Lesson 1 Scope and Influence of Procurement R0 1

Chapter 1 –
The scope and influence of

procurement
LOGO
Learning outcomes
How to define procurement
Strategic roles of procurement
The strategic scope of procurement
Procurement and change
2
Learning outcomes
World-class procurement
The status of procurement and

supply management (PSM)
Reflections on procurement
positioning in business
3
What is procurement?
4
Procurement vs Purchasing
PROCUREMENT PURCHASING
5
Business management function
Strategic
Manage
Identification Sourcing Access objectives
ment
of the external resources
6
• the best
to possible supply
implement outcome
resourcing
strategies
to explore
supply
market
opportunities
Procurement
exists
7
applies the science &

art of
external resource & supply

management through
a body of knowledge
interpreted
by competent
practitioners &
professionals.
8
To enable
world-class
To ensure a organisational
continuing performance.
A pro-active, supply of
strategic goods
corporate and services
activity
9
Cost and price

Quality
models
Effective Other essential

negotiation of supply
contracts characteristics
Supply chain
risk
management
10
right
quality
What
about 07
right right Rs in
source quantity Logistics
05 ?
Rights
right right
price time
11
P2P process (Procurement cycle)
Procure-to-Pay
cycle
Needs Contract
Forecasting Contract Receipt & Payment
Clarific Sourcing Administ
& Planning Approval Inspection & SRM
ation ration
An example for this: baking a cake for birthday

Sarah is the party planner = planning team You are cake maker
= procurement + production team
 How many Inform  People --> Decide how many
people? and ingredients.
 How much food decide  When --> prepare and deliver
needed? people at the right time
 When & where involved 13  Where --> at the right place
14
Procurement vs Purchasing
The Krajic portfolio matrix
Figure 1.1 The relationship

between procurement, supplier
management and purchasing
Due diligence Risk Supplier Continuous

management relationship improvement
management
Investment in Investment in Investment in

‘right first inventory procurement
time’ know-how
15
Due diligenece
■ financial robustness, including
working capital
■ competence & availability of key

personnel resources
■ reliance & extent of sub-contracting
■ history of legal disputes & litigious

actions
16
Due diligenece
■ experience of partnering
relationships
■ existence of a robust 5-year

business plan
■ history of insurance claims
■ IT system robustness
17
Risk management of the supply chain
3 categories of supply chain
1 Those risks that only the supplier can

manage
risks:
2 Those risks that only the buying

organisation can manage
3 Those risks that must be jointly managed

by the supplier and the buying organisation.
18
Supplier relationship management
❖ ■ conducting regular blame free reviews of

contracts
❖ ■ a joint commitment to continuous
improvement
❖ ■ sharing long-term business goals
❖ ■ active involvement of senior people at both
organisations
❖ ■ negotiations based on genuine business
objectives (lesson 7)
❖ ■ the provision of accurate and timely business
and contract management data.
19
Continuous improvement of supplier
performance
❖
20
The supplier’s investment in
‘right first time’
Profound Analysis
Specified
Pre- Bidder’s quality
quality
qualification management
satisfied or
processes attributes
exceeded
21
inventory
22
procurement expertise
Investment
in
Procurement procurement
operation know-how?
contributing
to a
Examine the competitive
potential advantage?
supplier
23
Managing
obstacles to Finance
change
Strategic
Technology scope of Legal
procurement
Supply chain
Operational
risk
24
FINANCE
25
LEGAL
26
SUPPLY CHAIN RISKS
27
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OPERATIONAL
28
TECHNOLOGY
29
09/09/2022

MANAGING OBSTACLES TO CHANGE
30
Procurement and change
Procurement & change
1.Challenge to manage escalating purchasing

costs
2.Public sector focus on driving out inefficiencies
3.Increasing trend of outsourcing
4.Recognition of procurement significant
contribution to efficiency
5.Positive impact of global sourcing
6.Enhanced use of information technology & e-
procurement
7.Redressing of procurement power
8.Challenge to outdated traditional practices
31
09/09/2
1. Challenge to manage escalating costs
022
in purchasing goods and services
Volatility in the cost of oil => increasing supply
chain costs
Continuing escalation of acts of terrorism,

culture tensions, displacement of people from
Africa, tensions in the EU
The related impact on the cost of living &

consequent demands for wage increases
Retail sector cannot escape the pressure on

costs
Difficulties in financial services sector => making

cost & availability of capital a factor in investment
decisions & availability of working capital.
32
09/09/2022
2. Public sector focus on driving out

inefficiencies in public expenditure
In the 1990s &
early in 21st • large amounts of spend in
century central & local
government => tackled
=> greatest
through the aggregation of
changes/significant
requirements.
improvements in
public expenditure.
• Procurement => have to

=> remaining adapt across departmental
challenges => boundaries
further improve • Procurement => have to
value for money. abolish classic silos [pháo
đài]
33
09/09/2022
3. Increasing trend to outsource

manufacture and services
A rapidly growing
trend to outsource
a wide range of
manufacturing &
service delivery
• tender processes
=> has challenged • due diligence
procurement
departments to • negotiation with
improve their different cultures
management of • managing
outsourced contracts
34
4. Recognition of significant 09/09/2022
procurement contribution to corporate

efficiency
Ex. long-range business planning requiring input

on longrange costs
availability of strategic materials & supplies
supply chain developments
trends in service delivery => ex. voice recognition

technology as an anti-fraud measure.
35
09/09/2022
5. Positive impact of global sourcing

The retail sector’s
Challenges for
long-standing
International procurement =>
expertise in global
airlines using how to structure
sourcing & coping
global sources their
with long-range
organisation.
supply issues:
not
1/ responding to uncommon
fashion changes for retailers
=> provide => set up a
2/ a cycle of equipment & buying &
product selection services supply
for the seasons of organisation
the year. in the Far
East.
36
09/09/2022
6. Enhanced use of information

technology & e-procurement
Drivers for • each tender document
change in weighed > 6 kgs
procurement =>
eradicating paper
Secure networks
facilitating a • => a far-reaching
whole e- objective for the global
procurement economy
system =>
payment
• relatively few reverse

E-procurement in auctions, electronic
relative infancy: tendering & knowledge
storage & gathering
strategies.
37
7. Redressing of procurement power
Growth of suppliers by Procurement profession

acquisition • unsuccessful
• power assumption counterpower
• => affected buyer’s • => ex. countering
pricing, output power by forming
allocation & other effective buying clubs
restrictive practices. (ex. consortia set up
by public sector)
38
09/09/2022
8. Challenge to outdated traditional

practices
Ex. in the
construction
Keeping sector =>
stakeholders in surveyors
Movement the dark => handle the
from by denying complete
Outdated transactional them access to procurement
traditional => strategic information cycle to the
practices => activities => (ex. status of total exclusion
must be desirable in tendering of procurement
challenged organisations processes) specialists
=> => must be
unprofessional refused to
accept.
39 Presented by Phan Vu Ngoc Lan ©

2020 Pearson UK
09/09/2022
12 characteristics of world-
class supplier management:
3 characteristics of world-
class suppliers
World-class supplier
management
40
09/09/2022
12 characteristics of world-class
supplier management:
1. ■ Commitment to total quality management (TQM).
2. ■ Commitment to just-in-time (JIT).
3. ■ Commitment to total cycle time reduction.
4. ■ Long-range strategic plans
5. ■ Supplier relationships
6. ■ Strategic cost management
7. ■ Performance measurements
8. ■ Training and professional development
9. ■ Service excellence
10.■ Corporate social responsibility
11.■ Learning
12.■ Management and leadership
41
09/09/2022
3 characteristics of world-class
suppliers:
1. ■ continuous improvement
❖ have a formal and proven commitment
to achieve year-on-year products and process
improvements
2. ■ technology and innovation
❖ technology leaders in their respective industries,
providing customers with next-generation technologies
and a ‘leg-up’ on their competition
3. ■ adaptability
❖ willing to invest in new equipment, develop
new technologies and rework their businesses to better
support the strategies of their customers.
42
09/09/2022
World-class supplier management
Searching for suppliers with the above
characteristics or the potential to achieve them
Providing such suppliers with specifications of the

purchaser’s expectations relating to products &
services
Agreeing how supplier performance measured

against expectations
Recognising outstanding supplier performance by

award of longterm contracts
Sharing the benefits of collaborative innovation

or performance => enhancing purchaser’s
competitiveness.
43
Focus
Professional
Leverage
ism
Status of
PSM
44
09/09/2022

LEVERAGE
❖ Leverage of procurement = enhancing profitability
▪ relevant in manufacturing/purchase for resale
▪ irrelevant for central & local government
procurement
❖ Where professional buyers must demonstrate their
effectiveness?
▪ => areas of greatest expenditure (labour &
materials) => greatest scope for savings/obtaining
value for money
▪ labour outside scope of procurement (except
outsourcing activities)
▪ Ex. outsourcing call centres to the Far East =>
reduced by more than 20 per cent of labour costs for
European-based organisations.
45
LEVERAGE
For ■ assuming other variables remain constant,
organisati every pound saved on procurement => a
ons driven pound of profit
by the
profit
motive
■ increased defects or poorer deliveries => a
pound off the purchase price => not
necessarily represent a pound of profit
■ when purchases form a high proportion of

total costs => a modest saving on bought-
out items => a similar contribution to profits
as a substantial increase in sales =>
however, must be used carefully
46
LEVERAGE
47
09/09/2022

LEVERAGE Be careful!
■ Cost reduction can be counter-profitable if =>

lower quality or higher expenditure on production
■ Total cost of ownership (TCO) approach =>

considering all costs associated with acquisition,
use & maintenance beside purchase price
■ proportion of expenditure on supplies & complexity

of bought-out items => varies widely from
organisation to organization
=> a corresponding variance in the contribution of
procurement to profitability.
48
LEVERAGE Be careful!
insignificant profit significant profit

contribution contribution in the motor
pharmaceutical industry vehicle industry where
where • high proportion of
• low proportion of material costs to total
ingredients of a patent factory costs
medicine to marketing
costs
49
LEVERAGE
Procurement as a critical factor in

profitability where:
• ■ a high proportion of total expenditure =

bought-out items
• ■ fluctuating short-run prices
• ■ involved judgments relating to innovation &
fashion
• ■ highly competitive markets for finished
product
50
09/09/2022

LEVERAGE
Procurement as less critical, though

still important factor where:
• ■ a small proportion of total expenditure =

bought-out items
• ■ relatively stable prices
• ■ an absence of innovation in operations.
51
FOCUS: 3 approaches
• procurement importance within an
1st approach organisation indicated by its focus:
by Syson whether transactional, commercial
or strategic
2nd
• 3 laws to determine important
approach by
internal status of procurement
Farmer
• procurement importance both

3rd
organisationally & within the supply
empirical
chain indicated by structural &
approach
influential factors
52
FOCUS: 1st approach by Syson
Procurement
importance indicated
by its focus
Transactional Commercial Strategic

area area area
greater effectiveness
& standing
53
Efficiency Effectiveness
a measure of
1/ how
a measure of how appropriate/correct
well/productively the focus/goals the
resources are used organisation is
to achieve a pursuing
goal. 2/ the degree to
which those goals
achieved.
54
09/09/2022

Figure 1.4 Positioning graph

strategies/policies
55
Figure 1.5 Positioning graph:

measures of performance.
56
FOCUS: 2nd approach by Farmer
3 laws to determine important internal status
of procurement
3 Whenever the
organisation
1 The shorter 2 When the
spends a
product organisation
significant
lifecycle times interacts
proportion of its
the more significantly
income on
important with a unstable
procurement
procurement market(s)
goods &
services
57
FOCUS: 3rd empirical approach
structural
factors
internal & external

status of PSM
influential
factors
58
09/09/2022

Struct ■ the job title of the executive responsible for
ural PSM
factor
s ■ to whom and at what level the executive in
charge of PSM reports
■ the total spend for which PSM is responsible
■ the financial limits placed on PSM staff to

commit the undertaking without recourse to
higher authority
■ the committees on which PSM staff
represented.
59
Infl Network a high position in a status hierarchy
uen centrality
tial (Formal varying degrees of access to & control
fact authority) over valued resources
ors
a key activity in materials management
& central in supply chains (chap 3)
Power sources of power & use of power (ability
to affect outcomes) (chap 4)
Innovative technical innovators: introduction of
involvemen new products, services & production
t technologies
administrative innovations: changes in
structure & administrative processes
60
09/09/2022

FOCUS: Conclusion
Status of PSM
Recognition Able to
Ability to
by PSM of the market that
impact
value of its contribution
positively =>
contribution => top
bottom line of
=> management
corporate
profitability & & other
strategic
competitive supply chain
planning
advantage members.
61
PROFESIONALISM
Profes ■ skill based on theoretical knowledge
sionali
sm
■ prolonged training and education
■ demonstration of competence by
means of tests and examinations
■ adherence to a code of professional

ethics.
62
PROFESIONALISM: Academic content
A hybrid =>
subject Irrelevant
‘Unscientific’ => A proactive,

contemporary scientific
academic work approach to the
academic study
of procurement
63
09/09/2022

PROFESIONALISM: 10 relevant
procurement areas
❖ 1 Management of supply chain risks
2 Access to latest technology
3 Competitive purchase prices
4 Effective supplier relationship management
5 Timely decision making
6 Cash flow
7 Demonstrable procurement skills
8 Forecasting of forward procurement prices
9 Zero defects on incoming goods and services
10 Contribution to corporate strategy
64
09/09/2022

PROFESIONALISM: 7 categories of
32 skills
❖1 Strategic
2 Process management
3 Team
4 Decision making
5 Behavioural
6 Negotiation
7 Quantitative.
65
09/09/2022

PROFESIONALISM: 7 categories of
32 skills
Examples of strategic,
quantitative skills:
behavioural and
66
09/09/2022

PROFESIONALISM: Name change of
procurement/purchasing
“logistics”
“external
“strategic resource
supply” manage
“distribution ment”
functionality”
“supply
manage
“sourcing ment”
managem
ent”
68
09/09/2022
Reflections on procurement
positioning in business
Can make Question the progress being made by
things a procurement and its positioning in business.
lot better.
In control ‘The awarding of business to a supplier is

of its one of the most important decisions made
destiny. by Volvo Purchasing.’ (Volvo)
Aspects of Highest standards of professional practice

success:
Personal standards of procurement staff
Delivering positive corporate change
69
Homework
70
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Chapter 1 –

The scope and influence of

How to define procurement

Strategic roles of procurement

The strategic scope of procurement

Procurement and change

The status of procurement and

Business management function

of the external resources

applies the science &

external resource & supply

Cost and price

Effective Other essential

An example for this: baking a cake for birthday

The Krajic portfolio matrix

Figure 1.1 The relationship

Due diligence Risk Supplier Continuous

Investment in Investment in Investment in

■ competence & availability of key

■ reliance & extent of sub-contracting

■ history of legal disputes & litigious

■ existence of a robust 5-year

■ history of insurance claims

1 Those risks that only the supplier can

2 Those risks that only the buying

3 Those risks that must be jointly managed

❖ ■ conducting regular blame free reviews of

The strategic scope of procurement

The strategic scope of procurement

Procurement & change

1.Challenge to manage escalating purchasing

Continuing escalation of acts of terrorism,

The related impact on the cost of living &

Retail sector cannot escape the pressure on

Difficulties in financial services sector => making

2. Public sector focus on driving out

• Procurement => have to

3. Increasing trend to outsource

procurement contribution to corporate

Ex. long-range business planning requiring input

availability of strategic materials & supplies

supply chain developments

trends in service delivery => ex. voice recognition

5. Positive impact of global sourcing

6. Enhanced use of information

• relatively few reverse

Growth of suppliers by Procurement profession

8. Challenge to outdated traditional

39 Presented by Phan Vu Ngoc Lan ©

Providing such suppliers with specifications of the

Agreeing how supplier performance measured

Recognising outstanding supplier performance by

Sharing the benefits of collaborative innovation

supply management (PSM)

■ when purchases form a high proportion of

supply management (PSM)

■ Cost reduction can be counter-profitable if =>

■ Total cost of ownership (TCO) approach =>

■ proportion of expenditure on supplies & complexity

insignificant profit significant profit

Procurement as a critical factor in

• ■ a high proportion of total expenditure =

supply management (PSM)

Procurement as less critical, though