Purchasing and supply management 7

Badenhorst-Weiss JA, Cilliers JO, Dlamini W, Ambe IM, Badenhorst-Weiss JA, Cilliers JO, Dlamini W, Ambe IM

• Publisher: Van Schaik Publishers
• Year: 2018
• ISBN:
  9780627035487
• Topic: Education
• Subtopic: Higher Education

An introduction to the current concepts and management tools to make purchasing and supply management more efficient in functioning within the broader concept of supply chain management. Covers not only basic principles but also the activities incumbent on a purchasing and supply manager. Addresses the relationships between purchasing and concepts such as strategic sourcing, and areas of application. Aimed at students in this field as well as practitioners in business.

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PART 1

PURCHASING AND SUPPLY MANAGEMENT: AN OVERVIEW

1. Chapter 1 Purchasing and supply management in perspective
2. Chapter 2 The task of purchasing and supply management
3. Chapter 3 The purchasing and supply process and procedures

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1

PURCHASING AND SUPPLY MANAGEMENT IN PERSPECTIVE

After you have studied this chapter, you should be able to

• describe the nature of the purchasing and supply function
• illustrate and explain the importance of purchasing and supply management for organisations
• explain the differences between purchasing management, supply management, logistics management, supply chain management and value chain management
• differentiate between environmental purchasing and sustainable purchasing.

INTRODUCTION

Purchasing is an activity that occurs regularly in every household. The decision to purchase for a household is often spur of the moment, taken on the premises of a supplier (e.g. the supermarket), and it seldom involves large quantities of products or services that are to be delivered over extended periods of time. More often than not, this kind of purchasing involves small to moderate amounts of money related to the total household budget.

Similarly, purchasing for organisations is part of practically all forms of business and has been a feature of business for centuries. One of the earliest written examples of a purchasing transaction was found on a centuries-old clay tablet discovered in Syria. The earliest procurement order dates from between 2800 and 2400 bc. The order was for “50 jars of fragrant smooth oil to be paid for in 600 small weights in grain” (Thai, 2001: 9–50).

In the case of commerce, purchasing is not equally important for all types of organisations. For example, for most small and medium-sized enterprises (SMEs), purchasing is not an important task, nor is it one that is identified as separate from managing the money or the stock of the business. Against this background, the reasonable question to ask is: why is it necessary to compile a textbook on the purchasing and supply activity if it is common knowledge for the ordinary person, an age-old business activity, or not even very relevant for some organisations?

The simple answer is that it is a fallacy to assume that expertise in the purchasing and supply function in commerce is based on own experience, to think that the purchasing task has been the same over many years, or to presuppose that the purchasing or procurement of goods and services is an elementary process for all organisations. In commercial purchasing and government procurement procedures, the transactions involve lengthier processes and are mostly for large volumes; the supply markets are frequently limited to a small number of potential suppliers; the industrial demand for products and services is a derived demand − 4dependent on the (sometimes fluctuating) sales of the organisation’s own products; the items or services to be purchased are often highly specialised; and most critically of all, the amount of money involved is so substantial that errors in procurement can cripple the organisations financially or even lead to insolvency. In addition, the commercial purchasing and government procurement function itself has evolved over time in reaction to a changing and uncertain business environment so that new knowledge and skills have become essential to perform the function successfully in industrial markets.

The evolution of purchasing consists of moving away from a narrowly focused tactical task to a broader and more strategic focus.

1.1 UNRAVELLING THE TERMINOLOGY CONFUSION

During the 1980s, terms such as purchasing, materials management network sourcing and supplier base reduction were used interchangeably. During the 1990s, the term procurement was used to indicate the broadening of the traditional purchasing function to include other related activities such as inbound transport, demand planning and receipt of purchased inventories. Currently, procurement is most often used in the sense of public procurement – the purchasing function of government entities. In South Africa, “public procurement” was replaced with “public supply chain management” to indicate a new era in public sector procurement.

Owing to changes in the global environment in the latter half of the 1990s, such as much more demanding customers, the globalisation of trade, shorter product life cycles and the burgeoning of information technology, the traditional purchasing function developed into a broader concept known as supply management. Supply management in turn was absorbed into a management philosophy known as supply chain management, which is again much broader than the management of the supply side of a particular organisation, and which is in essence a multifunctional and multi-organisational concept.

A number of terms in the field are incorrectly used interchangeably. Defining them as they will be used in this text will hopefully assist in untangling some of the confusion.

1.1.1 Purchasing, procurement and sourcing

Purchasing refers to a functional group in the organisational structure and also to a functional activity that involves buying materials, goods and services. Materials, goods and services are sometimes collectively called “commodities”. The objective of the purchasing function is ensuring the continuous flow of products and services, at the right time, in the right quantities, with the most advantageous conditions for the organisation.

Purchasing can have a short-term transactional approach to buying standard, often-used products or services. However, purchasing also has a strategic focus, one that takes the long-term goals of the organisation as a whole into consideration in decisions, and thereby, in a very real sense, contributes to the future direction that the organisation will take.

Purchasing and procurement are often used interchangeably. However, there is a distinction, albeit academic. According to Boateng (2016: 439), procurement represents purchasing in the wider and more modern concept of supply chain management, and he defines it as “one of the elements of supply chain management primarily focusing on the sourcing and purchasing of goods and services within the supply value chain”.

Procurement refers to the process of managing a broad range of activities that are associated with satisfying the organisation’s need for goods and services to keep the organisation going, for example parts or raw materials for the production process; thus, it focuses on the more strategic products and services.

What, then, is sourcing? Boateng’s (2016: 513) definition of it as “the process of identifying, conducting negotiations with and forming supply agreements with suppliers of goods and services” makes it clear that sourcing represents the activity of purchasing in the wider and more modern concepts of supply management and supply chain management. These concepts will be explored further later in this chapter.

The term strategic sourcing is also often used in purchasing and supply chain management circles. The strategic sourcing process is broader and more comprehensive than the procurement process. It is a result of the strategic development of the purchasing function in an 5organisation that is managed according to the modern, integrated supply chain management approach. The principle of this approach will be explored in Chapter 4.

There are different views on what is meant by “strategic sourcing”. One view is that it is the application of certain supply strategies (Wisner, Tan & Leong, 2016: 105):

Strategic sourcing means managing the organisation’s external resources in ways that support the long-term goals of the organisation. This includes the development of ethical and sustainable sourcing initiatives (including the make-or-buy decision), managing and improving supplier relationships and capabilities, identification and selection of environmentally and socially conscious suppliers, and monitoring and rewarding supplier performance.

The other view is that strategic sourcing is the application of a process of analysing all the materials, products and services (sometimes called commodities); categorising the items in groups; and then adopting different sourcing strategies to manage these groups. This approach to strategic sourcing will be discussed later in this chapter and also in Chapter 4. Aspects of the first view of strategic sourcing will be covered throughout the book.

1.1.2 Supply management

The increasing emphasis on the strategic role of purchasing eventually led, after 1994, to an evolution of the term purchasing into supply; purchasing management to supply management, or as the title of the book indicates − purchasing and supply management, indicating that both the functional and strategic issues will be covered in this text.

According to Boateng (2016: 535):

Supply management is the broad set of activities carried out by organisations to analyse sourcing opportunities, develop sourcing strategies, select suppliers, and carry out...

Table of contents

• Title Page
• Imprint Page
• Authorial Team
• Preface
• Contents
• PART 1: PURCHASING AND SUPPLY MANAGEMENT: AN OVERVIEW
• PART 2: MANAGING THE SUPPLY BASE
• PART 3: PURCHASING AND SUPPLY: KEY PERFORMANCE AREAS
• PART 4: INSTRUMENTS IN MANAGING PURCHASING AND SUPPLY
• PART 5: AREAS OF APPLICATION IN PURCHASING AND SUPPLY
• Index