Chapter 2: The task of purchasing and

supply management
LEARNING OBJECTIVES
After you have studied this chapter, you should be able to
• explain the essentials of the management task
• illustrate, explain and give examples of the different
levels of purchasing planning and objectives
• summarise purchasing and supply planning on a
tactical and operational level
• discuss a centralised purchasing and supply
organisational structure for a large organisation, and
point out the advantages and disadvantages of the
structure
 LEARNING OB
• discuss a decentralised purchasing and supply
organisational structure for a large organisation, and
point out the advantages and disadvantages of the
structure
• explain the increasing use of cross-functional teams in
purchasing and supply management
• summarise coordination as a management task in
purchasing and supply management, and point out why
this task is becoming more important
• explain the purpose of performance evaluation
• point out the problems relating to the performance
evaluation of the purchasing and supply function
• summarise and illustrate the process of performance
evaluation
• identify and explain the three different levels of
performance evaluation, and indicate appropriate
measures.
INTRODUCTION
• Purchasing and supply management is one of the most
important management functions.
• Management is the process of planning, organising,
coordinating and controlling all the resources of the
organisation effectively and efficiently in order to attain
the objectives of the organisation as determined by
management (Griffin, 2013: 5).
2.1PURCHASING AND
SUPPLY MANAGEMENT
AS PART OF BUSINESS
MANAGEMENT
• Purchasing and supply management is executed as an
integrated part of the organisation`s broader general
management function
– Planning
– Organisational structure
– Coordination
– Control
2.2PLANNING FOR
PURCHASING AND
SUPPLY MANAGEMENT

THE NATURE OF PURCHASING AND SUPPLY

PLANNING
• Planning is the continuous process of determining the
future position of the organisation and deciding on the
strategies required to reach that position
• Purchasing and supply planning is the first
responsibility of purchasing and supply management.
 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT

LEVELS OF PURCHASING AND SUPPLY

PLANNING AND OBJECTIVES
Involved at three levels in the organisation:
• Strategic planning
– Top management (long-term or strategic planning)
• Tactical planning
– Middle management level (medium-term or
integrated functional planning)
• Operational planning
– Lowest level (short-term or operational planning)
 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT
Figure 2.1 The relationship between the management level, the
formulation of objectives and the time frame of purchasing and supply
planning
 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT

Table 2.1 An example of the different levels of purchasing and supply

objectives
 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT

STRATEGIC PURCHASING AND SUPPLY

PLANNING
Strategic purchasing involves integrating the purchasing
and supply function with other functional disciplines
within the organisation.

See Example 2.1: Foschini planning huge Africa expansion

 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT
The following factors will determine whether the
purchasing and supply function can play a proactive or
reactive role in the strategic planning process:
• The extent to which the organisation depends on
purchased products, raw materials and services
• The importance that top management attaches to the
purchasing and supply function
• The extent of the evolutionary development of the
purchasing and supply function within the organisation
• The ability of the purchasing and supply manager to
effect a shift in emphasis from tactical to strategic
purchasing action and to function effectively in
multifunctional (cross-functional) or inter-organisational
teams
• The importance of supplier relations and long-term
contracts
• The willingness of top management to invest in
integrated systems
 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT

The following are examples of strategies which can be

developed by supply management
• Cost reduction strategies
• Supply chain support strategies
• Environmental change strategies
• Competitive-edge strategies
• Risk management strategies
 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT

TACTICAL PURCHASING AND SUPPLY PLANNING

• Executed at middle management level
• Implement plans formulated at strategic level
• Develop purchasing and supply strategies
• Plan resource requirements applicationThe four
categories of purchasing and supply planning at middle
management level are:
– Needs
– Purchasing and supply programme planning
– Planning the purchasing and supply system
– Extraordinary projects
 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT

OPERATIONAL PURCHASING AND SUPPLY

PLANNING

Figure 2.1 The relationship between the management level, the

formulation of objectives and the time frame of purchasing and supply
planning
 PLANNING FOR PURCHASING AND SUPPLY MANAGEMENT

• Objectives at operational level are set for each of the

following categories at middle management level.
• Materials requirement planning
• Supply planning
• Planning the purchasing and supply system
• Extraordinary projects
2.3ORGANISATION OF
PURCHASING AND
SUPPLY MANAGEMENT

• Entails creation of structures, assigning tasks and

resource allocation
• Process involves decision on:
– the position of the purchasing and supply function
– internal organisational structure
– cross-functional teams
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT
POSITION OF THE PURCHASING AND SUPPLY
FUNCTION IN THE ORGANISATIONAL
STRUCTURE
The position or level of the purchasing and supply
function is influenced by the following factors:
• Extent of monetary value of purchasing expenditure
• Perceptual contribution of purchasing and supply
function to organisation’s profit
• Possibility of increasing organisation’s profitability
further
• Variety and nature of products purchased and degree
of expertise required
• Characteristics of supplier market
• Extent to enter market quickly
• Size of organisation
• Management’s commitment to integration, outsourcing
and supplier partnering
• Importance that management attaches to purchasing
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Most popular organisational structures:

– Centralised
– Decentralised
– Hybrid or combination
– Cross-functional teams
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Centralised purchasing and supply organisational

structure
The authority for the purchasing and supply function is
vested in one person or dedicated team.

Advantages of a centralised organisational structure

• Materials and products are standardised
• Negotiating power is increased and volume discounts
are made possible
• Staff are afforded the opportunity of becoming experts
• Control is improved
• Administrative costs are reduced
• Supplier relations are enhanced
• Information systems integration is facilitated
• Duplication of efforts is eliminated
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Disadvantages of a centralised organisational structure

• Slow response time to regional plants
• Resentment from geographically dispersed business
unit management
• Tendency to bypass the central buying office
• Less integration with user departments
• Top heavy staff structure
• Lack of insight into the requirements of dispersed plant
units
ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Figure 2.2 Centralised

purchasing and supply
in a centralised
multiplant organisation
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Decentralised purchasing and supply organisational

structure
Purchasing by different departments, branches or plants,
while each of them enjoys an important measure of
autonomy on decision-making regarding the purchasing
and supply function.
ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Figure 2.3
Decentralised
multiplant
purchasing and
supply
organisational
structure
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Advantages of a decentralised organisational structure

• Better relations between decentralised purchasing and
other functions
• Good service delivery to regional plants
• Faster reaction to user departments in emergencies
• Goodwill generated by support of local suppliers
• Greater autonomy for profit centres
• Interdivisional competition for improved purchasing
performance
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Disadvantages of a decentralised organisational structure

• Loss of economies of scale
• Confusion among suppliers when dealing with many
offices
• Duplication of staff and facilities
• Difficulties in control over the function
• Greater likelihood of communications breakdown
• Focus on local units and under-emphasis on strategic
issues
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Combined purchasing and supply organisational structure

Common requirements are purchased centrally, while
individual requirements are purchased on a decentralised
basis.

Figure 2.4 combined organisational structure for purchasing and supply

 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

INTERNAL ORGANISATIONAL STRUCTURE OF

PURCHASING AND SUPPLY
• The internal organisation of the purchasing and supply
function is directly related to:
• the activities that have to be performed.
• Specialist groups within the purchasing function are
formed
• Factors issues such as the skills required for various
activities, the nature of the supplier system, purchasing
methods and the interrelationships that are formed as
a result, characteristics of internal relationships
between groups
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Integration with other functions

• Certain buyers purchase from certain suppliers only
• Certain buyers purchase certain commodities only
• Certain buyers perform certain tasks only such as
negotiations in multifunctional teams
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

CROSS-FUNCTIONAL TEAMS
• Comprises of expert personnel from different functional
areas within the organisation.
• May be created on a part-time basis to achieve a
specific goal or outcome
• Pre-requisites for successful cross-functional teams
• Executive sponsorship
• Effective team leaders
• Qualified team members
ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Figure 2.5 Cross-

functional
approach to new
product
development
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Advantages
• Different perspectives, inputs and expertise of team
members
• Responsiveness to user needs
• Increased acceptance by users of the products
• Understanding by other functions of the range of trade-
offs considered in making a final purchase
• Reduced time to solve problems or complete an
assigned task as a result of synergy
• Increased innovation because of informal
organisational structures
• Joint agreement and ownership of decisions among the
members
• Enhanced communication between functions and with
top management
• Overcoming organisational resistance
 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Challenges
• Additional investment in scarce resources may be
necessary
• Role conflicts may emerge
• Overload for key members may develop
• Continuity cannot be guaranteed
• Senior management may not recognise individual
contributions

See Case study: 75% of cross-functional teams are dysfunctional

 ORGANISATION OF PURCHASING AND SUPPLY MANAGEMENT

Table 2.3 key characteristics of successful and unsuccessful purchasing

and supply teams
2.4COORDINATING
PURCHASING AND
SUPPLY MANAGEMENT

THE NATURE OF PURCHASING AND SUPPLY

COORDINATION
• There is a relationship of reciprocal, mutual
dependence between the activities of the purchasing
and supply function, between purchasing and supply
and other business functions, and between purchasing
and supply and suppliers.
• The purchasing and supply function’s direct contact
with the external business environment also
contributes to the complexity of purchasing and supply
coordination.
 COORDINATING PURCHASING AND SUPPLY MANAGEMENT

COORDINATION BETWEEN PURCHASING AND

SUPPLY AND OTHER FUNCTIONAL AREAS
• Lateral purchasing and supply coordination has mutual
advantages for both the purchasing function and the
other organisational functions.
• The creation of an effective organisational structure
and communication channels are particularly important
tools or aids for coordination.
 COORDINATING PURCHASING AND SUPPLY MANAGEMENT

COORDINATION BETWEEN PURCHASING AND

SUPPLY AND THE SUPPLIER SYSTEM
• Two dimensions:
– Whole supplier system
– Activities of individual suppliers
• Coordination with the supplier system is difficult
• Coordinating mechanisms:
– Open communication
– Strategic alliances
– Integrated systems
– Conscious motivation of suppliers
– Standardisation of specifications, purchasing
documents and purchasing procedures
2.5CONTROL:
PERFORMANCE
EVALUATION OF THE
PURCHASING AND
SUPPLY FUNCTION
Control process consisting of a systematic measurement
on a quantitative basis and subjective judgement on a
qualitative basis of critical dimensions of supply
management aimed at a value assessment of the actual
performance, and at providing management information
to all functional groups linked to the supply chain.
 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY
FUNCTION
OBJECTIVES AND BASIC PRINCIPLES OF
PERFORMANCE EVALUATION
The most important objectives for the performance
evaluation of the purchasing and supply function:
• To improve purchasing and supply performance (the
primary objective)
• To provide of information as a basis for rational
decisions
• To motivate and enhance personnel.
• To place the internal reorganisation of purchasing and
supply activities on a rational footing
• To establish an objective basis for comparing the
purchasing and supply performance between different
divisions within organisations and also between
organisations
 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY
FUNCTION

Principles:
• Performance evaluation costs must be weighed up
against the benefits derived
• Both qualitative and quantitative measures must be
used to assess performance
• Performance evaluation requires a sound information
database
• Performance evaluation must continually be adapted to
changes in the organisation and its environment
• Because of the divergent nature of purchasing and
supply activities, there is no generic evaluation system
• Performance must be evaluated with the aid of several
measures
 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY
FUNCTION
DIFFICULTIES RELATING TO THE PERFORMANCE EVALUATION OF
THE PURCHASING AND SUPPLY FUNCTION

Difficulties of purchasing performance evaluation

• Large number of diverse activities makes it difficult to
build up an objectively based overall picture of
purchasing and supply performance.
• Difficult to express the performance of various
purchasing and supply activities in quantitative terms
• Difficult to set quantitative standards as control
systems may be less precise and meaningful than their
quantitative nature would indicate
• Traditional purchasing objectives are of little practical
value in the performance evaluation of the purchasing
and supply function
• Performance is directly influenced by both internal and
external factors
 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY
FUNCTION
Figure 2.6 external and internal factors influencing the purchasing and
supply function
 CONTROL: PERFORMANCE EVALUATION OF THE PURCHASING AND SUPPLY
FUNCTION

STEPS IN THE PROCESS OF EVALUATING THE

PURCHASING AND SUPPLY FUNCTION
The following steps are generally accepted in the control
process:
• Determining the objectives of purchasing and supply
• Determining appraisal factors and criteria for success
• Performing internal audits, self-governance or self-
assessment
• Exercising managerial control in response to results
 CONTROL: PERFORMANCE
EVALUATION OF THE PURCHASING
AND SUPPLY FUNCTION

Figure 2.7 steps in the

evaluation process of the
purchasing and supply
function