PuSm - Lecture 1 - Chapter 1 - Slides - Online (1) - Cópia

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
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
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
3 Short introduction to today’s 1st lecture
In this lecture, we discuss the role and importance of the purchasing

function.
• Therefore, Porter’s classic value chain is taken as a point of
departure in order to show the need of a differentiation between
direct and indirect purchasing.
• Some time is spent on defining important terms and concepts.
Also the role which purchasing professionals may play in cost
reduction, and product and process innovation is discussed.
• The lecture today concludes by describing some important trends
and developments which are perceived in the purchasing
strategies of companies that are leading edge in purchasing and
supply management.
• Finally, this first lecture sets the stage for the remaining lectures
of this introductory course (note: based on the structure and content
of the book written by A. J. van Weele: Purchasing and Supply
Chain Management, 7th Edition, 2018).
4 … before we start … (1/2)
Purchasing … (in general)

… represents the management of 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
under the most favourable conditions.
Supply…
… includes at least purchasing, materials management, incoming
inspection and receiving.
Supply is used in relation to buying based upon total cost of
ownership in a manufacturing environment.
5 … before we start … (2/2)
Management …
… is a multi-purpose organ that manages business and manages
managers and manages workers and work.
(quoted after Peter F. Drucker, The Practice of Management, 2006)
Value Chain …
… is composed of value activities (e.
g. operations) and a margin* which is
achieved by these activities. Value
activities can be divided into primary
activities and support activities.
*The margin represents the value that
customers want to pay extra for the
company‘s efforts compared with the
costs that were required for these.
6 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.
The introductory case study “Damen

shipyards” illustrates the complexities
that go with these “exploitation activities”.
It is shown that purchasing and supply
management have different roles within
a company.
7 Introduction: Case Study - Damen Shipyards
*Note:
The full text of this case study you may find in the primary literature for this
course, the textbook “Purchasing and Supply Management“ written by Arjan
van Weele (2018), 7th edition, p. 3.
8 Introduction: Case study – Damen shipyards (remarks)
The introductory case illustrates that …

• … it is important to secure the supply for all projects and shipyards.
Component deliveries should be made by suppliers and
subcontractors on time and their quality should be flawless.
• … prices of purchase materials should be within the project budget,
in order not to jeopardize project and company profitability.
• … project-specific purchases are tailored to the project. Deliveries
are made based upon the detailed project planning in order to avoid
the build-up of unnecessary inventory and to keep working capital
investments minimal.
• … careful supplier selection and differentiated supplier strategies
are needed. This calls for a highly professional purchasing and
supply chain organization.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 2-3.
9 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
10 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.
11 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.
12 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 (note: see also next slide)
• Technology development
• Human resources management
• Facilities management (maintenance of firm’s infrastructure)
13 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 be classified in “maintenance, repair and operating (MRO)” supplies,
investment goods and services.
14 The role of procurement in the value chain - overview
15 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…

16 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.”
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).
18 Definition of Concepts (3/5)
Final note: Although the terms are different (from a theoretical point of view), “Purchasing” and “Procurement”
in business practice are used as synonyms. That is the reason why it is alternated between these terms
throughout this course as well as in this set of slides (note: with reference to A.J. van Weele, 2018, p. 9).
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).
*Note:
The full text of this memo you may find in the primary literature for this course,
the textbook “Purchasing and Supply Management“ written by Arjan van Weele
(2018), 7th edition, p. 11.
21 Definition of concepts: The linear purchasing process model
22 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 %.
23 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
24 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.
25 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.
26 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.
27 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).
28 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).
29 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.
• 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).
• 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).
Memo 1.4 provides an illustration of some of the challenges that lie
ahead for procurement professionals and supply chain managers.
Taken from: van

Weele, A. (2018),
Purchasing and
Supply Management,
7th edition, p. 18-19.
33 Brief summary
• Purchasing and supply chain management has developed into a key

business driver. 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.
34 Lecture 1: Self-assessment (Individual work)
Preliminary remark:
The aim of this exercise is to reflect on the content presented in this
lecture and to prepare for the final exam at an early stage.
Work order:
1. Answer the self-assessment questions given on the following slide(s).
2. Take approx. 15 minutes per question.
Final note: To answer/discuss/reflect on the questions on the following slide(s), please

consult the primary as well as the relevant literature of this course we have listed for you on
the TUGrazTeachCenter learning platform (see: course-detailed view -> further information ->
recommended reading). Of course, you are also welcome to use further sources.
35 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.
36 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.
37 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.
Graz University of Technology
38 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
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
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

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Graz University of Technology

1 Institute of Business Economics and Industrial Sociology

Purchasing and Supply Management

Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

After this lecture you should understand the following:

In this lecture, we discuss the role and importance of the purchasing

Purchasing … (in general)

The introductory case study “Damen

The introductory case illustrates that …

In many business strategies, the concept of value chain management

Firm Infrastructure, Human Resources etc.

Inbound Outbound Marketing

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

These contrasting manufacturing situations explain why

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

Direct procurement: Procurement of all materials and products

Support activities are those value activities that are required to

They can be divided in four generic categories:

Procurement activities may also be related to supplying products and

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

Different definitions / perceptions: Operational = short

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

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

The procurement function covers…

The DuPontAnalysis shows that procurement contributes to improving the

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

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

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

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

Diminishing growth opportunities result in a situation where an increase in

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

• Leveraged procurement and supply strategies

• Corporate social responsibility and business integrity

• Early supplier involvement in new product development (NPD)

Taken from: van

• Purchasing and supply chain management has developed into a key

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

• Purchasing encompasses everything for which the company receives an

• From the perspective of a procurement professional the management of

Final note: To answer/discuss/reflect on the questions on the following slide(s), please

1.1 Take the annual report of an industrial company. Calculate

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

1.3 What are the major differences between procurement, sourcing

1.5 The chapter describes a number of new developments in

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

Purchasing and Supply Management

Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

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