Sie sind auf Seite 1von 433

Graz University of Technology

1 Institute of Business Economics and Industrial Sociology


Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Introduction to the course

Prof. Dr. Bernd M. Zunk


bernd.zunk@tugraz.at

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Contact Information

Source: https://online.tugraz.at
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 373.551 3SH L Purchasing and Supply Management (I)

Source: https://online.tugraz.at/tug_online/wbLv.wbShowLVDetail?pStpSpNr=217550&pSpracheNr=2&pMUISuche=FALSE
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 373.551 3SH L Purchasing and Supply Management (II)

Source: https://online.tugraz.at/tug_online/wbLv.wbShowLVDetail?pStpSpNr=217550&pSpracheNr=2&pMUISuche=FALSE
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 373.551 3SH L Purchasing and Supply Management (III)

All questions concerning organizational issues please pose solely


to our office at bwloffice@tugraz.at

Source: https://online.tugraz.at/tug_online/wbLv.wbShowLVDetail?pStpSpNr=217550&pSpracheNr=2&pMUISuche=FALSE
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 373.551 3SH L Purchasing and Supply Management (IV)

Source: https://online.tugraz.at/tug_online/wbLv.wbShowLVDetail?pStpSpNr=217550&pSpracheNr=2&pMUISuche=FALSE
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Course material: Recommended Book
Purchasing and Supply Chain Management
7th Edition by A. J. van Weele (9781473749443), 2018

Source: van Weele, A. J., Purchasing and Supply Chain Management, 7th edition, Cengage 2018, p. xiii
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Course material: 2 ways to get this book (1/2)

1. The book “Purchasing and Supply Chain Management” is


available FOR FREE at the
Graz University of Technology Library, in the textbook collection &
the open access holdings.
For further information please visit: http://ub.tugraz.at/index_e.html

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Course material: 2 ways to get this book (2/2)

2. Special offer for students: ‘CengageBrain’ offers a 25% discount


code for students. The code is valid on text book and eBook
orders until the 31st of Dec. 2019.
The discount code CENGAGE89125 can be redeemed at the
checkout as in the screen shot ->

→ If you need further assistance


please contact:
Jayne Nikolic
CENGAGE Learning Consultant
HE Central and Eastern Europe

jayne.nikolic@cengage.com
http://www.cengage.co.uk/education/

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 ‘CengageBrain’ offers a 25% discount for students (1/3)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 ‘CengageBrain’ offers a 25% discount for students (2/3)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 ‘CengageBrain’ offers a 25% discount for students (3/3)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Introduction to the Subject:
Purchasing and supply management of the move

Source: van Weele, A. J., Purchasing and Supply Chain Management, 7th edition, Cengage 2018, p. xiii
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Introduction: Intended audience – This course …

Source: van Weele, A. J., Purchasing and Supply Chain Management, 7th edition, Cengage 2018, p. xiv
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Introduction – Framework: The course has been developed using
the following principles

Source: van Weele, A. J., Purchasing and Supply Chain Management, 7th edition, Cengage 2018, p. xiv
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Structure of the Course “Purchasing and Supply Management”:
3 Parts / 15 Lectures

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Overview: 15 lectures (1/15)

PART I: Core concepts is aimed at becoming acquainted with the


discipline. The key concepts and terms are presented here.

Lecture 1. Tue 15.10.2019, 08:15 - 10:45, HS F (NT03064)


The role of purchasing and supply management in the value chain
Text: Chapter 1, pp. 2 – 20

Chapter 1 focuses on the role and significance of the purchasing function for
industrial and service companies. This is done by describing purchasing and
supply's role in the company's value chain. Further, definitions of important
terms and concepts are provided. In the remainder of the book a dear distinction
is made between the activities of the purchasing department and the purchasing
function. It was decided to use the terms purchasing and procurement as
synonyms given their popularity in business. This chapter also discusses the
differences between the different kinds of products and services that can be
bought. In doing so, this chapter provides a framework for the rest of the book.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Overview: 15 lectures (2/15)

Lecture 2.
Industrial buying behaviour: Decision-making in purchasing
Text: Chapter 2, pp. 21 – 53

Chapter 2 addresses the buying behavior of organizations. The major


differences between buying behavior of consumers and organizations are
discussed. Various models of organizational buying decision-making, developed
in the (industrial) marketing literature, are presented. A core model in this
chapter is the purchasing process model, which is described in detail.
Through this chapter the reader will gain insight into the complexity which
characterizes many purchasing decisions in organizations. A discussion on the
role and importance of e-procurement solutions, including e-auctions, completes
the chapter.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Overview: 15 lectures (3/15)

Lecture 3.
The purchasing management process
Text: Chapter 3, pp. 54 – 78

The core of Chapter 3 is the purchasing management process.


In order to be effective, management needs to give attention to each element of
the purchasing management process. This starts by defining purchasing and
supply goals and objectives and strategies needed to realize these. Purchasing
goals and objectives need to be aligned with the company's goals and
objectives. Purchasing strategies need to be worked out into time-phased action
plans. Next, the implementation of these action plans needs to be monitored and
followed up. The purchasing development model describes how purchasing and
supply as a business function may develop over time. In general, six different
stages of development may be identified. In this way the purchasing
development model may serve as a vehicle to provide guidance for a company
on how to professionalize procurement in the future.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Overview: 15 lectures (4/15)

Lecture 4.
Buying business services
Text: Chapter 4, pp. 79 – 97

Chapter 4 deals with how to buy and contract for services. It will become deal'
what specific difficulties may arise when buying services. A classification on how
to differentiate between services is provided and the implications for how to
structure the purchasing process for services are discussed.
Specific attention is given on how to specify for services, how to select service
providers and how to contract for their services.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Overview: 15 lectures (5/15)

Lecture 5.
Contract management for complex projects
Text: Chapter 5, pp. 98 – 119

Chapter 5 discusses contract management for complex projects.


Contracting for investment goods, infrastructural and civil works is an art itself. It
represents a new task-buying situation where many stakeholders are involved.
The varying degrees of complexity are reflected in different contract types such
as Construction only, Design & Construct, Engineer-Procurement-Construct, and
Design-Build-Finance-Maintain contracts.
The key characteristics of each of these contract types are discussed as wen as
when to apply these contracts.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Overview: 15 lectures (6/15)

Lecture 6.
Public Procurement
Text: Chapter 6, pp. 121 – 158

Chapter 6 describes the specific characteristics of public procurement, i.e.


buying for governmental institutions.
We do so, mostly from a European perspective. The text has been adapted to
the most recent changes in European Procurement Law. From this chapter it will
become dear that large differences exist between buying for government and
buying for private enterprise. Governmental bodies are not free in choosing their
purchasing procedures.
Therefore, this chapter gives elaborate attention to the most important EU
Directives on public procurement, its purchasing procedures and how to work
with these.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Overview: 15 lectures (7/15)

PART II: Strategy and planning discusses in detail the elements of the
purchasing management process introduced in Chapter 3.

Lecture 7.
Purchasing and business strategy
Text: Chapter 7, pp. 159 – 187

Chapter 7 focuses on how to design effective purchasing strategies. Attention is


given to the issue of how purchasing strategies can be linked to the overall
business strategy of the company. The question of whether purchasing is
strategic or not is discussed. Next, the role of purchasing in contemporary
strategic management thinking is discussed. Furthermore, a conceptual model is
presented on how to create purchasing excellence. Building on strategic
marketing concept, a purchasing portfolio approach is presented on which four
basic differentiated supplier strategies are based. It will be explained that in
order to develop effective purchasing strategies, the company also needs to
understand its position in the supplier's customer portfolio.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Overview: 15 lectures (8/15)

Lecture 8.
Outsourcing and risk management
Text: Chapter 8, pp. 188 – 206

Outsourcing and risk management are the prime topics of Chapter 8.


Attention is given to the growing trend towards outsourcing. Many companies
decide nowadays to focus on what they can do best and those activities that
provide them with a competitive edge in their end-user markets. Non-core
activities are increasingly outsourced to specialist suppliers. This is, however,
not without problems, as companies run the risk of becoming too dependent on
their suppliers.
This chapter deals with the issue of how outsourcing may be structured in a
company, the underlying change processes that are required and how
companies can reduce their risk profile vis-a-vis their suppliers.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Overview: 15 lectures (9/15)

Lecture 9.
Category sourcing: developing effective sourcing strategies
Text: Chapter 9, pp. 207 – 224

Overall purchasing and supply strategies need to be worked out in specific


category sourcing strategies and plans.
This is the central topic of Chapter 9.
Here the question is addressed of how to assess cost-savings potential for
different purchased categories and commodities.
Key to the sourcing strategy are to select the right number of suppliers, and to
decide about the right type of relationship and the right type of contract that
should be put in place.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Overview: 15 lectures (10/15)

Lecture 10.
Purchasing, innovation and quality management
Text: Chapter 10, pp. 225 – 250

The purchasing function has a complex network of relations in the company


because it maintains relationships with nearly all departments within a company.
The relationships with new product development, engineering and quality
management on the one hand and supply chain management and logistics on
the other are described in the next chapters.
Chapter 10 discusses open innovation, early supplier involvement and the
relationship between purchasing and engineering. Next, special attention is
given to how to improve supplier quality. Here, supplier quality assurance and
supplier certification are presented as approaches which can be used in this
respect.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Overview: 15 lectures (11/15)

Lecture 11.
Purchasing, logistics and supply chain management
Text: Chapter 11, pp. 251 – 277

Chapter 11 describes the role of purchasing within supply chain management.


After providing some key definitions, the basics of supply chain management are
presented. This is achieved by providing a logistics reference model, which
differentiates between several manufacturing situations (ranging from assembly
to order to job shop operations).
This model explains why purchasing operations within different companies and
industries may be vastly different. Next, it covers a detailed discussion on
materials requirements planning, just-in-time management and the required
information technology.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Overview: 15 lectures (12/15)

Lecture 12.
Purchasing organization
Text: Chapter 12, pp. 278 – 300

The subject of how to organize for efficient purchasing is covered in Chapter 12.
In practice, a large variety of organizational structures is observed and the most
important of these are discussed. There is no one best way to organize for
purchasing. Specific attention is given to the issue of how to create purchasing
leverage in a multi-plant environment.
Here different co-ordination structures are discussed through which companies
try to capture purchasing synergies. Next, the issue of how to organize for
efficient purchasing at the business-unit level is presented. Finally, different job
profiles in purchasing and supply management are discussed.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Overview: 15 lectures (13/15)

Lecture 13.
Performance measurement and governance in purchasing
Text: Chapter 13, pp. 301 – 334

Chapter 13 deals with purchasing performance measurement and governance.


The central issue here is how to measure and assess the performance of the
purchasing department.
Several important methods and (benchmarking) techniques are presented. The
relevance of the Sarbanes-Oxley Act is discussed as a platform for future
procurement governance.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
30 Overview: 15 lectures (14/15)

PART III: Special topics. deals with two topics that should be of a prime
concern to any purchasing professional, i.e. supplier management tools
and techniques and purchasing, corporate social responsibility and
integrity.

Lecture 14.
Supplier management: cost approaches and techniques
Text: Chapter 14, pp. 335 – 355

All purchasing decisions and decisions concerning supplier selection must be


based on sound business analyses. In Chapter 14 some methods and
techniques which can be used to support the decisions involved are discussed.
Among other things, special attention will be given to the learning curve and cost
modelling. Both techniques enable the purchasing professional to get a thorough
understanding of supplier costing behavior. Such an understanding is
prerequisite for developing collaborative supplier relationships.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
31 Overview: 15 lectures (15/15)

Lecture 15.
Purchasing, corporate social responsibility and integrity
Text: Chapter 15, pp. 356 – 384

Chapter 15 contains an updated text on the highly important issue of how


purchasing and supply professionals can contribute to sustainability or 'people,
planet, profit'.
This topic is very real today in many large companies. Buyers in Western
companies have a great responsibility of buying for a better world. New material
on circular sourcing is presented. Besides corporate social responsibility, this
chapter also deals with purchasing ethics and business integrity.
Together, these three concepts create the necessary foundation for every
modern purchasing supply organization.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
32 Scheduling: Draft of “1 typical teaching unit = 3 lectures a 45 min. + break”

Repetition
of the core content of the preceding class

Introduction
to the respective chapter/lecture

Input Phase 1
(presentation & case studies & memos)

Break

Input Phase 2
(presentation & case studies & memos)

Assignments / Self-assessments
(can be seen as support for your exam preparation)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 1.
The role of purchasing in the value chain

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning Objectives

After this lecture you should understand the following:


• The role and importance of the purchasing and supply functions in
the value chain.
• The difference between concepts such as ordering, buying,
purchasing, procurement, sourcing, supply chain management and
value chain management, and how these are interrelated.
• New developments in purchasing and supply practices of
organizations.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Relevance of Purchasing and Supply Management

Since most companies today spend more than half of their sales
turnover on purchased parts and services, efficient and constructive
relationships with suppliers are key to the company’s
(i) short-term financial results and
(ii) long-term competitive position.

-> Companies cannot escape from exploiting the huge potential that
PuSm represents to them today.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Introduction: Case Study - Damen Shipyards

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 3.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 The value chain (exemplarily) as “point of departure”

In many business strategies, the concept of value chain management


plays a central role. Also when describing the position of the purchasing
and supply function in industrial companies Porter’s value chain is
taken as a term of reference.
SUPPORT ACTIVITIES

Firm Infrastructure, Human Resources etc.


Procurement Function etc.
Technology Development, Risk Management, CSR etc.
Controlling, Financial Management, Accounting etc.

Inbound Outbound Marketing


Operations Services
Logistics Logistics and Sales

PRIMARY ACTIVITIES*
Note: “five generic categories” according to Porter, M.E. (1985) Competitive Advantage, pp. 39-40
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 The role of purchasing in the value chain – primary activities (1/2)

Primary activities are those activities that are required to offer the
company’s value proposition to its customers.
Primary activities can be divided in five generic categories (Porter
1985):
• Inbound Logistics…
• Operations…
• Outbound logistics…
• Marketing and sales…
• Services…

The procurement function should be able to meet the material (and services)
requirements related to operations management and inbound and outbound logistics.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 The role of purchasing in the value chain – primary activities (2/2)

Manufacturing processes (note: as a central part of “operations” in


most industrial companies) can be characterised according to:
• Make (and distribute) to stock (MTS)
• Make to order (MTO)
• Engineer to order (ETO)

These contrasting manufacturing situations explain why


procurement activities may be different between companies and
industries.

→ Buying for primary activities will be referred to as ‘production


related buying’ or ‘direct procurement’.

Direct procurement: Procurement of all materials and products


that are used for manufacturing a company’s end product.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 The role of purchasing in the value chain – support activities (1/2)

Support activities are those value activities that are required to


support the company’s primary activities.

They can be divided in four generic categories:


• Procurement
• Technology development
• Human resources management
• Facilities management (maintenance of firm’s infrastructure)

Procurement activities may be also related to supplying


products and services for the other support functions.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 The role of purchasing in the value chain – support activities (2/2)

Procurement activities may also be related to supplying products and


services for the support functions. Some examples are buying of:
• Laboratory equipment for research and development
• Computer hardware and software for the central IT department
• Lease-cars for the sales force and senior management
• Office equipment for the administrative staff
• Beverages and foods for the canteen
• Machinery and equipment for the production department

→ This type of purchase is referred to as ‘non-production buying’,


‘indirect procurement’ or ‘general expenses’.

Indirect procurement: Procurement of all materials, components and services


that are used to support the company’s infrastructure and back-office activities.
They may also classified in “maintenance, repair and operating (MRO)” supplies,
investment goods and services.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 The role of procurement in the value chain - overview

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Definition of concepts – operational vs. strategic

Different definitions / perceptions: Operational, short


term, deal and
• Ordering… margin
• Buying… oriented

• Purchasing…*
• Procurement…
• Sourcing…
• Supply Chain Management… Strategic, long
term, performance and
• Value chain management…. value
oriented

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


TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Definition of concepts (1/5)

Purchasing: All activities for which the company receives an invoice from
outside parties. Differentiation between the (i) Purchasing function and the
(ii) Purchasing department.
Procurement: All activities that are required in order to get the product
from the supplier to its final destination. It is based on “total cost of
ownership (TCO)-thinking”. (Note: TCO relates to the total costs that the company will
incur over the lifetime of a product that is purchased.)

→ As there is no agreement existing in literature & practice about a general


definition of Procurement Management, in this course we perceive
procurement as follows:
“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 covering the materials, information
and money flows up to the point of consumption”.
“Procurement management include all activities that are required to manage
supplier relationships in such a way that their activities are aligned with the
company’s overall business strategies and interests.”
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Definition of concepts (2/5)

The procurement function covers…


…assessing if the company should consider make versus buy.
…determining the procurement specifications (in terms of required
quality and quantities) of the goods and services that need to be bought.
…selecting the best possible supplier and developing procedures and
routines to be able to do this.
…preparing and conducting negotiations with the supplier in order to
establish an agreement and to write up the legal contract.
…placing the order with the selected supplier or to develop efficient
purchase order and handling routines.
…monitoring and control of the order to secure supply (expediting).
…follow-up and evaluation (settling claims, keeping product and supplier
files up-to date, supplier rating and supplier ranking).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Definition of Concepts (3/5)

Final note: Although the terms are different, “Purchasing” and “Procurement” in business practice are used
as synonyms, which is why it is alternated between these terms throughout this course as well as in the
related slide deck (with reference to A. van Weele, 2018, p. 9).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Definition of concepts (4/5)
Ordering refers to the placing of purchase orders at a supplier against
previously arranged conditions.
Buying includes determining the purchasing needs, selecting the supplier, arriving
at a proper price, specifying terms and conditions, issuing the contract or order,
and following up to ensure proper delivery and payment.
Sourcing: Finding, selecting, contracting and managing the best possible
source of supply on a worldwide basis (popular in the materials area).
Supply Chain Management: The management of all activities, information,
knowledge, 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: All stakeholders belonging to the same value chain
are challenged to improve the (buying) company’s value proposition to its final
(end-)customers, i.e. consumers. Usually the suppliers work closely with the
(buying firm’s) technical and marketing staff to reduce costs, come up with new
designs etc. to make the product sell better (e.g. Supplier relationships at Volvo).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Definition of concepts (5/5)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Importance of purchasing to business: Procurement value

Cost of goods
solds

Purchased
goods and
services

In relation to the cost of goods sold (COGS; note: based on the cost-of-sales
method) the average procurement value (= value of purchased goods and
services which relate to components that make up the final product) is
approximately 50 %.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Importance of purchasing to business: DuPont Analysis (1/2)
Final note:
As the purchasing
to sales ratio
increases for a
specific company,
purchasing
decisions will have
a more profound
impact on the
company‘s
returns.
The same goes
for capital turnover
ratio, of course!

Plus 20 %
of RONA* Minus 2% of
Purchasing
related
expenditures*

*) a 2% reduction of Philips‘ cost of purchased materials and services leads to a 20% increase of Philips‘
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk th
For use with Purchasing and Supply Chain Management 7 Edition
Return On and
373.551 Purchasing Net Assets
Supply (RONA); of course: the reverse is also true!
Management by Arjan J. van Weele (9781473749443) © 2018
19 Importance of purchasing to business: DuPont Analysis (2/2)

The DuPontAnalysis shows that procurement contributes to improving the


company’s RONA in three ways:

1. Through reduction of all direct material costs: This will immediately lead to an
improvement in the company’s sales margin, which in turn will affect RONA in a
positive manner. A number of measures may lead to lower direct materials costs such
as a reduction in the number of suppliers, improved product standardization, applying
competitive tendering and looking for substitute material.
2. Through a reduction of the net working capital employed by the company: This will
work out positively on the company’s capital turnover ratio. This can be reached by
longer payment terms, reduction of inventories of base materials through Just-In-Time
(JIT) agreements with suppliers, supplier quality improvement (which will lead to less
buffer stock required) and leasing instead of buying equipment.
3. Through improving the company’s revenue generating potential: Challenging suppliers
for new product ideas and process improvements may lead to new customer value
propositions that in turn lead to higher margin of new products. Since innovation in
many industries today come from suppliers, procurement managers are challenged to
mobilize their suppliers’ expertise and to involve supplier technical experts early in the
new product development process.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Importance of purchasing to business: The Purchasing Spend Cube (1/2)

The Purchasing Spend Cube allows us to allocate purchasing expenditure from 3


different angles: (1) suppliers, (2) purchasing segments or categories and (3) internal
budget holders or departments.
-> This approach is the foundation for every purchasing strategy.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Importance of purchasing to business: The Purchasing Spend Cube (2/2)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 15.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Classification of purchased goods (1/2)

The procurement 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.
Differentiation between physical raw materials (e.g. iron) and natural raw materials
(e.g. soya).

 Supplementary materials; materials that are not absorbed physically in the end
product. They are used / consumed during the production process (e.g. cooling water).

 Semi-manufactured products; products that have already been processed once or


more times and that will be processed further at a later stage. They are physically
present in the end product (e.g. rolled wire)

 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. They are built into an end product (e.g. batteries).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Classification of purchased goods (2/2)

 Finished products or trade items; all products which are purchased to be sold,
after negligible added value, either together with other finished products and/or
manufactured goods (e.g. navigation systems, car stereo systems).

 Investment goods or capital equipment; products that are not consumed


immediately, but which purchasing value is depreciated over a period of time
(economic life cycle). Examples are buildings or production machines.

 Maintenance, repair and operating materials (MRO items or ‘indirect materials’ or


‘consumable items’); materials, which are necessary for keeping the organization
running in general and for the support activities in particular. These products are
often supplied from stock (e.g. office supplies, cleaning material, copy paper).

 Services; services are activities which are executed by third parties (suppliers,
contractors, engineering firms), or other business units of the company, on a
contract basis. They are labour intensive. Services can range from providing
cleaning services and hiring temporary labour to having new production facility for
e.g. a chemical company designed by a specialized engineering firm (contractor).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Challenges and changes in purchasing’s context (1/4)

Diminishing growth opportunities result in a situation where an increase in


sales turnover can only be realized by the expense of the competition and a
great deal of effort. This leads to increased pressure on sales prices and
consequently on cost prices and margins which causes two developments:
1. Shift of power between selling procurement and selling parties in many
markets. Due to the fact that in many cases the market has changed
from a seller’s to a buyer’s market, the role of the buyer is now more
dominant than a number of years ago.
2. Increasing pressure on sales prices and margins resulted in an
increased pressure on direct materials-related costs. Because the
procurement prices determine the sales prices in the industrial and
trade sector to an large extend, the buying company will be constantly
on the lookout for opportunities to keep these prices as low as possible.

-> As a result of both developments, the purchasing strategies of industrial


companies have undergone major changes.
-> Some of them are presented in the following.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Challenges and changes in purchasing’s context (2/4)

• Global sourcing
 Components are increasingly sourced from foreign, low cost countries, a
reason why large manufacturing organizations have set up International
Purchasing Offices (IPOs) in different regions of the world.

• Leveraged procurement and supply strategies


 In companies with several manufacturing plants, important purchasing
advantages can be realized by combining common purchasing
requirements (e.g. for raw materials; at present also for computer
hardware and software as well as capital goods).

• Corporate social responsibility and business integrity


 Apart from environmental issues there is a growing pressure from the
public that products should be clean (or even “green”) and originate from
countries with free trade (note: also child labour became a big issue which
poses new challenges for procurement).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Challenges and changes in purchasing’s context (3/4)

• Resource scarcity
 As the world population is expected to grow to 9 billion by 2050, this will
lead to unprecedented demand for basic resources such as water,
agricultural land, oil, gas etc. This poses new challenges towards
purchasing professionals who need to develop a much more forward
outlook on how to secure the company’s future requirements for critical
materials and products.

• Supplier integration
 Modern IT enables companies to improve their materials planning, internal
supply systems as well as their supplier relationships. An integrated
approach of materials management requires close cooperation between
production planning, inventory control, quality inspection and purchasing.

• Early supplier involvement in new product development (NPD)


 As more and more innovations in industry come from suppliers, getting
them involved early in the NPD process becomes an issue of prime
concern (e.g. NPD done in-house or by the supplier).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Challenges and changes in purchasing’s context (4/4)
Memo 1.4 provides an illustration of some of the challenges that lie
ahead for procurement professionals and supply chain managers.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Brief summary

• Purchasing and supply chain management has developed into a key


business drivers. Its purpose is to develop a competitive, world-class supply
base for the company.

• Although the terms are different, “Purchasing” and “Procurement” in business


practice are used as synonyms.

• Purchasing encompasses everything for which the company receives an


invoice. Traditionally direct purchasing has received the most attention but
this is changing.

• The most important new challenges will be global sourcing, the need to
develop leveraged purchasing and supply strategies, integration of
suppliers in both materials and new product development processes,
reciprocal arrangements, and socially responsible purchasing.

• From the perspective of a procurement professional the management of


the procurement function requires a thorough understanding of the
procurement process within the organization as well as a good understanding
of business and change management.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Lecture 1: Self-assessment (1/2)

1.1 Take the annual report of an industrial company. Calculate


the procurement value in relation to the turnover. Calculate the
effect of a 2 and 5 per cent saving on the procurement value. Do the
same for a 2 and 5 per cent increase in the procurement value
ceteris paribus. Describe the elements in the DuPont chart that are
affected by procurement policy directly or indirectly.

1.2 What would you consider to be procurement’s added value to a


company? Mention at least three areas where procurement can
contribute. What would you consider to be procurement’s core and
non-core activities?

1.3 What are the major differences between procurement, sourcing


and supply management? Would you consider the procurement
function to be part of supply chain management or would you favour
the reverse? Discuss.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
30 Lecture 1: Self-assessment (2/2)

1.4 What are the major differences between the activities of the
procurement function and the activities conducted by the
procurement department? Do you think it is important to differentiate
between these two concepts? Why?

1.5 The chapter describes a number of new developments in


procurement and also addresses the aim for total quality control in
companies. Describe the major consequences of total quality
control on the procurement function in general and on the
relationships with suppliers in particular.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
31 Supplementary literature (Lecture 1)

Aljian, G.W. (1984), Procurement Handbook, New York: McGraw-Hill.


Drucker, P. (2006), The Practice of Management, Harper Business.
Malnight, T.W. and Keys, T.S. (2012), The Global Trends Report, Strategy
Dynamics Global Limited.
Porter, M.E. (1985), Competitive Advantage, New York: Free Press.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 2.
Industrial buying behaviour: decision making in
purchasing

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• The major differences between organizational and consumer
buying behaviour.
• The key elements of the purchasing process.
– The linear versus the extended purchasing process model.
– The various roles in a buying decision-making unit.
– The involvement of the purchasing department in the
acquisition of various goods.
• How to model organizational buying behaviour based on
business marketing theory.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case study – Buying computer systems in a car leasing
company (remarks)

The introductory case is …


• … outlining one part of a complex decision-making process related
to an important purchase.
• … describing a situation concerning the purchase of products or
services that are still to be developed; situations like this are
generally characterized by a high degree of complexity and
uncertainty.
• … emphasising that in such situations usually many disciplines and
departments in the organization are involved.
• … showing that various disciplines and stakeholders involved do
have varying interests and different views as well as opinions about
what should be done.

The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 22.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Organizational buying behaviour (1/2): Important/basic characteristics
of industrial (=business-to-business) markets

• Professional purchasing. Professional buyers with education and


experience who know their tasks and responsibilities.
• Derived demand. Most companies sell to other companies; only few
manufacturers sell to end-users. Developments in industrial markets are often
related to changes in the end-user markets upstream in the value chain.
• Inelastic, fluctuating demand. Due to the derived demand, price-elasticity
in industrial markets is frequently lower than in consumer markets.
• Geographical concentration. Many industrial markets are geographical
concentrated (e.g. electronic industry in Silicon Valley).
• Large order quantities and large amounts of money involved.
• Limited number of customers. Industrial suppliers often supply only a few
companies compared to companies that deliver directly to end-consumers
(e.g. European automotive industry – if limited to producers – is made up of
approx. six major independent manufacturers).
• Consumers usually spend their own money. Consumers are usually
more careful in spending money than industrial customers.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Organizational buying behaviour (2/2): Main differences between
business-to-business and consumer marketing

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 23.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Purchasing on business-to-business markets = management of a
network of (long-lasting) buyer-supplier relationships

Business-to-business marketing and professional purchasing


require active management of relationships within
complex organizational networks.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Models of industrial buying behaviour

Based on the purchasing process model (Figure 1.1) and its different
stages variables that affect the outcomes of this process will now be
addressed. Therefore, we distinguish between variables that affect the
(1) buying process and the
(2) buying behaviour.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Models of industrial buying behaviour: Variables that affect the buying
process

• Characteristics of the product: Financial importance, technical complexity and


risk involved (decision making by technical specialists or financial managers).
• Strategic importance of the product: “Bottleneck products” show significant
risk in terms of supply and turn out to be a threat to the production continuity.
• Sums of money involved: Top management is often directly involved in
negotiation about important raw materials or investment goods.
• Characteristics of the purchasing market: In monopolistic or oligopolistic
markets, negotiations with suppliers are far more complex and difficult than in
markets characterized by free competition.
• Degree of risk related to the purchase: The more disciplines are involved in
the purchasing process the higher the risk.
• Role of the purchasing department in the organization: Tasks, responsibilities
and competences vary between large and small companies.
• Affect of purchased products on existing routines (e.g. when implementing a
new computer system or new manufacturing technology): In general, three
categories of products can be identified: (1) routine products, (2) products
requiring instruction/training or (3) adaption of operational processes.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Models of industrial buying behaviour: Typology of buying situations

→ According to Fisher
(1970) the purchasing
decision-making process is
primarily determined by two
aspects:
• product complexity
and
• commercial uncertainty.

If these two
aspects are combined,
statements can be made
about what disciplines will
be involved in
the decision-making
process.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Decision-making process and decision-making units

• When analysing purchasing processes it makes sense to differentiate


between business interests (served by the purchasing decision),
departmental interests and personal interests (e.g. “Black & Decker vs. Hilti”).
• Importance of social, psychological and emotional factors on purchasing
decision-making (Note: this is still a research gap!).
• Purchasing for organization = group decision making: An important concept is
the decision making unit (DMU which is sometimes referred to as the “buying
centre”).
• A DMU relates to all those individuals and groups who participate in the
purchasing decision-making process, who share some common goals and
the risks arising from the decisions.
• Roles within a DMU can be distinguished:
– Users (people who will work with the purchased product)
– Influencers (are able to affect the outcome of the purchasing process)
– Buyers (negotiate terms & conditions, places the order, orchestrate the process)
– Decision-makers (determine supplier selection, write specifications, budget control)
– Gatekeepers (people who control the flow of information from the supplier towards
the other members of the DMU and vice versa).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Decision-making process: Buying centre roles (example)

→ It can be seen that the importance of individual roles can differ, depending
on which phase the purchasing process is in.

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 28.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 The linear purchasing process: P&S role, elements and documents

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Purchasing process management: Important aspects of the linear
purchase process model (1/2)

• Business needs are leading. Business needs and requirements are the
input for the purchasing process model. It is common that business needs
arise because of new customer orders that are translated into production and
operations planning which is then translated into detailed planning of future
materials requirements that need to be obtained from suppliers.
• Process approach. The various steps in the model are closely connected
and the quality of the output of the preceding steps determines to a large
extent the quality of the subsequent steps.
• Defining the interfaces. The output of each phase has to be clearly defined,
preferably with a document (e.g. a ‘go – no-go’ document). The correct
process is usually explained in the company’s purchasing procedures, which
are laid down in a purchasing manual or handbook, where the roles and
responsibilities of the members making up the DMU are explained.
When such procedures are absent, this usually results in a highly
unstructured purchasing decision-making process and operational problems.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Purchasing process management: Important aspects of the linear
purchase process model (2/2)

• Determining responsibilities. Purchasing is considered to be a cross-


functional responsibility. Professional purchasing is all about teamwork.
Therefore, the tasks, responsibilities and authority of the parties involved
should be clearly indicated in each phase of the purchasing process. For
example, when deciding on specifications of technical components,
engineering departments often have the sole authority. However, in most
cases they are not responsible for the cost and risk related to the supply base
for the supply of materials etc. that appear later at the manufacturing stage.
• Combining different skills, different types of knowledge and expertise.
The key question is how to combine the different types of knowledge, skills
and expertise in such a way that all parties/functions involved arrive at an
optimal solution for the company. With regard to the purchasing process
model the first three steps are primarily of technical-commercial nature
(tactical buying function). They have to be combined with the remaining three
steps that are more logistics-administrative nature (operational purchasing
function). Therefore, in practice, a cross-functional co-operation between
different disciplines is growing.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Three types of purchasing situations (1/2)
→ There are relatively few situations in which all of the steps (see Figure 2.3) in
the purchasing process are taken. In general, three types of purchasing
situations are distinguished:

1. New task situation


= f (type of purchasing situation
Degree of risk and uncertainty

 Completely new product from unknown suppliers


 High uncertainty regarding outcome
 (e.g. acquisition of capital goods, see also the case “car lease firm”)

2. Modified Rebuy
 New product from known supplier
 Or: Existing product from new supplier
 Moderate uncertainty regarding outcome

3. Straight rebuy
 Known product from known supplier
 Low uncertainty regarding outcome
 Framework agreements (e.g. consumable items like MRO)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Three types of purchasing situations (2/2)

Figure 2.4 New-Task situation, modified rebuy and straight rebuy illustrated by some examples of
purchasing situations

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
WHY? →
…to compensate some of the major
weaknesses of the linear purchasing
17 The extended purchasing process model model (i. a. no reflection of make vs buy,
disregard of buying experiences with
materials, services and supplier
relationships).
→ … provides guidance to complex
category (= group of products which can
be substituted for one another by a
consumer; e. g. cereals, household
products) sourcing projects.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Extended purchasing process model: Key processes and
enabling activities
Three key processes of the extended model
1. Source (spend and demand analysis, supply market analysis, sourcing strategy
development, tendering and supplier selection, contracting and implementation).
2. Purchase (search for specific product/service in a product catalogue, prepare
purchase order and submit to supplier, follow up to secure on time supply).
3. Pay (receiving and checking invoice, paying amount due to supplier, respecting
payment terms).

Enabling activities of the extended model


I. Risk management (as part of any strategic sourcing project)
• Risk. Assessing the impact and likelihood of unknown factors that may affect
availability of business critical supplies.
• External factors determine the degree of availability of a certain product and
cannot be influenced by an individual company.
II. Stakeholder management
• Assessing the interests and impact of influential parties (internal and external key
stakeholders) on purchasing decision-making outcomes.
• Focused communication is essential to companies that do not have a clear
governance structure and that are subject to political decision making.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Role of the buyer (1/2)

The added value of the professional buyer lies in the ability to act as a
facilitator for the supply process:
• Involvement, preferably in all stages of the linear or extended purchasing
process model.
• Support/lead multidisciplinary purchasing teams.
• Conducting a risk analysis upfront and manage risk during the different
stages of the purchasing process.
• Awareness of the complexity of a specific purchase and being able to engage
stakeholders actively in the purchasing process.
• Conducting internal and external analyses in order to design an effective
category sourcing strategy.
• Preventing specifications being defined in such a way that products or
services can only be delivered by one supplier.
• Involvement in new product development projects and investment projects at
an early stage, to suggest technical solutions and suppliers based on proven
expertise.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Role of the buyer (2/2)

• Identifying new, potential suppliers and business partners for the company’s
changing business needs.
• Preparing a list of approved suppliers in co-operation with the internal
customer, drawing up requests for quotations and preparing their evaluation
together with the user, selecting a supplier by mutual agreement.
• Preparing and carrying out the contract negotiations, drawing up and
reviewing the terms and conditions of the contract.
• Reviewing contract compliance regularly with internal stakeholders and
suppliers.
• Setting up requisitioning and ordering routines, resulting in full contract
compliance in case orders cannot be placed by users themselves, taking
care of order handling.
• Expediting or following up outstanding orders to secure on-time delivery and
monitoring outstanding financial obligations.
• Conducting objective supplier performance evaluations in order to
substantiate future supplier selection decisions.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Roles and responsibilities of procurement professionals in each stage
of the extended purchasing process model

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 36.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Purchasing process: Overview of the 6 phases

1 2 3 4 5 6

→ In the following the 6 phases of the purchasing process will be


described and briefly discussed.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Phase 1: Specification

… differentiates between
Purchase order specification … • Functional specifications
• Technical specifications

… document contains:
– Quality specifications (…answer the question how the product should be
delivered, what technical norms and standards should be met).
– Logistics specification (… indicates the quantity needed, place & time of
delivery with respect to the physical conditions).
– Maintenance specification (… describes how the product will be maintained
and serviced in the future by the supplier and if spare parts will be needed).
– Legal and environmental requirements (… determining that both product &
production process are in compliance with health, safety & environmental
legislation).
– Target budget (… indicates the financial constraints the solution to be
provided by the prospective supplier should be found).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Phase 2: Supplier selection and assessment

After the purchasing requirements are defined the buyer can start the
supply market research in order to identify and select adequate
suppliers. The selection phase contains a number of separate steps.
1. Determine the method of subcontracting (turnkey subcontract, partial
subcontracting, fixed-price contract, cost-reimbursable contract)
2. Based on order specification & preliminary qualification requirements
→ Draw up a “bidders long list”, send out a request of information/RFI
to each long-listed supplier to help these suppliers to qualify for the
order and to be selected for the short list (=most promising suppliers).
3. Prepare and send out a request for quotation/RFQ to the suppliers on
the short list and analyze the bids received (“tendering process”).
4. Based on the quotations the purchasing department makes a
preliminary technical and commercial evaluation. This step usually
ends with a supplier selection proposal which consists of: (1) decision
to select a certain supplier, (2) underlying ranking scheme and (3)
quotations that have been considered.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Phase 3: Negotiation and contracting (1/4)

Once a supplier is selected the purchase contract is drawn up.


• The technical contents of a purchase agreement is project/product
specific.
• There is only limited use of standard purchase contracts due to the
fact that commercial and legal terms vary by contract.
• Differences in contracts are caused by:
– purchasing policy
– company culture
– market situations
– product characteristics, etc.
• A contract can refer to specific additional terms and conditions. There
are several important aspects to be discussed between buyer and
supplier (e. g. prices, terms of delivery, terms of payment, penalty
clauses, warranty conditions and other arrangements).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Phase 3: Negotiation and contracting (2/4)

• Prices and terms of delivery:


– Competitive bidding/negotiation used to arrive at a fixed price with which
the buyer and the supplier are happy with.
– Financial obligations should be defined unequivocally.
– Ideally the supplier should accept all risks (note: if they are not excluded
contractually).
– Fixed price is best for cost control and budget management.

• Terms of payment:
– Preferred method of payment = performance bond (which is based on
suppliers performance, e. g. payment of 20 % of the total sum when 25
% of the work is completed)
– Advance payments should be covered by bank guarantee where the
supplier agrees to fulfil the obligations. Milestone payments are
sometimes used when installations or capital goods are purchased.
– Subsequently, it should be agreed on the transfer of ownership.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Phase 3: Negotiation and contracting (3/4)

• Penalty clauses and warranty conditions:


– Supplier guarantees: goods are of good quality, new and without defects.
– Important: which legal system would prevail in the event of litigation.
– Agreement made with supplier about performance of goods delivered.
• If goods do not meet requirements → corrective measures can be discussed.
• If these don’t work → the supplier will bear any resulting costs.
– A penalty clause may not be effective in certain circumstances (e.g. when
the performance of the purchased equipment is found to be 5% under the
agreed performance standard. In this case, the buyer must have the right
to refuse the product or equipment in question).
– A penalty can only limit damages after execution or delivery. A penalty
can not solve problems before these stages.
– The period in which the supplier is liable for reliability and adequate
functioning of goods should be established in the contract.
– Investment goods are a special case and often the supplier will be
responsible for maintaining the product during its lifespan.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Phase 3: Negotiation and contracting (4/4) – Other arrangements

• The general purchase conditions include


– Insurance and safety regulations
– Transfer of rights and obligations
– Contracting out to third parties
– Specific terms of delivery
• In practice, buyers strive for a situation they can prescribe the
company’s terms of purchase. → However, in some cases suppliers
will accept an order only on their own sales conditions. If the supplier
does not explicitly reject the terms of purchase in the purchase order
confirmation, they are still valid. If they are rejected, then there is
basically no consensus and therefore no purchase agreement.
• This tug-of-war is something referred to as the “battle of forms”.
• In international trade attempts have been made to standardize much-
used trade terms. The INCOTERMS are an example.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Phase 3: Other arrangements - INCOTERMS as an example

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
TakenPurchasing
373.551 from: van Weele,
and Supply A. (2018), Purchasing and Supply Management, 7th ed., p. 42.
Management by Arjan J. van Weele (9781473749443) © 2018
30 Phase 4 & Phase 5: Ordering and expediting

A purchase order includes


 an order number,
 a concise description of the product,
 unit price,
 number of units required,
 expected delivery time or date,
 delivery address and
 invoicing address.
Three types of expediting:
• Exception expediting: buyer only takes action when the organization sends out
signals of material shortages.
• Routine status check: preventing materials supply and quality problems – few
days before promised delivery, the buyer contacts the supplier to confirm
delivery date.
• Advanced status check: for critical purchase parts a detailed production plan
will be handed over to the buyer and during the process the buyer will carry
out periodic checks.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
31 Phase 6: Follow-up and evaluation

The buyer’s role continues after the new product has been taken into
production or the installation has been put into operation…

Important final/closing activities has to be done, e.g.


– Compare invoice with the original order
– Solve delivery issues
– Supplier assessment = keep track of (and document carefully)
 supplier’s quality,
 delivery record,
 competitiveness and
 innovativeness.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
32 E-procurement solutions (1/5)

E-procurement solutions are defined as all web-enabled solutions aimed


at supporting the purchasing process and all electronic data exchange
that are needed for efficient transaction processing. There are 3 types:
• Electronic market places: make searching for suppliers easier; e.g.
 www.chemconnect.com for chemicals and plastics or
 www.aeroxchange.com for the aviation industry.
• Electronic auctions: the electronic trade exchange is the most popular
e-solution. There is a distinction between
 Open request for interest (RFI) / request for proposal (RFP)
 Reverse auction
 Forward auction
• Electronic catalogue and ordering systems: offer buyers greater
opportunities for more efficient order handling.
 Efficient order processing, logistics and payment systems
 Transactions without human interference
 Substantial cost reduction because of a.o. transaction costs
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
33 E-procurement solutions (2/5)

Forms of E-auctions
• Open Request for information (RFI) / request for proposal (RFP)
– Qualification before auction.
– Supplier is invited based on the offer (price range, rates).
• Reversed auction
– Input price determined by buyer that the supplier needs to meet in
order to gain access to the auction.
– Offers and target price are visible, suppliers can see how far away
they are from the best offer.
• Forward auction
– Vendor determines the price.
– Several buyers announce their offer to the auctioneer.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
34 E-procurement solutions (3/5)

• Most popular form of an e-auction under buyers is the reversed


auction:
– High purchasing volumes are needed to cover the auction costs.
– Sufficient competition among suppliers/bidders.
– Equal opportunities for all suppliers.
– The buyer has to be interesting for the supplier.
– Specifications should be very clear and should not be subjected to
change.
• Generally e-auctions realize a cost reduction between 5% and 40%.
• E-auctions cost time and money: the benefits of the buyer should
clearly outweigh the investments. Therefore, e-auctions are used for
products and services that are bought in large volumes (e.g. routine
items)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
35 E-procurement solutions (4/5): Example

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 47.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
36 E-procurement solutions (5/5)

In general, suppliers do not like e-procurement methods because their


margins will decrease (because of the creation of more competition).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
37 Major bottlenecks and problems (1/3)

• Suppler or brand specifications


The specifications of the user are sometimes written to the capabilities
of specific suppliers. This limits the buyers commercial latitude (in
terms of negotiation).
• Inadequate supplier selection
Not performed check of the supplier's (bank) references can produce
unpleasant surprises like bankruptcy. This is particularly important if
the products delivered require many years of maintenance & service.
• Personal relationships
Purchase orders are placed with suppliers with whom the user has a
friendly relationship. As a result such suppliers may not be as
competitive.
• Lack of good contractual arrangements
Contracts are too general, incomplete, drafted up by the supplier or
have not passed legal scrutiny.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
38 Major bottlenecks and problems (2/3)

• Too much emphasis on price


Especially when buying capital equipment buying decisions need to
be based upon total-cost-of-ownership (TCO) rather than only on the
price (e.g. computer printers).
• Poor administrative processes
Putting a sound administrative system in place could lead to
significant savings.
• Problems in delivery phase
Over time or incomplete delivery, quality problems can put the
continuity of the business process in danger.
• Suppliers are not systematically assessed
This results in unprofessional suppliers and repeating problems.

Final note: To prevent these problems (“major bottlenecks”) companies


need clear rules & guidelines with regard to procurement governance.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
39 Major bottlenecks and problems (3/3): Example “Poor Administration”

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 50.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
40 Brief summary

• Industrial buying behaviour was discussed from different


perspectives:
– Organizational perspective
– Models that regard the interaction between two or more parties
• The purchase process model offers a tool for organizations to
structure their purchasing processes.
• Although organizational purchasing processes may vary to a great
extend, each purchasing process evolves according to similar
stages.
• E-procurement solutions offer many opportunities for the
purchasing professional to deal with problems.
• To prevent problems in practice, companies need to have clear
purchasing rules and guidelines (procurement governance) as well
as a professional administrative organization.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
41 Lecture 2: Self-assessment (1/2)

2.1 To what extent is the purchasing process model complete in your


opinion? What would you like to add or change?

2.2 What is meant by ‘procurement governance’ and what does it


take a company to put a proper ‘procurement governance’ in place?

2.3 How might a procurement manager of a manufacturer of


consumer electronics, based upon the purchasing process model,
arrive at zero defects deliveries to the internal customer?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
42 Lecture 2: Self-assessment (2/2)

2.4 As a buyer for a do-it-yourself chain you import hand-tooling


equipment from China. You desperately want to have these tools
before spring in your supermarkets. What INCOTERMS would you
choose for your purchasing contract with the Chinese supplier and
why?

2.5 What is the value of e-auction for a buyer? When would you go
for an e-auction? Provide arguments for and against.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
43 Supplementary literature (Lecture 2)

Brand, G. (1968), How British Industry Buys, Landon: Hutchinson.


Fisher, L. (1970), Industrial Marketing: An Analytical Approach to Planning and
Execution, 2nd ed, London: Business Books.
Lehman, D.R. and O‘Shaughnessy, J. (1974), Different industrial products,
Journal of Marketing, April: 36-42.
Robinson, P.J., Faris, C.W. and Wind, Y. (1967), Industrial Buying and Creative
Marketing, Boston, MA: Allyn & Bacon.
Sheth, J.N. (1973), A model of industrial buyer behaviour, Journal of Marketing,
October: 50-4.
Webster, E.R. and Wind, Y. (1972), Organizational Buying behaviour, Englewood
Cliffs, NJ: Prentice Hall.
Wynstra, J.Y.F. (1998), Purchasing involvement in product development, PhD
dissertation, Eindhoven University of Technology.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 4.
Buying business services

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• The increasing importance of the buying of services.
• The differences between buying services and buying goods.
• Different views on buying services and the implications for the
purchasing process.
• The importance of stakeholder management for buying
services.
• Specific areas of attention in specifying services, and selecting
and contracting service providers.
• The importance of professional contract management.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: On the path to purchasing excellence (1/2)

Today, companies increasingly buying services instead of goods.

• Traditionally, transportation companies


would buy trucks and negotiate an attractive
acquisition price with the manufacturer.
Today these companies seek integrated truck lease solutions by
negotiating the best all-in rate per kilometre. These include
 a guaranteed flawless transportation capacity during the contract period
 costs for services, maintenance, insurance (and eventually fuel).

• Buyers of copy machines no longer want to


arrange deals on the acquisition price – they
negotiate a price per copy or print (including
a - by the supplier guaranteed & predefined
service level - all maintenance, and service
costs during the lifetime of the contract).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Introduction: On the path to purchasing excellence (2/2)

Also manufacturing companies are increasingly buying services, e.g.


• Philips Electronics has outsourced parts of the
production of consumer electronic products to
contract manufacturer in Far East. In this case
manufacturing becomes a service and therefore
a fundamental part of Philips’ value proposition to the customers.
• Global brands like NIKE etc. focus on
designing and developing exciting new
products, whilst outsourcing their manufacturing.
• Railway companies (like the Austrian ÖBB) who are
buying services from a cleaning company to clean the
train coaches, buy a service that is a fundamental part
of their own value proposition. This because the cleaned seats in
the railcar etc. influences the traveller’s perception of quality of the
transportation service provided by the railway company.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Introduction: Professional purchasing and purchasing excellence

At this stage it becomes clear, that in recent times a number of service


companies made significant progress in achieving purchasing
excellence.
• Purchasing excellence explains how to professionalize purchasing,
making use of two types of processes
– strategic management processes
– enabling processes.
• The increasing popularity of outsourcing and offshoring has led to
the fact, that many large service companies nominated a Chief
Procurement Officer (CPO) to head up their (global) procurement
operations.

→ Service companies have become aware of the necessity to put


professional purchasing and contract management in place.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Introduction: Case study – Buying marketing services at a
European telecom provider (remarks)

The introductory case is illustrative of what may happen when


buying marketing services.
In many cases in practice …
• … the services buyer has to deal with a wide range of internal
customers who are spread out over the entire organization, each
having their own wishes and preferences.
• … it is not simple to translate all wishes into a specification that is
clear and fully accepted by every internal stakeholder.
• … demand is highly dispersed throughout the organization and so
it is difficult to
 gain an idea of the volume of services expenditure
 identify the actual users and decision-makers
 find out with which service providers the company does business

The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 80.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Increasing importance of services (1/2)

• Nowadays, services were increasingly contracted from outside


providers that make up an important part of the company’s value
proposition to its customers.

• Examples are…
 … pharmaceutical companies who are contracting services from
external research laboratories to test pharmaceutical products
among international samples of patients. This influences the time to
market of new medicines.
 … logistics providers, such as UPS, DHL, FedEx etc. affect the
service delivery of the products that are shipped by them on behalf
of their customers.
 … international banks that outsource the management of their
electronic banking and payment systems to outside IT providers.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Increasing importance of services (2/2)

• The purchasing to sales ratio for …


– … industrial companies may range between 60% and 80%.
– … service companies usually amounts to 10% – 50%

• The largest part of the total cost within the service providing
company is related to personnel, e.g. consultants, cleaning staff.

• Services are actually produced in close collaboration and


interaction between buyer and supplier. Therefore, when buying
services relationships were deemed more important than cost
considerations.

• As a consequence, professional services-buying is rising on the


corporate agenda.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Differences between goods and services (1/2)

• Services are defined as ‘[…] the management of a series of more or


less tangible activities, which take place in the interaction between
customer and supplier employees, that either or not in combination
of physical goods or solutions are offered as an integrated solution to
customer problems […]’.
• Since services involve people and every person is unique, service
exchanges can not be standardized. Services relate to the exchange
of knowledge, expertise and capacity that are embedded in human
beings.
• Therefore, the actual exchange will be different depending on the
individuals a buyer deals with. This explains why it is so difficult to
produce and buy services at a consistent quality (Ellram et al., 2004).
• It is a fact that services are produced and consumed at the same
time. This happens in a continuous interaction between employees
of the customer and the supplier.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Differences between goods and services (2/2)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Towards a classification of services (1/2)

For a first classification of services the purchasing portfolio approach


(see Chapter 7 in detail)* can be used.
 This portfolio consists of four quadrants (i.e. leverage products,
strategic products, routine products and bottleneck products).
 The portfolio approach can be based upon two criteria: financial impact
and supply risk.

 A purchasing portfolio serves to develop four differentiated supplier


strategies.
* see: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 176.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Towards a classification of services (2/2)

However, a more popular way is to classify services upon their physical


characteristics. Here, a distinction is made between:
 Facility services (e.g. contract catering, security)
 Financial services (e.g. leasing, insurance)
 Professional services (e.g. legal services, management consultancy)
 ICT services (e.g. computer help desk, software development)
 R&D and technical services (e.g. technical maintenance, engineering)
 Transportation and distribution services (e.g. warehousing)
 Human resource services (e.g. training, recruitment)
 Marketing services (e.g. advertising, sales support)
• This classification is based upon the functional environment in which
the service is consumed.
• It can be used to explain what specialists will be involved in
purchasing decision-making.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Classifying services as portfolio: Example

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 86.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Pre-contractual stage

The pre-contractual stage (= tactical purchasing process) consist of


 Specifying: Defining the scope of work for service providers
 Selecting service providers
 Contracting for services

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Specifying: Defining the scope of work for service providers

• Prior to the actual supplier selection decision it is often difficult to


determine what the service provider should exactly accomplish.
• As a first step - to make the situation clearer and more concise –
three types of service specifications can be differentiated.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Types of service contracts

• Input-based and
throughout based
contracts are usually
referred to as classical
purchasing contracts or
behavioural contracts.
• Output-based and
outcome-based contracts
are referred to as
performance contracts as
they focus on the
performance to be
delivered by the contractor.
Outcome relates to the
economic value that is
generated by the provider
for the customer.
Taken from: van Weele, A. (2018), Purchasing and
Supply Management, 7th edition, p. 88.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Selecting service providers (1/2)

• If the scope of a specific service cannot be defined, it will be difficult


to define what a future supplier should be able to meet.
• The more intangible the service, the more time it takes to prequalify
and preselect the future service provider.
• The preliminary prequalification will cover an assessment of the
 provider’s organization and operational processes
 expertise and capacity
 quality of the staff and management involved
• In case of an
– input specification certificates or diplomas are of interest for the buyer.
– output specification the buyer will be interested in positive references.
• Suppliers for complex services and projects need to be selected
carefully. In recent years “Best Value Procurement and Vested
Outsourcing” has been developed to do just that.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Selecting service providers (2/2): Best Value Procurement and Vested
Outsourcing

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 90.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Contracting for services (1/2)

• When buying services, it is often not so clear when the contracted


performance has been delivered by the service provider.
– Example: What will happen if an architect delivers a design that meets
the technical criteria of the customer, but which does not meet the
customer’s personal taste?
– In such cases a contract probably will not give the answer. It is almost
impossible to formulate clauses in a contract that deal with ALL possible
misunderstandings that my arise in service contracts.
• When the service is to be delivered within the physical premises of
the buying company: (1) sufficient office space and (2) access to
internal information & administrative systems should be provided.
• The assessment of the quality of the service provided (based on
specific KPIs as a key component of Service Level Agreements -
SLAs) is the foundation for the supplier’s payment.
• To make such service contracts work, the buyer needs to periodically
report on the supplier’s performance.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Contracting for services (2/2)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Post-contractual stage (1/5)

• In reality, many problems emerge at this stage.


• Example: Outsourcing of the IT help desk
– Situation: The IT helpdesk is now operated by new staff → more strict
and formal than the “old” staff → leading to more paperwork and
frustration among internal employees.
– Supervision made clear:
• Need of active management of the relationship is the task of the
buying organization.
• KPIs and bonus/incentive arrangements (that highly influence
supplier behaviour) have not been appropriately established and
formulated in the contract (there is an emphasis on uptime of the
servers; but nothing has been said about internal customer
satisfaction).
• Having the server uptime in the focus it is likely, that the support of
the supplier will end as soon as the server starts causing
difficulties.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Post-contractual stage (2/5)

In general, inside the buying organization …


– … it is to accept that the buying organisation and the service provider
should actively collaborate to establish a successful service delivery.
– … the way how services should be executed by a service provider
should get as much attention as e.g. how to pay for it.
– ... an effective link between the tactical purchasing process and the
operational stages of the project should be established.
– … the anticipation of different types of problems (e.g. inappropriate
KPIs) at early stages in the discussion with a future service provider is
crucial before drafting a contract with service providers.
– … contract execution means that operational staff members should be
consulted at an early stage about how activities actually take place.
– … it is wise to differentiate between the person who
• supervises the quality of the services provided by the service provider.
• is responsible for selecting the right contract, contract negotiation and
contract compliance by buyer and seller (contract manager).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Post-contractual stage (3/5)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 93-94.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Post-contractual stage (4/5)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Post-contractual stage (5/5)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 94.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Involvement of purchasing in contracting for services

• Traditionally, buyers were involved in low importance services e.g.


travel, print or courier.
• Increasingly buyers are involved in high importance services like
marketing and ICT.
• These types of services may not be contracted for by the purchasing
department, but by the respective functional departments using their
own contacts.
• When tight interpersonal relationships between internal customer and
supplier exist, it will be difficult for any buyer to interfere.
• The best a buyer can do in such situations is to provide superior
transparency to internal customers in terms of the
– (i) purchasing spend related to services,
– (ii) number of service providers the company works with and
– (ii) actual quality provided by the suppliers involved.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Brief summary

• Traditionally, services buying was limited to contracting for facility


services.
• Buying services requires specific expertise and close
collaboration with internal experts in the company especially if an
internal customer has strong personal relationships with the service
provider.
• Challenges include:
– deciding on the specification of services.
– objective selection criteria.
• Service-level agreements stimulate internal customers to express
the key performance indicators.
• Purchasing management control and good governance in
service supplier relationships may help to professionalize service
buying in order to get superior value for the money spend.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Lecture 4: Self-assessment

4.1 Traditionally services and goods buying differ in four aspects.


What are these aspects and what is the relevance of each to the
services buyer?

4.2 Three ways to specify services have been described in this


chapter. Could you apply each of these three types to contracting for
cleaning services (offices)? And also to contracting purchasing
consultancy services?

4.3 Buying marketing services is usually done by the marketing


department. You are recruited as a marketing services buyer. You
reside within the purchasing department. How would you proceed to
professionalize the buying of all marketing services?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Supplementary literature (Lecture 4) (1/2)

Axelsson, B. and Wynstra, J.Y.E (2002), Buying Business Services, Chichester,


UK: Wiley.
Ellram, L.M., Tate, W.L. and Billington, C. (2004), Understanding and managing
the services supply chain, Journal of Supply Chain Management, 40(4):17-32.
Jackson, R.W, NeidelI, L.A. and Lunsford, D.A. (1995), An empirical investigation
of the differences in goods and services as perceived by organisational buyers,
lndustrial Marketing Management, 24:99-108.
Li, M. and Choi, T. (2009), Triads in services outsourcing: bridge, bridge decay
and bridge transfer, Journal of Supply Chain Management, 45(3):27-39.
Patel, R. (2005), Walking a tightrope, CPO Agenda, 1(3):44-9.
Schiele, J. (2005), Meaningful involvement of municipal purchasing departments
in the procurement of consulting services: case studies from Ontario, Canada,
Journal of Purchasing & Supply Management, 11(1): 14-27.
Smeltzer, L.R. and Ogden, J.A. (2002), Purchasing professionals’ perceived
differences between purchasing materials and purchasing services, Journal of
Supply Chain Management, 38(1): 54-70.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
30 Supplementary literature (Lecture 4) (2/2)

Stradford, D. and Tiura, D. (2003), Keeping the savings you thought you were
getting in services sourcing: paper given at 88th Annual International Supply
Management Conference Proceedings, ISM, Tempe, AZ.
Van der Valk, W. (2007), Buyer-seller interaction during ongoing service
exchange. Doctoral Dissertation, Erasmus Research Institute of Management,
RSM Erasmus University, Rotterdam.
Wynstra, E., Axelsson, B. and Van der Valk, W. (2006), An application-based
classification to understand buyer-supplier interaction in business services,
International Journal of Service Industry Management, 5(17): 474-496.
Wynstra, E., Robbe, T., Rooks, G., Türksever, H. and Van der Valk, W. (2012),
Three is a crowd, but in which ways? Performance based contracting in buyer-
supplier-customer triads, IPSERA 2012 Conference Proceedings, Part C:
Competitive Papers. CP41.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 5.
Contract management for complex projects

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• The perspectives that can be used to manage contracts in
complex project settings.
• The different elements of the contracting process.
• How to identify and overcome opportunism in contractual
relationships.
• What contract models exist and when to apply them.
• How to decide about different pricing and payment
mechanisms for contracts.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – What happended at the Amsterdam Metro
project (remarks)

The introductory case shows that in practice …


• … large projects, due to their technical complexity and financial risks,
require decision-making among a wide variety of stakeholders.
• … the project buyer should
– have a good understanding of the project goals and objectives, and the
intentions of all parties involved.
– be involved in the pre-contractual stage of the project (feasibility study,
initial design, engineering, construction design and tendering).
– support or lead the contract negotiations and contract closure.
– finally, follow up and manage the contract in the post-contractual stage to
make sure that all work is executed according to what has been
contractually agreed.
• … dealing with projects, buying is not sufficient. In general the wider
connation of contracting or contract management is used.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 98.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Introduction: Contract management (1/2)
“[…] the process that ensures all parties to a contract fully meet their obligations”.

• Contracting for complex projects is different from buying goods and


services, since projects, by definition, are unique.
• However, buyers and contract managers need to go through all the
different steps of the purchasing process model (see Chapter 2).

• Construction projects were taken as the point of departure (technical


complexity, financial risks and complex decision making). Practices
from this sector may be easily transferred to other sectors/projects.
• But contract management in sectors such as construction has
developed into a specialist area.
► One of the biggest challenges in contracting for projects is to overcome
opportunism, i.e. a situation where each contract partner primarily serves
his/her own self-interest (→ agency problem; → agency theory).
Note: Contractor or subcontractor are used as an equivalent to supplier.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Introduction: Contract management (2/2)

• Parties operating in value chains are linked to each other through


complex contracts that have become more varied over time.
• Different contracts are used for different situations and objectives:
contract management is about deciding on the “right” type of contract.
→ Problems in setting up a “good contract”:
– “Bounded rationality”: It is difficult to put all obligations of both parties in
writing because each of the parties
• (i) will not have complete information and
• (ii) will perceive the transaction predominantly from its own perspective.
– “Complexity”: As contracts differ in terms of complexity, their outcome
may be more or less predictable. Good contracts will allow for specific
arrangements, i.e. how and when to change the contract when the
circumstances change.
– “Focus”: Not only focus on product or service delivery; good contracts
should also take the goals of the (end) customer into account (e.g. when
buying IT very often the customer is not the actual user…).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Contract management and contracts: Agency theory (1/3)

• Agency problem (…in a nutshell…)


– Buyer’s main interest: pay as little as possible for the job to be done.
– Supplier’s main interest: gain as much money as possible from the
assignment.
– In academic literature this “conflict” is known as agency problem.
– Origin of the agency problem = risk that parties face when collaborating.

After contracting, …
– … the parties find out that each of them have different interests, goals
and objectives.
– … each party will experience some asymmetry in terms of contribution to
the collaboration.
– The major problem in contract management /contractual relationships is
to transform a conflict system into a co-operative system.

• Agency theory addresses this problem.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Contract management and contracts: Agency theory (2/3)

Agency theory is concerned with resolving problems that arise in


commercial relationships.
In case of problems it may become obvious that
(1) there are conflicting goals of the client and the agent (goal incongruence);
(2) the client often has insufficient knowledge about how the agent will act to
perform the work (information asymmetry);
(3) contract partners do not want to assume risk and want to shift risk to the
other party (risk aversion);
(4) the contractor should behave opportunistically and not align with the clients
interests (moral hazard).

The main focus of agency theory is on how to determine the most


efficient and effective contract between parties who differ in terms of
(a) risk aversion, (b) self-interest,
(c) bounded rationality, (d) information,
(e) effort and (f) experience.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Contract management and contracts: Agency theory (3/3)

Agency theory differentiates between two types of contracts.


(1) Behaviour-oriented contracts are contracts that specify how the
agent should act in order to deliver the work that is contracted for.
(2) Outcome-oriented contracts (of performance-based contracts) are a
contracting mechanism that allows the customer to pay primarily
when the firm has delivered outcomes.

Final note: It is assumed that outcome-oriented contracts, in general, are more


effective in curbing agent opportunism. Performance-based contracts co-align
the preferences of agents with those of the client because the rewards for both
depend on the same actions. As information also curbs agents opportunism,
powerful information systems inform the client about what the agent is actually
doing. Thus, the agent realizes that it is not easy to deceive the client. The last
aspect is often referred to as “moral hazard”, i.e. the chance that the agent in the
post-contractual stage will deliberately act to primarily serve his or her self-
interest, against the client’s interest (Eisenhardt, 1989, p. 60).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 The contracting process: Contract stages (1/3)

Pre- Contractual Contract Post-


contractual stage execution contractual
stage stage

→ Contract management is “[…] the process that ensures


that all parties to a contract fully meet their obligations, in
order to satisfy the operational objectives of the contract
and the strategic business goals of the customer.“
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 101.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 The contracting process: Contract stages (2/3)
• Pre-contractual stage
– Basic design and engineering (activities needed to develop the
technical specification of the work) result in detailed technical
specifications.
– Tendering (activities needed to select contractor for the work based
upon competitive bids):
• Tender documents (technical specifications and a draft contract) will be
send out to prospective contractors.
• Suppliers should be allowed sufficient time to prepare their proposals.
• Note: In Europe public institutions are bound by European procurement
directives (see Chapter 6); private companies have more degrees of
freedom in communicating the future project to the market.

• Contractual stage
– Contract negotiation and closure
• Based upon a number of competitive bids, the buyer will preselect one or
two suppliers with whom the buyer is going to negotiate.
• Negotiations start after having made an agreement on the base price.
• This stage results in the contract = basis for future collaboration.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 The contracting process: Contract stages (3/3)
• Contract execution
– Detailed project engineering and planning
• Contractor will take care for detailed specifications, preparation of budgets.
• Crucial phase: technical changes, government permits require a lot of time.
• Delivery date of the work will not change → Project manager’s time squeeze.
– Subcontracting and procurement
• After agreement on main contract, contracts with subcontractors & materials
suppliers has to be set up.
• Supplier options: (1) back-to-back agreement, (2) best competitive bid, (3) mix.
– Project execution: In this phase changes in the original contract may lead to
conflicts, disputes etc. – need to be dealt with on a day-to-day basis.
– Testing and delivery
• Work needs to be approved by the buyer or representative/engineer.
• Payment needs to be managed in line with the project milestones.
– Maintenance and guarantee period: After delivery of the work, suppliers
and the contractor remain liable for defects and failures.
• Post-contractual stage: Long after the project has finished, legal counsels
and lawyers may be busy for years to settle claims from the buyer.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Problems in contract management (1/2)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 106.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Problems in contract management (2/2)
“Realizing a complex, successful project is far from simple task.”

→ In a study (Van der Puil and Van Weele, 2014) contractors of large
construction projects (see also the case study at the beginning of this
chapter on the Amsterdam metro) reported the following issues in their
relationship with their clients:
• Misalignment of objectives between client and supplier.
• The buyer is lacking sufficient knowledge and expertise.
• Active involvement of engineering and other consultants.
• Contract management expertise/efficiency.
• Inefficient decision-making.
• Frequent scope and planning changes.
• Misunderstanding of what has been agreed.
• Payment problems.
• Local political pressure.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Perspectives on contract management (1/2)

(1)

(2)

(3)

(4)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Perspectives on contract management (2/2)

Whatever contract is made between parties involved, contracts may


be perceived from different perspectives, such as:
(1) Dyadic perspective: Contracts are closed based upon interests of buyer
and seller only.
(2) Supply chain perspective: Contracts are closed based upon recognizing
interests of key supply chain partners (e.g. suppliers with specific
expertise).
(3) Value chain perspective: Contracts are closed based upon client’s (end
user’s) key interests and requirements.
(4) Network perspective: Contracts are closed recognizing value network
interdependencies.

→ Knowledge of these four perspectives on contract management is


important when designing a contract or when discussing a conflict
between parties.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Contract models

• Construction-only contract
– Contractor constructs the project in accordance with the design provided
by the client.
• Design and construct (D&C)
– Contractor designs and provides, in accordance with the client’s
requirements, plant and/or other works.
• Contract for engineer-procure-construct (EPC)
– Contractor delivers project or work turnkey.
• Design-build-finance-maintain (DBFM) contract
– Contractor completes work at own risk and gets paid on long- term
payments after delivery.
• Design-build-finance-maintain-operate (DBFM-plus) contract
– Contractor completes and operates work at own risk and gets paid based
upon actual performance.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Contract models: Responsibilities and liabilities

A basic understanding of contract models is important, since every


contract defines the responsibilities and liabilities between contract
partners.
The following types of contract have different implications for the roles
of the parties involved:
• In construct contracts the risk and liability for design and engineering lies
with the client or the client’s engineer. The contractor is liable to the degree
to which their work meets the client’s specifications. When a construct
contract applies, the client should be aware that every change in it technical
requirements could result in extra cost to be charged by the contractor.
• Where an EPC contract applies the contractor is responsible for securing
that the work delivered meets the customer’s functional design, which
beforehand was checked and accepted by the contractor and as such
became part of the contractor’s responsibility. Another way of putting this is
that their work should be fit for functional requirements of the design,
whereas the design should be fit for purpose.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Contract building blocks: Pricing mechanisms

Before entering into the contract negotiation stage, the client has to
decide on the contract reward scheme.
• Fixed-price contract
– The client orders the contractor to perform the required
activities at a fixed price, and to have the work completed by a
predetermined date.
• Cost-reimbursable basis
– The client orders the contractor to perform the required
activities and/or to provide equipment at a predetermined
hourly rate, in combination with a prearranged percentage to
cover the overhead costs. Next, a profit percentage is agreed.
All materials for the project are paid by the client.
• Unit-rate contract/charter contract.
– Unit-rate contracts are used for activities which are common,
repetitive and/or standardized but which are difficult to
estimate in terms of volume and time.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Contract building blocks: Cost-reimbursable contracts

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Contract building blocks: Deciding on fixed or cost-reimbursable
contracts?

The decision for fixed-price or cost-reimbursable contracts is


determined by a number of factors, such as:
• Scope and comprehensiveness of the specification.
Absence of specifications makes a fair comparison impossible.
• Available time.
Is there enough time for a tender procedure and price
negotiations?
• Technical expertise.
When specialized knowledge and skills are required a cost-
reimbursable contract is often preferred.
• Knowledge of the industry.
The degree to which the client knows about the methods and
price arrangements that apply in that particular industry.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Contract building blocks: Additional arrangements - Payment terms

When capital goods are contracted for, it is common practice for payment
to take place over several terms, partly because the contractor will have
to make large investments to be able to produce the desired work.
• Milestone payments.
Payments are made based upon deliveries made for each project
planning stage.
• Bank guarantee.
Guarantee issued by the bank of the supplier that supplier will meet
its obligations.
• Concern guarantee.
Holding company secures payment for agree sum in case business
unit may fail in making payments.
• Performance bond.
Written guarantee form a third party guarantor.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Contract building blocks: Additional arrangements - Penalty clauses,
liquidated damages and warranty conditions
• Legal system
– The applicable law in a specific country or region.
• Performance guarantee
– The contractor guarantees the actual output or outcome of the work to be
delivered.
• Liquidated damages
– If the agreed performance is not met, one should first discuss corrective
measures. If these turn out to be inadequate, the resulting liquidated
damages (=sum that will be paid in case the contractor fails to deliver
works according to the client’s specifications) are to be recovered from
the contractor.
• Penalty clause
– Payment by the contractor in case of partial failure in delivery of works.
– Penalty clauses do not provide a solution for problems occurring at the
stage of execution or delivery; at most they can limit the resulting
damages afterwards.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Subcontracting and project execution

• Subcontractors and materials suppliers make up (on average)


50–70% of the contract price.
• The procurement organization often has a tense relationship with
its supply partners, who use every opportunity to cut costs, give
in on quality and delivery, and charge heavily for extra work.

• Dyadic perspective
- A ‘win–lose’ attitude of contract partners.
- A major disadvantage of this is that parties will pursue only
their own self-interest to the detriment of the client’s interest.
- This traditional approach towards subcontracting and
procurement should therefore only apply for non-strategic,
low-volume subcontractors and suppliers.
• Back-to-back agreements
- Key subcontractor contracts reflect all conditions of the main
contract.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Subcontracting and project execution: Case study

Taken from: van Weele, A. (2018), Purchasing


and Supply Management, 7th edition, p. 115.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Contract governance (1/2)

• The view of contract management as war is quite common among lawyers


and legal counsels.
• However, based on our definition for contract management we propose a
collaborative view. This requires a careful orchestration of “the four
dimensions of the buyer-supplier interaction”.

→ Experience has shown that better outcomes can be achieved through collaboration
(see, for example, Liker and Choi, 2004; Nicholas and Nicholas 2011; Womack and
Jones, 2003)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Contract governance (2/2)

• Information flow. In organizing for the work to be done, parties need to


agree on what information will be provided by whom, at what time, in what
form, when and to whom. Moreover, it should be agreed what information
will be exchanged between parties during the course of the project.
• Goods flow. Arrangements should be made on how materials will be
delivered to the work and when the work will become the property of the
buyer. Arranging for the goods flow implies agreement on how tracing and
tracking of the project deliverables between parties will take place.
• Cash flow. As large projects will require sufficient and timely funding,
parties need to arrange for specific agreements on when payments will be
made against what warranties. It should also be discussed what happens in
case payments are deferred of postponed.
• Relationship. Human factor is the key to project success. Therefore,
specific arrangements are needed on how to improve and maintain the
relationship quality (such as trust, commitment) among all stakeholders
involved (within a highly complex network consisting of different companies,
managers and employees who may come from different cultures).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Brief summary

• Contract management is defined as ‘the process which ensures that


all parties to a contract fully meet their obligations, in order to satisfy
the operational objectives of the contracts and the strategic business
goals of the customer’.
• Contract management puts demands on the governance structure;
the way communication and information is exchange among parties.
• To resolve operational problems, contract managers have different
perspectives: dyadic, the supply chain, the value-chain and the
network perspectives.
• Contract parties may have different attitudes towards contracting.
When disputes arise each party will seek for power strategies to
outsmart the other party.
• A collaborative view towards contracting helps avoid
misunderstandings in the pre-contractual stage, the contractual
stage and the post-contractual stages.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Lecture 5: Self-assessment (1/3)

5.1 Suppose you own the house that you live in. The house needs to
be painted. You intend to hire someone else to do the work for you. It is
the first time that you contract someone for paintwork. What type of
contract would you prefer: a fixed-price contract or a reimbursable
contract? Would you pay your painter based on a lump sum? Discuss.

5.2 When a contractor has won a contract with a client, the contractor
in most cases has to give an extra discount on the initial price that was
offered to the client. This discount usually reduces the contractor’s
already thin profit margin to a bare minimum. Given the fact that
procurement in general makes up more than 70 % of a project’s price,
management puts pressure on its buyers to obtain lower prices from
their suppliers and subcontractors as ‘ procurement needs to secure
the profit of the project’. Do you agree with such an attitude towards
suppliers? What would you consider the most important risks related to
dealing with suppliers in this way?
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Lecture 5: Self-assessment (2/3)

5.3 When discussing ‘The contracting process’, this chapter states


that when subcontracting for a complex project, the buyer should
use back-to-back contracts for business-critical project activities,
that are subcontracted to specialist firms. What are back-to-back
contracts and why should buyers use these? Explain.

5.4 When discussing ‘Problems in contract management’, this


chapter states that engaging consultants and advisors in projects in
practice seems to represent a significant challenge as this often
slows down the project. Why would that be so? Discuss. Use the
agency theory as a platform for your arguments.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
30 Lecture 5: Self-assessment (3/3)

5.5 Some legal counsels and solicitors operate from the view that ‘a
contract does not need to be fair, but just needs to be clear’. Do you
agree with this statement? Why? Why not? Discuss.

5.6 Different views on contract management are explained in this


chapter. Extremes are: (1) contract management as a war game,
and (2) contract management as a vehicle to facilitate collaboration.
What factors could explain both views? Use Figure 5.2 when
answering this question.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
31 Supplementary literature (Lecture 5)

Eisenhardt, K.M. (1989), Agency theory: an assessment and review, Academy of


Management Review, 14(1): 57-74.
Fisher, R. and Ury, W (2012), Getting to Yes: Negotiating an Agreement without
Giving In, London: Random House.
Flyvbjerg, B., Bruzelius, N. and Rothengatter, W. (2003), Megaprojects and Risk:
An Anatomy of Ambition. Cambridge, UK: Cambridge University Press.
Liker, J. and Choi, T. (2004), Building deep supplier relationships: Harvard
Business Review, reprint R0412G.
Nicholas, M. and Nicholas, J. (2011), Lean Production for Competitive Advantage,
New York: Productivity Press.
Van der Puil, J. and Van Weele, A.J. (2014), International Contracting: Contract
Management for Complex Projects, London: Imperial College Press.
Womack, J.P. and Jones, D.T. (2003), Lean Thinking: Banishing Waste and
Create Wealth in Your Corporation, New York: Free Press.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 6.
Public Procurement

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• The principles of public procurement and tendering.
• The specific characteristics of public procurement policy.
• The content and scope of the European Public
Procurement Directives.
• The most important purchasing procedures for public
procurement.
• The specific problems that may occur when executing
these purchasing procedures.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: The role of public procurement
• Governmental institutions play crucial role in internal markets such as
the “European Market”.
 EU strives towards a free market without any impediments so that all
suppliers are able to solicit for governmental orders for products/services.
 The idea behind the European treaty is to create an European market
without trade barriers, based upon a liberal market mechanism, so that
free exchange of goods, persons, services & capital can be accomplished.
• In 2010 governmental procurement spent accounted for €2.400 billion
in the EU.

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 122.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Introduction: Public procurement’s relevance

Austria‘s
Government spent
on procurement in
2013:
approx. 13.5% of Taken from: van
Weele, A. (2018),
its GDP (gross Purchasing and
domestic product) Supply Management,
7th edition, p. 122.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Introduction: The public procurement market

• For many suppliers, service providers and construction firms, public


authorities and utilities are the most important customers.
• In some sectors, public institutions and utilities may, in fact, have the
position of a monopolist.
• Examples:
– weapon systems and tanks
→ Ministry of defense.

– water purification installations


→ Drinking water companies
owned by government.

– civil infrastructure, such as roads, bridges and


tunnels → (in large parts and in many
countries) limited to ministries of infrastructure
and transport as well as municipalities.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Introduction: Case Study – What is good procurement? (remarks) (1/2)

The introductory case outlines the key steps to successful public


procurement in most cases. “Good procurement means getting value
for money […].” 1
Thus, the procuring authority should …
• … be clear on the objectives of the procurement from the outset.
• … be aware of external factors that will impact on the procurement such as
the policy environment or planning issues.
• … communicate those objectives to potential suppliers at an early stage, to
gauge the market’s ability to deliver and explore a range of possible
solutions.
• … consider using an output or outcome based specification, to give
suppliers - who naturally know more about their business than potential
buyers - more scope to provide innovative solutions to solve the underIying
problem the procurement is designed to deal with, rather than deciding
what the precise solution should be at the outset.
1Source: Transforming government procurement, HM Treasury (UK), January 2007
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 121.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Introduction: Case Study – What is good procurement? (remarks) (2/2)

… follow a competitive, efficient, fair and transparent procurement process,


and communicate to potential suppliers at the outset what that process will
be. This will give suppliers greater certainty about the costs and benefits to
them of submitting a bid, which should encourage effective competition. As
all suppliers have the same knowledge when going into the process, and will
be assessed in the same way, the successful bidder can be chosen purely
on his or her ability to provide the best solution.
… be clear about affordability of the resources available to spend on the
particular good or service. The procurer has to select on the basis of whole-
life value for money, but in setting budgets for individual projects
departments he or she also need to make decisions about relative policy
priorities and needs. If more is spent on one project than originally allocated,
that will mean less is available for other priorities. Conversely, if savings are
achieved, then these can be redeployed into frontline services.
… establish effective contract management processes and resources in
good time to drive excellent supplier performance throughout the contract.
1Source: Transforming government procurement, HM Treasury (UK), January 2007
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 121.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Nature of public procurement

Public procurement has a multidisciplinary character (such as


economics, public administration, public finance and law).

The purchasing policy of …


• … public authorities (the state, regional or local authorities, bodies
governed by public law etc.) has very specific characteristics.
• … public utilities sector (e.g. public transport, energy supply) has a
separate and more flexible regime in place.

Public procurement can be compared to tactical purchasing.

→ Important characteristics of public procurement are public


accountability and legality of tendering.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Nature of public procurement: public accountability & legality of tendering

• Public accountability and legitimacy


– Legitimacy of procurement process is important.
– Public institutions are subject to European Procurement Laws.
– EU procurement law prescribes in a fair level of detail how purchases
should be made and contracts should be awarded.
– Process is procedure-driven instead of result- or performance-driven.
– This often has a negative effect on the efficiency.

• Public procurement is not subject to free markets


– Public institutions are funded by money from taxes.
– There is not always a drive to create best value for tax payers.
– Sometimes focus on other than commercial goals: e.g. support local
economy or make sustainable investments.
– EU introduced strict procurement directives in order to make the massive
EU market accessible for all suppliers within the EU.
– Tendering is a crucial part of the public procurement function.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Nature of public procurement: Public tendering

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 125.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Nature of public procurement: Important notes

In public procurement (note: only within the EU) the concept of the
“contracting authority” (which is in general a public institution or public
utility that is subject to the EU procurement directives) is widely used.

To understand public procurement, it is important to know how public


finances are managed within the government:
• Sometimes budgets are granted per year
– If the budget is not completely used in one year, this often means that
the budget will be lowered for the next year.
– Results in an increased spend at the end of the year.
• Budgets for investments and exploitation are separated
– Often only purchase price of products and services are considered
(rather than total costs of ownership)
– This often leads to suboptimal financial results.
• Unfortunately, professionalization of public procurement is a rather slow
process.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 EU Procurement Directives

Four major principles underlie each of the EU procurement


directives:
– Non-discrimination - ensures the market for government
contracts is accessible to every supplier regardless of
nationality/country.
– Equality - ensures that all competitors for a contract are
treated in the same way with the same information given at
the same time.
– Transparency: Publishing of contracts that exceed financial
thresholds in the Tender Electronic Daily (TED) ensures
communication of procurement procedure used by public
institutions.
– Proportionality - ensures requirements and conditions
imposed on future suppliers are reasonable; in balance with
scope, features and volume of the contract.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Public procurement law

Public procurement law prescribes in a formal


way how to go about government contracts.

• Public procurement law is based upon the body of international law,


national laws and jurisprudence.
• The objective of the public procurement law is to make the EU market
for public contracts accessible to all suppliers regardless of their
nationality.
• Major constituents of public procurement law are European Public
Procurement Directives, there are four main directives:
– 2014/24/EU on public procurement
– 2014/25/EU on procurement by entities operating in water, energy,
transport and postal services sector
– 2014/23/EU award of concession contracts
– 2004/18/EC defence and security
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Scope of the European Directives on public procurement (1/3)

• Scope
– The directives apply to all governmental institutions (state, regional or
local authorities and bodies governed by public law).
– Contracts need to be tendered according to the public procurement
directives relate to works and supplies, i.e. goods and service
contracts.

• Framework agreements …
– … are agreements between one or more contracting entities and one
or more suppliers.
– … have the purpose to establish the terms governing contracts to be
awarded during a given period.
– … include terms and conditions related to a description of the supplies
(works, goods and services) characteristics and the quality, special
delivery guarantees, payment and delivery conditions, and price
escalation clauses.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Scope of the European Directives on public procurement (2/3)

• Excluded Assignments
In a limited number of cases governmental institutions do not have to
apply European Public Procurement Directives.
Special arrangements exist for:
• Contracts for Ministry of Defense
• Secret assignments or assignments aimed at protecting state security
• Contracts placed based upon international treaties
• Intra-public assignments

• Threshold values represent the purchasing volumes beyond which


public institutions are obliged to follow European legislation when
making their purchase decisions.
– There are different threshold values for works, and supplies (i.e. goods
and services).
– Central government institutions have lower threshold levels than other
contracting authorities.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Scope of the European Directives on public procurement (3/3):
European threshold values
Table 6.1 Threshold values of European Directives on public procurement

Note: European procurement regime only applies to contracts that meet certain threshold values.
The structural values, which are put here excluding VAT, are updated every two years.

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 128.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Notices and public procurement procedures

• A European tender starts with a contract notice.


• A notice is an advertisement through which the contracting authority
invites interested parties to submit a proposal.
– Formal notice sent to Tender Electronic Daily (TED)
– The electronic forms, i.e. templates for the notice to be made can be
found at www.simap.ted.europa.eu
• Three different types of notices
– Prior information notice
– Contract notice
– Contract award notice
• A European procurement procedure is defined here as “[…] the total
set of rules and regulations that are aimed at selecting the best
supplier for the best product against the best conditions, recognizing
European laws and regulations.”
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Notices and public procurement procedures: European procurement
procedures

(1) Open procedure: Every market party can apply.


(2) Restricted procedure: Focused on pre-selection.
(3) Competitive procedure with negotiation: Used in complex projects,
investigates which solution best fits the functional specification.
(4) Negotiated procedure with/without contract notice: Announcement on
forehand: negotiations about execution and costs possible, with or without a
pre-selection.
(5) Competitive dialogue: Happens under same circumstances as competitive
procedure.
(6) Innovative partnership: Contracting authorities form partnership to develop
product/service/work.
(7) Design contest: A jury grants the project to one party, the procedure has to
be clear and genuine.
(8) Dynamic purchasing system: Completely electronic process aimed at
facilitating buying standard goods and services.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Procurement process
• Defining specifications following the principles…
– … proportionality: inline with the nature of the assignment
– … non-discrimination: specifications can not form a trade limitation
– … equality: fair competition allowing a ‘one level playing field’ for suppliers
• Supplier selection
– Separation between selection and bid award criteria
– Two categories of selection criteria
• First evaluate suppliers on exclusion criteria (relate to personal situation of
suppliers and are further divided into mandatory and optional grounds)
• Then on suitability criteria (relate to financial and economic standing &
technical or professional ability)
– Suppliers not selected for short list have to be informed
• Soliciting bids and awarding contracts
– Bid award criteria have to be proportional (i.e. reasonable in relation to the work to
be committed)
– Award of the bid based upon (i) lowest price or (ii) best economic offer
– Informing of non-selected parties about refusal necessary
– Awarding the contract to the selected supplier
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Procurement process: Selection and award criteria

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 135.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Procurement process: Disproportionality

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 137.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Implications for public procurement

• Resistance against European procurement directives on public


procedures from governmental purchasers and politicians.
• Successful implementation of European legislation calls for clearly
structured purchasing processes and a professional organization.
• Management culture in governmental institutions are causing
problems (i.e. lack of rationality, absence of fact-based mentality,
budget culture, low priority of purchasing on political agenda).
• Examination on correct application of these procedures is needed.
• European Procurement Procedures have been developed without
looking at current position and competences of purchasing function
and professionals. Training will be necessary for professionalization.
• The purchasing function in public procurement should be improved
drastically.
• Implementation of European procurement directives can create
significant benefits: member states report cost savings up to 30%.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Brief summary

• Public procurement concerns a lot of money.


• The EU Treaty has significant implications for public
procurement.
• Public procurement primarily serves political objectives and
plans.
• As a result of general EU procurement directives free trade and
free competition between market parties are ensured.
• Contracting authorities have to be able to explain their supplier
selection decisions.
• Contracting authorities need to respect European financial
thresholds.
• Applying the EU directives requires a professional
procurement organization, which, in general, is absent in many
countries.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Lecture 6: Self-assessment (1/2)

6.1 Why do governmental institutions often have a preference for


dealing with local or national suppliers? Provide and discuss some
recent examples from the press.

6.2 Describe the most important principles underlying the EU Treaty.


In what manner do the EU procurement directives contribute to the
EU Treaty?

6.3 What procurement procedures are available to governmental


institutions in Europe? Describe each procedure and indicate when
and for whom it would be applicable by using the web links that are
provided in this chapter/lesson.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Lecture 6: Self-assessment (2/2)

6.4 A police organization in one of the EU Member States wants to


tender for a new car leasing contract. The police organization is
subject to EU procurement law. Which procedure would you
recommend? Prepare a detailed project plan based on this
procedure.

6.5 When buying copying equipment for a small city, which criteria
would you use: (1) lowest price or (2) best economic offer? Why?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 7.
Purchasing and business strategy

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• The changing international business context and how
companies strategically respond.
• The strategic role of the purchasing function.
• How to develop purchasing excellence.
• How purchasing can support the company’s business
strategy.
• How to develop a differentiated purchasing and supplier
strategy.
• Global sourcing as a potential sourcing strategy.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – Harnessing the power of the network to
deliver results (remarks)

The introductory case indicates that in practice …


• … the changing global business context has contributed to the
growing strategic importance of purchasing and supply management.
• … the gravity of the world economic growth has shifted from the US
and Europe to the Far East and South America. Thus, companies in
US and Europe started to focus on “selective growth” in their long-
term strategy.
• … companies enhanced their core activities and outsourced those
activities that were not considered to belong to their “core business”.
• … logistics activities are increasingly being outsourced to specialist
third-party logistics services which led to intertwined activities with
suppliers.
• … companies see suppliers as an important source of competitive
advantage in terms of innovation and new product development.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 161-162.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 The strategic role of purchasing

• Transaction cost economics theory (Williamson, 1981): Companies


can benefit from economies of scale, learning effects and lower cost
by purchasing supplies externally.
• Outsourcing: Due to the increased outsourcing of business activities,
purchasing and supply management has developed into a functional
domain of strategic relevance.
• As a consequence, suppliers are becoming more important for
competitive positioning of companies.
• “Strategic purchasing” focuses on integrating the purchasing and
supply function with other domains within a firm.
• However, the purchasing and supply domain still focuses on
purchasing's “bottom line” impact through cost reduction, quality
development and technology as companies are unsure of how much
involvement they want from suppliers.
– How do companies create value for their supplier networks?
– How do they mobilize their supplier networks to create sustainable
competitive advantage?
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 IS PURCHASING STRATEGIC… or NOT?

• Ramsey (2001a) argued that purchasing was strategically irrelevant


according to resource-based theory, as the purchasing function could
never generate above “normal returns” and competitive advantage
(which is coming from “core activities”).
→ Resource-based perspective is pointing out, that business success
and/or competitive advantage is primarily achieved through deploying a
company’s unique resources.

• Ramsey (2001b) argued that since all purchasing functions are not
the same it is possible for companies (of whatever size) to develop
“superior performance” compared to their competitors in order to
achieve competitive advantage. This indicates that purchasing plays
a strategically important role in companies.

→ A key issue in uncovering the strategic potential of purchasing is that


companies need to understand the power circumstances they are in
with suppliers and how to leverage improvements in these relationships.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Purchasing’s role in strategic management theory (1/7):
Strategic planning and marketing theories

• After World War II the US and European industry went through a


period of restructuring, recovery and economic growth. This period
was characterized by strong technological development as well as a
growing need for products by consumers.
• Major concern of companies was how to secure supply for production.
→ Backwards integration was a strategy followed to secure basic needs!

Example: Example:
Philips in the early General
1960 had its own Motors
glass manufacturing and Ford
(e.g. their cathode produced in
ray tube/electron large factories
tube TV) and the majority of
packaging plants; their parts in-
they even produced house.
their own toilet seats.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Purchasing’s role in strategic management theory (2/7):
Strategic planning and marketing theories

… time of strategic change …


• Ansoff (1980) introduced the SWOT and the strategic growth matrix.
→ Many large US companies embarked on diversification strategies.
• These strategies were later supported by the PIMS* studies (note: a
strong correlation between market share and profitability was found).
→ Repeated message of PIMS: “Build market share so that you later
can profit from economies of scale”.
• This advice was followed and companies started to buy competitors
and smaller players to strengthen their market position.
Examples:
Heineken (Dutch beer company) and
Saint Gobain (French conglomerate in construction
materials) strive for dominant market share in all
their markets within 3-4 years. If they can’t reach
the position, they withdraw.
* The PIMS (profit impact on market share) studies were conducted by researchers of the Harvard Business School.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Purchasing’s role in strategic management theory (3/7):
Strategic planning and marketing theories
Going for market share was supported by the Boston Consulting Group
(BCG), who introduced the famous “Market Growth-Market Share matrix”.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Purchasing’s role in strategic management theory (4/7):
Competitive strategy

During the end of the 1970s / early 1980s, economic growth both in
Europe and the US came to a halt. A change in strategic management
theory was introduced when Michael Porter (1980) entered the scene.
– “Value chain concept” = broader management perspective
– Differentiation of a firms’ activities
• Primary activities: inbound/outbound logistics, operations
management, marketing and after-sales services.
• Support activities: technology, development, human resources
management, procurement and infrastructure.
– The size of a company is not the only driver of profitability –
focused companies are able to generate substantial financial
results due to “economies of focus” (note: “Porter’s 5 Forces”)
– Introduced buyer-supplier management as a driver of competitive
performance.
Short note: Porter preferred the term “procurement” instead of “purchasing”, which in his sight “has a too narrow connotation”.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Purchasing’s role in strategic management theory (5/7):
Innovation & competence management

How is it possible that within one sector some players consistently


outperform their competitors?
• Resource-based view: Rumelt (1991) and Wernerfelt (1984) argued that
differences in performance and innovation between companies aren’t
primarily to be attributed to their products or market environment.
→ Resources and the way they were used cause differences in performance.
• Prahalad and Hamel (1990) argued that companies should focus on their
core competencies, whilst outsourcing their non-core competencies to
supplying firms which are specialized in these non-core competencies.
– Core competencies
• Those activities through which the company achieves sustainable competitive
advantage.
– Non-core competencies
• Activities conducted within the company, that do not contribute to sustainable
competitive advantage.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Purchasing’s role in strategic management theory (6/7):
From internal to external resource management

In parallel to the resource-based view of the firm, other researchers


suggested that rather than internal resources, the way firms deal with
their external resources determines firm’s competitiveness.
→ Resource dependency theory
– Looks beyond the boundaries of an individual firm.
– Business success is primarily achieved through deploying a
company’s external and internal resource.
– The firm’s dependence on other external parties, such as
suppliers, is central.
– Suppliers are necessary for adapting to and anticipating the
developments in the supply chain’s environment.
– Securing effective relationships with suppliers leads to securing
the external resources required to foster the firm’s
competitiveness (Pfeffer and Salancik, 1978).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Purchasing’s role in strategic management theory (7/7):
Strategic management thinking since the 1960s – An overview

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Towards purchasing excellence (1/3)

Purchasing strategies definitely need to be linked to overall business


strategies. Monczka and Trent (1991, 1992) published extensively on
this subject.
• “Global Procurement and Supply Chain Benchmarking Initiative”
• The idea behind this initiative was that companies participating in
it would be able to
 compare their purchasing and supply processes,
 exchange experiences and
 learn from “best practice”.
• A number of large companies, such as Shell, Philips, Motorola
and Coca-Cola subscribed to this initiative.
→ The outcome of the programme was the idea that companies,
when pursuing purchasing excellence, need to pay attention to two
kind of processes:
• Strategic management processes
• Enabling processes
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Towards purchasing excellence (2/3): Strategic management processes

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Towards purchasing excellence (3/3): Enabling processes

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Towards purchasing excellence: Guiding the purchasing organization
→ Assessing the actual score of the 14 processes against external benchmarks.

8. Manage cost across the supply


chain

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Purchasing portfolio analysis: Principles

• Fundamental to the purchasing portfolio approach is the idea that


since suppliers represent a different interest to the company,
purchasing managers need to develop differentiated strategies
towards their supply market. (Kraljic 1983)
• Key in developing purchasing and supply strategies is the issue of
influencing the balance of power between the buying company and its
key suppliers.
→ Buying firms should avoid being too dependent on specific suppliers.
• In case, a buying company is too dependent on a supplier,
developing effective supplier strategies may help out of this situation.
– Step 1: Companies purchasing spend analysis per category (apply “20-
80 rule”: 20% of the products/suppliers represent 80% of the purchasing
turnover).
– Step 2: Refining the analysis executed in step 1 using Kraljic’s
purchasing portfolio approach on the basis of (i) Purchasing’s impact on
financial results and (ii) supply risk.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Purchasing portfolio analysis: Kraljic’s (1983) purchasing portfolio

Purchasing turnover and the supplier base are analysed on two variables:
(1) Purchasing’s impact on the bottom line to the company.
(2) Supply risk.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Purchasing portfolio analysis: Purchasing supplier portfolio
Looking at the balance of power between the complex and intensive
communication between customer and supplier involved one can
differentiate between three different sub-segments:
(3) Balanced
(1) Buyer-dominated relationship: In this
segment: Here situation neither of
requirements are in the two parties
in fact imposed on dominates the other.
the supplier by the
buyer/manufacturer.

(2) Supplier-
dominated segment:
Through its
technology and
marketing strategies
the supplier has the
customer ‘locked in’
a relationship.
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 176.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Purchasing portfolio analysis: Purchasing product portfolio (1/3)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 176.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Purchasing portfolio analysis: Purchasing product portfolio (2/3)

• Strategic products.
– High-tech, high-volume products which are often supplied at
customer specification.
– Only one source of supply is available, which cannot be changed
in the short-term without incurring considerable costs.
– Usually this type of product represents a high share in the cost
price of the company’s end product.

Examples:
- Engines and gearboxes for
car manufacturers
- Turbines for the
chemical industry
- Bottling equipment for
breweries

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Purchasing portfolio analysis: Purchasing product portfolio (3/3)

• Leverage products.
– Products that can be obtained from various
suppliers at standard quality grades.
– The contractor has freedom of choice
regarding his selection of suppliers.
– Example: Steel and aluminium profiles

• Bottleneck products.
– Can be obtained from only one supplier.
– Example: Vitamins for the food industry.

• Routine products.
– Usually have a small value per item
and there are many alternative suppliers.
– Example: Cleaning materials
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Purchasing portfolio analysis: Basic characteristics of the
four supplier strategies

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Purchasing portfolio analysis: Four supplier strategies (1/2)

• Performance-based partnership
– Goal is to create a mutual participation based on pre-planned, mutually
agreed cost and operational improvement targets.
– “Open costing” is preferred (Buyer discusses how to improve supplier’s
cost position. Supplier efficiency programmes are being developed).
– High supply risks.
– Selection of supplier is important in this process.
• Competitive bidding
– “Corporate or co-ordinated approach”. Long-term contracts and annual
agreements are combined with ‘spot’ purchasing.
– Buyers adopt a multiple sourcing strategy
• Buying at a minimum price while maintaining quality level & continuity of
supply.
• Outsider regularly introduced to avoid price arrangements with suppliers.
– Price changes are monitored closely.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Purchasing portfolio analysis: Four supplier strategies (2/2)

• Securing continuity of supply


– Focus on this for bottleneck products at additional cost if necessary
whilst looking into ways to reduce dependence on suppliers.
– Costs often outweigh gains.
– Risk analysis of most important products performed and contingency
plans made (consigned stock agreements/alternative transportation).
• Category management
– Defined as ‘an interactive business process whereby retailers and
manufacturers work together in mutual cooperation to manage
categories as strategic business units within each store’.
– Routine, maintenance, repair and operating supplies (MRO) products
require a purchasing strategy which is aimed at reducing administrative
and logistic complexity.
– Buyers will have to work out simple but efficient ordering and
administrative routines.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Purchasing portfolio analysis: From outsourcing to partnership…

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 180 -181.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Purchasing portfolio analysis: “The Dutch Windmill” (1/2)

The portfolio approach may have an important shortcoming:


If a product is of strategic importance for a buying company it
doesn’t necessarily imply that this product is also of strategic
relevance to the supplier involved.

How to deal with this situation?


• In order to develop effective collaboration, a good fit between the
position of the product in the buyer’s purchasing portfolio and the
position of the product in the supplier’s customer portfolio is
necessary.
• Detailed knowledge and a good understanding of the dependence
of BOTH parties and vice versa may prevent disappointment.

→ This is the reason why some companies introduced the “Dutch


Windmill” as an extension to their purchasing portfolio analysis.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Purchasing portfolio analysis: “The Dutch Windmill” (2/2)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Global Sourcing (1/2)

• Includes two types of activities


– Re-allocating purchasing volumes from domestic to international
suppliers.
– Co-ordination of common items, materials and suppliers across
worldwide purchasing, engineering and operating locations.
• Advantages
– Lower unit cost, benchmarking current suppliers, developing new
suppliers to stimulate competition, access new markets.
• Disadvantages
– Complicated distribution and logistics, increased handling costs due
to customs regulations/other formalities, problems from dealing with
different cultures, contractual problems, higher carbon footprint,
higher uncertainty about on time delivery and quality of product.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
30 Global Sourcing (2/2)

→ Recent studies point out that offshoring is on the return. Disappointing


results, unexpected costs, cultural differences and communication
difficulties force companies to take outsourced activities back in-house.
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 185.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
31 Summary

• Concentrate on core business’ because


– Many activities can be carried out at lower cost by specialized suppliers, the
company gains flexibility, and management’s attention can focus on its “core
business”.
• Purchasing strategy cannot be separated from the corporate policy
or from competitive strategy.
• The company needs to position against its three major groups of
stakeholders, i.e. its customers, competitors and suppliers.
• Kraljic’s purchasing product portfolio recognizes that different
products require different supplier strategies.
– Product groups and the supplier base are analysed (1) purchasing’s impact on
company profitability and (2) the degree of supply risk associated with the
purchase of a specific item.
– Further analyse the four product categories into (1) strategic products, (2)
leverage products, (3) bottleneck products and (4) routine products.
• This explains that partnership and competitive bidding should be
seen as complementary strategies rather than mutually exclusive.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
32 Lecture 7: Self-assessment (1/2)

7.1 Consider a manufacturer of food products (pasta products, dry


soups and sauces). Analyze the purchasing portfolio based on
Kraljic’s portfolio analysis. Indicate which products can be
characterized as strategic products, leverage products, bottleneck
products and routine products.

7.2 Global sourcing has become more popular among


manufacturing companies. For what segments of the purchasing
portfolio would you recommend a global sourcing strategy? Discuss
the advantages and disadvantages of global sourcing.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
33 Lecture 7: Self-assessment (2/2)

7.3 Many large manufacturers have tried to develop partnership


relationships with their key vendors. How would you define a
partnership relationship? Do you think a true partnership approach is
feasible in the manufacturing industry? What conditions would
buyers and sellers need to meet in order to be able to develop
effective partnership relationships?

7.4 Monczka’s purchasing excellence framework serves as a


guideline for professionalizing purchasing within organizations.
Discuss the weaknesses of this framework for purchasing
managers. For what kind of companies would you consider this
framework to be most useful?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
34 Supplementary literature (Lecture 7) (1/3)

Ansoff, I.H. (1980), Strategic issue management, Strategic Management Journal,


1: 131-148.
Kraljic, P. (1983), Purchasing must become supply management, Harvard
Business Review, September-October: 109-117.
Monczka, R.M. and Trent, R.J. (1991), Global sourcing: a development approach,
International Journal of Purchasing and Materials Management, 27(2): 2-8.
Monczka, R.M. and Trent, R.J. (1992), Worldwide sourcing: assessment and
execution, International Journal of Purchasing Materials and Management, 28(4):
9-19.
Monczka, R.M., Trent, R., and Handfield, R. (2005), Purchasing and Supply
Management, 3rd ed, London: Thomson.
Peters, T. and Waterman, R.H. (1982), In Search of Excellence, New York: Free
Press.
Porter, M.A. (1980), Competitive Strategy: Techniques for Analyzing Industries
and Competitors, New York: Free Press.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
35 Supplementary literature (Lecture 7) (2/3)

Pfeffer, J. and Salancik, G.R. (1978), The External Control of Organizations: A


Resource Dependence Perspective. New York: Harper and Row.
Prahalad, C.K. and Hamel, G. (1990), The core competence of the corporation,
Harvard Business Review, 68(3): 79-91.
Quinn, J.B. (1992), Intelligent Enterprise, New York: Free Press.
Ramsay, J. (2001a), Purchasing's strategic irrelevance, European Journal of
Purchasing & Supply Management, 7(4): 257-263.
Ramsay, J. (2001b), The resource base perspective, rents, and purchasing’s
contribution to sustainable competitive advantage, Journal of Supply Chain
Management, 27(3): 38-47.
Rumelt, R.P. (1991), How much does industry matter?, Strategic Management
Journal, 12(3): 67-85.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
36 Supplementary literature (Lecture 7) (3/3)

Stock, R.M. (2006), Interorganizational teams as boundary spanners between


supplier and customer companies, Academy of Marketing Science Journal, 34(4):
588-599.
Wernerfelt, B. (1984), A resource-based view of the firm, Strategic Management
Journal, 12(3): 171-180.
Williamson, O.E. (1981), The economies of organization: the trans action cost
approach, American Journal of Sociology, 87(3): 548-577.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 8.
Outsourcing and risk management

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• Why companies outsource part of their business processes.
• How to structure the process of outsourcing.
• The most important risks and pitfalls related to outsourcing.
• How to deal with the most important downside risks related to
outsourcing.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – Outsourcing of IT (remarks)

The introductory case shows that in practice …


• … identifying and deciding between core and non-core activities is
one matter; bringing this idea into practice another.
• … when outsourcing complex activities such as IT to an outside
specialist based on a single source agreement, the risk profile of the
company will change dramatically.
• … decision-making exclusively based upon economical and financial
considerations may led to disappointment.
• … later, at the stage of implementation, the perceived and expected
savings are often more than outweighed by the price the company
has to pay for its total dependence on the partner that was selected.
• … such situations cannot be changed quickly.

The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 188-189.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Outsourcing as a business concept

In an attempt to enhance their competitiveness, organizations are


increasingly turning to outsourcing.
• Outsourcing in US became a standard business practice among all
companies in all industries by 2000 (www.outsourcing.com).
• The global market of outsourced services in the US increased from
$45 billion in 2000 to $104 billion in 2014.
• This trend is visible in Europe as Asia as well, where the market for
outsourcing has grown at a rate of double digits.
• In general, outsourcing is viewed as one of many approaches to
maintain or develop competitive advantage.
• Starting out with activities, more and more entire business functions
are being outsourced.
• Examples: IT, transport and logistics services, manufacturing,
engineering and specific customer services (call centres).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Definitions and concepts (1/3)

• Outsourcing can be described as the transfer of activities that were


previously conducted in-house, to a third party. The company
divests itself of the resources to fulfil a particular activity to another
company, to focus more effectively on its own competence.
• The difference with purchasing and subcontracting is that assets,
infrastructure, people, competences and knowledge go over to
another party.
• Characteristics of outsourcing:
(1) In-house performed activities are transferred to an external party.
(2) Assets, knowledge and sometimes employees are sent to the external
party.
(3) Extended long-term relationship between parties involved.
(4) Buyers from both parties experience new cost and risk profiles.
(5) Implementing outsourcing involves a complex transition and change
process that affects the role and position of many people and
managers.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Definitions and concepts (2/3)

Outsourcing may come in different forms; companies may decide to go


for a nearby or distant solution.
• Offshoring relates to the commissioning of work to a provider in a low
cost country (e.g. in many cases (IT) services).
– Nearshoring: outsourcing of activities to nearby low-cost countries.
– Onshoring: outsourcing of activities to providers which are operating in
the same country as the customer organization.
There are two additional types of outsourcing:
• Partial outsourcing means that only a part of an integrated function is
outsourced. The coordination of the function and activities still lies
with the client (the buyer). Here a major problem is of course how to
demarcate the responsibility between the parties involved.
• Turnkey outsourcing applies when the responsibility for the execution
of the entire function (or activities) lies with the external provider. This
includes not only the execution of the activities, but also the
coordination of these activities.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Definitions and concepts (3/3): Partial versus turnkey outsourcing

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Rationales for outsourcing (1/4): Reasons to outsource

Strategic reasons Tactical reasons


(1) Improve company focus (1) Reduce control costs and
(2) Gain access to world class operating costs
capabilities (2) Free up internal resources
(3) Get access to resources that (3) Receive an important cash
are not available internally infusion
(4) Accelerate reengineering (4) Improve performance
benefits (5) Ability to manage functions
(5) Improve customer satisfaction that are out of control
(6) Increase flexibility
(7) Sharing risks

All these reasons underlie one overall objective:


To improve the overall performance of the outsourcing firm!

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Rationales for outsourcing (2/4): Outsourcing matrix

→ The outsourcing decision is dependent on two variables.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Rationales for outsourcing (3/4): Advantages and disadvantages of
outsourcing

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Rationales for outsourcing (4/4): Success of outsourcing?

It is difficult to be able to determine the success of outsourcing as a


business strategy, because the external factors in the before and
after situations may have significantly changed.

Some examples/findings from literature:


• (Delen et al,. 2016) found in their research on IT outsourcing that
around 40 per cent of such projects fail.
• (Deloitte, 2014) reported that 49 per cent of companies who had
outsourced part of their business processes complained about
the reactive attitude of their outsourcing partners.
• (Deloitte, 2014) reported that 48 per cent of these companies
(who had outsourced part of their business processes)
complained about the poor service quality that they gained from
these partners.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 The outsourcing process

Three distinct phases can be identified


– Strategic phase (why, what, who?)
– Transition phase (how?)
– Operational phase (how to control?)

→ Based upon these phases, Momme and Hvolby (2002) present a


framework that provides guidance to the outsourcing process.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 The outsourcing process: Strategic phase

Three essential questions have to be answered in the strategic phase:


I. What are the motives for outsourcing?
 Focus on core competences
 Focus on cost efficiency/effectiveness
 Focus on improving customer service
II. Which activities or functions should be outsourced?
 Transaction cost approach (…“cost should be optimized”)
 Core competence approach (… “concentrate on core competencies”)
III. What qualifications should a supplier be able to meet?
 A supplier should have the technical and managerial qualities to
achieve demanded level of performance.
 Furthermore, the selected supplier should be able to understand and
be committed to the required level of performance.
→ Thus, the supplier selection is the key to the success of the buyer-
supplier relationship.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 The outsourcing process: Four-phase strategic outsourcing model
• This model provides some guidance on how to identify, evaluate and
select outsourcing candidates (suppliers).
• It’s an appropriate tool in the strategic phase of outsourcing processes.

Source: Momme and Hvolby (2002, p. 191); reproduced with permission.


TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 The outsourcing process: Transition phase

• Contract negotiation
– Contract forms a legal basis for relationship
– Contracts depend on characteristics of outsourced activity
– The contract type has a great impact on the success of the joint
operation
• Project execution and transfer
– Outsourcing transition can be very complex
– Transfer should be conducted by using project management principles
– Test phase before going “live”
• The type of contract is just one of many issues to be discussed;
other “ingredients” in an outsourcing agreement are:
- The scope of the service - Communication
- Terms of agreement - Management and control
- Rates, fees, incentives - Conflict resolution
- Termination plan - Other (warranty, confidentiality etc.)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 The outsourcing process: Operational phase

The operational phase consists of two processes:


(1) Managing the relationship: “the” critical stage in the outsourcing
relationship; “core values” determine the success (see Table 8.3).
(2) Contract termination: Performance-driven contracts; the buyer must
explain what the buying company wants, but the buyer should leave
it to the supplier to determine how the results are achieved.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 The outsourcing process: Risk assessment

In cases where trust and interpersonal relationships are not present,


parties try to arrange for dealing with these risks and uncertainties by
detailed outsourcing contracts.
• These contracts are associated with the following kinds of risks:
– Technical risks are related to the extent to which the supplier is able to
provide the desired functionality and performance.
– Commercial risks are related to the uncertainty with regard to the price
we will pay and the costs that we will incur when having outsourced our
activities to the supplier.
– Contractual risks: e.g. does the contract in sufficient detail describe the
performance that is expected from the supplier?
– Performance risks are related to the chance that the supplier is not
capable of doing the job he was hired for.
• Final remark: Trust and partnership are more important to solve the
problem!

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 The outsourcing process: Risk assessment matrix

Risks are assessed on two criteria:


(1) The negative impact on the company’s financial performance or operations
and
(2) The likelihood with which the risk factor probably would occur.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 The outsourcing process: Critical success factors of outsourcing

In the following, an overview of the most important critical success


factors that should be considered prior to engaging in an outsourcing
relationship with an external provider are listed:
• Understanding company goals and objectives
• Based on a strategic vision and plan
• Selecting the right vendor
• A properly structured contract
• Open communication with the individual groups involved
• Ongoing management of the relationship
• Senior executive / top management support and involvement
• Careful attention to personnel issues
• The way the company is strategically positioned vis-à-vis its future
supplier. Can the sourcing company still exert some control over its
supplier, or not?
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Summary

• Outsourcing has become popular as a business strategy in


many industries around the world.
• Most companies start outsourcing to benefit from cost
advantages and to create more focus.
• The new strategy involves the decision to move an activity,
that was conducted in house, to an outside provider.
• Offshoring is similar to outsourcing: it usually relates to
services and is located in a low-cost country.
• The outsourcing strategy should be in line with the overall
corporate strategy.
• As a result of outsourcing, the “traditional” balance of power
between the outsourcing company and its provider
changes.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Lecture 8: Self-assessment (1/2)

8.1 In business many terms are used to describe purchasing and


contracting activities. What would you consider to be the most
important differences between purchasing, subcontracting and
outsourcing? Discuss.

8.2 Looking at the case at the start of this chapter: what went wrong
at the telecom company? What would the telecom company need to
do in order to get more control over its provider?

8.3 What would you consider to be the most important elements of


an outsourcing contract? Provide at least ten items that you would
need to arrange apart from the usual contract terms and conditions
(such as price, delivery or quality).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Lecture 8: Self-assessment (2/2)

8.4 When outsourcing an activity that was conducted in house to


another firm, what kinds of resistance would you most likely meet
and what would be the consequences of this resistance? What
would you consider to be the role of the buyer i.e. contract
manager?

8.5 As a result from outsourcing, the outsourcing company would


become more dependent on the supplier. What could a company do
in order not to become too dependent on a specific supplier? What
would you recommend to the outsourcing company to be able to
exert some degree of control over its supplier?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Supplementary literature (Lecture 8) (1/2)

Delen, G.P.A.J., Peters, R.J., Verhoef, C. and Van Vlijmen, S.E.M. (2016),
Lessons from Dutch IT-outsourcing success and failure, Science of Computer
Programming, http://dx.doi.org/l0.l016/j.scico.2016.04.001.
Deloitte (2014), Deloitte 2014 Global Outsourcing and Insourcing Survey,
December.
McQuiston, D.H. (2001), A conceptual model for building and maintaining
relationships between manufacturers’ representatives and their principals,
Industrial Marketing Management, 30: 165-181.
Momme, J. and Hvolby, H.H. (2002), An outsourcing framework: action research
in the heavy industry sector, European Journal of Purchasing and Supply
Management, 8: 185-196.
Quinn, J.B. and Hilmer, EG. (1994), Strategic outsourcing: Sloan Management
Review, 36 (Summer): 43-55.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Supplementary literature (Lecture 8) (2/2)

Savelkoul, R. (2008), Creating value in the 21st century, public lecture,


Eindhoven University Of Technology, 25 February.
The Outsourcing Institute (2000), Effectively managing the outsourcing relation,
www.outsourcing.com.
Williamson, O.E. (1983), Markets and Hierarchies: Analysis and Antitrust
Implications - A Study in the Economics of Internal Organization, London: Collier
Macmillan.
Williamson, O.E. (1985), The Economic Institutions of Capitalism, New York: Free
Press

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 9.
Category Sourcing: Developing effective sourcing
strategies

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• Why in most deals with suppliers there is room for cost
savings.
• What it takes to develop a sourcing strategy.
• Identify the different elements of a category sourcing plan.
• Know how to assemble a cross-functional sourcing team.
• Identify key success factors for successful implementation of
sourcing strategies.
• Understand why real partnerships in B2B are scarce.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – HP shows how to outsource production while
keeping control over suppliers (remarks)
The introductory case shows that …
• … HP drives its sourcing strategies for all strategic commodities from
the corporate centre in co-operation with the divisions/business units.
– … HP relies on the purchasing expertise and experience that is present in
the different parts of the global HP organization.
– … strategies are developed and implemented by carefully selected
sourcing teams that consist of specialists in different disciplines.
• … HP decided to outsource most of the production to large Electronics
Contract Manufacturers (ECMs) in the Far East.
 How to keep control over the relationship with such large suppliers?
 How to prevent ECMs using HP’s large component spend to drive down prices,
which will also benefit HP competitors doing business with same ECMs?
• … HP decided to set up its Global Procurement Services that contract
all components needed by ECMs to assemble HP’s products.
– ECMs order directly from HP suppliers (based on contracts, of course)
– However, they will never be informed about the prices HP pays.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 161-162.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Reasons underlying cost-savings potential in purchasing (1/2)

The cost-down programmes that have been set up over the past few
years by many large companies have resulted in large purchasing cost
savings (in production-related & non-production related buying).
– How were cost savings realized? What activities have generated these?
– What reasons may explain the slack that apparently exists in the price paid for the
purchased materials and services?

→ Suppliers slack in materials costs and prices may exist due to:
 Traditional purchasing where buyers are involved later in the purchasing
process; only a fixed group of familiar suppliers are in the supply base.
 Continuous and relentless competitive bidding: purchasers sound out
competition among a fixed group of suppliers by playing suppliers off
against each other.
 Overspecification can lead to monopolistic supply situations.
 Price increases passed on to the next in the line (“French fries principle”).
 Supplier cartels: silent agreements on pricing behaviour and the division
of (international) supply markets.
 Suppliers’ customer relationship programmes: Ethics & Integrity!
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Reasons underlying cost-savings potential in purchasing (2/2)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 211.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 How to identify cost-savings potential (1/4): Category tree gives an idea
Remarks:
→ Based on
analysis of a firm’s
purchasing spend
by means of the
“spend cube”.
(see Chapter 1)
→ “Spend
category” = group
of coherent
products and
services, bought
from the supply
market used in the
company to satisfy
internal and
external customer
demands.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 How to identify cost-savings potential (2/4): Category prioritization matrix
Remarks:
→ Based on
“category tree”.
→ Category
prioritization matrix
is used to classify
category cost-
savings based on
two criteria:
• “cost savings
potential”
and
• “ease of
implementation”

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 How to identify cost-savings potential (3/4)
• In assessing the cost-savings potential of a certain spend category,
purchasing managers may use different criteria. Cost-savings
potential may be dependent on the following factors:
– Customized versus standard (“off-the-shelf”) specification.
– Modular versus component buying.
– Buyer-supplier dependence.
– Number of suppliers involved in last tender.
– Scope of last tender.
– Type and age of contract.
– Market price versus cost price differential.
– Level of purchasing involvement.
• Ease of implementation may be decided by totally different factors:
 Degree of internal resistance.
 Internal technical expertise related to the spend category.
 Available supply market and contracting expertise.
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 214.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 How to identify cost-savings potential (4/4): Conducting a feasibility study

Prior to deciding to develop a sourcing strategy, all spend categories are


analysed by “cost-savings potential” & “ease of implementation” through
a feasibility study to get an idea of how the potential can be realized.

List of the activities that are required when conducting a feasibility study:
 Definition of category and sub-categories.
 Overview of current and future purchasing spend.
 Most important stakeholders and actors involved.
 Analysis of current supply base.
 Definition of future company requirements and needs.
 Functional and technical specification of purchased products and future
needs.
 Important legislation that may affect requirements and buying process.
 Underlying cost structure and major cost drivers based on ownership cost.
 Assessment of initial savings that can be made.
 Assessment of ease of implementation.
 Overview of resources needed for category sourcing plan.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Developing a sourcing strategy

Based upon a thorough analysis of the company’s future requirements


and the current supply base, the future sourcing strategy needs to be
decided for every spend category.*
• Issues when setting up a category sourcing strategy
– Single vs. multiple sourcing.
– Global vs. local sourcing.
– Partnership or competitive relationship.
• Aspects for deciding on a contract strategy
– Buying on contract or buying on spot basis.
– Price agreement vs. performance agreement.

* To perform this task (in a first step) a purchasing portfolio analysis can be conducted (see Chapter 7).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Category sourcing plan (1/3)

(1) Business strategy and (2) Analysis of historical data:


business issues: – Historical usage & supplier
– Business goals and issues performance reports
– Current and future business – Functional, technical, quality,
requirements logistics and environmental
– Business priorities specifications
– Important stakeholders – Supply market analysis and
supplier analysis
– Infrastructure and other
organizational conditions – Current suppliers
– Appraisal and ranking of
suppliers
– Price and cost analysis,
important cost drivers
– Legal and environmental
conditions

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Category sourcing plan (2/3)

(3) Customer requirements and (5) Commodity sourcing strategy:


purchasing process – Targeted number of suppliers
(4) Objectives sourcing strategy: – Supplier performance
statement of measurable requirements
results that need to be – Location/geographic spread of
obtained in terms of suppliers
– Cost reduction – Type of preferred supplier
– Quality improvement relationship
– Lead-time reduction – Type of preferred contract
– Inventory reduction – Supplier performance
measures (KPIs)
– Reduction transaction cost
– Reduction working capital
– Innovation

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Category sourcing plan (3/3)

(6) Planning of activities: (7) Organization and team


– Briefing and team preparation composition
– Spend and supply market (8) Summary of expected results
analysis and costs
– Target setting and activity
programming
– Commodity strategy
development
– Sending out RFIs and RFPs
– Sending out RFQs
– Bid comparison and
negotiations
– Contract negotiations and
contract signing
– Communication and contract
reviews
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Getting better results from suppliers (1/2)

Is it always necessary to work through a systematic category sourcing


planning cycle? Is there a simpler way? → Indeed, there is.
The following three steps describe a way of working that has proved to
be very effective in smaller organizations to driving down purchasing
expenditure:
1. Put the best possible legal contract in place: Check of all contracts which
already in place with suppliers and make sure these are updated; go for
performance-based contracts!
2. Select the best possible supplier: Is the contracted partner the best for the
company’s needs? Focus on analysing the supply market and sound out
(international) competition in order to identify “new” possible suppliers; do
not limit to well-know companies only!
3. Get the best possible solution from the best possible supplier: Now the
company has the best contract with the best-in-class supplier. The goal here
is to exchange ideas for mutual improvement activities via implementing
early involvement of suppliers in the new product development process.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Getting better results from suppliers (2/2)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 221.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Myth of partnerships (1/2)

In recent years, many large international manufacturers (in various


industries) have spent a lot of time and money in the development of
supplier relationship programmes (e.g. “Co-makership” at Philips )
A major objective of this type of co-operation is to achieve major
improvements in:
• Logistics. Giving the suppliers insight into the needs and materials
schedules means they can anticipate future requirements.
• Quality. Early agreement on quality requirements enables zero defects
deliveries, which in turn result in a reduction of quality costs for the
contractor.
• Product and supply chain cost. Having understanding of the supplier’s and
the industry cost structure means targets are set to jointly reduce the
supplier’s underlying costs.
• Product development. Introducing engineering knowledge and experience
of the supplier early into the development process means time-to-market
and start-up costs reduced.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Myth of partnerships (2/2): Large differences in the relationship with a
supplier and a design partner
Remark:
A partnership in
this context is
considered as a
result of the
contractors’
continuous
effort to improve
results in the
relationship with
suppliers, rather
than a simple
technique which
can be adapted
and applied in a
short time.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Summary

• Effective supplier management is a cornerstone for a successful


business strategy.
• The international competitive arena forces manufacturers to
look continuously for ways to improve their value propositions
to customers.
• The foundation of any category sourcing plan is to make a
sound spend analysis.
• Successful companies tie their purchasing and supplier
strategies to their overall business strategies.
• The road to partnership is difficult.
– Supplier strategies should be supported by senior management.
– Activities are to take place in cross-functional teams from both sides.
• Buyer conflict is avoided by category sourcing programmes
which focus on where to go for single sourcing, global sourcing
or partnership.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Lecture 9: Self-assessment (1/2)

9.1 What is a sourcing strategy? What major questions should a


sourcing strategy address?

9.2 Consider the product lifecycle concept that you probably know
from your marketing classes. Do you see any relationship between
the different stages of the product lifecycle and the type of sourcing
strategies that companies would need to follow?

9.3 What are the primary tasks of a category sourcing manager?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Lecture 9: Self-assessment (2/2)

9.4 Why would companies in general benefit from reducing their


supply base? Explain.

9.5 What sourcing strategies would help a company to build a


dominant position in its supply chain? Give at least four examples of
such sourcing strategies.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Supplementary literature (Lecture 9)

DTI (1994), A Review of the Relationships between Vehicle Manufacturers and


Suppliers. Report of the DTI/SMMT Automotive Components Supplier Initiative
Stage Two, p. 28.
Dyer, J. (1996), How Chrysler Created an American Keiretsu, Harvard Business
Review, July-August: 42-91.
Ellram, L. and Hendrick, T. (1993), Strategic Supplier Partnering: An International
Study, Phoenix, AZ: Center for Advanced Purchasing.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 10.
Purchasing, innovation and quality management

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• Why large companies pursue “open innovation” in their external
relationships.
• The challenges of integrating purchasing in technical design
and new product development processes.
• What it takes to involve suppliers early in new product
development.
• The most important concepts concerning purchasing and
quality management.
• Purchasing’s role in and contribution to quality management.
• How to set up a supplier quality assurance (SQA) programme.
• How to improve supplier performance.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – Suppliers as a source of innovation: PSA’s
Pluriel project (remarks)
The introductory case (note: although the PSA Pluriel project took
place several years ago) indicates that in practice …
• … a company (not only in automotive industry) must – in order to
be able to compete – pay considerable attention to reducing the
“time-to-market”.
• … suppliers should be seen as a “major source of innovation” that
enable companies to develop entirely new products and even enter
new markets in shorter time periods.
• … in new product development it might be wise to working closely
together (instead of at arm’s length) with the innovative suppliers.

The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 226-227.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Purchasing and innovation

• Innovation is different than in the 1990s!


• Transition from closed to open innovation:
• Sharing ideas
• “Stage gate models”
• Open innovation
The purpose of open innovation is to create close collaboration on R&D,
new product design and development as well as market introduction with
parties that share the company’s business interests in such collaboration.
• Closed innovation
Closed innovation implies that companies try to develop new products and
processes based on the following assumption: the company itself has the
best possible knowledge and resources for innovation.
• Complexity of products asks for external expertise.
– External cooperation can speed up the innovation process.
– Innovation today without external partners is not possible.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Purchasing and innovation: “Closed vs Open” innovation approach

“Open innovation”

“Closed innovation”

Source: Chesbrough, H. (2003), Open Innovation, © Harvard Business School Publishing Corporation. All rights reserved.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Purchasing and innovation: “The innovation funnel” – Innovation
managed as a process marked with stage gates
Remarks:
→ Idea: Secure the
most promising ideas
at an early stage of
development by …
• … careful screening
• … elimination of
unpromising ideas
• … prevention of
unnecessary
development costs
→ That is the reason
why many large
companies have
developed the so-
called “stage gate
processes” for
innovation.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 The role of suppliers in new product development: Early supplier
involvement (1/2)
• Suppliers are an increasingly important source of innovation.
Example: Automotive industry
– Fuel injection by Bosch
– Sun protecting and security glass by Saint Gobain
• Academic research results are controversial: putting the idea of early
supplier involvement (ESI) into practice is far away from simple.
– Ragatz et al. (1997) showed that ESI leads to shorter development lead-
times, higher product quality and a shorter time-to-market.
– Other studies reported higher development cost, higher product cost,
delayed market introduction and discussions on intellectual property.
– Wynstra (1998) and Van Echtelt (2004) conclude that problems with ESI
exist, such as …
• … conditions for cooperation are not always present
• … conflicts concerning intellectual property (IP)
• … overestimation of the developing skills of a supplier
• … how to reward the supplier for its development
efforts (benefits?)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 The role of suppliers in new product development: Early supplier
involvement (2/2)

• When discussing the benefits of early supplier involvement, the


distinction between short-term and long-term benefits needs to
be made.
• Van Echtelt (2004) distinguishes between Example:
– Short term benefits may relate to: “Senseo Crema“ represented
a completely new solution for
• Better production quality the Dutch coffee market.
• Lower production costs
• Shorter development time
• Lower development costs
– Long term benefits may result from:
• Joint research programmes
• Aligned technology strategies
• Risk sharing

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 The role of suppliers in new product development: Early supplier
involvement – The example of “Senseo Crema”

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 232.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 The role of suppliers in new product development: Early supplier
involvement – “Three parallel core processes”
→ In order to benefit from early
supplier involvement initiatives,
buyers need to conduct all three core
processes in parallel:
(1) Strategic management
processes
– Create infrastructure for future
technological collaboration
(2) Operational management
processes
– Individual development process
– For which technology areas do we
want to get suppliers involved?
(3) Collaboration processes Source: Van Echtelt (2004)

– Foster and implement


collaboration with external parties
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Purchasing and new product development: Stages of new product
development (1/2)
1. Idea generation
 As many new product ideas as possible are generated
 New ideas emerge from e.g. customers, sales staff, new technologies
2. Concept study stage
 Translation of the new product idea into a first conceptual design
 Conceptual design describes the functionality the new product should offer
 Is subdivided into: functional design, pre-study and feasibility study
3. Design stage
 Conceptual design translated into a technical design
 Decisions about e.g. materials, physical requirements etc. are made
 Test of product design among customers to find the “best option”
4. Product development
 Product design is translated into prototypes/laboratory models
 These models are extensively tested to obtain information about their
durability, safety and functionality in different working conditions
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Purchasing and new product development: Stages of new product
development (2/2)
5. Preproduction planning
 Production requirements are taken into account; if it is a technically
complex (new) product this phase is time-consuming as eventually new
production equipment has to be purchased
 Capacity requirements of the new equipment will have to be determined
based on market & sales forecasts (done by the marketing department)
 Preproduction planning results in a number of preproduction series
6. Pilot production
 All products are subjected to thorough investigation and quality inspection
 Several engineering changes have to be suggested, documented and
carefully administered and potentially forwarded to suppliers for approval
 At this stage configuration management (i.e. keeping track of all technical
changes and making sure that all parties work according to the latest
versions of technical drawings) is of extreme importance
 Buyer has to communicate all changes to suppliers; very time-consuming!
7. Start of regular production – after all problems have been solved…
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Purchasing’s relationship to the new product development process:
“... ‘natural conflict’ in the way designers/engineers & buyers operate ...”

Remarks:
→ As the product
development
process advances,
specifications
become more rigid,
changes are more
difficult…
→ Consequence
for purchasing:
• Latitude decreases
• Costs of technical
changes become
higher

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Purchasing’s relationship to the new product development process:
The value of catalogues

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 236.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Purchasing’s relationship to the new product development process:
Communication with suppliers

How do large manufacturers communicate with their first tier


suppliers in product development projects?

Possibilities are:
• Purchasing engineering
A specialist function to provide the liaison between the engineering
department and the purchasing department.
• Early supplier involvement
Best-in-class suppliers are invited to participate in the company’s
product/process development projects at an early stage.
• Residential engineering
Engineers from the other party (supplier) are located on a more or less
permanent basis within the organization.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Interaction between purchasing and engineering activities: “Buyers are
generalists. Engineers are specialists.”

→ Conflicting interests between purchasing and engineering activities…

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Purchasing’s relationship to the new product development process:
Supplier involvement (1/2)
• Involving buyers in new product development processes at an early
stage can result in a contribution of new knowledge and a better
understanding of (i) Construction, (ii) Suitable materials, (iii) Suppliers
and (iv) Supplier knowledge.
• Ideally, the project planning for a new product development project will
identify at what time suppliers will be involved in the project.

→ Involving the
supplier in new
product
development
process can result
in considerable cost
reductions.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Purchasing’s relationship to the new product development process:
Supplier involvement (2/2)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 238.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Purchasing’s relationship to the new product development process:
Supplier development strategies
The supplier development portfolio, based upon the “degree design
responsibility held by the supplier” and “development risk” can be
pursued (→ 4 supplier integration strategies).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Purchasing and quality management: Definition of terms

• American National Standards Institute defines quality as:


– “The total of features and characteristics of a product or service that bear
on its ability to satisfy a given need”.
• IBM defines quality as:
– “Quality is the degree in which customer requirements are met. We speak
of a quality product or quality service when both supplier and customer
agree on requirements and these requirements are met.”
• Quality management is defined as:
 “Making sure that the requirements are met and being able to
demonstrate this objectively.”
 This implies that for every transaction between customer and supplier,
they need to agree on …
o … the basic requirements of the transaction (“plan”).
o … the way in which the requirements are to be realized (“do”).
o … how to check that the requirements are (being) fulfilled (“check”).
o … the measures to be taken when the requirements are not met (“act”).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Purchasing and quality management: The “plan-do-check-act” cycle, the
four interrelated functions of quality management and quality assurance

Quality management has at


its disposal four interrelated
functions:
(1) setting standards,
(2) assessment,
(3) control and
(4) assurance.

Quality assurance is an
important criterion for
supplier selection (note: will
be addressed in more
detail later on).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Purchasing and quality management: The cost of quality

• Crosby (1984), one of the founding fathers of quality management


theory, pointed out that it is not so much quality, as the lack of it that
costs money.
• In many companies a considerable number of work hours are spent
on the inspection of incoming goods and on solving acute quality
problems (“troubleshooting“). The cost involved are often invisible and
the companies have no idea what a lack of quality is costing them.
→ Making costs transparent begins with classifying them.
In practice three types of quality costs are distinguished:
1. Prevention costs - the costs of preventing quality errors
2. Assessment costs - the costs related to the timely recognition of
quality errors
3. Correction costs - the cost that result from (rectifying) mistakes
• Internal error costs: result from mistakes noticed in time
• External error costs: are result of flaws identified by the customer

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Purchasing and quality management: The quality costs model

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Supplier quality assurance

• Working on improving the quality offered by the suppliers is a main


task for buyers.
• For this reason, many large manufacturers in Europe have initiated
supplier quality assurance (SQA) programmes.
• To improve the quality of their products, companies opt for an
approach based on prevention.
• The preventive approach is expressed by the following measures:
– Preparing the purchase order specification
– Preliminary qualification of (potential) suppliers
– Sample inspection procedure
– Delivery of first and subsequent preproduction series
– Manufacture of the first production series
– Quality agreement and certification
– Periodic verification

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Assessing supplier quality: Diagnostic methods

Methods for assessing a supplier’s capabilities:

• Product audit
Provides an image of the degree in which a company succeeds in
making everything run perfectly by inspecting final products.

• Process audit
A systematic investigation of the extent to which the (technical)
processes are capable of meeting the standards.

• Systems audit
Compares the quality system to external standards (e.g. ISO 9000).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Assessing supplier quality: Diagnostic methods – systems audit

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Assessing supplier quality: Diagnostic methods / Systems audit (example)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 247.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Implementing supplier quality assurance: Consequences for purchasing

The most important changes to be prepared for by purchasing:


• Clear task descriptions and performance measures
– Maximum rejection percentage per article code or per supplier
– The average term in which rejection reports must be dealt with (per buyer)
– Number of quality agreements closed with suppliers
– Number of certified suppliers
• Clarity concerning supplier selection
– Who in the company is competent to enter into relationships with suppliers?
– Who is responsible for ultimate selection of suppliers?
– Communication to suppliers from one central point (supplier account management)
• Quality first
– Take responsibility for quality and being accountable
– Rejection percentages and number of quality agreements becoming part of the
buyer’s annual assessment
• To measure is to know
– Essential that suppliers receive feedback on their performance (e.g. vendor rating
system)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Summary

• There are interfaces between purchasing, new product


innovation and quality assurance.
• Competition forces companies to speed up their innovation
processes.
• The challenge, however, is how to mobilise a supplier’s
innovation potential.
• A question to consider is what supplier to involve at what
stage of the new product development process.
• Buyers are important scouts when it comes to spotting new
technological developments that occur in the supplier market.
• The product design is the basis for product quality.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
30 Lecture 10: Self-assessment (1/2)

10.1 What kinds of risks are related to involving suppliers early in


new product development projects? Answer this question from the
perspective of a) the buyer and b) the new product development
engineer.

10.2 What kinds of benefits would you as a manager of a company


require in order to make up for the risks that were mentioned when
answering the previous question?

10.3 What will it take from a buyer to develop innovative,


collaborative relationships with suppliers?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
31 Lecture 10: Self-assessment (2/2)

10.4 What activities would be required from a buyer to get to zero-


defect deliveries from suppliers?

10.5 Which types of quality costs can be distinguished? Provide at


least two examples of every type. To what extent can the purchasing
department contribute to a reduction in the quality costs?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
32 Supplementary literature (Lecture 10) (1/2)

Chesbrough, H. (2003), Open Innovation: The New Imperative for Creating and
Profiting from New Technology, Boston, MA: Harvard Business Press.
Crosby, P.B. (1984), Quality without Tears, New York: McGraw-Hill.
Liker, J.K. and Choi, T.Y. (2004), Building deep supplier relationships, Harvard
Business Review, December: 2-10.
Ragatz, G.L., Handfield, R.B. and Scanneil, T.V. (1997), Success factors for
integrating suppliers into product development, Journal of Product Innovation
Management, 14(3): 190-202.
Van Echtelt, F.E.A. (2004), New product development: shifting suppliers into gear,
PhD dissertation, Eindhoven Center for Innovation Studies (ECIS), Eindhoven
University of Technology, the Netherlands, p. 370.
Van Echtelt, F.E.A., Wynstra, J.Y.F., Van Weele, A.J. and Duysters, G. (2008),
Managing supplier involvement in new product development: a multiple-case
study, Journal of Product Innovation Management, 25: 180-201.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
33 Supplementary literature (Lecture 10) (2/2)

Wynstra, J.Y.F. (1998), Purchasing involvement in new product development,


PhD dissertation, Eindhoven Center for Innovation Studies (ECIS), Eindhoven
University of Technology.
Wynstra, J.Y.F. and Ten Pierick, E. (2000), Managing supplier involvement in new
product development: a portfolio approach, European Journal of Purchasing and
Supply Management, 6: 49-57.
Wynstra, J.Y.F, Axelsson, B. and Van Weele, A.J. (2000), Driving and enabling
factors for purchasing involvement in product development: European Journal of
Purchasing and Supply Management, 6: 129-141.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 11.
Purchasing, logistics and supply chain management

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• The definition of supply chain management and the
basic supply chain concepts.
• The most important steps in the materials planning cycle.
• How supply chain activities can be structured within
organizations.
• Characteristics of just-in-time scheduling and
purchasing.
• The most important elements of a purchasing
information system.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – Li & Fung (remarks)

The introductory case demonstrates that …


• … the success factors for effective supply chain management are a
strong position in the customer-supplier network, advanced IT support
and “creative” entrepreneurship (i.e. linking customer networks
directly to supplier networks).
• … the key element of the business is NOT the price that Li & Fung
offers to its customers, but rather the integrated value proposition for
the design, purchasing and logistics for a complete line of products.
• … Li & Fung acts as a supply chain integrator that fulfil the role of a
“supply chain director” due to their superior logistics and financial
information systems (specific knowledge about various industries).
• … of course, the business model is erosive as – thanks to the
globalized world – the presence of the Internet and Western
companies in China, “industry knowledge” (= the “rare asset” Li &
Fung provide) is becoming a commodity and much better accessible.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 252-257.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Definitions and concepts (1/2)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Definitions and concepts (2/2)

• Physical distribution relates to the way in which finished products are


distributed by the company to its customers (outgoing materials flow).
• Logistics covers activities needed to optimize the goods flows from
suppliers to the point of consumption within the company itself
(incoming materials flow).
• Materials management includes all materials related activities aimed
at optimizing incoming materials flows from suppliers to production.
• Logistics management encompasses all materials flows, from the
flows of purchased materials into a facility, through the manufacturing
process, and out to the customer.
• Supply Chain Management (SCM) is the management of connected
series of activities which is concerned with planning, coordinating and
controlling material, parts, and finished goods from suppliers up to its
customers; they may have divergent, linear and convergent structures.
• Purchasing and Supply management can be seen as an integrated
part of SCM.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Definitions and concepts: Supply chain structures (1/3)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 255.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Definitions and concepts: Supply chain structures (2/3) – Figure 11.2
The external structure on a macro level

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 256.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Definitions and concepts: Supply chain structures (3/3) – Figure 11.3

Diverging materials flow:


The finished product of one
link is the main or sole input
for the next production stage
of various other industry
columns. This applies to
industries which process raw
materials.
Linear materials flow:
The finished product of one
link is the main or sole input
for the subsequent link.
Converging materials flow:
Various finished products of
links of various supply chains
are the input for the next link.
This situation is found in
companies with assembly-
oriented production.
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 256.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Definitions and concepts: External factors and market structure

• External factors (e.g. number of suppliers, market structure) are


relevant because they determine the market structure and therefore,
the degree of availability of a certain product. External factors can not
be influenced by individual companies.
• Market structure is defined as the total set of conditions in which a
company sells its products, with special attention to the number of
parties in the market and the nature of the product being traded.
• Economic theory uses a number of constructs to explain the
relationship between demand, supply and market price. It
distinguishes between various market structures such as:
– Pure competition
– Monopolistic competition
– Oligopoly
– Monopoly

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Definitions and concepts: Market structure (1/2)

• Pure (Perfect) competition.


This is characterized by a large number of buyers
and sellers. Neither the individual supplier nor the individual buyer
can influence the price of the product. Price is the result of the
balance between supply and demand.
• Monopolistic competition.
This market structure is characterized by a large number of buyers
versus a large number of suppliers. Through product differentiation
each supplier wants to make his or her product offering stand out vis-
a-vis its competitors. This provides the supplier with some room to
manipulate prices, within a given bandwidth.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Definitions and concepts: Market structure (2/2)

• Oligopoly.
An oligopoly is a market type characterized by a
large number of buyers versus a limited number of suppliers and a
limited product differentiation. Usually, there are important entry
barriers for new competitors. Depending on the situation, the
market price can be set by a market or price-Ieader, or arranged
through some form of price arrangements (cartels).
• Monopoly.
A monopoly is characterized by the presence of only one supplier
of the product in question. Substitutes are (virtually) absent. This
enables the monopolist to pursue their own pricing policy.
Monopolies emerge when the entire supply of raw materials or a
particular manufacturing process or technology is owned by just
one producer or manufacturer, excluding others by means of
contracts or patents (e.g. oil concessions, diamonds, IT solutions).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Materials requirements planning

• Materials requirements planning (MRP) starts in the sales


department with drawing up a sales plan, providing an estimate of
the volume to be sold.
• Comparison of the sales plan with the available finished product
stock yields the volumes to be produced.

→ MRP is the input for the manufacturing planning and control system
consisting of:
– Master planning
Plans at the level of the product families (product groups) are
established. Customer orders, sales plan, planned stocks of finished
products as well as the production and purchasing plans are linked
together.
– Manufacturing Resources Planning (MRP-II)
Records the manufacturing resources needed to realize the master
plan. In the process it may become clear that particular production
series are not feasible because of limited production capacity.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Materials requirements planning: Manufacturing planning and
control system

Source: Adapted from Vollman et al. (1984), p. 25


TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Elements of a manufacturing planning and control system (1/2)
• Master production scheduling (MPS).
Translates the master plan into specific materials requirements.
MPS provides the input for calculating the net materials
requirements.
• General capacity testing.
The MPS should be tested for capacity limitations and this should
be done for all potential bottleneck capacities.
• Materials requirement planning (MRP-I).
The materials requirements planning “explodes” the requirements
from the MPS level on a weekly basis, step by step, in
accordance with the bill of materials (BOM). Note: Literature
makes a distinction between MRP-I and MRP-II:
– MRP-I stands for materials requirements planning; aims at releasing and
managing manufacturing orders and purchasing requisitions.
– MRP-II stands for manufacturing resources planning; it represents an
integrated system that controls relevant materials flows and production
capacity while also taking into account the relationship between these
materials flows and the required capacity.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Elements of a manufacturing planning and control system (2/2)
• Capacity requirements planning.
Conceptually comparable with materials requirements planning.
The current and planned manufacturing orders from the MRP
provide the input for the detailed production line planning.
• Order release.
Order releases change the status of the manufacturing orders from
‘planned’ to ‘released’. The decision to release is based on the
availability of the required materials and capacity.
• Priority management.
The priorities are directly derived from the MPS. Each unit receives
a priority sheet which lists all manufacturing orders for that line or
machine center.
• Capacity Management.
Waiting times per processing group have to be controlled.
Input/output reports have an important function: they compare the
realized output for a production unit against its planned output.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Basic logistics structures: Customer order decoupling point (CODP) –
The deciding factor for an effective logistics structure
Remarks:
→ The question of
where the CODP
(=order penetration
point - OP) should be
located in the firm’s
primary processes is
a major issue when
designing the
manufacturing and
logistics organization.
→ The answer to this
question determines
where in the process
inventories should be
located and in what
quantities.
Note:
The CODP (=OP) indicates how deeply the customer order penetrates the firms materials flow.
The OP defines from what moment on a production order becomes customer-order-specific.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Basic logistics structures: Five basic manufacturing and logistics
structures – “forecast-based” & “order-based” planning techniques

1. Making and  Products are manufactured and distributed to distribution

“forecast-based“
sending to points which are dispersed and located close to the
stock (MSS) customer. E.g. sweets, foods, beverages.
2. Making to  Finished products are kept in stock at the end of the
(central) stock production process and are from there shipped to
(MTS) geographically dispersed customers. E.g. dairy products.
3. Assembly to  Only systems elements, modules or subassemblies are
order in stock at the manufacturing center, whereas final
(ATO) assembly takes place based on a specific customer

“order-based“
order. E.g. cars, computers.
4. Making to order  Only raw materials and components are kept in stock.
(MTO) Every customer is a specific project. E.g. beer and
lemonade cans, basic construction materials.
5. Engineering  No stock at all. The purchase and order of materials
and making to takes place based on the specific customer order. E.g.
order (ETO) construction companies and shipyards.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Just-in-time management (JIT): Characteristics of JIT management

JIT
All materials and products become available at the very moment when
they are needed in the production process, not sooner and not later but
exactly on time and exactly in the right quantity.

Major objective
Continuously tackle and solve manufacturing bottlenecks within, and
interfaces between, consecutive steps in the manufacturing process.

Quality (and “cost orientation”)


Incoming inspection, buffer stock and extensive quality control
procedures on incoming materials are primarily considered as “waste”.
The basic idea is to strive continuously to reduce and eliminate these
often “hidden” costs in the factory – before introducing JIT!
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Just-in-time management (JIT): Order quantities and batch sizes (1/3)

• There are several models that can be used for optimizing the
incoming materials flow.
• One very well-known model is “Camp’s formula” which is targeting
at the calculation of the Economic Order Quantity (EOQ).
• EOQ is the quantity where the sum of inventory costs and ordering
costs is lowest.
Camp’s formula
Qo = √ 2S x Co/Ci
S … fixed usage per period
Qo … order quantity
Co … costs per order
Ci … inventory carrying costs for one unit during one unit time

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Just-in-time management (JIT): Order quantities and batch sizes (2/3) –
Towards a reduction of the economic order quantity

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Just-in-time management (JIT): Order quantities and batch sizes (3/3)

Conditions/assumptions of “Camp’s formula”:


– The consumption of the component at hand is fairly stable and is
evenly spread over the course of time.
– The delivery time of the product is fixed and not due to fluctuation.
– The ordering costs per order are fixed.
– The inventory carrying costs do not depend on the ordered quantity.

→ JIT basically challenges each of these assumptions. For example,


order-related costs are analyzed referring to:
 Negotiations with the supplier
 Administrative processing
 Follow-up and expediting of orders
 Incoming and quality inspections

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Just-in-time management (JIT): Quality and zero defects

• JIT production and scheduling cannot be successfully implemented


without a zero defects philosophy!

• JIT and zero defects need to go hand-in-hand:


– Smaller batches make it necessary to detect quality defects at
an early stage.
– JIT must be supported by all functions within the company.
– Adopting JIT will take time: It took Toyota 15 years to
implement the KANBAN (note: as a form of JIT scheduling
based upon fixed volume lot delivery. When a lot is used, the
Kanban [card] will be sent to the supplier as a signal to
replenish that lot) philosophy.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Just-in-time management (JIT) and the purchasing function

→ Looking at the characteristics of JIT, it is clear that traditional buyers must


alter their views and policies radically in two important aspects: they should be
willing (i) to consider single-sourcing and (ii) to arrange longer-term contracts.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Just-in-time management (JIT): Consequences for suppliers (1/2)

• Advantages of JIT for a supplier


– Supplier is able to plan his production volume much better
because he’s informed regularly about the quantities to be
delivered.
– Administrative savings: supplier’s and customer’s production
and materials planning systems are linked through electronic
information systems (like EDI).
– Constant communication on quality and costs improvements
can lead to product and process innovation.
– Investment policy: JIT contracts are signed for a long period
of time and guarantee a certain volume and turnover over
that time period.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Just-in-time management (JIT): Consequences for suppliers (2/2)

• Disadvantages of JIT for a supplier


 It may result in a pyramid shaped structure with a strong
hierarchy in the different links of the supply chain. The
large manufacturers at the top of the “supplier pyramid”
impose their demands ruthlessly on the often smaller first
tier suppliers.
 It takes time (and money) to deliver at zero defects or to
produce zero defects. These investments come at the
expense of the supplier.
 Supplier can become very dependent on only one
manufacturer. This can become a threat to its continuity.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Just-in-time management (JIT):
The supplier pyramid
Finally:
Supply chain management…
(a) … actually can be
considered as a “wholistics”
philosophy to manage the
total flow of a distribution
channel from suppliers to the
final customer.
(b) … extends the concept of
business logistics to other
tiers in the supply chain*.
(c) … integrates/utilizes JIT
as a concept aiming at the
availability of all materials
and products in production,
exactly on time in exactly the
right quantity.
*A supply chain is understood as connected series of activities
concerned with planning, co-ordinating & controlling materials, parts
and finished goods from the company’s suppliers to its customers.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Just-in-time management (JIT): “JIT II” – The system supplier is made
responsible for delivery planning and logistics…

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 270.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Just-in-time management (JIT): JIT and supplier selection (1/2)

Example:
Toyota demands that their main suppliers to …
 … have production plants within a radius of 30 km.
 … base their business on open calculations.
 … arrange performance agreements on delivery in advance.
 … deliver with zero defects so that incoming inspections at
the buying firm (Toyota) can be omitted.

→ If there are no suppliers in the immediate vicinity, then Toyota


tries to …
 … do business with suppliers who are concentrated in
particular geographical areas.
 … combine transports and reduce associated costs.

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 270.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Just-in-time management (JIT): JIT and supplier selection (2/2)
• “Quality” and “on-time delivery” are the two main criteria on which
suppliers are assessed when applying JIT purchasing.

• The following classification of suppliers is used often:


On time delivery A = excellent B = good C = inadequate
Quality delivery 1 = excellent 2 = good 3 = inadequate
→ A “C1 supplier”, for example, provides high quality, but does not always deliver on time.
At worst this can cause interruptions in the manufacturing process.
→ An “A3 supplier”, however, delivers on time, but the quality of the products is poor. This
means that incoming inspection remains a necessity, which is in conflict with the JIT
concept.

In conclusion,
• … the central issue affecting supplier selection is not so much the purchase
price, as the level of total cost (i.e. cost including the ”waste” resulting from poor
performance, safety stocks, quality and incoming inspections, and production
standstills).
• … it is argued, that the implementation of JIT principles automatically leads to
(more) single sourcing, agreeing on/closing long-term contracts and engaging
local suppliers.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
30 Elements of the purchasing information system

• A study among 48 medium-sized industrial companies shows that


they had on average to manage
– 16.600 different article items or “stock keeping units” (SKUs)
– 1.155 suppliers
– 19.980 purchasing requisitions
– 18.900 orders
– 26.980 purchasing invoices
→ A solid and efficient administration is needed for the functioning
of any purchasing organization!

• Most important elements of a purchasing information system:


– Requisitioning and ordering → Introducing advanced
– Product, supplier & contract database purchasing information
– Order follow up systems and electronic
procurement solutions is
– Delivery a prerequisite for
– Invoice handling & payment improving efficiency!
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
31 Major elements of a purchasing information system

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
32 Elements of a purchasing information system: What problems are
solved by e-procurement systems?

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 273.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
33 Elements of a purchasing information system: E-procurement systems
result in a significant reduction of the traditional order-to-pay cycle

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
34 Co-ordination problems between purchasing and logistics

• The large amount of data to be processed, the huge differences in


the demand structure of products, problems with predictability of
expenditures etc. make clear, that production planning and materials
planning in most companies are far away from simple matters!

• Some typical problem situations between purchasing and logistics:


– Lack of well defined specifications
– Lack of standardization
– Frequent changes in materials planning
– Unreliable planning information
– Insufficient integration of purchasing in logistics management

• Co-ordination of systems may be facilitated when purchasing and


logistics activities are reported to one overall supply chain executive,
which explains the growing popularity of this function.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
35 Summary

• The relationship between purchasing, materials planning and


logistics has been discussed.
• Five different structures may underlie a company’s production
and logistics activities.
– Make and send to stock (MSS)
– Make to stock (MTS)
– Assemble to order (ATO)
– Make to order (MTO)
– Engineer and make to order (ETO)
• Central element has been the order penetration point.
• Most available Enterprise Resource Planning (ERP) systems are
capable of supporting the operational, transactional purchasing
activities.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
36 Lecture 11: Self-assessment (1/2)

11.1 Supply-chain management is about managing the materials


flows, information flows and financial flows throughout the supply
chain. Discuss how “Li & Fung” in the introductory case study of this
chapter keeps control of each of these flows.

11.2 What would you consider to be the main difference between


supply chain management and value chain management?

11.3 Supply chain management assumes that the companies


involved in the supply chain are willing to work closely together and
are willing to develop partnership relationships? How valid is this
assumption in your opinion? Under what circumstances are
companies willing to develop partnership relationships?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
37 Lecture 11: Self-assessment (2/2)

11.4 Some critics argue that the supply chain concept is a too
narrow view of the reality that can be observed in many industries
today. Rather, they favour a network approach since they feel this
reflects much better the interdependencies that may exist between
customers and suppliers in several sectors. What is meant by this
statement? When optimizing supplier relationships, what view do
you favour? Discuss.

11.5 What logistics concepts can be used to optimize the logistics


flows between a manufacturer and a supplier? What can both
parties do to take costs out of the supply chain? Investigate and
discuss.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
38 Supplementary literature (Lecture 11)

Hoekstra, S. and Romme, J.H.J.M. (eds) (1985), Op weg naar integrale


logistieke strucuren, Deventer, The Netherlands: Kluwer.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 12.
Purchasing organization

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• The underlying factors that determine the role, position and
organizational structure of purchasing.
• The major tasks, responsibilities and competences of
purchasing and how to organise these.
• How to get organized for purchasing in multi-unit
companies.
• How to get organized for purchasing in single-unit
companies.
• Which criteria to use in deciding on centralized versus
decentralized purchasing.
• The most important job profiles in purchasing.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – Building blocks of change (remarks)

The introductory case demonstrates that …


• … fierce competition in the construction industry caused Skanska
Sweden to turn around its purchasing organization.
• … key decision-making on strategic commodities was centralized.
• … framework agreements for key commodities were negotiated.
• … the more strategic role of purchasing led to some drastic changes
in the way project managers needed to operate; instead of dealing
with purchases project-by-project → accept framework agreements.
• … Skanska buyers needed to move away from their operational and
transactional tasks into more strategic tasks.
• … in order to be able to perform these tasks effectively, higher
demands were imposed on buyers in terms of communication with
the project managers and the senior management.
• … new tools, such as electronic sourcing and electronic
procurement systems, supported this major change initiative.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 278-280.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Purchasing organizational structure

•Location and structure of purchasing is very much dependent of


business characteristics and situational factors.
→ Purchasing organization = f (characteristics of the company,
type of industry, characteristics of the products purchased)

• Levels of centralization
– Centralized
– Centralized hybrid
– Hybrid
– Decentralized hybrid
– Decentralized

• Usually, in practice a mixed organizational form in purchasing is


chosen.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Purchasing organizational structure: Research findings 1 – Supply
organizational structure by sector

These figures (note: data from US and Canada) show that the
hybrid structure remained the most popular organizational mode.
Similar research in Europe has not been conducted. However, it
can be expected that the trends and developments are similar.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Purchasing organizational structure: Research findings 2 – CPO
reporting lines

These figures show that over the past decades purchasing has
become more visible on the top floor of large corporations.
There is a steady increase in the percentage of reporting to one of
the top five executive positions.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Factors influencing the location of purchasing in the organization

• The view management holds towards the purchasing function


determines the organizational location of purchasing. If
purchasing is considered ...
– ... mainly as an operational activity → purchasing department
relatively low down in organizational hierarchy.
– ... to be of strategic importance → then purchasing managers might
be reporting to or even be part of the board of directors.

• Managements view on purchasing is related to following factors:


 Purchasing’s share in the end-products’s price.
 The financial position of the company.
 The extend to which the company is depending on the supply
market.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Factors influencing purchasing’s reporting relationships

• Implementaion of materials requirements planning and JIT may lead to


an integration of purchasing with logistics management → report to
supply chain / logistics manager.
• In technically oriented companies (which are confronted with rapid
changes in product or process technologies) → the purchasing
manager may report to the operations / production manager.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Levels of tasks, responsibilities and authority (1/2)

With regard to the allocation of purchasing tasks, responsibilities and


authority, three different levels may be differentiated: the strategic, the
tactical and the operational level.

• Strategic purchasing decisions (“long-term impact” on market position)


– Outsourcing of activities and/or functions
– Establishing long-term contracts with preferred suppliers
– Adopting a supplier strategy based on multiple versus single sourcing
– Major investment decisions (in buildings, equipment, computers, etc.)
– Participate financially in suppliers organization (backward integration) in
order to safeguard future supply of critical materials
– Formulating policies concerning transfer pricing & intercompany supplies
– Formulating policies on reciprocal arrangements, countertrade, etc.
– Development and issuing operational guidelines, procedures and task
descriptions, which provide authority to the purchasing department
– Development and implementation of auditing and review programs

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Levels of tasks, responsibilities and authority (2/2)

• Tactical purchasing decisions (“medium-term” impact on product,


process and supplier selection)
– Agreement on corporate and/or annual supplier agreements
– Preparing and developing value analysis programs
– Adopting and conducting quality certification programs for suppliers
– Selection and contracting of suppliers in general
– Intorducing a cross-functional, cross-business category sourcing structure
• Operational purchasing decisions (“short-term” impact related to
requisition-to-pay process)
– Ordering process and expediting activities related to released orders
– Invoice verification and payment
– Troubleshooting and monitoring as well as evaluation of supplier performance

Table. Relationship between the three managerial levels of purchasing and some management positions
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Organizational structures within purchasing: Structures for multi-unit
companies (1/4)
Decentralized purchasing: In a division or business unit* purchasing is
responsible for all purchasing decisions.

* Note: A division / business unit is a discrete part of a company that may operate under the same name and legal responsibility or as a
separate corporate and legal entity under another business name.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Organizational structures within purchasing: Structures for multi-unit
companies (2/4)
Centralized purchasing: A central purchasing department is responsible
for all strategic and tactical purchasing decisions.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Organizational structures within purchasing: Structures for multi-unit
companies (3/4)
Hybrid structure: Represents a combination of the previous two
structures aimed at combining common requirements across operating
units. The terms “hybrid”, “pooling” and “co-ordination” are used
interchangeably. There are different forms of pooling:
 Voluntary coordination:
o Exchange of information between purchasing departments and operating
companies.
o Every business unit is free to decide whether to take part in a corporate
contract or to operate individually.
 Lead buyership:
o The business unit with the greatest volume for a specific type of commodity is
made responsible for negotiating a corporate agreement with suppliers.
o Each business unit orders directly referring to the corporate agreement.
 Lead design concept:
o The operating unit or division which is responsible for the design of a specific
product or component is responsible for contracting all materials and
components from suppliers.
o Example: Division of a car company developing a new diesel engine.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Organizational structures within purchasing: Structures for multi-unit
companies (4/4)
Line/staff organization: Both corporate purchasing and division /
business unit purchasing exist next to each other and divide
responsibilities and activities.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Organizational structures within purchasing: Structures for multi-unit
companies – Five organizational models
Research suggests that when the purchasing function is highly mature,
companies will use a different and more advanced approach to manage
corporate purchasing synergy, than in the situation where one is dealing
with low purchasing maturity.

Source: Rozemeijer and van Weele, A. (2003), pp. 10-11.


TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Organizational structures within purchasing: Structures for multi-unit
companies (including the example: IBM’s commodity team structure) (1/2)
Category sourcing structure/Cross-functional sourcing teams: Contracting
is done centrally by a commodity team. However, all operational
purchasing activities are decentralized.
Remark:
→ All procurement
organizations
company-wide
must be aligned to
ensure interlock of
the procurement,
development/desig
n and fulfilment/
manufacturing
process.

Source: Van Weele and Rozemeijer, (1996), p. 142.


TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Organizational structures within purchasing: Structures for multi-unit
companies (including the example: IBM’s commodity team structure) (2/2)

→ The enterprise-wide processes are interlocked at the procurement


executive level for business strategy.
→ ”Virtual centralization” of commodity management.
Source: Van Weele and Rozemeijer, (1996), p. 142.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Organizational structures within purchasing: Structures for multi-unit
companies – Shell’s purchasing structure and global service centres

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 292.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Organizational structures within purchasing: Structures for multi-unit
companies – centralized / decentralized purchasing: Criteria to consider

To what extent to centralize or decentralize purchasing?


• Most companies balance between the two extremes: at one moment
they will have a centralized purchasing organization, whereas some
years later they may opt for a more decentralized purchasing
organization.
• In practice the following factors / considerations appear to be
decisive when deciding on buying products centrally or otherwise:
 Commonality of purchasing requirements
 Geographic location
 Supply market structure
 Savings potential
 Expertise required
 Price fluctuations
 Customer demands

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Organizational structures within purchasing: Structures for multi-unit
companies – Advantages and disadvantages of decentralized purchasing

Advantages Disadvantages
• Direct responsibility for profit • Dispersed purchasing power, lack
centres, i.e. business units of economies of scale
• Stronger customer orientation • No uniform attitude towards
towards internal user suppliers
• Less bureaucratic purchasing • Scattered supply market research
procedures (higher operational • Limited possibilities for building up
flexibility) specific expertise on purchasing,
• Less need for internal co- materials, supply markets and
ordination components
• Direct communication with • Probably different commercial
suppliers purchasing conditions among
different business companies

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Organizational structures within purchasing: Structures for single-unit
companies (1/2)
• In a single-unit organization the issue of centralized versus
decentralized purchasing relates to the question what authority should
be assigned to the purchasing department and, in general, depends
on following variables:
– Management’s view towards purchasing
– Information technology
– Personal relationships
– Total cost approach
• Based on these variables purchasing’s reporting relationships in a
single-unit organization may take different forms:
(1) The fully integrated logistics structure → Purchasing reports directly to
the logistics manager at the same level as production planning and
physical distribution.
(2) The partially integrated logistics structure → Production planning and
physical distribution report to the logistics manager, whereas the
purchasing manager reports to another senior manager.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Organizational structures within purchasing: Structures for single-unit
companies (2/2)
Remark:
→ External and
internal changes
may lead to
significant changes
in purchasing’s
organizational
structure (tasks,
responsibilities,
authority of the
purchasing
function) in the
business unit:
(a) traditional
structure
(b) revised
structure

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Purchasing job profiles: Buyer profiles and their most important skills
and responsibilities
In most (large)
companies the
following functions
can be found.
→ The table at right
summarizes the
most important
responsibilities,
skills and abilities of
individuals in
different purchasing
functions.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Purchasing job profiles: What buyers really do (remarks)

Survey of 175 procurement professionals (note: from all levels of


management) carried out in 2010 found that they were …
• … likely to be highly educated (62% to degree level and more than 50% to
masters/higher).
• … likely to be new entrants (40% in procurement for 5 years or less, one
third for 15 years or more).
• … unlikely to change suppliers but more likely to challenge specifications
by non-procurement specialists.
• … likely to manage a high number of supplier relationships.
• … likely to face serious challenges carrying out their role effectively.
• … likely to achieve savings targets.
• … likely to be trained in core skills.
• … unlikely to use online sourcing technology (52% rarely or never, 44%
hadn’t in the last 12 months).
Source: “Procurement in action“, The Efficio Grassroots Procurement Survey (2011), London, UK, www.efficioconsulting.com
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Summary (1/2)

• Purchasing organizational structures appear to vary greatly


between companies, due to the different views which top
managers hold towards purchasing and supply.
• Purchasing structures appear to be highly volatile: a
period of centralized purchasing is often followed by a
change to the other way around.
• Due to increasing international competition and the
maturing of many end-user markets, the present trend is
towards co-ordination and hybrid structures.
• Many companies try to reap the benefits of co-ordinated
sourcing of common materials requirements, while
delegating operational purchasing tasks to local
business units.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Summary (2/2)

• When designing purchasing structures in a single-unit


environment, a number of parameters need to be
considered. Managers may…
 … choose a totally integrated supply chain organizational model
or
 … decide on a partially integrated model.
• Changes in the business context and corporate structures are
reflected in future profiles of purchasing positions.
• It is clear that the purchasing and supply arena provides
significant challenges to those with an engineering and
business background.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Lecture 12: Self-assessment (1/2)

12.1 When discussing the opportunity to foster synergies in the area


of purchasing, some top managers stated that ‘purchasing in our
company is too important to leave it only to buyers!’ Would you
agree with this?

12.2 In this chapter it was argued that most large companies have
opted for a hybrid structure to organize their purchasing activities.
What is meant by this? Why would companies choose such a
structure?

12.3 When applying for a new job in medium-sized company, a


prospective purchasing manager was asked to whom he would
prefer to report: (1) the financial manager, (2) the production
manager, or (3) the logistics manager. Each of these managers
reports at the same hierarchical level. What would you consider to
be the most important advantages and disadvantages of each
option? Which option would you prefer?
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Lecture 12: Self-assessment (2/2)

12.4 Some complaints that can be heard from Chief Procurement


Officers in companies are that their carefully negotiated corporate
agreements are barely used by the decentralized business
companies. These contracts suffer from a low compliance rate. What
could be the reason for this phenomenon?

12.5 How would you explain the growing popularity of cross-


functional sourcing teams when co-ordinating purchasing at the
corporate level? What would you consider to be the critical success
factors of such teams?

12.6 Cross-functional teams prepare corporate sourcing plans for


strategic commodities. What would such a commodity plan look
like? What elements need to be taken into account in such a plan?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Supplementary literature (Lecture 12)

Johnson, P.P. and Leenders, M.R. (2012), Supply organization in North America:
A twenty four year perspective in roles and responsibilities 1978-2011,
Proceedings of the 22nd Annual IPSERA Conference, 24-27 March, Nantes,
France, pp. 204-222.
Rozemeijer, F.A. and Van Weele, A.J. (2003), Creating corporate advantage
through purchasing: a contingency model, The Journal of Supply Chain
Management, (Winter): 4-13.
Van Weele, A.J. and Rozemeijer, F.A. (1996), Revolution in purchasing: building
competitive power through pro-active purchasing, European Journal of
Purchasing & Supply Management, 2(4): 153-160.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 14.
Supplier Management: Cost Approaches and
Techniques

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• How prices are set by suppliers.
• How to use the learning curve technique as a basis for
price negotiations.
• Supplier evaluation and vendor rating techniques.
• How to evaluate the financial position of suppliers.
• What it takes to develop suppliers.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – Building a new headquarters (remarks)

The introductory case shows that …


• … in B2B (construction industry), the supplier will always attempt to
hide his/her prices and cost structures as much as possible.
• … decisions relating to the purchasing price determine the cost price
of a company’s product or services-offering product to a high degree.
• … pricing and cost price information are insufficient to gain a
comprehensive impression of the situation.
It is also essential that …
– … the buyer knows how to use financial-economic analysis techniques.
– … for the buyer information with regard to the supplier’s order position
may also be important when selecting a supplier.
– … to gain an intimate knowledge of the local supply market.
– … the buyer has an idea of the expected building costs which are of
crucial importance in preparing for the negotiations with the contractor.

The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 336-337.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 How is the purchase price determined? Influence of internal and external
factors on purchase price
The price ultimately paid for
materials and services is the
result of environmental
factors (internal & external):
→ Internal factors can bring
about a change in the cost of
materials before the finished
product is placed on the market
(logistical, technical or
organizational factors).
Examples: Changes in quality,
specification, infrastructure.
→ External factors change the
availability of a product in a
given market (economic, socio
political or technological
factors).
Examples: Inflation, legislation,
labour costs, economic climate.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 How is purchase price determined? Price influencing factors

The price of a product can be influenced by external factors in two ways:


(i) due to direct changes in the cost structure of a particular product (i.e.
labour, materials, energy costs) or, indirectly, (ii) due to changes in
market structure (shifts in supply/demand relationships).

∑ [f*(c) + f*(m)] = 100% of the price

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 How is purchase price determined? Cost and market factors

Some products react almost entirely to changes in cost factors, others to


changes in market factors. Still others react to changes in both cost and
market factors (→ see Memo 14.1).

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 340.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 How is the purchase price determined? Pricing models

The classification reflects three different pricing models:


1. Cost-based pricing. In the case of cost-based pricing the
supplier’s offering price is derived directly from their cost
price; what most systems boil down to is that a particular
profit margin is added to all costs, including the costs of
sales (mark-up pricing).
2. Market-based pricing. The price of the product is determined
by the market and is generated exclusively by market
circumstances such as demand, supply, stock positions, the
economic situation and political factors (e.g. raw materials
and semi-manufactured products).
3. Competitive bidding. The price is influenced by market
factors as well as cost factors. This situation is most
common.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 How is the purchase price determined? Product groups and methods of
price setting – Overview

The following table reflects the relationship between the “price setting
methods” and the various purchasing product groups.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 Pricing methods: Fixing a selling price – Influencing factors (1/2)
Factors suppliers have to take into account to set the selling
price:
 Expected demand for its product: If demand is high, the supplier
will normally set the price a little higher than when demand is low.
In such cases he or she will not be willing to make price
concessions easily.
 Number of competitors: The monopolist’s situation is, of course,
ideal. Buyers have to go to it for a specific product. The
monopolist therefore has a high degree of freedom in determining
the selling price. This situation is rare in practice. As a rule,
suppliers will look to their competitors’ prices when setting their
own prices.
 Expected development of the cost price per product unit: Large-
scale production makes low prices possible. If the supplier
expects his or her production volume to increase in the future, he
or she will take this into account. He or she will anticipate his or
her cost development based on potential learning curve effects.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Pricing methods: Fixing a selling price – Influencing factors (2/2)
 Customer’s order volume: Suppliers are often willing to make price
concessions in exchange for the promise of “more business” in the
future. This principle is often recognized in pricing methods, usually
by awarding extra discounts for larger purchased quantities. Many
suppliers employ a sliding scale to indicate which price or discount
applies to which quantities.
 Importance of the customer to the supplier: From a commercial
point of view the supplier’s position may be strengthened by good
references. For this reason, they will be eager to do business with
certain large, well-reputed companies. In order to gain access to
this type of customer, suppliers often charge “special prices”.
However, after some time has passed they will try to re-establish
the price at “normal” levels.
 Value of the product to the customer: Some products (e.g. spare
parts for manufacturing equipment) have a value to the customer
that bears no relationship to their manufacturing cost. In some
circumstances supply of spare parts is critical for continuity of
production. It is not uncommon for suppliers to charge prices for
critical spare parts which are a multiple of the original cost price.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Pricing methods (1/3)

Taking account of all of the price influencing factors mentioned


before, the following pricing methods (purchasing or selling price)
can be distinguished:
 Mark-up pricing. A fixed percentage (mark-up) is put on top of the cost
price. This method of pricing does not take competitors’ prices into
account, neither does it acknowledge developments in the demand
for the product. Nevertheless, this method is frequently used in
practice because of its simplicity.
 Target-return pricing. In target-return pricing the price is determined
based on the amount of profit that should be realized. Based on the
fixed and variable costs and the expected selling price, the required
sales volume is calculated. This is done in two steps. First, the break-
even volume is determined through a break-even analysis. Then,
based on the profit that is to be made, the required extra volume is
determined. Finally, a check is made as to whether this required sales
volume can be realized at the estimated price.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 Pricing methods (2/3)

 Perceived value pricing. A general rule in marketing is that you do not


base your selling price on the cost price of the product, but rather on
what the market can bear. In this reasoning, the price that the buyer
is willing to pay is related primarily to the value they attach to the
product. The perceived value pricing method is often used for
consumer products (well-known branded articles) and also for
industrial products.
 Value pricing. Here, the company tries to win customers by charging
them fairly low prices for high-quality offerings.
An example is IKEA, a company known for the value for money that it
offers to consumers. Value pricing is not a matter of simply setting
lower prices. It is a matter of re-engineering the company’s operations
to become a low-cost producer without sacrificing quality, and
lowering prices significantly to attract a large number of value-
conscious customers. Wal-Mart is another example of a company
which attracts large masses of consumers through its everyday low
pricing strategy.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 Pricing methods (3/3)

 Going rate pricing. In going rate pricing, the firm bases its price largely
on competitor prices. The firm might charge the same amount, more or
less than major competitors. In such cases companies may follow the
market leader in setting their prices. Some oligopolistic markets are
characterized by price leadership. Smaller companies follow the market
leader's pricing behaviour often at some distance. Fuel prices in many
European countries are examples of this pricing method.
 Auction type pricing. Due to web technology, reverse auctions have
become more popular among buyers. Professional buyers today may
use a large number of marketplaces which allow for organizing buying
processes through electronic auctions. Suppliers may use auctions to
dispose of excess inventories or used goods. Auctions are used when
buyers decide to go for a straight tender process. Such a tender may be
selective or public. In the last case, all suppliers that qualify may
participate in the tender. Tendering is quite common in public
procurement and some industries (such as the petrochemical,
construction and defense industries; → see also Chapter 2).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 Pricing methods: Discount policy

• A special characteristic of pricing policies for industrial products


is the discount policy which is applied.
• Some authors differentiate between following discount practices:
 Payment discount: e.g. 2% discount for payments within 10 days.
 Quantity discounts: To stimulate larger quantity orders.
 End of year bonus: Bonus is linked to the amounts purchased from
a specific supplier for a full year. Reinforces customer loyalty.
 Geographical discount: Given to customers located near the
supplier.
 Seasonal discount: Applied to improve capacity utilization in periods
when sales decline.
 Promotional discount: Provided to temporarily stimulate the sale of a
product.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Pricing methods: Distinction between cost price analysis & pricing method

• To get a grip on the supplier prices, a distinction should be made


between the cost price analysis and the pricing method.
• When conducting an analysis of the supplier’s cost structure buyers
should create detailed knowledge about the …
(1) … supplier’s materials costs (to be itemized according to the major
components);
(2) … direct labour costs (information can often be obtained by consulting
the collective labour agreements for that particular industry);
(3) … energy consumption and C02 emission rights;
(4) … transportation and distribution costs; and
(5) … indirect costs, to be divided into general management overhead and
sales costs.
→ As a general rule, the higher the share of the fixed costs in the cost price of
the end product, the greater the supplier’s price elasticity. By expanding the
order volume to the supplier, the buyer will be able to create a decrease in the
fixed costs per unit, and this should result in a lower price per unit.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 The learning curve: Introduction

• The learning curve is an important instrument in the development of


purchasing strategies.
• It was discovered in the US aircraft industry that the cost price per
unit decreased at a fixed percentage as experience (the cumulative
production volume of a particular type of aircraft) increased.

• The learning effects results from:


– Reduced supervision as experience with production grows
– Increased profits, from improved efficiency through streamlining the
process
– Reduced defects and line reject rates during production
– Increased batch sizes (less time spent on resetting machines)
– Improved production equipment (after a while)
– Improved process control
– Reduced engineering changes

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 The learning curve: Basic principle

• The basic principle of the learning curve is that “each time the
cumulative production volume of a particular item doubles, the
average time required to produce that item is approximately x per
cent of the initially required time”.
• An 80 per cent learning curve means that if the cumulative number
of produced goods is doubled, only 80 per cent of the original
number of hours are needed to produce one unit (see Table 14.2).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 The learning curve: Graphical representation and relevance for buyers

→ These data can also be reproduced graphically; regular graph paper yields a
curve (Figure 14.3), while log-log paper produces a straight line (Figure 14.4).

This knowledge is clearly of vital importance to the buyer:


→ Anticipating the supplier’s learning experience,
buyers can negotiate price reductions in the future.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 The learning curve: Usage (exemplarily)

The learning curve is used preferably in the following situations:


– When it concerns customized components manufactured by
a supplier to the customer’s specification.
– When large amounts of money are involved (so that the
costs which must be incurred to apply the technology in
question can be recovered).
– When the buyer cannot request competitive quotations
because, for example, a considerable investment has to be
made in moulds and specific production tooling, which leads
the buyer to single sourcing.
– When direct labour costs make up an important part of the
cost price of the product to be produced.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Supplier assessment: Levels of assessment

• The need for objective assessment of suppliers increases as the role


of the supplier in the value chain grows. It is necessary to know
whether the supplier can guarantee sustained continuity of supply.
→ The systematic gathering of supplier performance data enables the buyer
to negotiate strict agreements about improving reject rates, reducing total
lead time and contributing to cost reduction.
• Supplier assessment may take place at four different levels*:
1. Product level. Focuses on establishing and improving the supplier’s
product quality.
2. Process level. Not the product, but the supplier’s production process is
closely investigated.
3. Quality assurance system level. The entire supplier quality organization
is subject of investigation by the customer.
4. Company level. Besides quality aspects also financial aspects are taken
into consideration. Also auditors want to get an idea of the quality of
management (how competitive is the supplier in the future?)
* Note: Most supplier evaluation is limited to the first two levels.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Supplier assessment: Methods (1/4)

Two types of assessment may be differentiated:


o Subjective methods are used when companies evaluate suppliers
through personal judgments.
o Objective methods attempt to quantify the supplier’s performance.
In general, the following techniques and tools can be used:
(1) Spreadsheets are used to systematically compare and asses
quotations obtained from suppliers. Important criteria are listed on one
axis and the supplier quotations on the other.
(2) Qualitative assessment is used for suppliers with whom exist close
business relationships. Specialists who have experience with the
suppliers rate them according to a agreed checklist.
(3) Vendor rating: Limited to quantitative data only. Entails measuring the
aspects of price, quality and delivery reliability per supplier.
(4) Supplier audit: Entails that the supplier is periodically visited by
specialist(s) from the customer. They investigate the production
process and quality organization.
(5) Cost modeling: Specialists from the buying company estimate, based
on the production technology, the costs of the product. This may lead
to ‘should cost’ discussions with the supplier (→ see Memo 14.2).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Supplier assessment: Methods (2/4) – Cost modeling for purchasing

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 348.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Supplier assessment: Methods (3/4) – Identifying cost drivers (examples)

A cost driver is the unit of an activity that causes the change in activity’s cost. A
cost driver is any factor which causes a change in the cost of an activity.*
Source: Chartered Institute of Management Accountants.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Supplier assessment: Methods (4/4) – Major differences between
supplier auditing and vendor rating

• Vendor rating will be used to judge existing suppliers. It has a more


quantitative focus than auditing techniques.
• During a supplier auditing faults and weaknesses are reported and
discussed with the supplier. Measures for improvement are negotiated and
established.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Supplier assessment: Financial assessment

• The financial assessment of suppliers is carried out on the basis of


annual financial reports.
– In most European countries legislation requires companies to file a
summary of their fin annual reports at the local chamber of commerce.
– Additionally, an increasing number of companies publish (a part) of their
annual financial results in online.
– Next, information brokers, provide information via detailed electronic
databases online (Example: “dun&bradstreet”, www.dnb.com).

• Financial analysis (note: based on historical data!) …


… enables buyers to judge the potential future opportunities and threats.
… gives a first impression of the quality of the supplier’s management.
… enables buyers to visit suppliers well-prepared & to ask pointed questions.
… provides insight into the quality development of the supplier’s results.
… makes knowledge available that can be used in discussions with the
supplier to achieve improvements in their organization.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Supplier assessment: Financial assessment – Overview of indicators for
assessing a supplier’s financial position

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
27 Supplier assessment: Financial assessment – Cost breakdown of
Apple iPhone 6 (example)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 349.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
28 Supplier development
• Due to outsourcing, buying companies are becoming increasingly
dependent on their suppliers.
• For this reason, many large companies have developed programmes,
which are aimed at improving supplier (relationships), e.g.
 BASF segmented the suppliers into distinct segments: (1) strategic
partnerships, (2) performance partnerships, (3) preferred suppliers and
(4) competitive suppliers.
 Based on this segmentation, BASF has developed different relationships
with different suppliers.
• That is what is called for now: Because, the best customers and the
customers with the best development potential get most of the
attention and most of the supplier’s resources.
→ However, supplier performance measurement is still not widespread
in some industrial and service sectors; even rarer are companies that
measure supplier satisfaction (“supplier satisfaction surveys”). Here, the
theory is clearly ahead of practice.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
29 Supplier development: Actions for development of suppliers (exemplarily)

What does a purchasing professional need to do in order to develop its


suppliers, i.e. to take supplier performance to a higher level?
In general, they can initiate three types of actions:
• Supplier suggestion program: actively ask for suggestions for
improvements of suppliers
• Supplier development, ask questions like:
 What is going well in the cooperation?
 What could or must get better?
 What is needed for improvement?
 How to measure the improvements?
• Supplier satisfaction survey, collaborative relationship between
business partners requires that expectations between all
stakeholders involved are made explicit.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
30 Supplier development: The supplier-partnering hierarchy

Remarks:
→ Building up collaborative
relationships takes many
years and a lot of effort.
→ Starting from the
beginning, business
partners will go through
several consecutive stages
to develop from a
traditional, arm’s length
relationship to a more
collaborative relationship.
→ The figure illustrates
what it takes from both
partners to go down this
Source: From Building Deep route.
Supplier Relationships by Liker
and Choi (2004), © 2004 Harvard
Business School Publishing
Corporation. All rights reserved.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
31 Summary

• Pricing and cost structures of suppliers are interrelated, but


the effect they have on one another is not always clear.
• The prices of goods and services can be based on market
factors, on cost factors or on a combination of both.
• Suppliers can be differentiated in to strategic suppliers,
preferred suppliers and competitive suppliers.
• When doing business with a supplier, it is important that the buyer
is aware of the supplier’s financial performance.
• Methods to control supplier’s pricing policy:
– Closely monitoring the supply market
– Monitoring individual supplier financial performance
– Make analysis of supplier’s cost price
– Monitor developments in the supplier’s performance on price, quality,
delivery, etc.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
32 Lecture 14: Self-assessment (1/2)

14.1 To be able to build long-term collaborative relationships with the


supplier, the supplier needs to have a sound financial position.
Apart from financial reports, what weak signals would indicate that
things are going wrong with the supplier and that its continuity may
be at stake?
Give a few examples.

14.2 A supplier of components announces that it has to raise his


prices by 10 per cent because it has lost a major customer.
It states it is now forced to spread its fixed cost across a smaller
production volume.
What costing method does this supplier use?
Assuming that this supplier is important to you, how would you deal
with the supplier’s request? What steps would you take?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
33 Lecture 14: Self-assessment (2/2)

14.3 In this chapter vendor rating was named as one of the methods
that can be used to measure supplier performance. Delivery
reliability and quality performance of the supplier are two aspects of
vendor rating. How can a supplier’s delivery reliability and quality
performance be measured in a practical way? What KPIs would you
suggest?

14.4 Last year you purchased 100 units of product X from a supplier
at € 50.00 each. You estimate that you will purchase 300 units of this
product from the same supplier this year. You are now preparing for
the price discussion with the supplier. What price are you willing to
pay, assuming that an 80 per cent learning curve applies to this
product?

14.5 Name examples of products for which the price is set by means
of cost-based pricing, market-based pricing and competitive bidding.
Which arguments will the buyer use in each of these cases to obtain
the lowest possible purchase price?
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
34 Supplementary literature (Lecture 14)

Laseter, T.M. (1998), Balanced Sourcing: Cooperation and Competition in


Supplier Relationships, San Francisco, CA: Jossey-Bass.
Liker, J.K. and Choi, T.Y. (2004), Building deep supplier relationships, Harvard
Business Review, 82(12), 104-113+149.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
Graz University of Technology
1 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management


Lecture 15.
Purchasing, Corporate Social Responsibility and
Integrity

Course no. 373.551, 3 semester hours, lecture

Winter Semester 2019/20

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives

After this lecture you should understand the following:


• The importance of corporate social responsibility.
• Purchasing and supply’s contribution to “people, planet,
profit”.
• How corporate responsible purchasing can be embedded
in a company’s culture.
• How circular sourcing relates to sustainable purchasing.
• The importance of integrity codes within purchasing.
• How companies can act responsibly in their
relationships with their suppliers.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
3 Introduction: Case Study – Mattel’s reputation at stake through sourcing
in China (remarks)
The introductory case illustrates that …
• … due to violation of environmental and social
laws in total, 19 million toys needed to be
recalled from the market.
• … since then, Mattel like many Western manufacturers (e.g. Apple,
H&M), has become much more critical with respect to the way in
which purchases are made.
• … today, most Far Eastern suppliers (so-called contract
manufacturers) are thoroughly screened on sustainability issues and
labour conditions.
• … production orders are monitored and supervised accurately by
quality inspectors on site.
• … unethical sourcing practices can do major harm to the reputation
of companies in Western markets and may result in major financial
damage and losses.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 356-358.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
4 Business principles and procurement

Looking at the current situation on international markets:


• Global sourcing is broadly developed.
• Regulation regarding labor and environment often limited.
• Consumers do not accept atrocities in the production.

How can purchasers contribute to a “more sustainable business world”


and to corporate social responsibility?
– Companies draw up principles that form a context for doing
business.
– Some principles are: → Corporate social
• Respecting international law responsibility is about how to
• Fair competing contribute to a better world, a
better environment and
• Integrity
better labour conditions.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
5 Business principles and procurement: Shell general business principles

Imagine: You are a project buyer employed by Shell in Brunei, and assigned
with the important task of buying the materials and equipment for one of Shell’s
exploration projects conducted in the Indonesian archipelago. Now problems
with the local port’s customs arise… “Customs are busy”… But: … things may
be speeded up if … → What would you do in such a situation?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
6 Towards a sustainable environment: “People, Planet, Profit”

• Sustainability seems to be used as a general, container concept,


without highlighting the different aspects it comprises.
• Most of the time it is referred to as corporate social responsibility
(CSR), and sometimes it is referred to as sustainability.
→ However, the “CSR idea” is to develop business solutions in such
a way that requirements of the current world population are met
without doing harm to the needs of future generations.
• Focus shifts from shareholders to stakeholders:
– People: Labor circumstances → Business decisions
have to be tested
– Planet: Usage of natural resources continuously against
– Profit: Financial development these three principles!

→ Sustainable profitability can only be achieved if a company is able


to serve the needs of “people, planet, profit”.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
7 Towards a sustainable environment: The pyramid of corporate
social responsibility
Sustainable profitability can only be reached if a company is able to
balance the interests of customers, employees, society, the environment
and its shareholders; this situation is schematically represented in the
sustainability pyramid (“CSR pyramid”).

Source: Carroll (1991)


TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
8 Towards a sustainable environment: Example of Unilever – “Driving
carbon footprint down in the value chain” (results of analysis)
The “Sustainable Living Plan” was based on a thorough analysis of Unilever’s
carbon footprint across its value chain.

The results of this analysis show that…


… only 3 % of Unilever’s carbon footprint is caused by its factories.
… around 2 % is caused by its distribution and transport network.
… Unilever’s supplier network is responsible for 26 %, which represents a major challenge.
... 68 % of its carbon footprint is caused by the consumer at the point of consumption.

→ This analysis explains why Unilever has put great emphasis on new product
development and innovation in order to stimulate sustainable behaviour from
their consumers.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
9 From the resource-based view to stakeholder theory: Key aspects

• Resource-based view (…was the traditional management practice…)


– Purpose of the resource-based view was to create as much profit as possible for
owners by capitalizing on resources.
– Internally oriented: it only embeds supplier resources and capabilities when
structuring, bundling and leveraging resources in order to obtain competitiveness.
• Resource dependence theory
– Typically looks beyond the boundaries of an individual firm.
– In the resource dependence theory thinking, the firm’s dependence on other
external parties, such as suppliers, is central.
– The resource dependence theory views effective relationships with the most
qualified suppliers as a prerequisite to secure the external resources that are
required to create customer value and, hence, foster the firm’s competitiveness.
• Stakeholder theory
– Stakeholders represent different values that the focal firm should try to realize.
– Stakeholder orientation aims at satisfying a broad array of stakeholder groups
based on their specific demands.
– Stakeholder satisfaction results in greater competitiveness of firms, increases
innovation and is able to deal better with the changing environment.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
10 Sustainable Purchasing: Towards sustainable supply chains

Referring to the stakeholder theory a firm needs to balance, weigh and


respond to diverse stakeholder perspectives.
It argues that for achieving competitive advantage a firm and its supply
chain partners should create in parallel customer value, societal value
and shareholder value.
→ This is what CSR and sustainable purchasing is all about:
• Suppliers form an important source of competitive ability as well as
risks considering sustainability.
• Example: Companies like Philips are busy considering these issues
o Developing a sustainability standard
o Self-assessment and supplier sustainability audit
o Plan of action with corrective measures
o Suppliers are willing to cooperate
• Continuing this approach from first tier to second tier suppliers is still
a long way to go... step-by-step.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
11 Sustainable Purchasing: How do firms put principles in place with regard
to “people, planet and profit”?
Philips started with a worldwide sustainability programme and developed a
“Supplier Sustainability Audit Questionnaire” with the following topics:
Implementation:
1. This questionnaire
was filled out by the
→ Today,
suppliers and by
Philips urges
internal experts. its suppliers
2. Variances between to transfer
both audits were their CSR
discussed and policies to
suppliers were asked their 2nd tier
& raw
to come up with
materials
action plans to take suppliers!
corrective measures.
3. These measures
were periodically
followed up by Philips‘
procurement
organizaton.
Source: www.Philips.com
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
12 How to drive CSR in supply chain relationships

What do large companies do to drive CSR in their supply chain


relationships?
→ Here are a few observations from practice and literature:
• Most major companies today have CSR integrated in their mission
statement and business strategies.
• Companies that operate downstream in their value chains, i.e. consumer
goods manufacturers and retailers seem to emphasise product safety and
environmental friendliness in their stakeholder relationships.
o Zadek (2004) has identified five stages organizations typically go through
when developing a sense of corporate responsibility, as they move along
the learning curve: defensive, compliance, managerial, strategic and civil.
o Van Tulder and Van der Zwart (2006) has distinguished between passive,
reactive, active and proactive approaches of organizations to CSR.
o Nidumolu et al. (2009) presented a multi-staged model.
o Van Weele and Vivanco (2014) propose an evolutionary model on the
adoption process of CSR for organizations.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
13 How to drive CSR in supply chain relationships: CSR tools, techniques
and activities

When driving CSR in their supply chain relationships, some activities,


tools and techniques are more popular than others.
The following differentiation can be made:
• Supplier sustainability codes – Support the general codes of conduct and
business values of corporations; most large companies have specific codes.
• Supplier sustainability assessments – Supplier self assessments or
sustainability audits are performed by the buyer or by outside experts.
• Supplier sustainability follow-up – Aims to ensure that suppliers put corrective
actions in place in order to prevent the trend among suppliers (in low-cost
countries) signing the code of conduct without reflections on their processes.
• External sustainability standards – Based on external standards and norms
(UNGCP - United Nations Guidelines for Consumer Protection - is a popular
choice as well as the Dow Jones Sustainability Index; many firms report using
ISO 15001 or ISO 20400; beside these general standards, sector specific
standards exist, e.g. FSC - Forest Stewardship Council for sustainable wood).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
14 CSR in practice
Examples:
→ Companies such as
Nestle, Mars and
Unilever have invested
heavily in programmes
aimed at helping local
farmers in developing
countries improve their
product quality,
operational efficiency
and crop productivity.
→ Part of these so-
called supplier diversity Supply chain and sourcing
programmes aimed at managers need to report on
promoting businesses the results that were obtained
from their supplier sustainability
owned by ethnical
programmes. Here, a wide
minorities and/or range of KPIs are found in
women. practice.
Taken from: van Weele, A. (2018), Purchasing
and Supply Management, 7th edition, p. 368.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
15 Circular sourcing (1/4)

The shift from shareholder focus to stakeholder focus is reflected in what


is often referred to as “circular economy” (note: it was the originally idea
of Ellen McArthur Foundation, www.ellenmacarthurfoundation.org).

Circular economy…
• … assumes that raw materials, components and products are
continually reprocessed to meet the needs of growing world
population.
• … contrasts linear economy where products are destroyed at the end
of their life-cycle.
• … follows the idea that economic value of products is sustained as
much and as long as possible.
• … identifies two cycles:
o The biological cycle, where residue materials after use return to nature.
o The technical cycle, where technical components are designed in such
a manner that they can be reused at the end of their life-cycle.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
16 Circular sourcing (2/4)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 370.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
17 Circular sourcing (3/4)

As companies buy so many materials and services, circular sourcing


seems necessary to close the value chain.

Circular sourcing assumes that …


• … we only pay for functionality not possession purposes.
• … everything bought from suppliers preferably is to be returned to
those suppliers at the end of the product life-cycle.
• … buying firms purchase products that are designed in such a
manner that when they have reached the end of their life-cycle,
they can be easily taken apart and that those parts can be easily
reprocessed.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
18 Circular Sourcing (4/4)

• Companies using circular sourcing for products that are often


short in supply, which are at the end of their life-cycle and which
can easily be reprocessed.
i.e. Philips reprocessed vacuum cleaners by collecting them after
consumers took them to the dump to dispose of them to use the
specialised plastic needed for new ones.

• Circular sourcing has been part of new business models where


the new product is based on the recycled materials.
i.e. Interface uses abandoned fishing nets gathered and sold to them
by poor people in emerging countries to make carpet tiles which they
lease to B2B customers. After the lease period Interface reprocesses
the tiles.

• Currently in its infancy, circular sourcing will change the nature of


traditional business as well as procurement.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
19 Trust, integrity and ethics

Since the late 2000s, there have been many debates over the issue of
integrity and trust in B2B relationships.
→ As companies become more dependent on each other, trust* (trust
“consists of” fairness, reliability, consistency and goodwill) becomes
more important.
– Three types of trust: (i) contractual trust (e.g. delivering the promised
good or service); (ii) competence trust (e.g. the ability of the actor to fulfil
the expectations); and (iii) goodwill trust (the commitment to do more
than formally expected, e.g. contributing with improvement ideas).
– Future competition will occur between integrated supply chains based on
trust.
– In a research project by the Centre of Advanced Purchasing Studies
(CAPS) it was found that “real” partnerships (which are based on trust)
among the over 300 companies that were investigated were less than
1% of the total number of supplier relationships.

* Trust is the confidence a party has that the other party will behave co-operatively, in a consistent, predictable and honest manner.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
20 Trust, integrity and ethics: Buildung trust in supplier relationships
Trust is a result of two
factors:
trustworthiness, i.e. the
situation in which trust is
granted to you by other
parties, and
competence. Building
competence is about
developing people’s
skills, experience and
creativity. Companies
that have skilled staff,
great expertise in what
they do, generate more
confidence and trust in
their client relationships
than companies with no
competent staff.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
21 Trust, integrity and ethics: Code of conduct

• Purchasing is sensitive for ethical issues through contacts with


suppliers.
– In the international sales arena, lots of activities are undertaken to put
the buyer in the most positive frame of mind about a possible
purchase.
– The main question being raised on the side of the buyer as to how far
one should go in a relationship with a supplier?
• To increase uniformity in behaviour towards the business
community, a number of large companies have become explicit on
their policies with regard to “business integrity” and published a
so-called “code of conduct”.
• Rules of conduct have also been drawn up by the International
Federation of Purchasing and Supply Management (IFPSM) and
some professional purchasing organizations, such as the Dutch
Purchasing Association (NEVI), have translated these guidelines
into local professional codes of conduct.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
22 Summary
• Corporate social responsibility (CSR) is a high priority item on the
management agenda.
– One reason for this is the fact that raw materials have become scarcer.
• An environmental or social scandal may quickly ruin a company’s
reputation.
• The idea behind CSR is to meet the needs of current generations
without sacrificing the resources to meet the requirements of
future generations.
• Operational processes of suppliers need to be controlled and
monitored for ethical compliance.
• Large manufacturers require that the first tier suppliers will transfer
their environmental policies to their second tier suppliers.
– The encourages supply chain integration which can only be built upon
constructive, trusting and long-term supplier relationships.
• The ethical code of the International Federation of Purchasing and
Supply Management is one example of this.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
23 Lecture 15: Self-assessment (1/2)

15.1 What are the reasons underlying CSR programmes of


companies these days? What do companies mean by responsible
purchasing?

15.2 What would you consider to be the most important elements of


a socially responsible purchasing programme?

15.3 What is the value of a statement made by a supplier that its


organization is sustainable?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
24 Lecture 15: Self-assessment (2/2)

15.4 Under what circumstances would you feel that the following are
allowed in purchasing: (1) accepting gifts from a supplier, (2)
accepting invitations for a dinner, (3) engaging in a personal
friendship with a supplier sales representative, (4) extending the
deadline for a competitive bid to one of your suppliers and (5) giving
the ‘right of first refusal’ to your current supplier?

15.5 Would you feel that integrity codes as used by some


companies have the same relevance for procurement managers as
for sales managers? Discuss.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
25 Supplementary literature (Lecture 15) (1/2)

Alvarez, G., Pilbeam, C. and Wilding, R. (2010), Nestle Nespresso AAA


sustainable quality program: An investigation into the governance dynamics in a
multi-stakeholder supply chain network, Supply Chain Management: An
International Journal, 15(2): 165-182.
Carroll, A.B. (1991), The Pyramid of Corporate Social Responsibility: Toward the
moral management of organizational stakeholders, Business Horizons, 34(4): 39-
48.
Kibbeling, M.I. (2010), Creating value in supply chains: suppliers’ impact on value
for customers, society and shareholders, PhD dissertation, BETA Research
School for Operations Management and Logistics, Eindhoven University of
Technology, the Netherlands, p. 187.
Nidumolu, R., Prahalad, C.K. and Rangaswami, M.R. (2009), Why sustainability
is now a key driver of innovation, Harvard Business Review, 87(9): 57-64.
Porter, M.E. and Kramer, M.T. (2011), Creating shared value: How to reinvent
capitalism and unleash a wave of innovation and growth, Harvard Business
Review, 89(1-2): 62-77.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
26 Supplementary literature (Lecture 15) (2/2)

Van Tulder, R. and Van der Zwart, A. (2006), International Business-Society


Management: Linking Corporate Responsibility and Globalization, London:
Routledge.
Van Weele, A.J. and Vivanco, L. (2014), Corporate social responsibility: moving
from compliance to value creation in value chain relationships, in: Cordon, C. and
Ferreiro, T. (eds), The Value Chain Shift: Seven Future Challenges Facing Top
Executives, Lausanne, Switzerland: IMD Global Value Chain Center, p. 137.
Zadek, S. (2004), The path to corporate responsibility, Harvard Business Review,
December, pp. 1-8.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018