Strategic purchasing and supply management Mervi Vuori Department of Industrial Engineering and Management 22 Sept 2017

Transcription

1 Strategic purchasing and supply management Mervi Vuori Department of Industrial Engineering and Management 22 Sept 2017

2 Purchasing and supply management as a field of academic study Purchasing and supply management is a young academic discipline Early studies concentrated on organizational buying behaviour Purchasing management first introduced as an important business function in 1980s and 1990s Purchasing portrayed as a clerical, reactive, price-driven function driven by the main operational paradigm of mass-production Johnsen, Howard, Miemczyk (2014). Purchasing and Supply Chain Management : A Sustainability Perspective. Routledge. 2

3 Mass production Henry Ford and Model T as the forerunner of mass production methods Intention to produce the largest number of cars, to the simplest design, for the lowest possible cost Inventing machinery to make parts that were needed, and devising methods to assemble the parts Using interchangeable parts that could be put together easily by workers that did not need special skills 3

4 Vertical integration A vertically integrated company controls most of the activities within the supply chain Upstream integration: controlling the means of production that supply the main business Downstream integration: marketing, distribution 100 years ago Ford owned rubber plantations, coal and iron ore mines, sawmills, glassworks, railways Jacobs, Chase, Aquilano (2009). Operations and Supply Management. McGraw-Hill International Edition. 4

5 Impact into purchasing and supply management? In times of vertical integration, purchasing was tactical / clerical, concentrating on negotiating with low value/risk suppliers and keeping record of expenditure Relationships with suppliers were arms-length and transactional, and suppliers were interchangeable Tactical Purchasing 5

6 Vertical disintegration Drivers of vertical disintegration Supply chains becoming more global and complex Pace of technological innovation Rise of Best-Cost-Countries as cost-efficient sources of supply Companies are increasingly focusing on their core competencies outsourcing non-core competences and activities Motorola s top 25 suppliers account for about 50 % of spend HP has centralised its purchasing on small number of suppliers: % of production spend is with 35 suppliers Sun Microsystems outsourced 90 % of it systems in three years Procter and Gamble does innovation collaboration with 15 of its top suppliers Iloranta & Pajunen-Muhonen, 2012 Gadde,

7 What to do internally and what to purchase? Concept of core competencies Important to our customers CORE Not so important to our customers We are not so good in this We are better than others in this Iloranta & Pajunen-Muhonen,

8 The impact into purchasing and supply management? With increased rate of outsourcing, companies are becoming more dependent on smaller number of suppliers External spend may account for up to 60-80% company turnover, thus the impact of suppliers to company profitability and performance is substantial Choosing the right suppliers with the right capabilities is becoming increasingly important 8

9 Purchasing becoming external resource management 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 at the most favourable conditions Van Weele (2010) 9

10 Purchasing becoming external resource management: the spend perspective 20% 80% Internal resources Salaries and social costs (own employees) External resources Direct spend (COGS) Indirect spend (i.e. most services ) Investments External sales and delivery networks External society, fans, official and inofficial communities, crowds Based on Iloranta & Pajunen-Muhonen,

11 Today, purchasing is facing many challenges Outsourcing trend has created many long-term supplier relationships where there is no competition Increasing complexity of products and services ie. total solutions that are not comparable and have long life-span Increasing interest of tapping into supplier capabilities and specialized knowledge in new product development Incorporating sustainability into purchasing 11

12 Traditional purchasing orientation Strategic orientation Segmentation of spend All purchases about equal Systematic differentiation by category Reporting Fragmented, production focus Total spend, category based Management Fragmented Coordinated Focus Price Total costs Education and training Traditional, functional Continuous, crossorganisational Relationship with suppliers Formal contract Complex exchange, differentiated by category Means to manage Inquiry of price, competitive bidding or blind partnership Balanced use of competition and social forces Tanskanen et al. External resource management. Upcoming. 12

13 Total Cost Thinking 13

14 Traditionally purchasing function has focused on price 80% 14

15 when we should be thinking in terms of Total Costs 20% Quality inspections 80% 80% Finding suppliers Claims handling Placing orders, handling invoices Training Logistics and freight Maintenance Spare parts See for example Iloranta & Pajunen-Muhonen, 2012, pp. 154; Ellram,

16 Modelling total costs Thinking in terms of costs related to acquisition, possession, use and disposal of a good or service In addition to the purchase price, total costs include costs related to: - placing orders, - research and qualification of suppliers - transportation, receiving, inspection - rejection - replacement - downtime caused by failure - disposal Total cost thinking may be applied to goods and services alike Source: Ellram,

17 Roodhooft, Hiel, van den Abbeele, van Doveren (2003) 17

18 Purchasing portfolio approach 18

19 Managing product and service categories Category = group of similar product or service items that are needed for firm activities Categorizing spend into manageable entities in an organization Differentiated approach to managing supply of various products and services Example of ICT purchase categorization* 1) Telephones and data networks 2) ICT accessories (phones, memory sticks, bags) 3) ICT hardware / equipment (hardware, servers) 4) Continuous IT services (helpdesk, user support, e- mail systems, application support, information security ) 5) ICT software (software packages, license contracts) 6) ICT professional services (consulting) *Source: The Hackett Group website

20 The Kraljic matrix is a basic tool for developing differentiated strategies for purchased items and services High Classifying products and services based on two dimensions: - What is the importance of purchase category for the company? - How is the supplier market by nature? The category s impact on business LEVERAGE NON-CRITICAL STRATEGIC BOTTLENECK Low Buyer s market Supply risk / Supplier market difficulty Supplier s market

21 Strategy depends on the respective position of the purchased item / service category High The category s impact on business LEVERAGE Aggressive purchasing NON-CRITICAL STRATEGIC Building the strategic position BOTTLENECK Handle efficiently Ensure availability Low Buyer s market Supply risk / Supplier market difficulty Supplier s market

22 The matrix is a dynamic supply management tool Gelderman & van Weele (2003)

23 Impact on business Respective positions in the matrix have implications for organizing, consideration for price /cost, make vs buy, supplier relationships Remarkable LEVERAGE Aggressive purchasing STRATEGIC Building the strategic position Handle efficiently NON-CRITICAL Ensure availability BOTTLENECK Negligible Buyer s market Supplier market difficulty Supplier s market Modified from Kraljic (1983)

24 Conclusions Purchasing has become a strategic function and external spend accounts for a substantial part of company turnover Key focus of purchasing is on cost reduction yet value creation is becoming increasingly important Total cost thinking and differentiating purchasing strategy according to supply risk and importance of purchase are key capabilities of purchasing and supply management function 24