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STUDY UNIT 1: INTRODUCTION TO
PURCHASING AND SUPPLY CHAIN
MANAGEMENT
1.1 A NEW COMPETITIVE ENVIRONMENT
• The new millennium features increasing numbers of world-class competitors, domestically
and internationally, that are forcing organisations to improve their internal processes to stay
competitive.
• Sophisticated customers, both industrial and consumer, demand price reductions!
• The info over internet will continue to alter the balance of power between buyers and
sellers
• Abundance of competitors and choices have conditioned customers to want higher quality,
faster delivery, and products and services tailored to their individual needs at a lower total
cost.
• “Social media” spreads info about products and services at an accelerated rate. “spread the
word” of inadequate delivery
• In 1960s and 1970s- companies began to develop detailed market strategies that focused on
creating and capturing loyalty.
• Strong engineering, design and manufacturing function were needed to support these
market requirements.
→ Design engineers had to translate customer requirements into product and service
specifications- which had to be produced at high level of quality at a reasonable
cost.
• As demand for new products increased in the 1980s, organisations had to become flexible
and responsive to modify existing products, services and processes, or to develop new ones
to meet ever-changing needs
• Organisational capabilities improved in the 1990s, managers began the material and service
inputs from suppliers had a major impact n their ability to meet customer needs
→ This led to an increased focus on the supply base and the responsibility of
purchasing
→ Getting the right products and services to customers at the right time, cost, place
and in the right condition, as well as quantity constituted an entirely new type of
challenge
→ The 21st century has spawned time reducing information technologies and logistic
networks aimed at meeting these new challenges
→ The availability of low- cost alternatives has led to unprecedented shifts towards
outsourcing and off shoring
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, → The impact of china as a major world competitor poses a tremendous challenge to
U.S. firms in both the manufacturing and services sectors.
➢ Services sector now accounts for 70% of the gross domestic product, new strategies
are required for effective supply management in this sector
• Changes have made 21st century organisations realise how important it is to manage their
supply base.
→ They must be involved in the management of the suppliers that provide materials
and services.
→ They must also be concerned with the network of downstream firms responsible for
delivery and aftermarket service of the product to the end customer.
Several factors driving an emphasis on supply chain management
1. The cost and availability of information resources among entities in the supply chain allow
easy linkages that eliminate time delays in the network.
2. The level of competition in both the domestic and international markets requires
organisation to be fast, agile, and flexible.
3. Customer expectation and requirement s are becoming much more demanding
4. Ability of an organisation’s supply chain to react rapidly by managing risk minimises
disruptions in both supply and downstream product or services to mitigate the impact on
lost sales.
1.2 WHY PURCHASING IS IMPORTANT
INCREASING VALUE AND SAVINGS
• Many features that make their way into final products originate with suppliers.
• The supply base is an important part of the supply chain
• Supplier capabilities can help differentiate a producer’s final good or service, increasing their
value to the final consumer.
In the manufacturing sector
• The percentage of purchases to sales averages 55 percent.
• This means that for every rand / dollar of revenue collected on goods and services sales,
more than half goes back to suppliers
• Purchasing is clearly a major area for cost savings.
→ Cost saving also encompasses avoiding costs through early involvement with design
and proactively responding to supplier requests for price increases.
BUILDING RELATIONSHIPS AND DRIVING INNOVATION
SAVINGS COME IN DIFFERENT FORMS
The traditional approach; bargain hard for price reductions
Newer approach is to build relations with suppliers to jointly pull costs out of the product or service
and expect suppliers to contribute innovative ideas that continually add value to the firm’s products
and services.
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,Examples of supply managers building relationships:
• Food producers are realising there are benefits to taking a new approach to supplier
relations
Traditional approach: negotiate hard with suppliers and squeeze their profits
Newer approach (progressive): to develop strategic partnerships and open innovations
between purchaser sand selected suppliers of inputs, packaging and equipment to produce
breakthrough solutions and sustainable growth.
Working with suppliers, certain producers have developed strategies to optimise:
• Formula costs
• Select more efficient raw materials
• Improve production processes
• Reduce processing tie
• Obtain higher yields
• Achieve a better shelf life/ life span an d stability
→ Outcome of relationship: ability to produce traditional (food) products with better
profits.
EXAMPLE: CARGILL CORPORATION- FOOD PRODUCER
➢ Created a field school for farmers to increase yields and improve quality , resulting in
higher incomes
➢ Farmers trained in good an safe farming techniques
➢ Program focused on grower of various oil seeds – vital part of Cargill’s business.
For these relationships to work – both buyer and supplier must agree to acceptable payback from
their investments so that each realises a positive gain.
If supplier’s strategic intent is to be the customer of choice, they have to provide necessary technical
infrastructure to assist the buyer. With both parties cooperating, a climate of trust emerges between
the parties setting the stage for innovative ideas.
In food industry:
➢ Trend among the affluent consumers for healthy convenience products; wants to
enjoy reduced preparation time without sacrificing appealing taste and healthy
fares.
➢ Suppliers can contribute novel ideas about techniques that preserve taste and with
innovative use of natural ingredients – allowing food producers to tout the health
benefits of their products as well as the convenience
➢ Enjoy higher mark-ups= greater profits for both parties.
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, 21st century- professional trained food industry buyer is looking to attract, retain and maintain the e
best suppliers in areas assisting the firm obtain competitive advantage:
➢ Product formulation.
➢ New product development
➢ research and innovation
The results will be new and innovative offerings for the purchaser’s company which are gained by
tapping the creative talent of their supply base. Given the global nature of the food business, such
partnerships will involve suppliers worldwide.
IMPROVING QUALITY AND REPUTATION
• Purchasing and supply management also has a major impact on product service and quality
• Companies are seeking to increase the proportion of parts, components and services they
outsource in order to concentrate their own areas of specialisation and competence
→ Increases the importance among purchasing, external suppliers and quality
The link between supplier quality and product quality
→ Sourcing components or ingredients needs to be accounted for and controlled
→ Key component and ingredients are sometimes sourced in small, poorly regulated
factories
→ One organisation can buy from another , but the other firm may not be able to
trace the supplies in a foreign region than it can domestically
→ Supplier selection process is important in the entire supply chain, from raw material
to finished product
→ Lapses in managing supplier quality potentially tarnish a firm’s reputation
REDUCING TIME TO MARKET
• Purchasing acting as the liaison between suppliers and engineers can also help improve
product designs
• Companies that involve suppliers early achieve an average 20 percent improvement on
material costs, material quality and product development times.
• Development teams that include supplier receive more improvement suggestions
• Early supplier involvement in the design process is a way purchasing can begin to add new
value and contribute to increasing competitiveness.
GENERATING ECONOMIC IMPACT
The power of organisational purchasers as a group is significant
• The ISM report on business is one of the most closely followed indicators of economic
activity.
• Surveys purchasing managers in both the manufacturing and non manufacturing sector is
closely monitored by the financial sector
CONTRIBUTING TO COMPETITIVE ADVANTAGE
The focus on purchasing is critical to gaining a competitive advantage. Tan indication of this
enhanced status, reputation and recognition is the higher salaries being paid to purchasing
professionals.
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