Key words Flashcards
Purchasing:
The management of 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 under the most favourable conditions.
Supply
Supply includes at least purchasing, materials management, incoming inspection and receiving. Supply is used when relating to buying based upon total cost of ownership in a manufacturing environment.
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.
Primary activities
Primary activities are those activities that are required to offer the company’s value proposition to its customers. They consist of inbound logistics, operations, outbound logistics, marketing and sales and customer service activities.
Support activities
Those value activities that are required to support the company’s primary activities. These include procurement, technology development, human resources management and facilities management (i.e. those activities aimed at maintaining the firm’s infrastructure).
Raw materials
Materials which have undergone no transformation or a minimal transformation, and they serve as the basis materials for a production process.
Porter differentiates between five generic categories of primary activities:
Inbound logistics.
These activities are related to receiving, storing and disseminating inputs to the production process, such as inbound transportation, incoming inspection, materials handling, warehousing, inventory control and reverse logistics.
Operations.
Activities associated with transforming inputs into the final product, such as machining, assembly, packaging, equipment maintenance, testing, printing and facility
operations.
Outbound logistics.
These are activities associated with collecting, storing, and physically distributing the final product to customers, such as finished goods warehousing, materials handling, outbound transportation, order processing and scheduling.
Marketing and sales. These activities relate to advertising, promotion, sales, distribution channel selection, the management of channel relations and pricing.
Services.
Activities associated with providing services to customers to enhance or maintain the value of the product, such as installation, repair and maintenance, training, parts supply and product adjustment.
Support activities are grouped into four categories:
Procurement.
Relates to the function of purchasing inputs used in the firm’s value chain. These may include raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment and buildings. These examples illustrate that purchased inputs may be related to primary activities
as well as support activities. This is one reason why Porter classifies procurement as a support activity and not as a primary activity.
Technology development.
‘Technology’ has a very broad meaning in this context,
since in Porter’s view every activity embodies technology, be it know-how, procedures or technology embodied in processes, systems or product designs. Most value activities use a technology that combines a number of different sub-technologies involving different scientific disciplines.
Human resources management.
These are all the activities directed at recruiting, hiring,
training, developing and compensation of all types of personnel on the company’s payroll, active in both primary and support activities.
Firm infrastructure.
The whole company is the customer of these activities. Infrastructure does not support one or more primary activities – rather, it supports the entire set of company processes. Examples include management, planning, finance, accounting, legal, government affairs, quality management and facilities management. In larger
companies, which often consist of different operating units, one sees these activities divided among headquarters and the operating companies. This division of these tasks between the headquarters and the business units is often the subject of discussion, which is why it changes so frequently.
Facilities management
Relates to the management (planning, execution and control), and the realization of housing and accommodation, the services related to these, and other means in order to enable the organization to realize its mission
Direct purchasing
Purchasing of all materials and products that are used for manufacturing companies’ end products.
Investment goods or
capital equipment
Products which are not consumed immediately, but whose purchasing value is depreciated during its economic life-cycle.
Indirect purchasing
Purchasing of all materials, components and services that are used to support the company’s infrastructure and back-office activities.
Expediting
Following up on a purchase order to make sure that the supplier is going to perform as it has confirmed through the purchase order confirmation. There are three types of expediting, i.e. routine status check, advanced status check and field expediting.
Quality
Quality refers to the total of features and characteristics of a product or service that bear on its ability to satisfy a given need (American National Standards Institute). Quality is meeting (internal or external) customer’s requirements that have been formally agreed between a customer and a supplier.
Purchasing function
Covers activities aimed at determining the purchasing specifications based upon ‘fitness for use’, selecting the best possible supplier and developing procedures and routines to be able to do so, preparing and conducting negotiations with the supplier in order to establish an agreement and to write up the legal contract, placing the order with the selected supplier or to develop efficient purchase order and handling routines, monitoring and control of the order in order to secure supply (expediting), follow-up and evaluation (settling claims, keeping product and supplier files up-todate, supplier rating and supplier ranking).
Total cost of
ownership (TCO)
Relates to the total costs that the company will incur over the lifetime of the product that is purchased.
Sourcing
Finding, selecting, contracting and managing the best possible source of supply on a worldwide basis.
Category
A group of products which can be substituted for one another by a consumer; examples include cereals, bakery, household products, body care and so on.
Sourcing strategy
Identifies for a certain category from how many suppliers to buy, what type of relationship to pursue, contract duration, type of contract to negotiate for, and whether to source locally, regionally or globally.
Partner
A (supplier) partner is defined as a firm with whom your company has an on-going buyer–seller relationship, involving a commitment over an extended period, a mutual sharing of information and a sharing of risks and rewards resulting from the relationship.
Purchasing
management
Relates to all activities necessary to manage supplier relationships in such a way that their activities are aligned with the company’s overall business strategies and interests.
Request for
information (RFI)
Suppliers are invited to submit general information that may help them to qualify for a potential tender.
Request for quotation
RFQ
Suppliers are invited to submit a detailed bid which meets the requirements as laid down in the request for quotation against the lowest possible price (identical to request for tender).
DuPont analysis
Financial diagnostic tool to calculate the company’s return on investment based upon sales margin and capital turnover ratio. Used to assess the effect of a 2% purchasing saving on the company’s return on investment (ROI).
Payment terms
Payment terms relate to what, how and when the buyer will pay for the products and services delivered by the supplier.
Indirect materials
All purchased materials and services that do not become part of the company’s value proposition. May be classified into MRO-supplies, investment goods (also referred to as capital expenditure, or CAPEX) and services (identical to non- BOM-materials or non-production materials).
Global sourcing
Proactively integrating and co-ordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering and operating locations.
Corporate social
responsibility
How to contribute to a better world, a better environment and better labour conditions. The idea is to develop business solutions in such a way that requirements of the current world population are met without doing harm to the needs of future generations. Companies need to balance the interests of customers, employees, the environment and its shareholders, i.e. serving the needs of ‘People, Planet, Profit’.
Early supplier
involvement (ESI)
Situation where the supplier is involved by the buyer in an early stage of the new product development process.
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 met or surpassed.
Value chain
Composed of value activities and a margin which is achieved by these activities. Value activities can be divided into primary activities and support activities. The margin represents the value that customers want to pay extra for the company’s efforts compared with the costs that were required for these.
Budget
A budget serves as a vehicle for delegating activities and responsibilities to lower management levels in the organization.
