Summary Lectures SSM
Lecture 1 – Procurement as a business function
Purchasing management
-> relates to all activities for which invoices are received
Core activity: managing supplier relationships
▪ structuring purchasing processes internally
▪ structuring supplier relationships externally
Aimed at:
▪ securing supply
▪ consistent quality
▪ cost reduction
▪ product innovation
▪ production efficiency
-> through mobilizing supplier expertise
Results of good purchasing/supply management:
▪ higher potential for profitability
▪ outsourcing
▪ improved product and service quality
Purchasing’s strategic irrelevance (based on RBV):
= ”inputs that cannot be purchased, such as learning-by-doing and organizational
culture, are, on average, likely to be more specific to the firm than purchasable
inputs and hence to have the potential to be more significant rent generators.
This view is consistent with the large amount of attention that intangible assets
have received in the resource-based literature”
Purchasing’s strategy relevance (based on Mol, 2003):
= “purchasing can even be said to have become more relevant in recent years as
firms have outsourced more activities and look towards their external suppliers to
create added value. This indicates strategic advantage not only resides within the
firm but also between the firm and its partners”
Procurement is part of the support activities in Porter’s value chain
-> but it is also part of ‘materials / supply management’, ‘inbound logistics’ and
‘the bargaining power of suppliers’
Corporate strategy = long-term mission & survival and a company’s ability to
compete in a changing competitive environment
Competitive priorities / performance outcomes:
1. Cost
-> focussing on cost reduction
2. Value
-> focussing on value improvement
3. Risk
-> focussing on risk management
1
,Purchasing process management:
1. Define specification
▪ functional specification
▪ technical changes
▪ bring supplier engineering knowledge
2. Select supplier
▪ prequalification of suppliers
▪ request for quotation
3. Contract agreement
▪ contracting expertise
▪ negotiating expertise
4. Ordering
▪ develop order routines
▪ order handling
5. Expediting
▪ expediting
▪ ‘trouble shooting’
6. Evaluation follow up
▪ vendor rating
▪ vendor evaluation
(the first decision is actually to determine whether it actually needs to be
procured)
Difficulties in service purchasing:
1. Describing the service (specification)
2. Evaluating the service in advance of the purchase, or in hindsight
3. Capturing the service in the right type of contract, including all legal issues
4. The high interdependence / ongoing interactions between buyer and seller
5. Services are very diverse
6. Continuous cost focus, value focus hardly adopted
Purchasing process in practice:
• Overspecification
= specification that are more than fit for purpose
• Supplier or brand specifications
= most buyers are involved only to a minor extent in the specification phase &
specifications of the user are often designed towards a particular supplier
2
,• Inadequate supplier selection
= suppliers insufficiently screened on financial status and strengths and
capabilities
• Insufficient contracting expertise
= in many cases insufficient legal contracts in place
• Too much emphasis on price
= strong price orientation leads to suppliers delivering inferior quality
• Administrative organization
= order to pay cycle insufficiently organized leading to invoices that are paid
without sufficient control on products delivered
Purchasing portfolio model:
Critiques of the purchasing portfolio model:
1. Accuracy: measurement of variables
2. One-sided: the disregard for the supplier’s side
3. Simplified: the selection of strategies based on two dimensions
4. Limited: deterministic character of strategic recommendations
5. Static: absence of movements within the matrix
3
, Lecture 2 – Supplier selection & contracting
Insourcing
Advantages Disadvantages
Higher degree of control over inputs High volumes required
Visibility over the process increased High investment needed
Economies of scale/scope Dedicated equipment has limited uses
Problems with supply chain integration
Outsourcing
Advantages Disadvantages
Greater flexibility Possibility of choosing wrong supplier
Lower investment risk Loss of control over process
Improved cash flow Long lead times / capacity shortages
Lower potential labour costs ‘Hollowing out’ of the corporation
The general process of supplier selection:
1. Prequalification
= determining selection criteria based on specification and composing a ‘bidder’s
list’
-> RFP process:
2. Select 3 to 5 potential suppliers (= bidder’s short list)
3. Send out Request for Proposal / Request for Quotation
4. Tentative technical and commercial evaluation
5. Use ‘ranking’ method
Critical steps in supplier evaluation and selection:
1. Recognize need for supplier selection
2. Identify key purchasing/sourcing requirements
3. Determine appropriate sourcing strategy
4. Identify potential supply sources
5. Determine method of supplier evaluation
6. Limit suppliers in selection pool (create shortlist)
7. Select supplier & reach agreement/contract
How much effort do you need to put in searching for a new supplier?
1. Efficient current supplier + High strategic impact
= minor-to-moderate information search
2. Efficient current supplier + Low strategic impact
= minor information search
3. Ineffective current supplier + High strategic
impact
= major information search
4. Ineffective current supplier + Low strategic impact
= minor-to-moderate information search
Shortlisting suppliers:
4
Lecture 1 – Procurement as a business function
Purchasing management
-> relates to all activities for which invoices are received
Core activity: managing supplier relationships
▪ structuring purchasing processes internally
▪ structuring supplier relationships externally
Aimed at:
▪ securing supply
▪ consistent quality
▪ cost reduction
▪ product innovation
▪ production efficiency
-> through mobilizing supplier expertise
Results of good purchasing/supply management:
▪ higher potential for profitability
▪ outsourcing
▪ improved product and service quality
Purchasing’s strategic irrelevance (based on RBV):
= ”inputs that cannot be purchased, such as learning-by-doing and organizational
culture, are, on average, likely to be more specific to the firm than purchasable
inputs and hence to have the potential to be more significant rent generators.
This view is consistent with the large amount of attention that intangible assets
have received in the resource-based literature”
Purchasing’s strategy relevance (based on Mol, 2003):
= “purchasing can even be said to have become more relevant in recent years as
firms have outsourced more activities and look towards their external suppliers to
create added value. This indicates strategic advantage not only resides within the
firm but also between the firm and its partners”
Procurement is part of the support activities in Porter’s value chain
-> but it is also part of ‘materials / supply management’, ‘inbound logistics’ and
‘the bargaining power of suppliers’
Corporate strategy = long-term mission & survival and a company’s ability to
compete in a changing competitive environment
Competitive priorities / performance outcomes:
1. Cost
-> focussing on cost reduction
2. Value
-> focussing on value improvement
3. Risk
-> focussing on risk management
1
,Purchasing process management:
1. Define specification
▪ functional specification
▪ technical changes
▪ bring supplier engineering knowledge
2. Select supplier
▪ prequalification of suppliers
▪ request for quotation
3. Contract agreement
▪ contracting expertise
▪ negotiating expertise
4. Ordering
▪ develop order routines
▪ order handling
5. Expediting
▪ expediting
▪ ‘trouble shooting’
6. Evaluation follow up
▪ vendor rating
▪ vendor evaluation
(the first decision is actually to determine whether it actually needs to be
procured)
Difficulties in service purchasing:
1. Describing the service (specification)
2. Evaluating the service in advance of the purchase, or in hindsight
3. Capturing the service in the right type of contract, including all legal issues
4. The high interdependence / ongoing interactions between buyer and seller
5. Services are very diverse
6. Continuous cost focus, value focus hardly adopted
Purchasing process in practice:
• Overspecification
= specification that are more than fit for purpose
• Supplier or brand specifications
= most buyers are involved only to a minor extent in the specification phase &
specifications of the user are often designed towards a particular supplier
2
,• Inadequate supplier selection
= suppliers insufficiently screened on financial status and strengths and
capabilities
• Insufficient contracting expertise
= in many cases insufficient legal contracts in place
• Too much emphasis on price
= strong price orientation leads to suppliers delivering inferior quality
• Administrative organization
= order to pay cycle insufficiently organized leading to invoices that are paid
without sufficient control on products delivered
Purchasing portfolio model:
Critiques of the purchasing portfolio model:
1. Accuracy: measurement of variables
2. One-sided: the disregard for the supplier’s side
3. Simplified: the selection of strategies based on two dimensions
4. Limited: deterministic character of strategic recommendations
5. Static: absence of movements within the matrix
3
, Lecture 2 – Supplier selection & contracting
Insourcing
Advantages Disadvantages
Higher degree of control over inputs High volumes required
Visibility over the process increased High investment needed
Economies of scale/scope Dedicated equipment has limited uses
Problems with supply chain integration
Outsourcing
Advantages Disadvantages
Greater flexibility Possibility of choosing wrong supplier
Lower investment risk Loss of control over process
Improved cash flow Long lead times / capacity shortages
Lower potential labour costs ‘Hollowing out’ of the corporation
The general process of supplier selection:
1. Prequalification
= determining selection criteria based on specification and composing a ‘bidder’s
list’
-> RFP process:
2. Select 3 to 5 potential suppliers (= bidder’s short list)
3. Send out Request for Proposal / Request for Quotation
4. Tentative technical and commercial evaluation
5. Use ‘ranking’ method
Critical steps in supplier evaluation and selection:
1. Recognize need for supplier selection
2. Identify key purchasing/sourcing requirements
3. Determine appropriate sourcing strategy
4. Identify potential supply sources
5. Determine method of supplier evaluation
6. Limit suppliers in selection pool (create shortlist)
7. Select supplier & reach agreement/contract
How much effort do you need to put in searching for a new supplier?
1. Efficient current supplier + High strategic impact
= minor-to-moderate information search
2. Efficient current supplier + Low strategic impact
= minor information search
3. Ineffective current supplier + High strategic
impact
= major information search
4. Ineffective current supplier + Low strategic impact
= minor-to-moderate information search
Shortlisting suppliers:
4
