Advanced Issues of Procurement Management

By Willi Darr

This book reasons, discusses and delves deeper into specific problems of procurement management. Key aspects of the procurement management are presented for advanced students, meaning interested students in the main course or in the master's degree study as well as for practitioners bearing responsibility.

• Language: English
• Publisher: tredition
• Release date: Mar 5, 2019
• ISBN: 9783748246008

Book preview

1. Procurement Services

a. Short Introduction

At the beginning of the specific discussion procurement services, the basic aspects to be presupposed are presented in the form of a list:

■ The terms procurement, real net input ratio and real net output ratio,

■ the terms logistics, production, marketing/sales, controlling,

■ the term supply chain,

■ the order cycle (purchase cycle) with its elements,

■ the Order Penetration Point (OPP),

■ the principal thoughts of pull and push,

■ the possible types of purchase objects,

■ the individual steps of the procurement processes,

■ the individual responsibilities of the strategic and operational procurement management, and

■ the strategic and operational objectives of the procurement management.

As introductory literature Darr (2013, 2017b), Johnson/Leenders/Flynn (2011), Krampf (2014), Large (2009), Lysons/Farrington (2012) and van Weele (2014) are recommended.

In the following section, a short explanation of the terms real net input ratio and real net output ratio will be given. The term real net input ratio stands for the proportion of purchased items of the total value added. Real net output ratio describes the proportion of the internal production of the total value added. Both combined, the total value-added results. Similar terms are proportion of value added, vertical range of integration or depth of production/ procurement (in German: Einkaufstiefe and Fertigungstiefe).

Real net input ratio + real net output ratio = 100 %.

CI:        Cost of purchased items

CO:       Cost of internal production

CTotal:   Total cost of production (supplier + own company)

b. The Problem of Procurement Services and their Measurement

The measurement of the procurement services is no surprising issue. Within the scope of corporate governance practices in a company, every performance is evaluated regarding the company’s objectives. In light of the importance of procurement, the discussion Procurement Performance Measurement is a crucial management issue. Since the 1990s, the procurement performances are classified as strategic resp. strategic benefits are generated through the services of procurement (see e.g. A.T Kearney (2013, 2014b), Cammish/Keough (1991), Large (2009), Reck/ Long (1988), Spekman et al. (1994)). Subsequently, two questions arise: What differentiates strategic from non-strategic services and how can they be measured? These questions will be answered in the following and in chapter 3.

An overview about the studies concerning Performance Management is provided by Entchelmeier (2008, p. 44). He lists in total nine studies since 1964. This results in relevant indicators for the performance measurement. The most comprehensive list was compiled by Monczka/ Carter/ Hoagland (1997) containing 250 performance indicators. However, already in 1932 and in two subsequent articles in 1936 and 1948, Lewis outlined that the reasons, the services and the service recipients need to be factored in as conceptional basis for a performance measurement. I. a. Entchelmeier (2008, p 12) documents the various levels of performance capability and thus of the procurement performances in distinguishing the performance levels beginner, basic and champion. These are helpful elements, but not a managerial concept. The necessary concept is based on the management process, which includes the following four steps.

First, to assess whether the different performance indicators are of significance or not, a systematization of the procurement performances that goes beyond the character of a listing is required in the first place. Second, on that basis, relevant key performance indicators (KPI) can be developed (depending on the category). Third, based on this, the measuring methods, the determination of the data basis and the necessary calculations of the performance indicators follow. Finally, management is able to take their procurement decisions. This complete sequence of steps is referred to as the conception of the management of procurement performances. This is illustrated in figure 1.1 and is a part of the business value chain as active determination, measurement, management and control.

Figure 1.1: Management process of procurement services

In general, performances are rendered everywhere: in companies, in schools or also when doing sports. A service performance usually consists of two elements: the action (creation of a contribution in kind/service) on one side and the outcome (effect of the service) on the other side. In the following, the procurement services are considered as a necessary function within the company. Strictly speaking, the procurement services and the services of suppliers are two different services. In this work, the production services of the supplier and the organizational service of the procurement (procurement services in the narrower sense) together are referred to as procurement services in broader sense and should express the responsibility of the procurement for the own company.

The necessity of this service (of procurement) is in principle determined in the make-or-buy comparison with the own production and always has to assert its advantageousness. The advantageousness of buy is based on the appreciation and thus on the value creation of the procurement services (in broader sense) through the/for the user. On the basis of his strategic and operational goals/ strategies/ company values, the user evaluates these procurement services with regard to the created utility compared to an inhouse production. Therefore, the user (R) and the utility (N) are two supporting pillars for the categorization of the performances, or of the procurement services in this example. These are the two fundamental ideas of this conception for the procurement performance measurement.

c. The Conceptual Fundamentals: User & Utility

The conception for the procurement performance measurement is based on the user (R) and the utility (N).

(1) The users will be discussed firstly. From a purchasing company’s point of view, three main users (recipients) are distinguished:

■ Procurement,

■ Production, and

■ Sales.

The main focus is on production as the classical user of procurement of purchase objects. A differentiated explanation of procurement of nonproduction material and investment goods is set aside here. Production receives intermediate products from the suppliers and the procurement in an organized way so that the utility of an external procurement always exceeds (should exceed) the utility of an in-house production. Production is the key user of procurement services in the classical way, since here the offered product is created according to its specifications. Procurement as the second user refers to the phase before production, without delivering a specific service to production. This preliminary phase contains benefits which are created for the company and have no effect on production. Facilitations for the goods receipt or an improved capital lockup through lower purchasing prices are two examples. Sales as third user evaluates the procurement services which arise after production is completed and which, in particular, affect the sales process and thus the clients of the purchasing company. Recognizable preliminary products of the suppliers (e.g. ingredient brands like Intel Inside or Goretex) could directly influence the end customer assessment of the complete product for instance.

The level of impact is also defined by the recipient of the procurement service. With its services, the procurement can impact on the production as well as on the phases before and after the production. Table 1.1 provides some individual examples for this.

This threefold division of the users will now be further developed. Within each level of impact, three stages are to be distinguished, at which the utility of procurement services can unfold:

■ Services through a better provision from the preliminary stage,

■ services through an easier processing at the respective section of the supply chain, and

■ services through a facilitated transfer to the next stage of the supply chain.

Table 1.1: Level of impact of procurement services

Subsequently, the procurement service can impinge on these three aspects in each stage of the supply chain: the input, the throughput or the output (differing from Entchelmeier, 2008, p. 35). The dimensions to measure the procurement performance will be discussed later. When applying these fundamental forms of utility unfolding to the three users of the procurement services, this results in a final overview categorizing the users of procurement services (Table 1.2). Based on this, the procurement output equals the production input and the production output equals the sales input.

Table 1.2: User categories of the procurement services

(2) The utility dimensions and thus the relevance of the procurement services are now discussed. For this, three categories of the significance of the services are distinguished:

■ Necessary services,

■ important services, and

■ strategic services.

Necessary services are the prerequisite for the next processing step in the supply chain. If this service was not rendered by the own company, it must be procured. The provision is a necessary service. It must be ensured to prevent disruptions of the value creation in quality and in delivery service. Important services, however, will be defined in the following with their effect on the company’s financial lever. Thus, the important suppliers impinge on the company result in terms of costs, revenue and risk. Necessary services can turn important when they are permanently absent, especially when a disruption causes significant opportunity costs. Strategic services are defined with their effect on the own company‘s value creation, meaning on the value creation of the own company’s customers. These so-called strategic procurement services directly impinge on the Unique Selling