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CHAPTER 1
PRINCIPLES OF SUPPLY CHAIN AND PROCUREMENT MANAGEMENT
Purchasing products and services poses risks for the organisation in terms of
availability of supply, difficulty and costs of securing the products and services.
The procurement function therefore has to develop a comprehensive picture of
the procurement profile and the procurement needs of the organisation. This
involves conducting the spend analysis of the past and projected spends for
materials/products and services as well as analysing the risks associated with
securing the goods and services. This helps the organisation to categorise
purchases of goods and services according to the difficulties of securing them
and their relative expenditure. Table 1.1 shows the categories of purchases,
their characteristics and possible strategies for reducing the risks associated
with purchases.
Table 1.1:
Categories of purchases [10, 23].
Category Typical characteristics
Possible strategies
Routine
(low risk
and low
spend)
Usually low value and low
volume items.
• Represent routine
procurement processing.
• Typically represent up to
90% of the organisation’s
suppliers.
• The suppliers are often
small businesses.
• Transaction costs can be
greater than the value of
the items themselves.
• There are generally
competitive local supply
markets for these items.
Minimise administrative efforts by:
• Procurement at the lowest practical
level (decentralised).
• Encouraging local suppliers to view
the organisation as a valuable client,
resulting in lower transaction costs.
• Focusing ordering and payment
terms with suppliers on transaction
efficiency (direct debiting,
aggregation of orders, monthly
accounts, payment cards, etc.).
Leverage
(low risk
and high
spend)
Commodities commonly used
across the entire organisation
with high volume.
• Represent commodities
where there is potential
for reduction of inventory
management, handling and
storage costs.
• Mature and competitive
supply markets.
• Markets are served by
a few suppliers with
extensive distribution
networks.
Total cost reduction and high service
levels from suppliers by:
• Establishing automated supplier
interfaces to minimise process-
related costs for high-volume
standard goods.
• Ensuring regular management
information reports on the nature of
this expenditure to keep strategic
focus.
• Establishing long-term agreements
to simplify procurement, coupled with
automated paying systems.
• Regionalising supply by using
local suppliers that are agents for
centralised arrangements.
• Forming collaborative initiatives with
other organisations to build leverage,
target off-peak periods in supply
markets.