CH4 - Management of procurement and purchasing

Question 1

Procurement

Answer 1

• Strategic procurement: long-term decisions beyond the day-to-day business.
• Operative procurement: deals with short-term decisions in the daily business of operation. The strategic objectives build the framework for operative business.

Question 2

Strategic procurement

Answer 2

 long-term decisions
 optimizing the price / performance ratio
 procurement market research
 qualified bid comparison
 contract negotiations

A central requirement for the selection of procurement strategies is the definition of the strategic basic direction and the targets of a company.
Strategic errors generate high costs and generally take a long time to correct.

Question 3

Operative procurement

Answer 3

 short-term decisions
 pure order activity
 daily business

Operative procurement has the task of allowing the strategic targets to be achieved.

Question 4

Strategic procurement - Tasks

Answer 4

 global, single, modular sourcing of A-parts
 diversification of the supply risk
 supplier evaluation
 framework contracts
 assurance of material quality
 procurement process optimization
 shortening of lead times
 reduction of inventory and procurement costs
 risk management

Question 5

Operative procurement - Tasks

Answer 5

 planning and forecasting, requests, inquiries, orders
 B- and C-part management
 level of safety stock
 ensuring material availability
 monitoring of deadlines, quantity and quality specifications
 electronic procurement
 risk management

Question 6

Operative procurement process- Steps

Answer 6

It has the task of providing the right material at the right time in the right quantity and quality.

1. Requirement planning
   MRP (Material Requirement Planning) calculates the requirement quantity and date.
2. Requirement notification
   MRP reports determine quantities and dates via purchase requisition to the responsible purchaser.
3. Consolidation
   Purchaser consolidates the requirements of the consumption points (bulk order).
4. Supplier selection
   Purchasing selects qualified suppliers.
5. Inquiry
   Purchasing sends inquiries to selected suppliers or proffer their requirements on the internet.
6. Bid comparison
   Purchasing department compares the offers according to specific criteria such as price, quality, time.
7. Offer choice
   Best offer / supplier is determined.
8. Order
   Purchasing triggers an order and supplier confirms. (Framework contracts possible -> step 3-8 omitted).
9. Order tracking
   Purchasing / MRP monitors the order (quantity, quality, deadline).
10. Supplier evaluation
    Evaluation of the supplier according to predefined aspects.

Question 7

Organization of procurement

Answer 7

ORGANIZATIONAL INTEGRATION

• Central –> Tasks are performed by one organization unit
• Decentral –> Tasks are performed by several organization units
• Mixed –> Tasks performed by central and decentralized organization units

ORGANIZATIONAL STRUCTURE

• Performing –> Units are classified by performing divisions (Order processing, requests, warehousing..)
• Objects –> Classification is done accordingly to material group (raw materials, auxiliary materials, purchased parts…)
• Regions –> Classification is done based on procurement markets (Asia, Western Europe)

Question 8

Decision factors to decide wether the procurement is centralized, decentralized or mixed

Answer 8

 size and location of the company
 number and distance of physically separated plants
 industry sector
 conformity of production programs
 in accordance with the required materials and markets
 flexibility of the company

Central procurement is often advantageous for small and medium-sized companies, e.g. bundling the requirements and one central point of contact.

Decentralized procurement can be locally oriented or simply by name. This way of procurement often is advantageous for big companies with many locations or separated responsibilities for specific material groups.

Question 9

Central procurement - Pros and Cons

Answer 9

Pros
 ordering large lot sizes leads to lower prices (discounts, bonuses.)
 central point of contract for internal departments and suppliers
 better overview, key decisions
 higher potential for standardization

Cons
 slow decision making (especially in big companies with many locations)
 country-specific circumstances have to be considered (compensation transactions, purchasing from local suppliers)

Question 10

Decentral procurement - Pros and Cons

Answer 10

Pros
 quick decision making
 meeting specific requirements for individual product sales
 high levels of experience and motivation of employees
 increased flexibility and adaptability

Cons
 majority of daily work involves ordering
 some tasks are performed multiple times (e.g. searching for suppliers)
 little time for procurement marketing
 worse purchasing conditions (fewer discounts, higher costs)

Question 11

Lead Buyer concept

Answer 11

 Mixed organizational structure combines advantages of centralized and decentralized procurement.
 Business units determine lead buyer for one or more specific groups of material.
 Lead buyer is responsible for management and coordination of strategic procurement activities for all decentralized
organizational units within a material group.
 The operational processing of the orders is done subsequently by the purchaser of the material groups.

Question 12

Supplier management

Answer 12

Steps:

• Selection
• Assesment
• Integration

The aim of supplier management is to develop / obtain a sufficient number of efficient sources of permanent supply and availability for the procuring enterprise.
Therefore, the task of the supply chain policy is to analyze the situation of the procurement markets and to determine and optimize the intensity of the cooperation with suppliers

Criteria for the supplier relationship:
 selection of suppliers in the concept phase
 partial development and design by supplier
 exchange of cost information
 common cost objectives