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MNP2601- Summary Notes

Purchase Management (University of South Africa)

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CHAPTER 1

INTRODUCTION TO PURCHASING AND SUPPLY CHAIN MANAGEMENT

 Understand the differences between purchasing and supply management

 Understand the differences between supply chains and value chains

 Identify the activities that are part of supply chain management

 Appreciate the importance of supply chain enablers

 Identify the historical stages of purchasing’s evolution

Re-shoring involves bringing some sourcing back to the United States, while near-shoring involves

evaluating suppliers located closer to United States. Such suppliers may be located in Mexico and Central

and South America.

The supply base consists of all the suppliers that provide and organization with its materials and services. In

some organization’s this supply base extends to the network of downstream firms responsible for delivery

and aftermarket service of the product to the end customer. The realization that competitive advantage

could be achieved by managing both upstream (suppliers) and downstream (customers) flows led to a focus

on supply chains and supply chain management.

Several factors are driving an emphasis on supply chain management.

1. First, the low cost and increased availability of information resources among entities in the supply

chain allow easy linkages that eliminate time delays in the network.

2. Second, the level of competition in both domestic and international markets requires organizations

to be fast, agile, and flexible.

3. Third, customer expectations and requirements are becoming much more demanding.

4. Fourth, the ability of an organization’s supply chain to identify and mitigate risk minimizes

disruptions in both supply and downstream product or services to mitigate the impact on lost sales.

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 customer.

Savings come in different forms; the traditional approach is to bargain hard for price reductions. A 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 a firm’s products and services.

Poor quality is only one supply threat; others include natural disasters, financial instability, operational

problems, transportation delays, and so on. These risks are magnified by sourcing strategies that

emphasized global sourcing, single sourcing, and JIT inventory. Certainly there were benefits realized from

these strategies, however, often the increased vigilance necessary to mitigate and manage these additional

risks was not established.

Managing talent requires a constant focus on finding, developing, and promoting individuals who will

contribute to making the supply management department recognized as a strategic contributor to the

organization.

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PURCHASING AND SUPPLY MANAGEMENT

Purchasing is a functional group (i.e., a formal entity on the organizational chart) as well as a functional

activity (i.e., buying goods and services). The purchasing group performs many activities to ensure it

delivers maximum value to the organization. Examples include supplier identification and selection; buying,

negotiation, and contracting; supply market research; supplier measurement and improvement; and

purchasing systems development. Purchasing has been referred to as doing “the five rights”: getting the

right quality, in the right quantity, at the right time, for the right price, from the right source. In this text

we will interchange the terms “purchasing” and “procurement.”

Supply management is a strategic approach to planning for and acquiring the organization’s current and

future needs through effectively managing the supply base, utilizing a process orientation in conjunction

with cross-functional teams (CFTs) to achieve the organizational mission. Similar to our definition, the

Institute for Supply Management defines supply management as the identification, acquisition, access,

positioning, and management of resources and related capabilities an organization needs or potentially

needs in the attainment of its strategic objectives.

Supply management requires pursuing strategic responsibilities, which are those activities that have a

major impact on the long-term performance of the organization. These long-term responsibilities are not

pursued in isolation, but should be aligned with the overall mission and strategies of the organization.

These strategies exclude routine, simple, or day-to-day decisions that may be part of traditional purchasing

responsibilities. The routine ordering and follow-up of basic operational supplies is not a strategic

responsibility. The development of the systems that enable internal users to order routine supplies,

however, is considerably more important.

Supply management is a broader concept than purchasing. Supply management is a progressive approach

to managing the supply base that differs from a traditional arm’s-length or adversarial approach with

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sellers. It requires purchasing professionals to work directly with those suppliers that are capable of

providing world-class performance and advantages to the buyer.

Think of supply management as a strategic and supercharged version of basic purchasing. Supply

management often takes a process approach to obtaining required goods and services. We can describe

supply management as the process of identifying, evaluating, selecting, managing, and developing suppliers

to realize supply chain performance that is better than that of competitors. We will interchange the terms

“purchasing,” “supply management,” and “strategic sourcing” throughout this book.

Supply management is cross-functional, meaning it involves purchasing, engineering, supplier quality

assurance, the supplier, and other related functions working together as one team, early on, to further

mutual goals. Instead of adversarial relationships, which characterize traditional purchasing, supply

management features a long-term, win-win relationship between a buying company and specially selected

suppliers. Except for ownership, the supplier almost becomes an extension of the buying company. Supply

management also recognizes the mutual benefits to both parties, through shared information, provisions

for on-site resources, and frequent help to suppliers in exchange for dramatic and continuous performance

improvements, including steady price reductions. In short, supply management is a new way of operating,

involving internal operations and external suppliers to achieve advances in cost management, product

development, cycle times, and total quality control.

Organizationally, leading and coordinating strategic supply management activities have largely become the

responsibility of the functional group called purchasing. Practicing professionals often use the terms

“supply management” and “purchasing” interchangeably. Through the above discussion we have sought to

clarify some of the differences while recognizing that good purchasing and supply management practices

can have significant impact on the organization’s overall performance.

SUPPLY CHAINS AND VALUE CHAINS

These researchers break down the concept into three areas and separate supply chains from supply chain

orientation and from supply chain management

A supply chain is a set of three or more organizations linked directly by one or more of the upstream or

downstream flows of products, services, finances, and information from a source to a customer. It is

important to acknowledge that anytime business is conducted a supply chain will exist.

A supply chain orientation is a higher-level recognition of the strategic value of managing operational

activities and flows within and across a supply chain.

Supply chain management then, endorses a supply chain orientation and involves proactively managing the

two-way movement and coordination of goods, services, information, and funds (i.e., the various flows)

from raw material through end user. According to this definition, supply chain management requires the

coordination of activities and flows that extend across boundaries. Organizations that endorse a supply

chain orientation are likely to emphasize supply chain management.

Regardless of the definition or supply chain perspective used, we should recognize that supply chains are

composed of interrelated activities that are internal and external to a firm. These activities are diverse in

their scope; the participants who support them are often located across geographic boundaries and often

come from diverse cultures.

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