WEEK 1 - PROCUREMENT
Taylor, “Management is an art
Course Description
This course provides students with a
comprehensive understanding of the role and
value of procurement management in the
business world. It aims to expose the students to
various procurement management
techniques and strategies.
What Is Procurement?
Procurement involves every activity involved in
obtaining the goods and services a company
needs to support its daily operations, including
sourcing, negotiating terms, purchasing items,
receiving and inspecting goods as necessary
and keeping records of all the steps in the
process.
What is Procurement?
Procurement is obtaining goods or services,
typically for business purposes. Procurement is
most commonly associated with businesses
because companies must solicit services or
purchase goods, usually on a relatively large
scale.
Procurement generally refers to the final act of
purchasing, but it can also include the
procurement process overall, which can be
critically essential for companies leading up to
their final purchasing decision.
What is Management?
“Management” is the process of working with
and through others to effectively achieve the
goals of the organization by efficiently using
limited resources in the changing world.
Management is a purposive activity. It is
something that directs the group
efforts towards the attainment of specific pre-
determined goals.
According to F.W.
of knowing what to
do, when to do, and see that it is done in the
best and cheapest way”.
Why Is Procurement Important in
Business?
Procurement is essential in understanding
supply chains because it helps a
company find reliable suppliers that can provide
competitively priced goods and services
that match the company’s needs. That’s the
case whether the company is seeking raw
materials for manufacturing, a marketing
services provider, or new office supplies.
For example, if a company needs a new supplier
to provide an ongoing service for an
indefinite period — such as an email security
solution — the procurement process
helps the company choose the supplier that best
meets all of the business’s requirements
at a reasonable price. It enables the industry to
avoid wasting time, money, and valuable
resources dealing with an inadequate supplier.
Minimizing cost is a critical aspect of improving
your procurement processes. But it’s
also vital to identify suppliers that provide the
quality of goods and services that the
the company needs and can deliver reliably and
has a track record of doing so.

What is Procurement Management?
Procurement management is responsible for
overseeing all the processes involved in
acquiring the products, materials, goods and
services needed for efficient business
operations. Organizations across all industries
depend on the expertise of procurement
management in seeking out and managing
external supplier relationships to ensure these
needed items are acquired at the best possible
cost. For these reasons, procurement
management has a direct impact on an
organization’s bottom line and strategic business
operations.
What is the Importance of Procurement?
Without procurement, it would be impossible for
most business operations to function.
Procurement management ensures that all items
and services are correctly acquired so that
projects and processes can proceed efficiently
and successfully.
More than a business necessity, procurement
can be leveraged as a competitive advantage
when optimized to save money, time and
resources. But driving down costs by avoiding
delays and errors and maximizing resources is
just part of the reason procurement
management plays an essential role in a
company’s bottom line.
What is the Importance of Procurement?
“Only focusing on cost is not sufficient,” says
Alex Zhong,
supply chain lead at IBM Sterling on Supply
Chain Dive. Procurement
management is “a strategic position to support
the business growth from a revenue
perspective.”
“When you take a look over the last five to 10
years, the supply chain has taken on a much
bigger role and encompassed procurement as a
key function within the organization, as opposed
to residing outside of the supply chain functions,”
says, Zhong.
What is a procurement manager?
A procurement manager is responsible for
sourcing products and services for the company.
The role is sometimes also called a purchasing
manager.
The procurement manager leads a team of
procurement agents and specialists in large
businesses. Often, the role reports to a chief
procurement officer (CPO).On the other hand, in
small- and medium-sized companies, the
procurement manager is often a department of
one. In this case, they report to the chief
operations officer (COO) or chief finance officer
(CFO). Regarding size, procurement teams must
work closely with the finance, operations, and
legal departments.
Procurement manager role
and responsibilities
A procurement manager ensures that their
business purchases the goods and services to
help them achieve their goals. Generally, that
means finding supplier partners that balance
quality and cost. Additionally, the procurement
manager's responsibilities include reviewing past
purchases made by the company. This
evaluation determines vendor effectiveness,
compliance, and the business’s return on
investment (ROI).

Procurement manager role
and responsibilities
The role of the procurement department has
been changing and expanding. Traditionally, the
part focused simply on obtaining goods to meet
internal needs. However, many companies now
recognize the insight and value procurement
managers hold. In light of their ability to reduce
costs, improve outcomes and identify strategic
partnerships.
Procurement manager responsibilities
●Solution and product research
●Inventory management
●Procurement process optimization
●ROI analysis
●Supplier evaluation and selection
●Risk and compliance management
●Contract negotiation
●Data analysis
Purposes and Aims of Purchasing
Purchasing is in charge of supply in the
organization. Its responsibility is to ensure the
availability of stores such as products, facilities,
resources, and
services.
The classic aim of Purchasing—to secure the
right products in quantity and quality at the right
time and place while considering economic
principles—still holds. But due to the increased
importance of purchasing activity, different
strategic approaches have been developed.
Purposes and Aims of Purchasing
Purchasing activities need integrated and long-
term planning. Suppliers must be developed to
become strategic partners, and procurement
markets must be produced globally. Out of these
considerations, strategic purchasing has evolved
into an extended field of action. This
development often leads to a division of
personnel within Purchasing according to
operational and strategic competence areas.
While Operational Purchasing is in charge of the
routine handling of order processes, the
Strategic Buyer develops the long-term
framework conditions subject to the business
strategy.
Purposes and Aims of Purchasing
But this is not a complete picture of the Buyer’s
field of activity. Working with projects in the
context of product development processes is a
further extension of the Buyer’s activities. Apart
from the Project Manager’s considerations of
costs and deadlines, suppliers are more
frequently engaged in technology partnerships at
an the early stage of development projects,
which means that Purchasing also obtains
new significance in project work. Its tasks in this
respect are, amongst others, to help, coordinate,
mediate, and actively organise the process.
Purposes and Aims of Purchasing
In summary, there are three essential functions
of Purchasing today:
• Operational Purchasing: Securing supplies
• Strategic Purchasing: Long-term planning
• Project Purchasing: Support of the product
Operational Purchasing
Operational Buyers assume the classical
purchasing functions with regard to
routine operations. As a rule, they will make
recourse to the conditions established by the
Strategic Buyer.
Within the tasks of Operational Purchasing, we
have, for example, the handling of routine order
processes, expediting deliveries, operational
planning of procurement activities in terms of
demand planning, scheduling, and the
processing of returns and notices of defects.
The main aim of Operational Purchasing is to
secure the availability of materials
at any time and also to achieve optimum stock
levels. Operational Purchasing activities are
often located there. Thus, in classical
Purchasing departments, necessary latitude to
perform strategic tasks is realised without a
need for additional personnel.
Strategic Purchasing
In the context of strategic considerations,
activities prior to the actual order process have
become increasingly important. This function is
assumed by Strategic Purchasing. Strategic
Buyers make decisions that are beyond the
scope of day-to-day operations. In doing so, they
create the framework conditions of Operational
Purchasing.
The first step is to define the basic strategic
direction of procurement activities
in terms of supplier, commodity groups, and risk
strategies that support the overall business
strategy. Furthermore, Strategic Buyers research
potential procurement markets, negotiate
framework agreements, and manage the
supplier portfolio.
Project Purchasing
Project Purchasing is a multidisciplinary
procurement function within the context of
product development projects in which
Purchasing is increasingly gaining significance.
One of its main tasks is to coordinate all
purchasing activities within the scope of the
project. Project Purchasing, therefore,
represents the suppliers involved, and it also
represents the interests of the Purchasing
department in the project team. In doing so, it
makes use of the resources of Strategic
Purchasing and hands over the established
framework conditions once the project has been
approved.
Project Purchasing
The importance of Project Purchasing becomes
especially clear if one considers that roughly
two-thirds of the product costs are determined in
the early opening stages of development
projects. For this reason, the early involvement
of Purchasing at the start of the project is
becoming increasingly important and should be
backed by the management. Project Buyers are
also involved in the case of complex, indirect
supplies with long lead times. This may be, for
example, capital investments such as new
plants, machinery, or workshops. That is why
Project Buyers need a sound basic knowledge of
technical and commercial aspects and a distinct
understanding of Project Management.
 ● Processing and organising payment with
WEEK 2 - PROCUREMENT supplier

REVIEW: Procurement can be either of the following

Procurement
It is the process of identifying and obtaining
goods and services. It includes sourcing,
purchasing and covers all activities from
identifying potential suppliers through to delivery
from supplier to the users or beneficiary.
● Purchasing: It is the specific function
associated with the actual buying of
goods and services from suppliers.
● Sourcing: It is simply identifying and
working with appropriate suppliers. It is
the process of acquiring goods, works
and services.
types:
a) Merchant buyers: These include wholesalers
and retailers who purchase for resale.
b) Industrial buyers: These include those who
purchase raw materials, capital equipment, or
maintenance, repair, and operating supplies.
● A general approach to procurement has
a series of common steps,which start
with a user identifying a need for
materials and end with its delivery.
Procurement cycle may be considered as
a process to include:

Procurement is a strategic process of product

or service sourcing, for example researching,
negotiation and planning. It comprises the
following:

● Identifying needs and requirements

● Sourcing and evaluating local, national,

or international suppliers

● Negotiating terms, conditions, and

contracts

● Building and managing supplier

relationships

● Performing cost savings and profit

margin analysis

● Receiving goods/services and

warehouse management

Procurement Cycle
a) Identification of need and requirements:
Based on business objectives, establish a short-
term strategy of three to five years followed by
defining the technical direction and requirements
b) External macro-level market analysis:
Based on its requirements, an organisation
assesses the overall marketplace by
understanding the competitiveness of the
marketplace and trends that are likely to
impact the organisation.
● A general approach to procurement has
a series of common steps, which start
with a user identifying a need for
materials and end with its delivery.
Procurement cycle may be considered as
a process to include:
c) Cost analysis: Accumulation, examination,
and manipulation of cost data for comparisons
and projections to help in plan.
d) Supplier identification: Identifying suppliers
who can provide the required product or services
from different sources.
e) Entering into Non-disclosure agreement
(NDA): Request vendors to sign an NDA prior to
engaging with them to protect the organisation
where sensitive information is shared with
multiple potential vendors.
● A general approach to procurement has
a series of common steps, which start
with a user identifying a need for
materials and end with its delivery.
Procurement cycle may be considered as
a process to include:
f) Supplier communication: Typically conduct
competitive bidding processes using a variety of
competitive bidding methods such as requests
for quotation, proposals, information, tender,
solution or partnership; making direct contact
with the suppliers; samples examined or trials
undertaken; and doing best value assessment.
● A general approach to procurement has
a series of common steps, which start
with a user identifying a need for
materials and end with its delivery.
Procurement cycle may be considered as
a process to include:
g) Negotiations and contracting: To include
price, availability, customisation, and delivery
schedules which are outlined in purchase order
or formal contract.
h) Logistics and performance management:
To complete supply process based on contract
terms, review their experience for reorder to
consider continuing with same suppliers or
continue with other suppliers.
i) Supplier management and liaison: Using
supplier relationship management process for
more strategic supplies within a formal
governance process.
7 R’s of Procurement
● 1) Right Price
● 2) Right Quantity
● 3) Right Quality
● 4) Right Time
● 5) Right Place
● 6) Right Source
● 7) Right Service

Immediate Goals of Procurement
The aim of procurement is to primarily have a
reliable supply of materials. Other more
immediate goals being:
● Organising a reliable and uninterrupted
flow of materials into an organisation.
● Working closely with user departments,
developing relationships, and
understanding their needs.
● Identifying good suppliers, working
closely with them, and developing
beneficial relationships.
● Buying the right materials and making
sure that they have acceptable quality,
arrive at the time and place needed, and
meet any other requirements.
Immediate Goals of Procurement
The aim of procurement is to primarily have a
reliable supply of materials. Other more
immediate goals being:
● Negotiating good prices and conditions.
● Keeping stocks low, considering
inventory policies, investment, standard
and readily available materials.
● Moving materials quickly through the
supply chain, expediting deliveries when
necessary.
● Keeping abreast of conditions, including
pending price increases, scarcities, new
products, etc.
Types of Procurement
Direct procurement:refers to obtaining anything
that’s required to produce an end-product. For a
manufacturing company, this includes raw
materials and components. For a retailer, it
includes any items purchased from a wholesaler
for resale to customers.
Indirect procurement: typically involves
purchases of items that are essential for day-to-
day operations but don’t directly contribute to the
company’s bottom line. This can include
anything from office supplies and furniture to
advertising campaigns, consulting services and
equipment maintenance.
Goods procurement: largely refers to the
procurement of physical items, but it can also
include items like software subscriptions.
Effective goods procurement generally relies on
good supply chain management practices. It
may include both direct and indirect
procurement.
Services procurement: focuses on procuring
people-based services. Depending on the
company, this may include hiring individual
contractors, contingent labor, law firms or
on-site security services. It may include both
direct and indirect procurement.
Principles of Procurement
Value for money: The organization must
manage funds efficiently and economically when
procuring goods and services. This may include
conducting cost-benefit analyses and risk
assessments. It’s worth noting that low cost does
not necessarily equate to greater value;
characteristics such as quality and durability also
factor into determining whether the purchase
represents value for money.

Fairness: Procurement should not provide

preferential treatment to individuals or suppliers.
All bids should be assessed objectively, based
on how well they meet the organization’s needs.

Competition: Organizations should seek

competitive bids from multiple suppliers, unless
there are specific reasons not to do so, such as
a sole-source provider where the good or
service is only available from a single vendor.

Efficiency: Procurement processes must be

carried out efficiently to help
maximize value and avoid delays.

Transparency: Organizations should make

relevant procurement information
available to everyone, including the public as
well as suppliers. Information
should be kept confidential only when there are
legal or other valid reasons to
do so.

Integrity: Those who practice public

procurement should always strive to be
perceived as trustworthy, reliable, honest and
responsible. Funds must be
used for their intended purpose and in the public
interest.

Accountability: People involved in the

procurement process are accountable
for their actions and decisions. They are
required to report procurement
activities accurately, including any errors.
WEEK 3 - PROCUREMENT
Purchasing
It includes the processes concerned with
acquiring goods and services, including payment
of invoices being a part of the wider procurement
process. Purchasing is a function that focuses
on how products and services are acquired and
ordered, such as raising purchase orders and
arranging payment. It has the following activities:
Receiving purchase requisitions
Evaluating quotes from suppliers
Raising and processing the purchase orders
Purchasing
● Purchasing contributes by:
● Actively seeking better materials and
reliable suppliers.
● Working closely with strategic suppliers
to improve the quality of
materials; and
● Involving suppliers and purchasing
personnel in new product design and
development
The Strategy of Purchasing
Acknowledging the importance of purchasing is
not enough to achieve the strategic and
integrated management of the company’s
supply.
The next step must be to develop an approach
by which such an integrated view is made
possible and thus specific courses of action are
opened up—Purchasing needs a strategy.
The Strategy of Purchasing
The attainment of long-term goals. The strategy
forms the highest level in the planning process,
answering the question: “What does the
company want to achieve?” Frequently, the
strategy is derived from a company vision, a
formalized picture of the company in the future.
From this vision, the business strategy is
derived, but it will still depend
on many factors.
Developing functional strategies
Following the overall business strategy, the next
step will be to develop functional strategies such
as marketing, development, and distribution
strategies. At this stage, the Purchasing
department also enters the strategy process by
defining its purchasing strategy and aims,
deriving courses of action from this strategy, and
implementing them. The crucial question in this
context is how far Purchasing can contribute
to the attainment of the strategic goals of the
company.
Developing functional strategies
Strategies cover a period of 3–5 years. This
does not mean that the strategy is set in stone
during this period. Rather, the strategy serves as
a framework for performance that needs to be
reviewed regularly; on the one hand, to quantify
the level of implementation and on the other
to adapt the basic strategic direction to changing
framework conditions. Consequently, a process
of recurring reviews is established.
The Process of Developing Strategy
With the help of different management methods,
e.g. SWOT analysis core elements can be
identified on which further strategic planning will
be built. On the basis of these considerations,
strategic targets are defined which will form the
framework for the intended development of the
company. In the next stage, the methods for
meeting the targets shall be established, as well
as determining how concrete metrics and
guidelines will be developed. During the ongoing
process, these methods must be checked and
quantified with respect to their effectiveness and
degree of implementation. The cycle of the
strategy process closes with the introduction of
measures that serve the correction or further
development of the strategy.
Strategic Analysis
An analysis of the purchasing environment can
serve to ascertain the relevance of Purchasing
towards achieving the company’s targets.
What is the position of Purchasing in the
business strategy and which demands do
Purchase have to meet? It can also be
ascertained which internal purchasing
requirements must be satisfied; for example
quantities, technologies, or processes, to which
the purchasing strategy must be aligned.
Monitoring external factors show the influence
the corporate environment has on the
achievement of the company’s goals and how
far this environment is linked with internal
requirements.
Analysis of the Internal Requirements
By analyzing the internal environment, the
requirements of one’s own company are
identified.
Cross-departmental sharing of information is
absolutely necessary in order to translate the
identified requirements into concrete demands.
Essentially, the following aspects will be
considered:
● Business Strategy
● Increase in Value
● Product Roadmap
● Technology Planning
● Production Planning
● Product Complexity and Product Quality
● Flexibility
Analysis of the Internal Requirements
Business Strategy - The business strategy
fundamentally determines the direction of the
purchasing strategy. What position does the
company want to occupy in the market in the
future, and what is the role of Purchasing in
this process? Ex. If the company distinguishes
itself by cost leadership, price reductions and
“low-cost country sourcing” will have priority.
Increase in Value - As a rule, investors expect a
lasting increase in the company’s value. To
ensure that increase, a cost-oriented approach
may be chosen with the consequences of total
cost control and the reduction of material prices.
Otherwise, a growth-oriented approach may
result in an increase in the value of the
company.
Product Roadmap - The product roadmap gives
an overview of the current and future product
portfolio of the company. Therefore, the
roadmap shows which products the company
has introduced in the market or intends to
introduce at which time and in which quantities.
For Purchasing, the roadmap includes important
information such as product life cycles, market
segments, competitive situations, planned
quantities of sale, and required technologies.
Technology Planning - Closely connected to
the product roadmap is technology planning.
Which technologies will be required in the future,
how many new developments will there be, and
what is the company’s own share of the
innovations? Especially in view of increasing
demands on time frames for development
projects, there is a clear trend towards open
innovation processes that require the early
involvement of development partners. To enable
this, Purchasing must proactively act in terms of
procurement market research and supplier
development in order to identify the optimum
partners at an early stage.
Production Planning On the basis of the
product roadmap, a decision must be made as
to how the ratio of internal to external added
value should be balanced.
What is the degree of the company’s own added
value and what preliminary work will suppliers
have to contribute in the future? Will parts be
bought separately or is it intended that complete
modules are bought? Furthermore, in this
context, a general make-or-buy approach must
be developed in which standardized decisions
can be made as to when supply shall be kept in-
house or sourced externally.
Product Complexity and Product Quality
What are the company’s demands regarding
product quality and therefore also on the
suppliers’ added value? If the demands are strict
they will be the decisive factor in future supplier
selection exercises. Furthermore, supplier
developments aimed at improving quality and a
targeted supplier build-up must be initiated to
meet the requirements.
Flexibility Depending on industry and market
position, companies must be able to react
quickly and flexibly to shifts in the market.
Competitive pressure, customer requirements, or
short product life cycles determine the
degree of flexibility with which Purchasing must
manage its activities in order to ensure the
required product availability. Just as important
as the internal demands on Purchasing are the
external market conditions which must be
reconciled with the company’s requirements.
The specific approach to the external
environment extends to the
following areas:
Industry Structure - For purchasing, the
question of whether it is acting in a buyer or a
seller market is of enormous importance. The
answer will be different depending on the
economic situation and industry. If, for example,
Purchasing acts in an oligopolistic market its
bargaining power will be correspondingly weak.
Another important point is the future
development of supply and demand in the
industry. How will the procurement market
change; is there a risk of material bottlenecks
or will excess capacity build up? All these
factors may influence current purchasing
methods.
Supplier Structure - Apart from a sound
knowledge of the current market situation,
purchasing must also know its own supplier
structure in details. The answer will be different
depending on economic situation and industry.
If, for example, Purchasing acts in an
oligopolistic market its bargaining power will be
correspondingly weak. Another important point is
the future development of supply and demand in
the industry. How will procurement markets
change; is there a risk of material bottlenecks or
will excess capacity build up? All these factors
may influence current purchasing methods.
Economic Environment - The review of the
economic environment does not focus on
individual sectors but on macroeconomic
developments. This includes economic
indicators, currency fluctuations, import and
export provisions, or political regulations.
Areas for Further Consideration - Regional
characteristics may be another factor the
Purchasing department has to consider.
WEEK 4 - PROCUREMENT
REVIEW:
Strategic Analysis
● An analysis of the purchasing
environment can serve to ascertain the
relevance of Purchasing towards
achieving the company’s targets.
● What is the position of Purchasing in the
business strategy and which demands
does Purchasing have to meet? It can
also be ascertained which internal
purchasing requirements must be
satisfied; for example quantities,
technologies, or processes, to which the
purchasing strategy must be aligned.
● Monitoring external factors shows the
influence the corporate company’s goals
and how far this environment is linked
with internal requirements.
Analysis of the Internal Requirements
● By analysing the internal environment,
the requirements of one’s own company
are identified.
● Cross-departmental sharing of
information is absolutely necessary in
order to translate the identified
requirements into concrete demands.
Essentially, the following aspects will be
considered:
● Business Strategy
● Increase in Value
● Product Roadmap
● Technology Planning
● Production Planning
● Product Complexity and Product Quality
● Flexibility
Analysis of the External Environment
● Just as important as the internal
demands on Purchasing are the external
market conditions which must be
reconciled with the company’s
requirements. Specific approach to the
external environment extends to the
following areas:
● Industry Structure
● Supplier Structure
● Economic Environment
● Areas for Further Consideration
SWOT Analysis
● The collected information can be
reviewed systematically with the help of a
SWOT analysis in order to find the
appropriate parameters for the
development of a strategy. In a SWOT
analysis, internal strengths and
weaknesses are combined with external
opportunities and threats. The collected
information is entered into a four-field
matrix; the particular fields may be
characterised as follows: (see next slide)
Strengths
 ● What strengths do the existing structures
have with respect to the products to be
procured? Are there high volumes that
strengthen one’s own bargaining power;
is there a high degree of technical know-
how in the products to be procured; or
can existing platform solutions be
applied? Other Purchasing strengths may
be a well positioned supplier network or
the participation in Group Purchasing
Organisations (GPOs). A good company
image and high brand awareness are
factors that should not be underrated,
especially in view of global purchasing
activities.
Weaknesses
● Are there any actual weaknesses with
regard to the products to be procured?
Weaknesses may be, amongst others,
limited resources, bad supplier relations,
and a lack of experience with the
products to be procured.
Opportunities
● What external opportunities might arise
with regard to the products to be
procured? Are there any excess
capacities; do suppliers command
special core competences; or is a
favourable market situation beginning to
emerge?
Threats
● What external threats and risks can be
estimated? Do monopolistic procurement
markets matter? Is there a share of
single-source supply? Could material
bottlenecks occur; or might suppliers pull
out?
● Target Setting
● Purchasing targets are defined with the
aid of the collected information and the
resulting overview. Essentially,
purchasing targets can be divided
according to two criteria: efficiency and
effectivity.
Efficiency targets
● Efficiency targets include the operational
targets of Purchasing.
● From an operational point of view, the
focus is on timely supply of products of
the required quality at competitive prices
to the company. In practice, this means:
reducing costs, ensuring quality, and
keeping deadlines. When setting these
targets, it is important to make sure that
an optimal balance should be achieved
and that none of the three targets are
ignored. In this context, target conflicts
can arise, e.g. in cases when the
quickest possible delivery irrespective of
quality is desired, or in cases when high
quality products are bought in without
considering the cost.
● Effectivity targets include the strategic
targets as opposed to the operational
 targets of costs, quality, and time.
Strategic targets aim for safety, growth,
and optimisation. For the costs, this may,
for example, mean the aggregation of
demand; for quality, the development of
suppliers; and for time, the shortening of
supply chains. If the focus is broadened
to include security, risk management will
become relevant; by including growth,
exploiting new sources of supply will be
necessary; and for optimisation the
design of internal processes and the
training of purchasing colleagues.
From this, general codes of conduct may
be formulated. These codes reflect the
basic design of the purchasing activities.
These rules of conduct often follow so-
called guiding principles by which
companies commit themselves to
compliance with internationally agreed
guidelines and social standards. Such
guidelines may demand, amongst other
things:
● Fair and partner-like conduct in dealing
with suppliers

● SMART rule: Targets must be Specific,
Measurable, Attainable / Agreed,
Realistic and Time-related
Strategy Development
● In the next stage, the purchasing strategy
is worked out against the defined targets.
From this, general codes of conduct may
be formulated. These codes reflect the
basic design of the purchasing activities.
These rules of conduct often follow so-
called guiding principles by which
companies commit themselves to
compliance with internationally agreed
guidelines and social standards. Such
guidelines may demand, amongst other
things:
● Compliance with ecological, social, and
ethical standards
● Combating corruption
● At the next stage, commodity group and
supplier strategies are defined. These
two aspects cannot be separated from
each other. While commodity group
strategies answer the question of what
shall be procured, supplier strategies say
how and where the products shall be
procured.

● Fair and partner-like conduct in dealing

with suppliers

● Compliance with ecological, social, and

ethical standards

● Combating corruption

Commodity Group Strategy

● In the next stage, the purchasing strategy
is worked out against the defined targets.
 ● Once internal company requirements and
external market conditions have been
brought together, the Purchasing
department will review the strategic
importance of the individual commodity
groups. To do so, the portfolio technique
as shown below can be used, by which
the requirements of the criteria “company
relevance” and “market relevance” are
divided into the divided into the
following four commodity groups:
Non-critical Commodity Groups
● Commodity groups classified as “non-
critical” are characterized by low
volumes, high availability, and low
complexity. Typically, these groups
encompass “C” items (identified with the
help of an ABC analysis) such as screws,
standard parts, and indirect material such
as ancillary and operating materials or
office supplies.
● With respect to non-critical commodity
groups, the target must be to buy them at
the best price while reducing supervision
to a minimum. At the extreme, this may
be achieved by outsourcing to a
purchasing service provider or by
automated order processes within the
scope of an e-procurement system.
Bottleneck Commodity Groups
● While “bottleneck commodity groups”
may also be characterized by low
volumes, purchasing them is complicated
by low availability and/or high complexity.
As a rule, the procurement volumes are
too low to either arouse the suppliers’
interest or initiate internal measures by
which the respective item might be
simplified or replaced. In many cases, the
only possible solution will be risk
minimization by providing high safety
stocks.
Leverage Commodity Groups
● “Leverage” products are the Buyer’s
“bread-and-butter” business. They are
characterized by high volumes, high
availability, and low complexity. Thanks
to high purchasing volumes and strong
supplier competition, cost reductions can
be achieved easily.
Strategic Commodity Groups
● These products are characterized by high
volumes, low availability, high
procurement risks, and high complexity.
These commodities must be managed
most thoroughly, e.g. by the development
of strategic suppliers, comprehensive risk
management, and by incessant
procurement market research.
● By classifying the demands, basic
strategies can be developed that allow
for the management of supply, costs, and
also the risks of the individual commodity
groups. On this basis, the Purchasing
department has to develop the best
possible procurement strategy with
respect to particular materials in order to
satisfy all relevant demands in an optimal
manner.