Chapter 1

The role of Purchasing in the

Value Chain
Program
 The role of purchasing in the value chain
 Definition of concepts
 Importance of purchasing to business
 Classification of purchasing goods
 New developments in purchasing
 Conclusions
The role of purchasing in the value chain

Primary activities can be divided in five generic

categories:
 Inbound Logistics
 Operations
 Outbound logistics
 Marketing and sales
 Services

The procurement function should be able to meet

the material requirements related to inbound
and outbound logistics, and to operations.
 The role of purchasing in the value chain

firm infrastructure
Support human resource management M
ar
activities g in
technology development
procurement

inbound operations outbound marketing service

M
logistics logistics & sales

ar gi
n
Primary activities

Drawn from Porter, 1985

The role of purchasing in the value chain

Support activities can be divided in four generic

categories:
 Procurement
 Technology development
 Human resources management
 Firm infrastructure

Procurement activities may be also related to supplying

products and services for the other support functions.
 The role of purchasing in the value chain

Aspects Buying for primary Buying for support

activities activities
Product assortment Limited to large Very large
Number of suppliers Limited, transparent Very large
Purchasing turnover Very large, considerable Limited
Number of Purchase Considerable Very Large
orders High Small
Average order size Depends on type of Limited, forecast-related or
Control production planning project-related planning
Decision-making unit Engineering, manufacturing Fragmented, varies with
specialists dominant product or service
Definition of concepts
Purchasing:
All activities for which the company receives an invoice from outside parties.
Differentiation between:
 Purchasing function
 Purchasing department

Definition:
“Managing 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 at the most favorable conditions”.

Procurement:
All activities that are required in order to get the product from the supplier to its final
destination.
Definition of concepts
Sourcing:
Finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of
supply and gathering knowledge of procurable resources.

Purchasing Management:
All activities that are required to manage supplier relationships.

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

Value Chain Management:

Challenging suppliers to improve the value proposition to the end-customers of the value chain.
Usually the supplier works closely together with the customer’s technical and marketing staff to
reduce the product’s overall costs and add new designs or features to the product which
increase the value for the end-customer.
 Definition of concepts

Different definitions...
 Ordering… Operational,
Operational,short
short
term, deal and
term, deal and
 Buying… margin
margin
oriented
oriented
 Purchasing…
 Procurement…
Strategic,
Strategic,long
long
 Sourcing… term,
term, performanceand
performance and
value
value
 Supply Chain Management… oriented
oriented

 Value chain management….

Purchasing: relates to every activity the company receives an invoice for…

Definition of concepts

purchasing function

tactical / initial ordering/ operational

Expediting Follow
Internal Speci-
Selecting Contracting Ordering and up/ Supplier
customer fication
evaluation evaluation

Sourcing Supply
Buying
Procurement
Importance of purchasing to business

5 Admin.
12 Services

18 Capex

3 Spares
60-85 60-80 50-70 60-80 12 Trade-
items

Produ
25-50 10-40 50 ction
parts

Retailers Computers Consumer Automotive Pharma Service Typical

electronics industry structure
adapted from Kluge, 1996
 Importance of purchasing to business

Challenge for managers: how to manage our EXTENDED ENTERPRISE ?

Sales: Profit 1,5 %

100%
Value added: 20 %

Question: what should

managers do?

Purchased materials
And services: 78,5 %

Purchased materials and

services have a large impact
on company profitability…
 Definition of concepts

Challenge: how to manage our EXTENDED ENTERPRISE ?

Sales: Profit 1,5 %

100%
Value added: 20 %

Question: what should

managers do?

Purchased materials
And services: 78,5 %

Suppliers determine 78,5%

of total cost, innovation,
carbon footprint and
customer value…
DuPont analysis: Sales
105 mio
Capital turn- Total assets
over ratio / 145 mio
2.1 x Net assets -
50 mio
Interest free
liabilities
95 mio

RONA
9.9 % × Sales
105 mio
Income
before tax - Other costs
5 mio 40 mio
Margin / Total costs
4.7 % +
100 mio
Purchased
Sales mat. & serv.
105 mio 60 mio
Amounts in Euro mio
 DuPont analysis: Sales
105 mio
Capital turn- Total assets
over ratio / 145 mio
2.1 x Net assets -
50 mio
Interest free
liabilities
95 mio

RONA
12.4 ----
9.9 % × Sales
105 mio
+ 25 % !! Income
before tax - Other costs
6.2 --5 mio 40 mio
Margin / Total costs
5.9 ---
4.7 % +
98.8 ----
100 mio
Purchased
Sales mat.& serv.
105 mio 58.8 ---
60 mio
Amounts in Euro mio -2%
Classification of purchasing goods (1)
The purchasing process may concern a large variety of goods and services.
In general, purchased materials and services can be grouped into the
following categories:
■ Raw materials; materials which have undergone no transformation or a minimal
transformation and which serve as the basis 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 times and that 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
 Classification of purchasing goods (2)

 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 a
period of time

 Maintenance, repair and operating materials (MRO items);

materials, which are necessary for keeping the organization running in
general and for the support activities in particular

 Services; labor intensive, non material activities that are executed by third
parties on a contract basis
New developments in purchasing

1. Seller’s market Buyer’s market

2. Increasing pressure on sales prices and margins leads to:

 Leveraged purchasing and supply strategies

 Global sourcing
 Supplier integration
 Early supplier involvement in new product development
 Reciprocity agreements and compensation agreements
 Corporate Social Responsibility and business integrity
Conclusions

 In short, purchasing represents a business area which is

being confronted with many changes and challenges.

 Without doubt these challenges will put purchasing and

supply chain management more in the spot light in
business.