Fundamental Issues of Procurement Management

By Willi Darr

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.

• Language: English
• Publisher: tredition
• Release date: Mar 5, 2020
• ISBN: 9783347030183

Book preview

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