Appendix A: Stages of development of purchasing
Keough’s concept on the development stage of the purchasing function (table A1) provides a useful tool to assess the purchasing function within Company X Foods Europe. Keough (1993) states that the purchasing function within an organisation can go through five stages of development. It is not necessary that an organisation goes through all five steps but it gives a good indication of the stage of development of the purchasing function of an organisation.
Development stage
“Serve the factory”
“The lowest cost per unit”
“Co- ordinated purchasing”
“Cross functional purchasing”
“World-Class Supply Management”
Organisation form
-Only at factory level
-Report to production management
-Purchasing at BU level -Professional buying
-Combination of central and co-ordinated buy
-Lead buyers -Purchasing commission
-Central-led but carried out by buyer
-Cross-functional teams
-Cross-functional supplier
development team -Supplier at own location
Core skills -Administration Operation oriented
-Competitive attitude -Negotiation skills
-National contracting -Establishing database
-Supplier development -Cross- functional problem solving -Team player
-Bench marking suppliers -Supporting suppliers -Relation management Example of
activities
-Order processing -Good market analysis -Play off suppliers
-Co-operation with users -Establishment of purchasing procedure
-Supplier qualification -Make vs. buy Value engineering -Total cost concepts
-Competitive partnership -Technological co-operation -Continuous improvement -Supplier performance measurement TABLE A1STAGES OF DEVELOPMENT
1. “Serve the factory”
At his stage the primary task of the purchasing function is to keep the production running continually by supplying the necessary inputs on time. The purchasing function is very much organised centrally and is located low in the organisation hierarchy. The head of purchasing reports to the production or material manager. The function has an administrative and operational orientation
2. “Lowest cost per unit”
Because management becomes aware of the proportion of money that is expended by purchasing, the purchasing function is be given a savings target. This can be realised by putting pressure on suppliers, encouraging competition among supplier and via skilful negotiations. At this stage the purchasing function might report to the general management of the factory.
3. ‘Co-ordinated purchasing”
At this stage it is realised that different business units buy the same products from the same suppliers under different conditions. The synergy of co-ordinated purchasing is recognised as means to further reduce purchase cost. Some purchasing activities are organised at a central level. The purchasing activities are still considered as the responsibilities of the purchasing department only and the line manager is not involved in carrying out the purchasing policy.
4. “Cross-functional purchasing”
At this stage, management becomes aware that the great potential cost savings are not in the negotiating and contracting phase but more at the precedent phases of purchasing, i.e. product specification and supplier selection. To achieve maximal cost savings, a total cost concept should be adopted. The purchasing function alone is not enough to realise such a concept and a cross-functional team is required.
5. “World-Class Supply Management
In this stage of development, factories are working with a small number of suppliers that belong to the best in the industry. The purchasing function has its focus on the selection and benchmarking of suppliers, the integration of suppliers into their production system and the provision of technical and logistic support to their suppliers. Continuous improvement is the catchword for both parties.
From the table below the stage of development of the purchasing function of Company X Foods Europe can be determined. Company X wants to close the gap with a World Class Supply Chain within the next three years by establishing a global buying programme and establishing a world class manufacturing programme. Although Company X is on the right path, to achieve a World Class Supply Chain a lot of work still has to be done.
TABLE A2ESM STAGE OF DEVELOPMENT Core skills Administra
tion
Operati onal
Comp.
attitude
Negotiatio n skills
Nat.
contract.
Establ.
Supplier database
Supplier dev.
Cross- functional team
Benchmark supplier
Supporting supplier
Relationship management
Serve the
factory ++ ++
The lowest
cost per units ++ ++ ++ ++
Co-ordinated
purchasing ++ ++ ++ ++ ++ ++ +/-
Cross- functional
purchasing ++ ++ ++ ++ ++ ++ +/- +/- +/-
World- class supply
management ++ ++ ++ ++ ++ ++ +/- +/- +/- + +
Note: ++ well developed; + developed; +/- unconvincing; - not found
Appendix B: Organisational chart ESM Dairy Group
FIGURE B1ORGANISATIONAL CHART ESM DAIRY PURCAHSING GROUP Alastair Lindsay
Euro Supply Group Manager
Daniela Ettogrammi Secretary
Laurent Azoulay Material Group Manager
David Kamnik Material Group Manager
Cliodn ha Dijkshoorn Material Gro up Manager
?
Material Group Manager
Leen Warnaar Technical Advisor Julie Dorangeon
Commercial Assistant
Appendix C: The Dupont analysis
The effect of a reduction of the material cost on the Return on Investment (ROI) of a company can be calculated with a Dupont analysis. Using the figures presented in the Annual Report of 2003, this analysis can be done for Company X. (Figure C1)
FIGURE C1THE DUPONT ANALYSIS
First of all the total material costs are calculated. These account for 38 % of total sales.
A 1% reduction of these material costs can therefore result in an increase of the profits with E 163.
The corresponding increase of the Profit before interest and amortisation is also E 163. This results in a margin of 10.25 % and a ROI of 12.92%.
The increase in ROI is then:
This calculation shows that a 1% decrease of the material costs can results in a 3,5 % increase of the ROI.
Return on average invested capital
12.48 %
12.92 %
Asset turnover 1.15
Total sales E 42942
Total assets E 37377
Margin 10.87 %
Profit (BEIA) E 4666
Total sales E 42942
Profit E 3011
Profit (IA) E 1655
11.25 %
E 4829
All amounts x 1000 E 3174 1 % reduction of
material cost
16317 42942
38
38%xTotal sales %xE E
costs material
Total = = =
3174 3011
163 16317
1 + = +E = E
= % x E Profit E
Profit
old % ROI
old ROI - new
ROI 35
48 12
48 12 92
12 .
% .
% .
%
. − =
=
Appendix D: Audit frequencies
The evaluation by questionnaire for approved low-risk material suppliers needs to be repeated every 3 years. If complaints or supplier performance measurement results indicate problems or the risk evaluation results for the delivered materials have changed, an audit needs to be performed. High and medium risk material suppliers have to be audited regularly. Table D1 gives guidance for the audit frequency based on material risk and audit rating. In addition to the regular audit scheme, extra audits may be necessary in case of serious non-compliance or drastic changes.
MATERIAL RISK
AUDIT
RATING NEXT AUDIT AUDIT FOLLOW-UP
Low A No next audit Risk Category reviewed at regular intervals (3 years) Verification of audit result by questionnaire (3 years) Low B1 No next audit Verification of actions required within 1 year
Verification of audit result by questionnaire (3 years) Medium A 3-4 years
Medium B1 2-3 years Verification of actions required within 1 year High A 3 years Regular quality review
High B1 2 years Verification of actions required within 6 months-1 year Regular quality review
TABLE D1:AUDIT FREQUENCY
The regular audit scheme allows fairly long periods between audits, even for high-risk materials. To maintain the contact with the supplier additional “quality review meetings” should be set up with key suppliers. The frequency is not mandated, but yearly meetings are proposed. Quality performance and supplier performance measurement results should be reviewed and new developments discussed. Poor supplier performance can cause cancellation of the original approval and the supplier can be de-listed.
Appendix E: Overview of portfolio models
TABLE E.1OVERVIEW OF PORTFOLIO MODELS
Portfolio models Year Classification dimensions Categories Materials Routine items Leverage items Bottleneck items Strategic items Supply situations Plain suppply situation
Internally problematic supply situation Externally problematic supply situation Complicated supply situation
Purchases Non-critical Bottleneck Leverage Strategic Relationships Market exchange Captive buyer Captive supplier Strategic partnership Supply strategies Efficient processing Exploit power Volume insurance Balanced relationship Supplier's dependence
Buyer's dependence Gelderman and van Weele 2000
Buyer's specific investment Supplier's specific investment 1999
Bensaou
Difficulty of managing the purchase situation
Strategic importance of the purchase
Olsen and Ellram 1997
Control need of the internal market demand
Control need of the external supply market
Van stekelenborg and Kornelius 1994
Kraljic Importance of purchasing
Complexity of the Supply market 1983
