Class # 5 Chapter 2

Purchasing Management
Part 2

1) What is Traditional Purchasing,

Operational Procurement, Supply
Management, Strategic Sourcing?
2) Why is the Procurement function of
strategic importance to CEOs and CFOs
in todays global environment?

Todays Procurement Landscape:

Purchasing and Supply Management
Operational Procurement

Strategic Sourcing

Lower $ Values/ Unit Costs

Higher $ Values/Unit Costs

Leveraged / Non-Critical
Items

Critical / Bottleneck Items

Contracts / Agreements

Purchase / Blanket Orders

Alliances / Partnering
Arms Length Relationships
Complex Ts & Cs
Standard Ts & Cs

Operational Procurement :
The acquisition of materials and services required to
meet the day-to-day needs of an organization.
Cost Management:
Revenue
- Less Cost of Goods Sold
- Less Overheads and Expenses
PROFIT
Quality and Quantity
Delivery right location, right time
Service
Risk Management

The Traditional Procurement

Process
1) Purchase Requisition the internal users request for
material or outside services
2) For material, check available existing inventory
3) Start competitive bid process RFQ or RFP
4) Evaluate bids pricing, technical and commercial
5) Possibly negotiate for improvements (large $)
6) Create a Purchase Order (PO)
7) Copies of PO to internal user, accounting dept. and
the successful supplier (enables the three way
match for payment)

Strategic Sourcing: Using facts about required goods

and services, the supplier base and the supply market, in
order to determine best acquisition strategies and best
suppliers available to achieve required improvements.
1

Demand
Analysis

Supply
Analysis

3 Sourcing

Strategy
Development

4 Negotiations

and Supplier
Selection

Implementation

A five step disciplined process is critical to

optimizing value.

Source: European Business School

Strategic Importance
Procurement and Supply Management
CREATES ENTERPRISE VALUE IN THREE WAYS

Financial
Performance

Revenue
Growth

q New products and

services
q First to market /
volume
q Flexibility and
responsiveness to
market trends
q Improved product/
service quality

EPS

Asset
Management
q
q
q
q
q

Capital utilization
Cash velocity
Inventory management
Cycle time reduction
Continuous improvement

q Lower purchase price

q Lower transaction
costs
q Lower overhead costs
q Raise productivity
q Logistics efficiency

Michigan State University Global Benchmarking Initiative

Strategic Importance
According to a McKinsey study, after Pricing Increases, reducing Purchasing
Cost is the most powerful way to increase Shareholder Returns

CEOs Strategic Levers

10% Improvement in

Increased Shareholder Returns by

Pricing Increases

30%

Purchasing Costs

22%

Market Share

17%

Labor

16%

Other Expenses

11%

Fixed Assets

11%

Working Cap. Assets

11%
McKinsey Quarterly

Strategic Importance
What might a 10% material cost reduction mean to
a typical $1 billion company?
Percent
Revenue

$ millions

100%

$1000

Labor

10%

100

Material

50%

500

Mfg. O/H

10%

100

Less COGS

70%

700

Less SG&A

15%

150

Profit

15%

$150

Strategic Importance
What might a 10% material cost reduction mean to
a typical $1 billion company?
Percent
Revenue

$ millions

(10%)

100%

$1000

$1000

Labor

10%

100

100

Material

50%

500

Mfg. O/H

10%

100

Less COGS

70%

700

Less SG&A

15%

150

650
150

Profit

15%

$150

$200

450
100

+33%

Strategic Importance
Supplier Relationship Management (SRM):
Companies Depend on the Success of their
Suppliers
The effects of outsourcing, off-shoring, globalization
Customer Satisfaction and Supplier Performance are linked
together as never before!
Need for Supplier Performance Measurement Systems
(Ex. unacceptable, developmental, approved, preferred)
Utilize a combination of quantitative and qualitative
performance measures
Communicate results (good and bad) quickly
Pursue longer term relationships (partnerships, alliances)
for strategic purchases when appropriate

Strategic Importance
Typical Performance Measurements
Metrics for Suppliers:
1)
2)
3)
4)
5)
6)
7)
8)

Procurement cost savings

Quality / defects / returns
On-time delivery
Responsiveness / flexibility
Process improvement / cost reductions
Innovation / product development
Corporate social responsibility pursuit
Adherence to legal / ethical standards

Assignment for Next Class:

Read How to Get Procurement Strategy Right
by
Per Segerberg (in Blackboard) and answer
questions:
1. What are the key points of the article?
2. Does the authors approach make practical
sense?
3. How hard would it be to implement in a

Todays Case Discussion:

Service Purchasing at the Sunny

Hotel