CHAPTER 1 Flashcards
(33 cards)
Definition of Procurement
SCOPE: Strategic and holistic
FOCUS: Long-term value, supplier development, optimisation
ACTIVITIES: Market analysis, supplier selection, supplier relationship management and contract negotiation
TIMEFRAME: Long-term, strategic partnerships
DECISION LEVEL: Higher- level, strategic decisions
IMPORTANCE: Ensures value creation, risk mitigation and alignment with organizational goals
EXAMPLES: Developing procurement strategy and evaluating supplier performance
Definition of Purchasing
SCOPE: Tactical and operational activity
FOCUS: Short-term transactions and fulfillment of order
ACTIVITIES: Order placement, expediting, invoice payment
TIMEFRAME: Short-term, focusing on immediate needs
DECISION LEVEL: Lower-level, routine decisions
IMPORTANCE: Ensures goods and services are procured on time
EXAMPLES: Issuing purchase orders, checking delivery schedules
PROCUREMENT in the value chain
Support activity to provide support to:
- Primary activities (direct procurement, PR buying)
- Support activities (indirect procurement, NPR-buying, general expenses)
PRIMARY ACTIVITIES
MTS- Make to stock- standard products, planning based on sales forecast
MTO-Make to order- standardized product with minor customization, production after customer order (Dell laptops, pizzas)
ETO- Engineer to order- all activities from design, customer- order procurement to assembly
SUPPORT ACTIVITIES
Computer hard- and software for IT dept
Lease cars
Office equipment
Machinery and equipment for production dept
MRO supplies (Maintenance, Repair, Operations) for maintenance dept
MAIN DIFFERENCES BETWEEN BUYING FOR PRIMARY ACTIVITIES AND BUYING FOR SUPPORT ACTIVITIES
PRODUCT ASSORTMENT- Primary: limited to large Support: very large
NUMBER OF SUPPLIERS- Primary: limited, transparent Support: very large, not transparent
PROCUREMENT TURNOVER PER SUPPLIER- Primary: very large considerable Support: limited
NUMBER OF PURCHASE ORDERS- Primary: considerable Support: very large
AVERAGE ORDER SIZE- Primary: high Support: Small
CONTROL- Primary: depends on type of production planning Support: limited, forecast-related or project-related buying
DECISION MAKING UNIT- Primary: engineering, manufacturing specialists dominant Support: fragmented, varies with product or service
SOURCING
Finding, selecting, contracting and managing the best possible source of supply on a worldwide basis
SUPPLY MANAGEMENT
All activities that are required to manage supplier relationships in such a way that their activities are aligned with the company’s overall business strategies and interests
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 OR MORE SIMPLY- is the process of making sure that the right products get to the right people at the right time. It starts with getting the raw materials (like wood or metal) from suppliers, then makes the product (like a toy or a phone), stores it, and finally sends it to stores or directly to customers.
It’s all about making sure everything runs smoothly, so customers get what they want, when they want it, and at the best price.
VALUE CHAIN MANAGEMENT
All stakeholders belonging to the same value chain are challenged to improve the (buying) company’s value proposition to its final end-customers, i.e. consumers All the people or companies involved in the same value chain work together to improve the product or service the buying company offers to its final customers. The goal is to make the product more valuable, better, and more attractive to consumers, which helps the company stay competitive and meet customer needs.
LINEAR PROCUREMENT PROCESS
Tactical Purchasing
This is the process where a company buys things it needs for its operations.
Internal Customer – A department in the company says what they need (e.g., materials, equipment, software).
Determining Specifications – The company decides exactly what they want (e.g., what type of materials, or what features the software should have).
Selecting Supplier – The company looks for a supplier (someone who sells the product) and picks the best one.
Contracting – The company and the supplier agree on the price, delivery, and other details, and they sign an agreement.
Order Function
Once the company has decided what it needs, it’s time to place the order and make sure everything goes smoothly.
Ordering – The company places the order with the supplier.
Expediting and Evaluation – The company checks to make sure the order is being delivered on time and the right way.
Follow-up and Evaluation – After the order arrives, the company checks if everything is okay and if the supplier did a good job.
Supplier Feedback – The supplier gets feedback, so they know if they did well or if something needs to improve.
In short: Tactical Purchasing is about deciding what to buy, picking a supplier, and signing a deal. Order Function is about actually ordering, making sure it’s on time, and checking if everything is right after it arrives.
DuPONT analysis- helps to understand profitability
DuPont splits company’s profitability into 3 main parts:
Profitability (Net Profit Margin): How much profit you make for each euro of sales
Efficiency (Asset Turnover): How well you use your assets to generate sales
Financial Leverage (Equity Multiplier): How much of the business is funded by debt versus owner’s money. Example: if you borrow money to increase sales, leverage helps, but too much debt can be risky
Formula; Return on Equity (ROE)= Net Profit Margin x Asset Turnover x Equity Multiplier
According to DuPont analysis
Saving 1 Eur in purchasing costs has a bigger impact on net profit margin than earning 1 Eur more in sales
SPEND CUBE:
allows us to allocate procurement expenditure from three different angles; sourcing category, suppliers and internal budget holders or departments- The Spending Cube is a way to analyze and organize a company’s procurement (buying) expenses by looking at them from three different perspectives:
- Sourcing Category (What we buy)
Groups expenses based on the type of product or service being purchased.
Example: Office supplies, raw materials, IT services, transportation. - Suppliers (Who we buy from) (in mock exam- spend per supplier)
Shows how much money is spent with each supplier.
Helps identify key suppliers, negotiate better deals, or find alternative suppliers.
Example: Supplier A provides raw materials, Supplier B provides IT services. - Internal Budget Holders or Departments (Who is spending) (internal customer)
Tracks which department or team is responsible for the spending.
Helps control budgets and improve cost efficiency.
Example: The Marketing team spends on advertising, while the HR department spends on training services.
Why is the Spending Cube Useful?
It gives a clear picture of where the company’s money is going.
Helps find cost-saving opportunities and better deals.
Improves budget control by identifying which departments spend the most.
Supports better supplier management and negotiations.
RAW MATERIALS-
Materials which have undergone no transformation or a minimal transformation and which serve as the base 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 and 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
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 an economic life- cycle. These are investment goods or capital goods. They are not used up immediately like food or paper but instead last a long time and lose value (depreciate) over time as they are used in business.
Examples:
Machines in a factory (used for years but slowly lose value).
Company cars or trucks (used for deliveries, but their value decreases over time).
Office computers (used for work but become outdated after a few years).
These products help businesses work but don’t last forever—they wear out or lose value over time! 😊
MAINTENANCE, REPAIR AND OPERATING MATERIALS (MRO items)-
Materials, which are necessary for keeping the organization running i§n general, and for the support activities in particular
SERVICES-
Labout-intensive, non- material activities that are executed by third parties on a contract basis. This definition means that services are:
Labour-intensive → They require people’s work and effort rather than just machines or materials.
Non-material activities → Services are not physical products (you can’t touch them like a phone or a car). Instead, they are actions or tasks performed by someone.
Executed by third parties → Companies hire other businesses or professionals (third parties) to do these tasks for them.
On a contract basis → Services are usually provided under an agreement (contract), where the provider does the work for a fixed time or under certain conditions.
PROCUREMENT FUNCTION COVERS:
- Make vs. Buy Decision
The company decides whether it should produce the goods itself or purchase them from an external supplier.
Example: Should a car company make its own tires or buy them from a supplier like Michelin? - Defining Procurement Specifications
Determine what needs to be bought, in terms of quality, quantity, and requirements.
Example: Ordering 100 high-quality steel sheets instead of just “some metal.” - Supplier Selection & Procedures
Finding the best supplier that meets cost, quality, and delivery requirements.
Setting up rules and routines to choose suppliers efficiently. - Negotiation & Contracting
Discussing prices, delivery terms, and conditions with suppliers.
Finalizing a legal contract that protects both sides. - Placing Orders & Managing Purchases
Issuing purchase orders to suppliers.
Setting up efficient systems for handling orders. - Order Monitoring & Expediting
Tracking the order to ensure on-time delivery.
Solving problems if deliveries are delayed. - Follow-up & Supplier Evaluation
Checking if the product/service meets expectations.
Keeping records of supplier performance (rating & ranking).
Filing claims if something goes wrong.
Why is this important?
A well-organized procurement function helps a company:
✔ Save money by choosing the best suppliers.
✔ Ensure quality by defining specifications.
✔ Prevent delays by tracking orders.
✔ Build strong supplier relationships for long-term success.
CHALLENGES AND CHANGES IN PROCUREMENT CONTEXT:
- Global sourcing
Companies are buying materials and components from low-cost countries to save money.
Large manufacturers set up International Purchasing Offices (IPOs) to manage global suppliers.
Challenge: Managing risks like longer lead times, quality issues, and political instability. - Leveraged procurement and supply strategies
In companies with several manufacturing plants, important savings can be realized by combining common material requirements.
Leveraged procurement means that companies with multiple factories combine their material needs to buy in larger quantities. This helps them get better prices from suppliers.
The challenge is coordinating between different plants to align their orders and save money.
Imagine you have two toy stores that need to buy a lot of same toys from a supplier. If each store buys only a few toys, it might cost more. But if both stores combine their orders and buy more toys together, the supplier can give them a cheaper price because they’re buying more at once.
The challenge is that the stores need to work together and plan so they can buy the toys together.
3..Sustainable sourcing
Companies must buy responsibly, ensuring suppliers follow ethical, social, and environmental standards.
Challenge: Ensuring compliance with regulations, avoiding suppliers that exploit labor, and reducing carbon footprints.
- Resource scarcity
Essential materials (e.g., rare metals, energy resources) are becoming harder to source.
Challenge: Procurement must plan ahead to secure long-term supplies and find alternatives when necessary.
5.Digitalization
Procurement is shifting to automated and data-driven decision-making.
Challenge: Ensuring that suppliers integrate with digital systems for real-time tracking and efficiency.
- Early supplier involvement
Suppliers are key innovators, so companies must involve them early in product development.
Challenge: Selecting suppliers with strong R&D capabilities and fostering collaboration.
Cross- functional sourcing
7.Cross-Functional Sourcing 🤝
Procurement professionals must work with other departments (e.g., R&D, production, finance).
Challenge: Procurement teams need technical skills to understand product requirements and strategic sourcing.
Cross-Functional Sourcing means that people who buy things for the company (called procurement professionals) need to work together with other teams, like the ones that create new products (R&D), make the products (production), or handle money (finance).
Why is this important?
Each team knows different things, like how to build the product or how much money it should cost. Procurement needs to understand all these things to buy the right materials and make smart decisions.
The challenge is that the procurement team has to learn about all the different jobs to make sure they’re buying the best materials and working well with the other teams!
