients.Adhering to planning schedules and deadlines. Striving to maintain adequate office staff and facilities. Practicing effective office management skills. Providing information to the client and institution and disclosing neglect or mistakes. Providing prompt and complete reports and Maintaining judgment in personal and professional conduct, in adherence with institutional policies.


Confidential Information You will be duty bound to hold in confidence all information concerning the business and affairs of the client acquired in the course of the professional relationship, and should not divulge such information unless authorized by the client. There a difference between confidential information and private information. Briefly think through the differences.

Conflict of Interest You will have the right to engage in activities which are of a private nature outside your formal employment or clients engagements. However, you must not use your position in any way to induce another person to provide any benefit to themselves, or persons with whom they have family, business, personal, or financial ties.


Discrimination Act in accordance with the laws of your country and your institutional policies in relation to discrimination on the basis of race, national or ethnic origin, colour, religion, sex, marital or family status, disability or age. Is there any form of discrimination which formally allowed?

Outside Interests If you will end up concurrently engaging in another profession, business or occupation you must not allow such outside interest to jeopardize your integrity, independence or competence. In your opinion the term "outside interest" covers what?

The Evolution of Purchasing Purchasing represents a stage in the evolution of civilized human relationships as it enables a desired object to be obtained by trading rather than conquest, plunder or confiscation.

A clay tablet excavated at El-Rash Shamra, northern Syria, dated 2800 B.C carries an inscription that, roughly translated reads: ‘HST to deliver 50 jars of fragrant smooth oil 15 days (a starting date) and during the reign of AS. In return he will be paid 600 small weight in grain. This order will continue indefinitely until the purchaser or his son removes his consent.

The Evolution of Purchasing Before 1900 there were few instances of purchasing departments separate from other operating departments. Purchasing departments as did exist were found mainly in the railroad field. It is worth noting at this point that rail and road transport were among first fields that benefited greatly from industrial revolution and hence needed to deal with multiple suppliers and also stock several components for maintenance.

Purchasing came of age during the early part of World War I, under the impact of expanded production brought about by the war. Howard T. Lewis of Harvard University wrote “Industrial Purchasing” in 1938. The 1950’s recession diverted the attention to cost-cutting efforts on purchased supplies.

The Evolution of Purchasing

According to Reck & LongStage 1 - PassiveDefinition Purchasing function has no strategic direction and

primarily reacts to the requests of other functions

Characteristics High proportion of time on quick-fix routine

operations Functional and individual communications due to

purchasing low visibility Supplier selection based on price and availability


Stage 2IndependentDefinitionPurchasing function adopts the latest purchasing techniques and processes, but its strategic direction is independent of the firms competitive strategy

CharacteristicsPerformance based primarily on cost reduction and efficiency disciplinesCoordination links are established between purchasing and technical disciplinesTop management recognises the importance of professional developmentTop management recognises the opportunities in purchasing for contribution to profitability

The Evolution of Purchasing Stage 3 - Supportive

DefThe purchasing function supports the firms competitive strategy by adopting purchasing techniques and products which strengthen the firms competitive position

CharacteristicsPurchasers are included in sales proposal teamsSuppliers are considered a resource, with emphasis on experience, motivation and attitudeMarkets, products and suppliers are continuously monitored and analysed


Stage 4 – Integrative DefPurchasings strategy is fully integrated into the firms competitive strategy and constitutes part of an integrated effort among functional peers to formulate and implement strategic plan

CharacteristicsCross-functional training of purchasing professionals and executives is made availablePermanent lines of communication are established with other functional areasProfessional development focuses on strategic elements of the competitive strategyPurchasing performance is measured in terms of contribution to the firms success


Jones 5 stage ModelStage 1 – InfantStage 2 – AwakeningStage 3 – DevelopingStage 4 – MatureStage 5 - Advanced

Purchasing & Change

Three drivers have influenced & are influencing changes in purchasing philosophies, processes & procedures;Globalization – global sourcingInformation technologyChanging production & management philosophies

Purchasing & Change

GlobalizationThe increasing interdependence across national & geographical boundaries of people, trade & commerce driven in large part by information technology & technology generally.Eg. Singer sewing machine company, “it buys sewing machine shells from a subcontractor in the united states, the motors from Brazil, the drive shafts from Italy & assembles the finished machine in Taiwan.

Purchasing & Change

Information TechnologyBy sharing information & processing electronic transactions over the internet, suppliers are being converted into e-suppliers

Changing production & management philosophiesGlobal competition has intensified the search for strategies that will yield competitive advantage eg. Reduced inventories, just-in-time, Total quality mgt, supplier collaboration, time based competition, lean & agile production & supply management

Purchasing & Change Changing Aspects of Purchasing & Supply Management

Aspect TraditionalChangingStructure Vertical,

hierarchical functionally oriented Purchasing regarded as a separate function

Horizontal, flatter, self-managed & cross-functional realtionaships Purchasing regarded as part of an integrated supply chain

Procedures Paper-based, slow, high cost All procurement routed thro purchasing

Based on IT applications, Rapid, low cost Increased emphasis on centre-led, user procurement

Purchase Considerations

Price only Buy What we can't make

Total Cost of Acquisition & use subcontract or outsource non-core business


Aspect TraditionalChangingSourcing Multisourcing.

Local or national Little use of purchasing consortia

Reducing supplier base Global Increasing use of purchasing consortia

Supplier relationships

Short-termAdversarial & ConfrontationalWin-lose negotiationsRetention of information

Long-termPartnerships & collaborativeWin-win negotiationsSharing of information

Quality & Specification

Purchaser specifications of design & qualityInspection of goods on receipt

Supplier specifications of design & qualitySupplier certification


Aspect TraditionalChanging

Inventory & Lead times

High to provide security

Low due to JIT requirements to reduce ‘waste’.

Purchasing performance

Assesses mainly on price differences & savings

Assessed mainly on its value-added activities as part of supply chain

Purchasing & ChangePurchasing in FutureResearch indicates that within the decade which commenced in 2000, future trends relating to purchasing & supply management will include;Increase in the strategic importance of PSM – supplier evaluation, selection & mgtAutomation of tactical activities Most non-tactical items will be bought under master contractsThe internet/www will be the main vehicle for electronic purchasingLeading organizations will establish strategic competency centers with highly trained cross-functional personnel

Purchasing & ChangePurchasing in FutureStrategic alliances with suppliers will increaseOrganizations in the supply chain will increasingly share resourcesGlobal supplier development will be critical for global penetrationIncreasing emphasis on win-win negotiationDominant companies in the supply chain will influence the sourcing decision of first, second & third-tier suppliersEnvironment factors will become increasingly important to purchase considerationsPersonel employed in purchasing will require a higher level of training, including that in leadership & influence skills.

Purchasing & ChangeWorld Class Purchasing

Schonberger defined world class manufacturing as analogous to the olympic motto ‘citius, altius, fortius’ (translated as faster, higher, stronger).

World class manufacturing equivalent is continual & rapid improvement

Purchasing & ChangeWorld Class PurchasingTwelve characteristics of world class supplier management were identified by the USA center for Advanced Purchasing Studies;

Commitment to total quality management Commitment to just-in-timeCommitment to total cycle time reductionLong-range strategic plans that are multidimensional & fully integrated with overall corporate planSupplier relationships, including networks, partnerships and alliancesPerformance measurements including regular benchmarking with & across industries.Strategic Cost Management – a total life acquisition approach to evaluating bids & use of IT

Purchasing & ChangeWorld Class Purchasing

Training & Professional developmentService excellence – purchasing is proactive, anticipates customers needs & demonstrates flexibility.Corporate social responsibility – regarding ethical, environment and safety issues & support of local suppliersLearning – world class purchasing recognizes that learning & education are critical factors in continuous improvementManagement & leadership – purchasing executives earn & enjoy top management support & recognize the importance of transformational change

Exercise 1Read on different ways of organizing the procurement function eg;centralization,Divisionalization etc

Documents

DPS 304 : Procurement Management Procurement as Purchasing Purchasing has long been considered one of the basic functions common to all organizations