Fundamental Issues of Procurement Management E-Book

Willi Darr

• Herausgeber: tredition
• Kategorie: Wissenschaft und neue Technologien
• Sprache: Englisch

Seitenzahl: 125

Veröffentlichungsjahr: 2020

Beschreibung

Procurement respectively procurement management in companies has received a significant boost in importance in recent years. The increasing outsourcing of services to suppliers and the simultaneous commissioning of international suppliers have changed the tasks and professional profile of buyers in terms of their contribution to corporate value creation. Without procurement management (purchasing management), corporate strategies and the achievement of sustainable competitive advantages can no longer be achieved. Procurement has become a central success factor in the company. Thus, the knowledge of procurement management and the skills of the buyers form an essential pillar for entrepreneurial decisions and strategies. Knowledge of the basic interrelationships of procurement management is and will be a natural part of any training and further education. This book provides a fundamental contribution by showing and explaining the central elements and interrelationships. It is suitable for the introduction to procurement management and therefore a helpful reading for students and practitioners.

Leseprobe

Willi Darr

Fundamental Issues of Procurement Management

Willi Darr

Fundamental Issues of Procurement Management

tredition Verlag

Prof. Dr. Willi Darr

University of Applied Sciences Hof

Procurement and Logistics Management

Alfons-Goppel-Platz 1 | D-95028 Hof/Saale

Hardcover

ISBN 978-3-347-03017-6

Paperback

ISBN 978-3-347-03016-9

E-Books

ISBN 978-3-347-03018-3

Bibliografische Information der Deutschen NationalbibliothekBibliographic Information of the German National Library

Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.dnb.de abrufbar.

The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data can be found on the Internet at http://dnb.dnb.de.

Copyright: 2020 Willi Darr

Das Werk einschließlich seiner Teile ist urheberrechtlich geschützt. Jede Verwertung, die nicht ausdrücklich vom Urheberrechtsgesetz zugelassen ist, bedarf der vorherigen Zustimmung. Dies gilt insbesondere für den Nachdruck, für Vervielfältigung, Bearbeitungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen.

The work including its parts is protected by copyright. Any use that is not expressly permitted by copyright law requires prior consent. This applies in particular to reprinting, duplication, processing, microfilming and storage and processing in electronic systems.

Cover and design by tredition & Willi Darr

Translated by Sally Rendl

Originaltitel: Grundfragen des Einkaufsmanagements, tredition Verlag 2017

Herstellung und Verlag | Printed and published bytredition GmbH, Halenreie 40-44, D-22359 Hamburg, Germany

Foreword

Procurement respectively procurement management in companies has received a significant boost in importance in recent years. The increasing outsourcing of services to suppliers and the simultaneous commissioning of international suppliers have changed the tasks and professional profile of buyers in terms of their contribution to corporate value creation. Without procurement management (purchasing management), corporate strategies and the achievement of sustainable competitive advantages can no longer be achieved. Procurement has become a central success factor in companies.

Thus, the knowledge of procurement management and the skills of the buyers form an essential pillar for entrepreneurial decisions and strategies. Knowledge of the basic interrelationships of procurement management is and will be a natural part of any training and further education. This book provides a fundamental contribution by showing and explaining central elements and interrelationships. It is suitable for an introduction to procurement management and therefore a helpful reading for students and practitioners.

I wish every reader a joyful reading and helpful insights into his or her own conceptual world of procurement management.

Willi Darr

Contents

Contents

List of tables

List of figures

List of abbreviations

1.  Basics

a.  The term procurement (purchasing)

b.  Procurement objects

c.  Purchasing process

d.  Procurement management

e.  Goals of procurement management

2.  Importance of procurement management

a.  Historical overview

b.  Outsourcing

c.  Leverage effect of purchasing

d.  Decreasing transfer costs

e.  Development in the procurement/sales markets

f.  Production development

g.  Fluctuating exchange rates and raw material prices

3.  Management of the procurement organization

a.  Preliminary remarks

b.  Organization of the primary organization

c.  Hierarchical significance of procurement management

d.  Classification principles of the organization

e.  Secondary organization

f.  Purchasing Offices

g.  Qualification of the buyers

4.  Material management

a.  A brief overview

b.  Outsourcing as a decision problem

c.  Stocks as a decision problem

i.  Stocks as value

ii.  Quantity planning

iii.  Strategic aspects of material management

5.  Supplier management

a.  Overview of the tasks of supplier management

b.  Supplier structure

c.  Supplier relationships

d.  Supplier evaluation

6.  Risk management and compliance

a.  Risk and crisis

b.  Legal basis for risk management

c.  Phases of risk management

d.  Compliance

e.  Risk, compliance and crisis

f.  Supplementary literature references

7.  In conclusion

8.  List of references

List of tables

Table 1.1: Overview of procurement (purchasing) management tasks

Table 1.2: 7x3 Target matrix of procurement management

Table 3.1: Comparison of the three forms of primary organization of purchasing

Table 3.2: Advantages and disadvantages of the three forms of primary organization of purchasing

Table 4.1: Coordination mechanisms based on the theory of transaction costs

Table 5.1: Advantages of Single Sourcing and Multiple Sourcing in comparison

Table 5.2: A comparison of the advantages of Traditional Sourcing and Modular Sourcing

Table 5.3: The purchasing advantages and purchasing disadvantages of Global Sourcing

Table 5.4: The Supplier Power/Purchaser Power Portfolio

List of figures

Figure 4.1: Capital commitment and effect of the measures

Figure 4.2: Graphical determination of the optimal order quantity

List of abbreviations

AktG

Aktiengesetz

ATO

Assemble to Order

BME

Bundesverband Materialwirtschaft und Einkauf e.V.

DIN

Deutsches Institut für Normung

EC

External cost

EICC

Electronic Industry Citizenship Coalition

EK

Einkauf (buyer, buying department)

EK 1,2,3

Einkaufspreis 1, 2, 3 (buying price 1, 2, 3)

EN

Europäische Norm

f.

folgend

GmbHG

GmbH Gesetz h Order frequency

HGB

Handelsgesetzbuch

IC

Internal cost

ISO

International Organization for Standardization

Kb

Fixed costs per order

IDW

Institut der Deutschen Wirtschaftsprüfer

MTS

Make to Stock

MTO

Make to Order

OPP

Order Penetration Point

OWiG

Gesetz über Ordnungswidrigkeiten

p

price

p.

page

PS

Prüfungsstandard

Q

Annual requirement

Critical stock level

S

Maximum target stock

T

Time of regular check

TC

Transaction cost

TCO

Total Cost of Ownership

TfS

Together for Sustainability

TÜV

Technischer Überwachungsverein

UK

United Kingdom

US

United States

X

Order quantity

Xopt

Optimum order quantity

Z

Storage interest rate

1. Basics

a. The term procurement (purchasing)

The term procurement is widely used and familiar in everyday life of consumers, companies, and in literature. Alternative terms are purchasing, replenishment or supply which in the following are used synonymously. Procurement is defined as the totality of activities to provide a company with the goods it requires but does not produce itself (see Arnold, 1997, p. 3, Large, 2011, p. 2, or van Weele/Eßig, 2017, p. 20 ff.).

The almost limitless use of these terms is related to the organization of global production in supply chains. A supply chain describes the path of raw materials to the final product and is characterized by a variety of work steps and usually a variety of active companies. From a company's point of view, specific manufacturing steps are carried out and the upstream manufacturing steps (preliminary products) are purchased from suppliers. The complete supply chain is thus made up of a multitude of purchasing and manufacturing processes. The production share of a company in the complete supply chain is called vertical integration (production depth). This is measured by the percentage share of production costs in the total costs of the product. The share that a company purchases is therefore referred to as procurement depth (or purchasing depth). This is measured by the percentage of purchasing costs as a proportion of the total costs of the product. In relation to a company, the sum of production and purchasing depth is always 100% by definition. The choice of in-house production (make) or external procurement of intermediate activities (buy) determines the vertical range of production or purchasing depth.

Today, supply chains are characterized by a high degree of division of labor. As a result, the purchasing depth (not only in the retail sector) is in most cases significantly greater than the vertical range of manufacturing. In the Statistical Yearbook of the Federal Republic of Germany for the years 1994 to 2016, the purchased services are shown in relation to the total output. In these years they have always increased and are consistently above 50 %. The global vehicle construction industry has a peak value of 82 % (Statista, 2016).

Procurement (purchasing) is a necessary function within a company due to the division of labor. Procurement together with other functions of a company (e.g. production and sales) describe all activities which are necessary to offer and sell products to their customers. Therefore, procurement has two natural "neighbors":

■ Sales department of suppliers and

■ Production department of the own company.

Purchasing procures all products not produced in-house from their suppliers. To do so, purchasing department requests and compares quotations, negotiates the details with the vendors, and concludes contracts with them. Purchasing receives the requirements for the goods to be procured from production department. The production plan thus forms an essential basis for the qualitative and quantitative requirements for purchasing department. It is based on the independent requirements of the company (orders of final customers) and is broken down into dependent requirements via the bill of material. In comparison with the warehouse stocks, net values for production and procurement are determined from the gross dependent requirements.

There are always fields of tension between the purchasing company and the selling company (supplier, vendor):

■ Material field of tension

■ Financial field of tension

■ Spatial field of tension

■ Temporal field of tension

■ Informational field of tension

■ Legal field of tension

The material field of tension describes the fact that suppliers have to produce preliminary products or they have already requested preliminary products in stock. The financial field of tension expresses the conflict of objectives that vendors aim for a high sales price and purchasing departments aim for a low purchase price. The spatial field of tension describes the different locations of vendors and purchasing and the tasks of logistics. In view of globalization, this area of conflict has become very important. The temporal field of tension expresses the fact that the ideal production times of suppliers and the ideal demand times of purchasing departments diverge. The informational field of tension is based on the different information that is available to purchasing departments or to suppliers. The legal field of tension expresses the different rights and obligations of suppliers and purchasing.

Despite the above-mentioned fields of tension, the division of labor in global supply chains is a topical issue, and despite these fields of tension, the division of labor is constantly increasing. Companies that produce almost the entire supply chain on their own can hardly be found anymore. For example, the Federal Statistical Office shows a purchasing depth of more than 50 % on statistical average for Germany; the lowest vertical range of manufacture and consequently the highest purchasing depth can be found in vehicle construction (see also Large, 2011, p. 3, van Weele, 2014, p. 12).

b. Procurement objects

The universality of purchasing is also expressed in the universality of purchasing objects. Basically, any form of product or service can be purchased. The possibilities for classifying purchased goods are therefore manifold (see Large, 2009, p. 7 ff., van Weele, 2014, p. 15, van Weele/Eßig, 2017, p. 31 ff.).

A first classification is made into categories:

■ Production material

■ Non-production material

■ Capital goods

■ Services

■ Merchandise (trade goods)

Here, the necessary factors of finance and work performance (personnel) are not discussed as purchasing objects. Examples of non-production materials include equipment for IT (computers, networks, telecommunications), marketing (agency services, advertising materials), logistics (transport, courier services, parcel services, industrial trucks), the general services of a company (vehicle fleet, insurance, canteen), or facility management (heating, cleaning, energy). Production materials, on the other hand, in contrast to capital goods, go directly into the end product to be manufactured. Services are non-material services. These include, for example, production consulting services or certificates that serve as the basis for production. Merchandise are goods that are offered/sold to customers of the purchasing company without further manufacturing.

A second classification differentiates regarding alternative supply chain structures. The following three structures are explained:

■ Make to Stock (MTS),

■ Assemble to Order (ATO) and

■ Make to Order (MTO).

Every supply chain can be divided into a forecast-based part and a sales order-related part. The separation of these two parts is called “Order Penetration Point (OPP)”. In the case of Make to Stock goods are completely forecast-based and the purchasing department procures these already finished goods from suppliers’ stock. Regarding Assemble to Order, the concrete selection of the goods to be procured is based on the combination of forecast-supported components, which are then assembled together individually. With Make to Order, the concrete selection of goods to be purchased is made by defining and developing the components of the procurement goods in cooperation with suppliers.

A third classification differentiates between suppliers’ production organization and the number of pieces:

■ Single-piece production

■ Series production

■ Mass production

The goods to be procured can be produced by suppliers/vendors in quantity 1 (single-piece production), in very large quantities (mass production) or in batches (medium quantities, series or repetitive manufacturing). This has a direct influence on the purchasing costs, delivery times and procurement tasks.

c. Purchasing process

Every purchasing process is part of a company's value-added process and describes individual steps from the decision-making process of purchasing orders to handover of procured goods to the own production, i.e. the internal neighbors. The entirety of all process steps from buyer's decision-making process to receipt of procured goods is referred to as order cycle. It covers informational processes in purchasing and at suppliers and the logistical processes from suppliers to the purchasing company (see e.g. Darr, 1992, p. 14, van Weele, 2014, p. 28 ff.). Overall, all following sub-steps can be distinguished in this order cycle (here for Make to Stock):

1. Determination of requirements

2. Order formation

3. Supplier search

4. Supplier selection

5. Transmission of orders

6. Order processing

7. Commissioning

8. Packaging

9. Transport to customer

10. Delivery of goods to customer

11. Invoicing

12. Payment of invoice

Steps 1-5 are the classic steps of purchasing activities. Steps 6-10 are the classic steps of suppliers' work. Steps 11 and 12 relate to the financial clearing of orders. These steps are carried out for all purchasing activities between ordering and supplying companies.

In the case of orders from final customers (usually in retail), these processes differ, for example, for stationary trade and for e-commerce orders. In the case of industrial or commercial customer orders, these processes differ for individual case orders, KANBAN replenishment control, just-in-time replenishment control, or classic warehouse orders. It is furthermore possible that individual process steps are not carried out by purchasing departments but by suppliers. On the other hand, it is also possible that individual process steps are not carried out by suppliers but by a purchasing company.

d. Procurement management

Procurement management comprises the planning, controlling, and monitoring of all measures to make the required goods (required production material, operating supplies, capital goods, services and merchandise) available to the purchasing company in a suitable legal and factual form. Procurement management is part of enterprise management and must be coordinated with these other areas. It is divided into three main tasks:

■ Supplier management: From whom are these external goods/services purchased?

■ Material management: What and how much external goods/services are purchased?

■ Management of the purchasing organization (procurement organization): Who organizes the external procurement?

This division into three main tasks allows to describe them clearly in detail. It is evident that these are also interdependent and they must therefore be coordinated.

The