Procurement Strategy by Derek Hendrikz

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Information about Procurement Strategy by Derek Hendrikz
Leadership & Management

Published on June 28, 2014

Author: derekhendrikz



Development of a procurement strategy and making the aquisition and purchasing choice by Derek Hendrikz. passive, independent, supportive and integrative strategies. Outsourcing vs. insourcing and bottle neck, critical, routine and leverage sourcing discussed.

Procurement Strategy derek hendrikz

Copyright © 2014 Derek Hendrikz Consulting

The Interdependence of Delivery Support Delivery& Production Customer Management Effectiveness Strategy Efficiency Policy

Do our cost calculations correctly reflect reality? Do our cost values effectively represent the effort which was spent to manufacture a product or deliver a service?

• There is no way to directly measure costs. • Cost measurement is always an indirect process, sometimes very indirect. • Behind cost measurement are human beings who can make mistakes and misinterpret the rules. • In worst cases, there could be humans who have an interest in distorting cost values.

• Activity-based costing struggle to locate activities to overall organisational functioning. • Balanced scorecard methodology has generic perspectives that do not necessarily represent the essence of the organisation. • Strategy cannot be linked to organisational action, resources and cost, because strategy represents +- 20 to 30% of what happens in the organisation. • Current organisational structures are ‘one-parent’, two-dimensional structures. • The organisation reports to people and not to outcomes. • Senior management do not understand the essence and nature of mission and vision.

•Structure; •Systems; and •Culture.

Strategy • Goals & Values • Resources & capabilities • Structure & systems • Culture • Competitors • Customers • Suppliers • Substitute Producst • New Entrants • PEST

Communicating & Linking •Communicating & Educating •Setting Goals •Linking rewards to performance measures Clarifying and Translating the Vision and Strategy •Clarifying the Vision •Gaining Consensus Planning & Target Setting •Setting Targets •Aligning Strategic Initiatives •Allocating Resources •Establishing milestones

The Procurement Mission… We acquire goods and/or services at the best possible total cost, in the right quantity and quality, at the right time, in the right place and from the right source for the direct benefit or use of our organization, generally via a contract

The Strategic Outcomes of Procurement: 1. Vendor Selection; 2. Vendor Compliance Management; 3. Acquisition; and 4. Contract Management (SLA & Works)

The Structure of Procurement Strategy Supply Chain Strategy Procurement Strategy Strategic Sourcing Manufacturing Strategy Lean Manufacturing Quality Management Organisational Strategy Inventory Management Transaction Management Supplier Relationship Management

Making the Procurement Decision

Integrative Supportive Independent Passive

Strategic Levels in Procurement Passive: The procurement department does not have its own strategic direction and primarily reacts to requests from other functional areas. Independent: The procurement department has adopted strategic practices, but has not aligned these with the organisations corporate strategy. Supportive: The procurement department has adopted strategic practices and is supporting the organisations corporate strategy through their use. Integrative: The procurement department has become an integral part of the organisations corporate strategy and is actively working with other functional areas to implement that strategy.

Vertical Integration: Vertical integration takes place where the organisation performs as many activities in the supply chain as possible, from the supply of primary materials to delivery to end customers. Outsourcing: This is the practice where an organisation focuses on doing what it does best (its core competencies) and using outside suppliers to perform and supply all other ‘non-core’ activities.

• Provides management with maximum amount of control over performance and cost. • Retaining in-house expertise. • Full utilisation of in-house assets. • Reduced risk in continuity of supply. • Reduced risk of commercial secrecy or confidentiality. • Increased quality control.

• Reduced Cost. • Access to suppliers expertise. • Increased capacity, leading to faster and more flexible supply. • Reduced capital employment. • Reduced headcount. • More accurate operating cost. • Concentrate on core business activities. • Reduced inventory.

Project- based Work Process- based Work Outsourcing Insource

Overhead Cost Variable Cost VS Enhanced through in- sourcing Enhanced through out- sourcing

Pro’s & Con’s

• Supplier much more responsive to customer needs. • Reduces the amount of inventory held by the customer. • Stronger relationship with suppliers. • Increased supplier involvement & commitment. • Strong customer / supplier relationship. • Suppliers involved in planning activities of the customer. • Push for supplier to build their capabilities for future customer requirements. • Suppliers involved in drawing up specifications. • Suppliers involved in product design & development. • Customers can use suppliers in-house technologies & expertise. • Customer to receive more cost-effective and higher quality designs.

• Fosters competition amongst suppliers. • Enables customer to play suppliers of against each other in order to achieve lowest possible price. • Lowers risk when there is a problem with existing suppliers. • Lowers risk of supplier holding the customer ransom. • Lowers risk of inability to supply by one supplier.

HIGH Risk LOW Critical Items/Potential Bottlenecks Example: scientific equipment Goal: quick turnaround, minimal disruption of day-to-day operations Natural owner: user’s department Role of Procurement Office: support for user’s department Strategic Items Example: capital improvement Goal: maximum value for money Natural owner: user department with advice from Procurement Officer Role of Procurement Office: part of cross-functional team Routine Items Example: catering supplies Goal: efficiency of process, cost reduction Natural owner: user department with advice from Procurement Office Role of Procurement Office: leads sourcing (user’s department leads execution Leverage Items Example: office supplies Goal: lowest price Natural owner: Procurement Office Role of Procurement Office: centralised procurement, with no exceptions LOW Savings Potential HIGH

Bottleneck items: Here it is important to ensure that supplies are not interrupted. Critical items: Here the emphasis is on co-operation of suppliers. Routine items: Here the emphasis should be on the most efficient way to procure the product. Leverage items: Here it is important to find the best deal.

Bottleneck items: Specialist manufacturing equipment. Critical items: Expansion of factory space. Routine items: Safety gear. Leverage items: Stationary.

• Low Risk • High Cost • Low Risk • Low Cost • High Risk • High Cost • High Risk • Low Cost Critical Items Bottle Necks Routine Items Leverage Items

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