1.

sourcing -> to identify the need

2. buying -> have to go through negotiation and sign the contract
3. supply -> obtain the supply 16/01/2018
these 3 factors add together means procurement

KTH ROYAL INSTITUTE

OF TECHNOLOGY

Core Concepts
ME2054 – Lecture 1
Chapters 1 – 3
Mohammad Akhbari

-> increased
competition
internationally ->
 Increasing numbers of world class global competitors important
down
to keep costs

-> different purchasing concerns -> price & quality.

 Sophisticated customer base different groups of customers have different demand
eg. Japanese customers demand better quality
 More performance at lower cost
 Widely available information sources -> are they reliable?
 Balance of power between buyers and suppliers -> strategy planning -> decide
on price, quality, reliability of
services, sustainability of
 Greater levels of outsourcing businesses
-> to avoid non-core business so that company is able to
focus on core business
-> when experimenting with foreign market
-> to come closer to the market, to gain an advantage of that market eg. the new technology
being used in the market

A New Competitive Environment

1
 16/01/2018

 Increasing value and savings

 Building relationships and driving innovation
 Improving quality and reputation
 Reducing time-to-market
 Managing supplier risk
 Contribution to competitive advantage

Why Purchasing is Important?

 Suppliers have substantial impact on a firm’s total cost

 Many product features originate from suppliers
 In manufacturing, purchased content is more than 55% of revenues
 Avoiding costs through early involvement in product design stage

Increasing value and savings

2
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Importance of purchasing to business

purchasing can affect profitability -> affect the variable cost eg. raw material
variable cost decrease -> total cost decrease -> profit margin increase
savings and purchasing will have impact on sales margin
profitability ratio -> return on capital employed ROCE (indicator) -> higher better

Importance of purchasing to business

3
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 Traditional approach is to bargain hard to price reductions

 Newer approach is to conduct joint cost reduction with suppliers
 Both buyer and supplier must benefit
 Suppliers can contribute innovative ideas

Building relationships and driving innovation

 Buyer focuses on core competencies and outsources non-core

activities and materials
 Need for ability to track materials back up through supplier’s
supply chain
 Supplier quality  Product quality
 Lapses in managing supplier quality can potentially tarnish
a buyer’s reputation

Improving quality and reputation

4
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 Include suppliers early in product design process to take

-> and educate the suppliers so that the suppliers will be
advantage of their expertise able to produce to meet your demands and do not have
to keep changing suppliers
 Early supplier involvement can lead to an average of
20% improvement on material costs, material quality, and
product development times

Reducing time-to-market

 Supplier risk is magnified by sourcing strategies that

emphasize global sourcing, single sourcing, and JIT inventory

 Need to develop business continuity plans to mitigate risks

Managing supplier risk