MNP3701 Study Guide

© 2017 University of South Africa
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Printed and published by the

University of South Africa
Muckleneuk, Pretoria
MNP3701/1/2018–2019
70510865
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CONTENTS
1 Page
Preface iv
Module framework vii
Module aim viii
Module outcomes viii
454 PART 1 INTRODUCTION 1

455 Study unit 1 Introduction to purchasing and supply chain management 2
456 PART 2 PURCHASING OPERATIONS AND STRUCTURE 15

457 Study unit 2 The purchasing process 16
458 Study unit 3 Supply management integration for competitive advantage 25
459 PART 3 STRATEGIC SOURCING 39

460 Study unit 4 Category strategy development 40
461 Study unit 5 Supplier evaluation and selection 47
462 Study unit 6 Supplier quality management 59
463 Study unit 7 Supplier management and development: creating a world-
class supply base 65
464 PART 4 STRATEGIC SOURCING PROCESSES 71

465 Study unit 8 Strategic cost management 72
466 Study unit 9 Purchasing and supply chain analysis: tools and techniques 77
467 Study unit 10 Contract management 85
(iii) MNP3701/1/2018–2019
PREFACE
THE MODULE
Welcome to the module that explores all the intricacies of establishing a world-class sup-
2
ply base of an organisation in an extremely competitive global context! Over the past
decade, particularly, the increased understanding and resultant application of strategic
sourcing have forced many organisations to overcome the narrow-minded focus on the
price of goods and services, and concentrate on the true costs associated with obtain-
ing the resources for an organisation. The efforts employed to source strategically are
predictable:
yy Assessment of a company's current spend (what is bought where?).
yy Assessment of the supply market (who offers what?).
yy Development of a sourcing strategy (where to buy what, while minimising risk and
costs).
yy Identification of suitable suppliers.
yy Negotiation with suppliers (products, prices).
yy Implementation of new supply structure.
yy Track results and restart assessment (continuous cycle).
Purchasing and supply chain management are aimed at creating value. Value consists
of the following components:
Value = (Quality + Technology + Service + Cycle time) ÷ Price
Keep this equation in mind while you study through this module. Each study unit con-
tains information on strategies and tools to improve one of these elements of value.
All these aspects will be comprehensively dealt with in this module. Ensure that you
systematically work through the study guide and the prescribed book!
THE STUDY MATERIAL

4The prescribed textbook for this module is:
Monczka, RM, Handfield, RB, Giunipero, LC & Patterson, JL. 2016. Purchasing and supply
chain management. 6th edition. Cengage.
The study guide is divided into four parts: Part 1 provides the introduction to purchasing
5
and supply chain management, whilst part 2 clarifies purchasing operations and structure.
Part 3 focuses on strategic sourcing, and part 4 on the strategic sourcing process. There
are 10 study units in the module. Each study unit starts with a table of contents and then
mentions the learning outcomes and key issues that will be covered in order to realise the
(iv)
outcomes. The idea is to tell you what the study unit is all about. The learning outcomes
are important. You must understand them because they form the core of the study unit.
6Each study unit is linked to a corresponding chapter in the prescribed book as follows:
STUDY UNIT CORRESPONDING CORRESPONDING

CHAPTER IN 5th ed CHAPTER IN 6th ed
1 1 1
2 2 2
3 4 4
4 6 6
5 7 7
6 9 8
7 10 9
8 12 11
9 8 12
10 14 14
We realise that the environment of sourcing and supply professionals in South Africa is
8
sometimes quite different to the challenges of those in other countries. We therefore

attempted to provide a fairly detailed theoretical basis with the international textbook
and made an effort to apply the theory in the study guide to include sourcing and supply
related situations unique to South Africa.
You should also make a point of doing the activities in the study guide. They afford you
9
an opportunity to see how well you know the work in a particular section. The answers to
these activities are also provided, so that you can check your responses. You should also
do the assessment questions at the end of each study unit because they cover the core
issues of each study unit. The icons used in the study guide are self-explanatory and you
should use them to help you work your way through the study guide. Keep your tutorial
letters safe because they contain important information on assignments, the lecturers'
contact details, prescribed books, and so on.
It would be to your advantage to consult other sources in the subject area especially those
10
that deal specifically with strategic sourcing locally. We have included a list of all resources
used at the end of the study guide, and advise you to use this as a recommended read-
ing list for your own benefit. You will, however, only be examined on the information
contained in this study guide.
(v) MNP3701/1
THE STUDY PROCESS
As mentioned earlier, the study guide, combined with the prescribed book, will enable
11
you to understand the theory in each study unit if you do the activities for each topic
and study unit. You will remember something better if you understand it. We therefore
suggest that you always follow the study guide when working through the prescribed
book. One of the best ways to ensure that you understand the material is to summarise
the theory in your own words. Work through one study unit at a time.
The first tutorial letter which accompanies this study guide contains a proposed study
12
programme that you can follow to ensure that you finish working through all the pre-
scribed sections before the examination. The study programme also makes provision for
adequate revision before the examination. If you follow the study programme and work
through the study guide and prescribed book carefully, you can rest assured that you
will know and understand the work and be able to apply it in practice.
13 Wishing you every success studying this module!
ICONS USED IN THIS STUDY GUIDE
Activity. These self-assessment activities should be performed in

order to develop a deeper understanding of the learning material
Study. The Study icon indicates which sections of the prescribed

book you need to study (i.e. learn, understand and practise).
Assessment. The assessment criteria indicate on what aspects of the

particular topic or study unit you will be tested/examined and dem-
onstrate that you have mastered the study material (i.e. competence).
Mind map. Mind maps illustrate relationships between various parts

of the learning material.
Key concepts. Attention is drawn to certain keywords or concepts

that you will come across in the topic or study unit.
Learning outcomes. The learning outcomes indicate what aspects

of the particular topic or study unit you have to master (i.e. know
and understand).
(vi)
Read. This icon will direct you to read certain sections of the pre-
scribed book for background information.
Feedback. Feedback is provided on the self-assessment activities.
MODULE FRAMEWORK
14 The module, STRATEGIC SOURCING (MNP3701), is summarised diagrammatically below.
15 STRATEGIC SOURCING (MNP3701)
16 PART 1 INTRODUCTION
17 Study unit 1 Introduction to purchasing and supply chain management
18 PART 2 PURCHASING OPERATIONS AND STRUCTURE

19 Study unit 2 The purchasing process
20 Study unit 3 Supply management integration for competitive advantage
21 PART 3 STRATEGIC SOURCING
22 Study unit 4 Category strategy development
23 Study unit 5 Supplier evaluation and selection
24 Study unit 6 Supplier quality management
25 Study unit 7 Supplier management and development: creating a world-class supply

base
26 PART 4 STRATEGIC SOURCING PROCESSES

27 Study unit 8 Strategic cost management
28 Study unit 9 Purchasing and supply chain analysis: tools and techniques
29 Study unit 10 Contract management
MODULE AIM
The aim of this module is to provide insight into and an understanding of strategic sourc-
30
ing management.
31
(vii) MNP3701/1
MODULE OUTCOMES
32 Learners must be able to
yy provide an overview of purchasing and supply chain management

yy outline the purchasing process
yy explain supply management as a tool for creating competitive advantage
yy differentiate between supply management and commodity strategy management
yy discuss supplier evaluation and selection
yy discuss supplier quality management
yy create a world-class supply base
yy develop, illustrate and explain the strategic sourcing process model
yy discuss strategic cost management
yy illustrate and explain contract management
(viii)
yy
33
34PART 1
35INTRODUCTION
Study unit 1
Introduction to purchasing and supply chain management
1 MNP3701/1
Study unit 1
INTRODUCTION TO PURCHASING AND SUPPLY CHAIN
MANAGEMENT
CONTENTS
36
37 Study unit aim

38 Study unit learning outcomes
39 Key concepts
40 Getting an overview
411.1 A new competitive environment

421.2 Why purchasing is important
431.3 Understanding the language of purchasing and supply chain management
441.4 Achieving purchasing and supply chain benefits
451.5 The supply chain umbrella
461.6 Four enablers of purchasing and supply chain management
471.7 The evolution of purchasing and supply chain management
Good practice example: Taking an entrepreneurial approach to purchasing at Babson

48
College
Conclusion
49
Assessment
50
STUDY UNIT AIM

51 The aim of this study unit is to introduce you to purchasing and supply chain management.
STUDY UNIT LEARNING OUTCOMES
After studying this study unit, you should be able to

yy put the phrase "a new competitive environment" in perspective
yy outline the importance of purchasing
yy explain and illustrate the language of purchasing and supply management
yy explain how an organisation can achieve purchasing and supply chain benefits
yy define the supply chain umbrella
yy distinguish between the four enablers of purchasing and supply chain management
yy provide an in-depth discussion on the evolution of purchasing and supply chain
management
2
KEY CONCEPTS
yy competitive environment
yy purchasing
yy purchasing and supply management
yy supply chains
yy value chains
yy purchasing and supply chain benefits
yy the supply chain umbrella
yy enablers
yy human resources
yy organisational design
yy real-time and shared information
yy technology capabilities
yy measures
yy measurement systems
yy evolution of purchasing and supply chain management
Study chapter 1 in Monczka et al. (2016).
GETTING AN OVERVIEW
Understanding the complex world of purchasing and supply management is no easy
52
task. Gone are the days of sending a simple request to suppliers for competitive bids
and then awarding a short-term contract based on price and agreeing with the not too
demanding performance measures – usually after a free lunch with the supplier's sales
team. Today, managing the purchases of an organisation is defining its own culture: pro-
cesses have had to become sharper and faster to be able to deliver in ever-tighter com-
petitive environments and has to be managed as a strategic component used to drive
maximum competitive advantage.
We will therefore address the new environment in which purchasing, sourcing and supply
53
professionals operate in this study unit, as well as the elevated importance of purchasing.
We will continue by explaining the language of purchasing and supply chain manage-
ment, achieving purchasing and supply chain benefits, the supply chain umbrella and the
four enablers of purchasing and supply chain management. We will end the discussion
by looking at the evolution of purchasing and supply chain management.
1.1 A NEW COMPETITIVE ENVIRONMENT

Global economic elements, specifically in the finance sector, and events in South Africa,
54
such as the power crisis and unstable political climate, have most organisations on edge. It
is important to understand the competitive environment of the modern era in which com-
panies are forced to employ innovative management strategies in order to survive.
3 MNP3701/1
Study pages 6 to 8 in Monczka et al. (2016).
Consider the following article explaining the global impacts on supply chain manage-
55
ment in Africa and South Africa.
"Global impacts on supply chain management in Africa and South Africa"
Gerard de Villiers
The continent of Africa in general – and South Africa in particular – is in the unique position
to learn from the Americas, Europe and the East, but implement or customise whatever
works best for the continent.
The continent consists of 53 countries, served by about 60 functioning ports around the
coastline. The logistics infrastructure ranges from well-developed First World standards to
very rudimentary Third World basic services. Most of the better development is along the
coastal cities and ports and in some development corridors that stretch into the hinterland.
Africa has challenges in supply chain management that are in some ways similar to the
rest of the world, but in many ways very different. This is a brief overview of the peculiar
challenges and solutions to ensure that Africa will indeed succeed. Africa suffers from a
massive logistics infrastructure constraint due to very few navigable rivers, large areas
in the tropical zone with high concentrated rainfall and the resulting high cost of infra-
structure provision and maintenance. The original borders have been moved during
the colonisation years and this left many traditional groups of people divided into small
hostile units in landlocked countries.
About 10 per cent of the land in Africa is within 100 km of the coast, compared to 18 per
cent in Europe. Only 21 per cent of Africa's people live within 100 km of the coast, com-
pared to 69 percent in Europe. This has resulted in Africa having the world's highest
relative logistics costs (due to poor infrastructure) estimated at around 250 per cent the
global average. However, Africa's resources potential could be realised through integrated
'development corridors' (spatial development initiatives).
Nicky Oppenheimer, chairman of the De Beers Group, gave an address at the Royal United
Services Institute for Defence and Security Studies in 2007 in London, on why he believes
Africa will succeed, despite all these negative factors.
He started with highlighting some of the specific challenges in Africa: it is one of the
most food insecure parts of the world; 250-million Africans living in urban slums; Africa
accounts for nearly two-thirds of global HIV/Aids cases; under one quarter of those living
in sub-Saharan Africa has access to electricity; there has been a two-fold rise in continen-
tal poverty in Africa over just the past three decades; half of Africans are under the age
of 20 and just 10 per cent older than 50, which implies that 15-million jobs are required
annually. This is indeed a challenging scenario.
But Oppenheimer suggested that Africa will nevertheless succeed because of the con-
tinental economic growth of 5,8 per cent in 2006, despite a dip in overall development
spending, general decline in conflict within Africa and political success stories in Rwanda,
Liberia and South Africa. He mentioned that 25 years ago there were only three democ-
racies (Botswana, Senegal and Mauritius) while now more than 40 countries have held
multi-party elections. There are new players in Africa, namely China, India, Russia and
4
Brazil, and Africa is catching up on globalisation, a good example being the growth in
cellular communications. According to Oppenheimer, there are some rules that apply to
governments and investors alike, though, to ensure the continued African success. They
should beware those bearing gifts, use aid as a growth catalyst (investment in infrastruc-
ture), and ensure market access.
A differentiated view of Africa is important as not all countries experience the same chal-
lenges; Africa should avoid bad policy choices and needs to deal with conflict as nobody
would like to invest in nations at war. Our future generations should take care for the
environment, business in Africa should act as a good corporate citizen, Africa should
manage its natural resources and we need serious investment in the development of
appropriate skills and technology.
South Africa, located at the most southern part of the African continent, probably has the
best logistics infrastructure on the continent, but a serious location disadvantage. Our top
five trading partners are the United States, Germany, Belgium, Japan and Australia, which
are located in the furthest corners of west, north and east, relative to South Africa. This
has a devastating effect on supply chain costs as we have to produce or manufacture at
a significantly lower price. Africa suffers from a massive logistics infrastructure constraint
due to very few navigable rivers, large areas in the tropical zone with high concentrated
rainfall and the resulting high cost of infrastructure provision and maintenance. The origi-
nal borders have been moved during the colonisation years and this left many traditional
groups of people divided into small hostile units in landlocked countries.
The 2008 supplychainforesight survey, published by TerraNova and sponsored by Bar-
loworld Logistics, reported that South Africa rated 24th among 150 countries overall for
its logistics performance, based on a 2007 World Bank Report. The survey found that
skills and capabilities of supply chain staff are two of the most consistent challenges
of the entire sample group, with a market increase in the use of outsourcing as a route
to competitive advantage.
Recruitment and the use of external consultants are seen as important short-term methods
of bolstering skills levels, while education is seen as the main action to address the skills
shortage in the medium term. South African companies show a low level of confidence
in the reform of Transnet, the state-owned railroad and ports company, as well as in the
National Industry Policy Framework, which confirms that urgent dialogue with govern-
ment is required.
The 2007 State of Logistics Survey for South Africa, published by the CSIR and sponsored
by Imperial Logistics, found from a macro-level perspective that logistics costs for 2006
were slightly lower at 15,7 per cent of GDP, than the 16,2 per cent in 2005. However, land
freight transport increased 5,5 per cent to 1,5 billion ton in 2006. The South African ports
are important gateways into Africa but unfortunately experience serious congestion.
From an industry-level perspective the survey found an increased use of third-party
logistics service providers (3PLs) when operating across borders. Border-post delays
proved to be the main challenge for road transport. South Africa has great potential to
become the logistics hub for the Southern Africa Development Community (SADC) as
it contributes 67 per cent of the total GDP of the region. Finally, the survey found that
small, medium and micro enterprises need assistance from government to streamline
their supply chains.
About 10 per cent of the land in Africa is within 100 km of the coast, compared to 18 per
cent in Europe. Only 21 per cent of Africa's people live within 100 km of the coast, com-
pared to 69 per cent in Europe. This has resulted in Africa having the world's highest
relative logistics costs (due to poor infrastructure) estimated at around 250 per cent the
5 MNP3701/1
global average. However, Africa's resources potential could be realised through integrated
"development corridors" (spatial development initiatives).
In conclusion, it is clear that Africa – and South Africa – will succeed. There are huge op-
portunities but also huge challenges, such as the serious lack of skilled resources, high
costs of domestic and regional supply chains and highly neglected or insufficient infra-
structure. Globalisation is receiving attention but remains a serious threat and although
life is tough in Africa, it is highly rewarding!"
Source: http://www.logisticsnews.co.za/ArticleDetail.aspx?ID=99
1.2 WHY PURCHASING IS IMPORTANT

It is clear from section 1.1 that organisations are operating in changed economic condi-
56
tions. A sagging economy is colouring the view of business experts as they struggle to
increase customer value by improving performance – and is forcing them to elevate the
importance of the purchasing, sourcing and supply management approach. Why? It's
one of the few functional areas with the ability to have a positive impact on the bottom
line and to make a difference now – today!
How does this apply to organisations in South Africa? In this challenging environment
57
that we are experiencing worldwide, purchasing, sourcing and supply initiatives that
are underway should be continued. New initiatives may prove to be more challenging.
Existing suppliers will carefully guard the business they have and lack the willingness to
cut into margins. Potential suppliers may be less aggressive. It's very likely that current
suppliers will be focusing on cash flow by ensuring that customers meet their commit-
ments under existing agreements – volume, spend and otherwise.
When times are good, customers tend to make aggressive commitments in return for
58
improved pricing or discounts. With cuts in spending they will be faced with falling
short. Companies will need all the purchasing, sourcing and supply expertise that they
can muster to avoid defaulting under these conditions. Fulfilling obligations may require
restructuring agreements through strong negotiations skills and non-traditional thinking.
On the flip side, if you are exceeding contractual commitments, now is the time to approach
59
suppliers to improve their conditions. It's very realistic to take a position that, since you
are exceeding contractual commitments, you can reduce the associated volume directed
to that supplier. Most suppliers won't want to put your business at risk. Purchasing, sourc-
ing and supply professionals can apply their expertise to restructuring an agreement for
increased benefit in the form of increasing discounts, or banking the volume for later use.
6
1.3 UNDERSTANDING THE LANGUAGE OF PURCHASING AND
SUPPLY CHAIN MANAGEMENT
Purchasing, sourcing and supply professionals are often misunderstood as they seem
60
to speak a language all of their own. This is often, to the exclusion of the Board of an
organisation, the engineers contributing on the technical aspects and even the internal
customer that they are supposed to serve effectively and efficiently. The Chartered In-
stitute for Purchasing and Supply (CIPS) (UK) believes that the purchasing, sourcing and
supply management function should avoid the use of jargon and provide an explanation
every time it is necessary to use an ambiguous term. It is important that when promoting
purchasing, the purchasing, sourcing and supply management professional designs sup-
porting literature according to the set language choice; and attempts to facilitate their
interpretation by logical and consistent use of terminology.
Equally, the purchasing, sourcing and supply function should select an appropriate ex-
61
pression for their service used throughout the organisation and preferably by suppliers
and customers as well. Different expressions mean different things – for example, the
term "procurement", "purchasing" and "supply" are often used interchangeably; but not
necessarily in the correct manner.
We suggest that you start this section be reviewing exhibit 1.3 and 1.4 in the prescribed
62
book! These exhibits illustrate the simple supply chain of a cereal manufacturer and the
more involved supply chain of an automotive supply chain. This will provide you with a
basic idea of what a supply chain is; what organisations are involved; and what material
and information flows are of importance.
1.4 ACHIEVING PURCHASING AND SUPPLY CHAIN BENEFITS
The prescribed book highlights that purchasing and supply chain benefits are real and
63
measurable by relating the success of the Apple computer.
Activity 1.1
Do a literature search (magazines, journals or the Internet) and discover more examples
of organisations achieving measurable purchasing and supply chain benefits. Include
South African organisations in your answer.
7 MNP3701/1
Feedback
Consider the following articles. The most important aspects relating to purchasing, sourc-
ing and supply management are highlighted. Read through the examples and compare the
benefits achieved by the organisations with those that you found.
"Cement demand expected to remain 'reasonably' resilient – PPC”.
Chanel Pringle
26 January 2009
Regional demand for cement would remain "reasonably resilient", despite the economic
slowdown, Pretoria Portland Cement (PPC) chairperson Bheki Sibiya said on Monday, add-
ing that the company's new production capacity and established footprint would
allow it to take advantage of any tight supply situations.
In a speech delivered its annual general meeting, Sibiya stated that this was in line with
some economists' expectations that gross fixed capital formation, as a percentage of
gross domestic product, would increase during the year. South Africa's fixed capital
formation has reached the 23% mark last year, up from a low of 14,7% in the early 1990s.
The country is targeting a ratio of 25% by 2014. "South Africa will inevitably feel some of
the effects of the international economic slowdown and it is therefore difficult to give a
definitive outlook for the year," he said, adding that the company expected current and
future infrastructure projects to boost the demand for cement.
Sibiya stated that the company would continue to review any potential opportu-
nities in South Africa, as well as export opportunities, while it would continue to
increase its production and supply networks. Regional industry cement volumes for
the first quarter of the 2009 year had declined by 8,2%, while cement volumes for the
2008 calendar year had been down 3,9%, reported PPC.
The producer noted that inland cement sales were constrained in November and Decem-
ber owing to production problems experienced by competitors, which led to a cement
shortage. Subsequently, PPC had benefited from additional sales, but experienced
some periods of stock-outs. Sales volumes in Mpumalanga had increased by 8% and
in Botswana by 14%, boosting the company's overall sales, while volumes in the Western
Cape were "disappointing".
Meanwhile, Sibiya noted that production at the 1,25-million Dwaalboom kiln was pro-
gressing, with 90 000 tons of cement having been produced in December. The expansion
project was started in 2006 and had been completed within the R1,4-billion budget in
September last year. The Hercules mill project was also on schedule, while the envi-
ronmental impact assessment process for the Riebeeck plant was under way. PPC has
been upgrading a number of its cement plants over the past few years to ensure
improvements in production and environmental conditions.
Source: ht t p: // w w w. e n g in e e r in g n ew s . co. z a /a r ti cl e /ce m e nt- d e m a n d - e x p e c te d - to -

remain-reasonably-resilient-ppc-2009-01-26
8
"Renault to unveil SA-manufactured Sandero in Feb”.
Irma Venter
26 January 2009
Renault South Africa will launch its first locally produced vehicle in more than three
decades in February. The Sandero hatchback is the result of a R1-billion investment
by the Renault-Nissan alliance, with the new vehicle being built on a refurbished
assembly line at the organisation's Rosslyn plant, in Tshwane.
"The Sandero is a key model in our range revitalisation strategy," says Renault South
Africa MD Xavier Gobille, "but it is also a vital addition to the mostly staid and outdated
entry-level sector – a sector in dire need of a thoroughly modern, safe, stylish and spa-
cious contender."
Renault has started the Sandero's pricing at below the R100 000 mark, and says it ex-
pects the arrival of the "robust, attractive Sandero to revolutionise the local entry-level
market". "We want to bring the Sandero within reach of a wide and varied motoring
audience seeking affordability without having to compromise on safety, quality,
practicality and comfort," says Gobille. "Local manufacture has allowed us to offer
an extraordinary motoring package." As a locally produced model, the Renault
Sandero is expected to benefit from local parts sourcing, which should have a
favourable impact on pricing and availability.
“The Renault Sandero range will initially be offered with a choice of 1,4 l and 1,6 l petrol
engines, producing 55 kW and 64 kW respectively. Consisting of five versions at launch, a
further three variants will grow the Sandero range during the remainder of the year. The
Renault Sandero range will be unveiled to the media in late February, and is scheduled
to reach dealer showrooms in early March. Sales for Renault in South Africa reached 8 143
units in 2007, dropping by 50% to 4 082 units last year. Gobille predicts sales of more
than 10 000 units for 2009."
Source: http://www.engineeringnews.co.za/article/renault-to-unveil-samanufactured-sandero-in-
feb-2009-01-26
1.5 THE SUPPLY CHAIN UMBRELLA
64 A large set of activities is included in the supply chain management approach. They include:
yy inbound transportation
yy quality control
yy demand and supply planning
yy receiving, materials handling and storage
yy materials or inventory control
yy order processing
yy production planning, scheduling and control
yy warehousing/distribution
9 MNP3701/1
yy shipping
yy outbound transportation
yy customer service
1.6 FOUR ENABLERS OF PURCHASING AND SUPPLY CHAIN
MANAGEMENT
Excellence in purchasing, sourcing and supply chain management is not an easy task!
65
Organisations that achieve the promised benefits of ensuring effective and efficient sup-
ply to their customers, usually invest resources in establishing the following four enablers
of purchasing, sourcing and supply management:
yy Capable human resources
yy Proper organisational design
yy Real-time and shared information technology capabilities
yy Right measures and measurement systems
We suggest that you start the section by reviewing exhibit 1.6 in the prescribed book.
66
Exhibit 1.6 depicts the four pillars with examples.
1.7 THE EVOLUTION OF PURCHASING AND SUPPLY CHAIN

MANAGEMENT
The changes that have affected purchasing over the last 15 years are greater than those
67
of the previous 150 years. To appreciate how we arrived at where we are today requires
a brief understanding of the evolution of purchasing and supply chain management,
although some might argue the last 15 years resembled a revolution. This evolution
covers seven periods:
yy Period 1: The early years (1850–1900)
yy Period 2: Growth of purchasing fundamentals (1900–1939)
yy Period 3: The war years (1940–1946)
yy Period 4: The quiet years (1947-mid-1960s)
yy Period 5: Materials management comes of age (mid-1960s–late 1970s)
yy Period 6: The global era (late 1970s–1999)
yy Period 7: Integrated supply chain management (beyond 2000)
The purchasing function originated as an independent, clerical activity mainly concerned

68
with the processing of orders. The first stage of figure 1.1 depicts the reactive nature of
purchasing during this period. Purchasing was not regarded as a vital business function,
and was therefore assigned to employees who had neither the skill nor the aptitude to
lead this function towards its full contribution to the success of an organisation. Purchas-
10
ing, however, was responsible for a representative component of the cost of the goods
sold, and a large share of business's quality.
As managerial philosophies advanced, the purchasing function acknowledged the con-

69
tinuous interaction between the variables to efficiently realise the organisation's mission
and objectives. During the 1960s and 1970s, the purchasing function expanded to also
include inventory management. A limited number of purchasing staff were equipped with
tertiary education, and the use of automation ensured that production lines functioned
smoothly. Despite this, the purchasing function remained mechanical. Purchasers were
mainly concerned with the purchase price, the prevention of line shutdowns and the
management of inventory. The main focus of this period is depicted in stage 2 of figure 1.1.
Then the world of purchasing changed. Purchasing management became a proactive

70
concept, as illustrated in stage 3 of figure 1.1. Training and education were offered to
equip professional staff to meet the demands of the challenge posed by the constantly
fluctuating environment, globalisation, major technological advancements, automation
in production processes, outsourcing and inflation. Materials costs increased as a percent-
age of the cost of goods sold. Firms initiated the growth of the materials management
concept during this period combining related functions such as purchasing, inventory
control, receiving and warehousing under the authority of one individual.
During the early 1980s, physical distribution management was seen as part of materials
71
management. This became known as logistics management, embracing all movement and
warehousing activities from where the materials are purchased, through the transforma-
tion process to the final consumer. By the late 1980s, competition became fierce, global
firms increasingly captured world market share, the rate of technological advances was
unprecedented and the ability to coordinate worldwide purchasing activities increased
with the use of global data networks, and the World Wide Web emerged.
The transition was made from tactical purchasing to a more integrated and strategic ap-
72
proach, known as "strategic sourcing", as illustrated in stage 4 of figure 1.1. Supply became
a competitive global weapon and supply strategies were integrated with organisational
strategies. Strategic sourcing entails a cross-functional process to manage, develop and
integrate supplier capabilities to achieve a competitive advantage. The strategic sourc-
ing process is run by a strategic sourcing team (including members from the engineer-
ing, quality, design, manufacturing, marketing, accounting, strategic planning or other
departments, as needed).
In addition to the evolution of the purchasing function into strategic sourcing, another
73
phenomenon – supply chain management – developed as depicted in figure 1-1. Accord-

ing to one view the evolution of the supply chain management concept could be viewed
in terms of organisational integration. This will be discussed in more detail in study unit 3.
At first, each business function operated in complete isolation from other business func-
tions. A limited degree of integration between these functions developed, as inbound
functions merged to form materials management and outbound functions united to form
distribution management. Internal integration between materials management, internal
operations and distribution followed. Cross-functional processes were established to link
design, quality and cost, and managed by multifunctional teams.
11 MNP3701/1
Interest in the concept of supply chain management steadily increased in the 1980s, when
74
organisations realised the benefits of collaborative relationships within and beyond their
own borders. External integration saw the incorporation of suppliers, customers and the
internal activities of the focal firm (the strongest leading firm in a distribution channel
to propel the product through the market), as it expanded to include the collaborative
activities of all organisations involved in producing a specific product or rendering a
specific service. This became known as the "supply chain" of a specific product or service.
Organisations became more specialised and sought suppliers who could provide low-
cost, quality materials rather than their own sources of supply.
Industry groups now work together to improve the integrative processes of supply chain
75
management and accelerate the benefits through successful implementation. This entails
activities such as the establishment of multifunctional or multiorganisational teams, strate-
gic relationships or alliances, management of processes, business process re-engineering,
total cost of ownership, customer focus and mutual sharing of risks and rewards.
However, supply chain management developed further as a management philosophy,

76
crossing the boundaries of the chain of organisations that is responsible for transforming
raw materials into a final consumer product. The information chain developed, and en-
abled cross-functional teams from around the globe to coordinate supply chain functions
and activities via electronic mobility, such as telephone, fax, e-mail, the internet and the
World Wide Web. This became known as virtual supply chain management.
From the above discussion it is clear that the purchasing function developed from a
77
clerical function to shift the focus to sourcing strategically aligning with the organisa-
tional objectives, which in turn became an integrated part of the broader supply chain
management approach.
GOOD PRACTICE EXAMPLE: TAKING AN ENTREPRENEURIAL APPROACH TO PURCHASING

78
AT BABSON COLLEGE
Read pages 29 to 34 in Monczka et al. (2016).
CONCLUSION
A vast amount of literature has emerged on the theory and practice of purchasing, stra-
79
tegic sourcing and supply chain management, and the topic continue to provide scope
for a considerable amount of research and publication. Make sure that you understand
all the concepts explained, before proceeding to study unit. Consult alternative sources if
you need to clarify some aspects. Use the reference list provided at the end of the study
guide as a guide.
80
12
FIGURE 1-1: The development of purchasing into strategic sourcing, and the evolution
of supply management
81
Source: Adapted from Burt et al. (2010:18)
Good theory, however, only becomes valuable if it is mirrored in practice. Be alert in order
82
to identify indicators in your business interactions that emphasise the new environment
in which purchasing, sourcing and supply professionals operate as explained in this study
unit, as well as those focussing on the elevated importance of purchasing. Establish a
language of purchasing and supply chain management, in your organisation if it does
not already exist and use your new knowledge, of the supply chain umbrella and the
four enablers of purchasing and supply chain management, to assist in the achievement
13 MNP3701/1
of purchasing and supply chain benefits. Make sure that you understand the different
periods of development of purchasing and supply chain management.
We will outline the variables influencing purchasing operations and structure in part 2
83
of this study guide, starting with the purchasing process in study unit 2.
ASSESSMENT
1
(1) Put the phrase "a new competitive environment" in perspective.

(2) Outline the importance of purchasing.
(3) Explain and illustrate the following concepts of purchasing and supply management:
yy Purchasing
yy Supply management
yy Supply chain organisation
yy Supply chain management
yy Value chain
yy Extended value chain
yy Supply chain
(4) Explain how an organisation can achieve purchasing and supply chain benefits.
(5) List the activities that are part of the supply chain umbrella.
(6) Discuss the enablers of purchasing and supply chain management by using the
following sub-headings:
yy Capable human resources

yy Proper organisational design
yy Real-time and shared information technology capabilities
yy Right measures and measurement systems
(7) Provide an in-depth discussion on the seven periods that make up the evolution of
purchasing and supply chain management.
Also attempt to answer the discussion questions on pages 34 to 35 Monczka et al. (2016).
84
14
85
PART 2
86
87PURCHASING OPERATIONS AND STRUCTURE
Study unit 2
The purchasing process
Study unit 3
Supply management integration for competitive advantage
15 MNP3701/1
Study unit 2
THE PURCHASING PROCESS
CONTENTS
88
89Study unit aim

90Study unit learning outcomes
91Key concepts
92Getting an overview
93 2.1 Purchasing objectives
94 2.2 Strategic supply management roles and responsibilities
95 2.3 Improving the procure-to-pay process
96 2.4 The purchasing process after supplier selection
97 2.5 Types of purchases
98 2.6 Improving the purchasing process
99 Conclusion
100 Assessment
STUDY UNIT AIM

101 The aim of this study unit is to provide you with an overview of the purchasing process.
yy list and explain the purchasing objectives

yy list and explain the purchasing responsibilities
yy explain the procure-to-pay process
yy distinguish between the various types of purchases
yy suggest ways to improve the purchasing process
KEY CONCEPTS
yy purchasing objectives
yy supply continuity
yy manage the purchasing process efficiently and effectively
yy supply base management
yy aligned goals
16
yy internal functional stakeholders
yy organisational goals and objectives
yy integrated purchasing strategies
yy organisational strategies
yy Broad-Based Black Economic Empowerment
yy preferential procurement practices
yy Constitution of South Africa (Act 108 of 1996)
yy Preferential Procurement Policy Framework (Act 5 of 2000)
yy Historically Disadvantaged South Africans
yy Broad-Based Black Economic Empowerment Act (Act 53 of 2003)
yy purchasing responsibilities
yy primary contact with suppliers
yy awarding purchase contracts
yy e-procurement
yy the procure-to-pay process
yy forecast and plan requirement
yy needs clarification
yy requisitioning
yy supplier identification
yy supplier evaluation
yy supplier selection
yy approval, contract, and purchase order preparation
yy receipt and inspection
yy invoice settlement and payment
yy records maintenance
yy supplier performance measurement
yy supplier performance management
yy re-engineering the procure-to-pay process
yy types of purchases
yy raw materials
yy semifinished products and components
yy finished products
yy maintenance, repair, and operating items
yy production support items
yy services
yy capital equipment
yy transportation and third-party purchasing
yy online requisitioning systems
yy procurement cards
yy electronic purchasing commerce
yy longer-term purchase agreements
yy online ordering systems
yy purchasing process redesign
yy electronic data interchange
yy online ordering
yy electronic catalogues
yy contact suppliers directly
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GETTING AN OVERVIEW
If we take a minute to reflect on study unit 1, we remember that purchasing is consid-
102
ered as a functional group concerned with performing many activities that make up the
formal process of buying goods and services in order to ensure it delivers maximum
value to the organisation. The purchasing process can vary from one organisation to
another – but there are some key elements that are common throughout. The process
usually starts with a demand or requirement – this could be for goods or services. The
process then continuous with the evaluation of that need, the identification of suppliers,
the discovery whether the need has been met, subsequent prompt payment, and a drive
for continuous improvement.
Let us now turn our attention to the key objectives and responsibilities of the purchasing
103
function. You will be able to appreciate the intricacies involved in the purchasing process
and the role e-procurement tools play in the process. The section continues to highlight
the different types of purchases to be made. Finally, the various ways in which organisa-
tions are seeking to improve the purchasing process are addressed.
2.1 PURCHASING OBJECTIVES

The objectives of a world-class purchasing organisation move far beyond the traditional
104
belief that purchasing's primary role is to obtain goods and services in response to internal
needs. To understand how this role is changing, we must understand what purchasing is
all about, starting with the primary objectives of a world-class purchasing organisation.
They include:
yy Objective 1: supply assurance
yy Objective 2: manage the sourcing process efficiently and effectively
yy Objective 3: supplier performance management
yy Objective 4: develop aligned goals with internal functional stakeholders
yy Objective 5: develop integrated purchasing strategies that support business
goals and objectives
In South Africa, a seventh objective of the purchasing function of any organisation can
105
be added. This is to address black economic empowerment.

yy Objective 6: address Broad-Based Black Economic Empowerment
Empowering disadvantaged groups through preferential procurement practices is by no

106
means a uniquely South African phenomenon. Many progressive purchasing and supply
organisations across the globe have developed and implemented diversity programmes
whose objectives are to ensure that diversity suppliers receive a reasonable share of the
purchasing organisation's business. Synonyms for the programmes used in different coun-
tries are "supplier diversity", "minority supplier development", "ethnic minority suppliers",
18
"disadvantaged business buying programmes", "affirmative purchasing programmes"
and "preferential procurement".
In a baseline study conducted by the Institute for Supply Management, 29 per cent of the
107
respondents acknowledged that they, to a good, great or very great extent, have a diversity
programme in place. The establishment of such supplier diversity, minority business or
ethnic empowerment programmes in buying organisation worldwide, is commonly the
result of (1) executing corporate responsibility; (2) supply base broadening with the aim
of mirroring the changes in the buying organisation's customer base; (3) complying with
government prescriptions associated with the allocation of a certain percentage spend
to diversity suppliers; (4) alleviating the fear of economic boycotts by diversity groups;
(5) complying with diversity requirements passed down from higher tier customers; and
(6) realising that diversity suppliers provide products and services competitive with those
of non-diversity suppliers.
In general, diversity suppliers are defined as those suppliers that have challenges in
108
becoming successfully established and gaining economic representation proportional

with their demographic representation. Usually, this includes minority groups represented
in a specific country and women-owned businesses. In South Africa, however, the op-
posite is true. It is well known and accepted that the Apartheid regime, systematically
and purposefully restricted the majority of South Africans from meaningful participation
in the economy. The result is an economic structure that today, in essence, still excludes
the vast majority of South Africans. The period since 1994 has seen the South African
economy undergo profound restructuring, and ten years of consistent economic growth
has been documented. The South African economy is the most developed and prosperous
on the continent of Africa; endowed with massive resources; well established with first
world infrastructure; and is managed by a progressive and popularly elected democratic
government.
Despite this, entrenched inequalities continue to characterise the economy and act as
109
deterrent to optimal economic development. From 1996 the Constitution of South Africa
(Act 108 of 1996) made provision for the implementation of preferential procurement
practices in section 217, whereby organs of the state in the national, provincial or local
sphere of government are compelled to procure goods or services in accordance with a
system which is fair, equitable, transparent, competitive and cost-effective. From that point
on the South African government issued a drive for public sector procurement reform,
leveraging its purchasing power in support of its economic policy objectives. Hence, the
Preferential Procurement Policy Framework (Act 5 of 2000) was established to give ef-
fect to section 217 of the Constitution. This framework allows for preference to be given
to Historically Disadvantaged South Africans (HDSAs), defined in the Mining Charter as
any person, category of persons or community, disadvantaged by unfair discrimination
before the Constitution came into operation, by implementing a point system (based
on price and preference to target groups) to be used in the awarding of tenders in the
public sector. Preferential procurement may, for the purpose of this paper be defined
as an active attempt on the part of organisations to purchase the materials and services
they require from businesses belonging to HDSAs.
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This policy forced the procurement process of all the different organs of state to be more
110
inclusive by allowing competitive advantage for businesses owned by HDSAs. Equity

ownership and management participation are among the main principles applied during
the evaluation of tenders as required by the Preferential Procurement Policy Framework
Act. These measures ensure that public tenders are more accessible to HDSAs, as large
tenders were divided into smaller tenders to allow smaller HDSA businesses to compete
more effectively. The changing view of procurement by the South African government led
to many South African organisations establishing procurement policies and procedures
promoting preferential procurement.
Yet, these regulations are only enforceable when organisations trade within the public
111
sector. The South African government's influence within the private sector is confined to
orderly regulations and the encouragement of equal opportunity for all citizens through
a complementary and supportive role. The lack of participation of the private industry
stakeholders resulted in a slow rate of transformation within the broad economy, and
predominantly white-owned organisations remain in control. Empowerment, in the South
African context, allows HDSAs or business owned by HDSAs to (1) become involved; (2)
obtain knowledge; (3) acquire a sense of worth and authority; (4) take ownership and
responsibility; and (5) achieve success.
Black Economic Empowerment (BEE) has at its aim to develop comprehensive strategies
112
to create increasing access to productive assets while simultaneously ensuring the pro-
ductivity of those assets by promoting new opportunities for and increased participation
of black people in ownership, management and control thereof. There is a tendency in
South Africa to define Black Economic Empowerment narrowly and focus on the entry and
transaction activities of black people in business, especially what is commonly referred
to as BEE investment companies. The consequence has been a continuous exclusion of
black people from broad-based financial and economic resources since 1994.
Subsequently, the South African government has outlined broad economic strategies
113
to transform the economy by 2014. One of these strategies involves the achievement of
Broad-Based Black Economic Empowerment (BBBEE) and the deracialisation of the South
African economy. This lead to the Broad-Based Black Economic Empowerment Act (Act
53 of 2003) with the aim of setting goals for transformation pertaining to BEE in both
the public and private sector, and the results envisioned include (1) more black South
Africans who have ownership and control of existing and new enterprises, (2) a significant
increase in the number of black, black-empowered and black-engendered enterprises;
and (3) accelerated and shared economic growth (Fourie 2005).
Following the misalignment between the Preferential Procurement Policy Framework

114
Act (Act 5 of 2000 (PPPFA) and the Broad-Based Black Economic Empowerment Act (Act
53 of 2003 (B-BBEEA) the South African Cabinet directed in 2008 that these should be
reviewed such that alignment exists with the set objectives. The approach to the align-
ment of the objectives of the two acts was agreed upon by the National Treasury and the
Department of Trade and Industry. Currently, the PPPFA regulations are incorporated as
an integral part of the broader regulations on Supply Chain Management that had been
issued in terms of the PFMA.
20
Against this background certain provisions were included in the recommendations that
115
were submitted to the South African Cabinet during May 2008 for the review of the PFMA;
where these provisions were intended to repeal the current PPPFA and give effect to the
alignment of the two acts in the reviewed PFMA and its new supporting regulations.
Cabinet resolved that further consultation should take place between the Minister of
Finance and the Minister of Trade and Industry.
The South African Cabinet further directed that the Minister of Finance gives consideration
116
to and submits proposals in the possible establishment of a centrally located Compliance

Office to monitor procurement compliance at all spheres of government. In this regard,
the National Treasury has commenced with certain initiatives to give effect to Cabinet's
directive. This monitoring of procurement compliance is consistent with National Trea-
sury's power to monitor and assess prescribed norms and standards.
2.2 STRATEGIC SUPPLY MANAGEMENT ROLES AND

RESPONSIBILITIES
We suggest that you start this section by reviewing exhibit 2.2. This section in the pre-
117
scribed book highlights the span of control in which purchasing functions in on organi
sation. This includes:
yy spend analysis and demand management
yy evaluating and selecting suppliers
yy acting as the primary contact with suppliers
yy determining the method of awarding purchase contracts
yy managing of supplier relationships
yy establishing of supply management strategy
2.3 IMPROVING THE PROCURE-TO-PAY PROCESS

Purchasing processes will vary from organisation to organisation. Using the Internet search
118
engine Google – you can view diagrams of 3 710 000 different purchasing processes at
the touch of a button! But the efficacy with which an organisation executes this process
will often result in the competitive advantage gained by the organisation. Today, many
purchasing, sourcing and supply professionals are leaning towards the design and ap-
plication of the purchasing process as purely a technological solution. Although there are
wonderful hi-tech tools that can be utilised by any organisation willing to pay for it, the
tool alone will not drive purchasing – and certainly not the supplier relationship manage-
ment concept – in an organisation. It is imperative to launch a purchasing management
course of action within the buying organisation, contemplate the tangible procedure and
then only continue to choose and procure a tool if it would ease the implementation and
endurance of the designed process.
21 MNP3701/1
In this section we will evaluate a generic process that can be implemented by an organisa-
119
tion to achieve an effective and efficient purchasing process employed when someone
within the organisation requires any goods or services. The following steps are included
in the discussion:
yy forecast and plan requirement

yy needs clarification: requisitioning
yy supplier identification and selection
yy contract and purchase order preparation
yy invoice settlement and payment and measurement of performance
This is an extremely practical discussion and even includes examples of some of the
120
documents used in the process. You should be well versed in the procure-to-pay process
after studying this section!
2.4 THE PURCHASING PROCESS AFTER SUPPLIER SELECTION

The purchasing process (after supplier is selected) is concluded by different steps or ap-
121
proaches, depending on the type of system in place. The prescribed book discusses the
following steps and documents:
yy purchase order
yy blanket purchase order
yy material purchase release
yy material packing slip
yy bill of lading
yy receiving discrepancy report
yy invoice settlement and payment
yy record maintenance
yy manage and measure supplier performance
yy re-engineer the procure to pay process
2.5 TYPES OF PURCHASES

An organisation requires many different goods or services. The considerations that ap-
122
ply to purchasing these items or services can be contrasted according to the nature of
the product or service, the types of production involved and the principal uses to which
22
the purchased item or service will be put. Fundamentally, we can distinguish between
consumer, industrial, and resale products, as well as services.
yy Consumer products are goods purchased by individuals and households for personal
consumption.
yy Industrial products are purchased by organisations for use in the manufacture of other
products to make profits or achieve other objectives.
yy Resale products are those purchased by organisations in order to resell them at a profit.
yy Services include the performance of duties or provision of space and equipment help-
ful to others.
This section of the prescribed book is concerned with industrial products, and they can
123
be categorised as follows:
yy raw materials
yy services
2.6 IMPROVING THE PURCHASING PROCESS

Most companies spend too much time and too many resources managing the ordering
124
of goods and service, particularly lower-value items. Some purchasing departments

spend 80 per cent of their time managing 20 per cent of their total purchase budget.
The prescribed book suggests the following ways of improving the purchasing process,
particularly low-value purchases:
yy online requisitioning
yy procurement cards
yy e-procurement
yy longer-term purchase agreements
yy cloud-based ordering systems
yy purchasing process redesign
yy EDI
yy online ordering through electronic catalogues
yy users contact suppliers directly
23 MNP3701/1
Read the example on the deployment of Procure-to-Pay Systems on pages 82
to 83 in Monczka et al. (2016).
CONCLUSION
Although the purchasing process seems relatively simple, the application thereof is an
125
intricate balance of finding the right harmony between mapping the physical process and
identifying the optimal technology to support it. In order to assist you in understanding
this, we focussed on the key objectives and responsibilities of the purchasing function
in this study unit. You should now be familiar with the purchasing process and the role
e-procurement tools play in the process, as well as highlight the different types of pur-
chases to be made. Finally, you should be able to make helpful suggestions regarding
the various ways in which organisations can improve the purchasing process.
We will focus on supply management integration as a tool for creating competitive ad-
126
vantage for an organisation in study unit 3.
2ASSESSMENT
(1) List and explain the six purchasing objectives.

(2) List and explain the purchasing responsibilities.
(3) Explain the procure-to-pay process. Use a diagram to substantiate your answer.
(4) Distinguish between the following types of purchases, and provide an example of
each:
yy raw materials
yy services
(5) Suggest ways to improve the purchasing process.
Also attempt to answer the discussion questions on pages 84 to 85 of Monczka et al. (2016).
24
Study unit 3
SUPPLY MANAGEMENT INTEGRATION FOR
COMPETITIVE ADVANTAGE
CONTENTS
127
128 Study unit aim

130 Key concepts
132 3.1 Integration: what is it?
133 3.2 Internal integration
134 3.3 External integration
135 3.3.1 Supply management's external linkages
136 3.3.2 Collaborative buyer-seller relationships
137 3.3.3 Advantages of closer buyer-seller relationships
138 3.3.4 Obstacles to closer buyer-seller relationships
139 3.3.5 Critical elements for supplier relationship management
140 3.4 The critical role of cross-functional sourcing teams
141 3.4.1 Benefits sought from the cross-functional team approach
142 3.4.2 Potential drawbacks to the cross-functional team approach
143 3.4.3 When to form a cross-functional team
144 3.4.4 Improving sourcing team effectiveness
145 3.5 Integrating supply management, engineering and suppliers to develop new
products and services
146 Conclusion
147 Assessment
STUDY UNIT AIM

148 The aim of this study unit is to introduce you to supply management integration.

yy define the concept "integration"
yy list and explain supply management's internal communication flows and linkages
25 MNP3701/1
yy list and explain the supply management's external communication flows and linkages
yy explain what collaborative buyer-supplier relationships entail
yy list the advantages of buyer-supplier relationships
yy list the obstacles of buyer-supplier relationships
yy explain what the critical elements of supplier relationship management are
yy identify the critical role of cross-functional sourcing teams
yy compile a checklist of the benefits from the cross-functional team approach
yy identify potential drawbacks from the cross-functional team approach
yy know when to form a cross-functional team
yy identify and explain ways to improve sourcing team effectiveness
yy provide an in-depth discussion on integrating supply management, engineering
and suppliers to develop new products and services
KEY CONCEPTS
yy integration
yy internal integration
yy external integration
yy collaborative buyer-seller relationships
yy supplier relationship management
yy cross-functional sourcing teams
yy sourcing team effectiveness
yy new product development
yy successful supplier integration efforts
yy customer order fulfilment
yy supplier suggestion programmes
yy buyer-seller improvement teams
yy on-site supplier representative
GETTING AN OVERVIEW
Read the case studies on pages 115 to 118 of Monczka et al. (2016).
Both these cases demonstrate the consequences of the risks associated when purchasing
149
and supply management attempts to function in isolation. And both hint at organisations'
persistent difficulties with developing and managing purchasing and supply models that
can help balance the rewards of doing business with the risks of doing so. It is a fact: pur-
chasing and supply management will never have a positive impact on the performance
of an organisation if it continuously operates in its own vacuum.
26
We saw in figure 1.1 that purchasing management in the past few decades developed in
150
four stages: from reactive purchasing to mechanical purchasing to proactive purchasing

and was finally labelled as strategic sourcing. If we take a closer look at the diagram, we
see that purchasing was distinguished as bureaucratic department processing paper
and reporting at a very low level. This changed, however, and the purchasing and supply
function is seen in stage 4 as a competitive global weapon, with a specifically designed
supply strategy which is integrated with the organisational strategy, in order to assess
value, reduce costs and apply best practices within managed buyer-seller relationships.
Reading between the lines we see that none of the above will be possible if there are not
151
constant communication flows and linkages between purchasing, sourcing and supply
professionals and their internal and external stakeholders. To make today's supply chains
successful, companies will need to take a holistic approach to their operations model – one
that brings together the worlds of product, market growth, and operations strategy. It is
not a simple approach. But it is a rewarding and necessary one where, for many, survival
may be at stake. In this study unit we will therefore be looking at integration – internally
and externally. The focus will be on the critical roles of buyer-supplier relationships and
cross-functional teams. You will also learn to value the integration of supply management,
engineering, and suppliers to develop new products and services.
3.1 INTEGRATION: WHAT IS IT?

The good news is that purchasing, sourcing and supply best practices can work for any
152
organisation that wants to eliminate waste, improve quality, move more quickly, and make
dollars go further. No two organisations are alike, and no two organisations will apply
these best practices in exactly the same way. Whether a commercial firm, not-for-profit
agency, or government entity – every organisation must be guided by its structure, mis-
sion, history, culture, and strategic goals.
One aspect that stands out however is the need for any organisation to invest resources
153
in supply integration. The word "integration" has a myriad of meanings, and may refer to
yy In sociology and economy:

-- Social integration
-- Racial integration, refers to social and cultural behaviour; in a legal sense, see
desegregation
-- Economic integration
-- Regional integration
-- Horizontal integration and vertical integration in microeconomics and strategic
management
-- Integration clause, in a contract, a term used to declare the contract the final
and complete understanding of the parties
-- Integrated production
yy In computer science:
-- System integration, the process by which smaller pieces of software are brought
together to form a larger piece of software that was designed to solve a problem
27 MNP3701/1
-- Digital integration, in computer science, allows data from one device or software
to be read or manipulated by another, resulting in ease of use; see also XML
-- Enterprise application integration, also known as systems integration, as the use
of software and computer systems to bring together a set of enterprise computer
applications
In the prescribed book, integration is defined as "the process of incorporating or bringing

154
together different groups, functions or organisations, either formally or informally, physi-

cally or by information technology, to work jointly and often concurrently on a common
business-related assignment or purpose." Learn more of the manner in which integration
occurs by studying the relevant section in the prescribed book!
We can see from the above section in the prescribed book that organisations must employ
155
different strategies to bring about supply integration. It is also true that change is seldom
easy. Old ways die hard, even when there is wide agreement that change is needed. We
have seen organisations struggle helplessly to implement change, and we have seen
organisations transformed into powerhouses through their ability to innovate and adapt.
IBM spends about $40 billion a year with suppliers and is a good example of the latter.
156
The company is a multinational computer technology and consulting corporation head-

quartered in Armonk, New York, United States. The company is one of the few informa-
tion technology companies with a continuous history dating back to the 19th century.
IBM manufactures and sells computer hardware and software, and offers infrastructure
services, hosting services, and consulting services in areas ranging from mainframe com-
puters to nanotechnology.
Until the mid-1990s, IBM made most of the parts used in its finished products. Highly
157
vertical and closely guarded, the company went to great lengths to prevent its own sup-
pliers from knowing how their parts were being used or how they fit into overall business
strategies. This lack of supply integration was common within the computer industry
during the 1970s. So was the need for top-level secrecy. By the 1990s, however, the
game had changed. Most of IBM's competitors were reducing costs by outsourcing and
integrating their own capabilities with the technological expertise that existed among
their suppliers. One day, IBM could no longer compete. Hanging onto the old ways had
prevented it from leveraging its huge global purchases, from eliminating waste in its
processes, and from taking advantage of innovative thinking.
IBM's story has become a textbook example of how purchasing, sourcing and supply
158
management integration can change an organisation almost overnight. In a few short

years, IBM climbed up from a burning platform to a new level – that of a lean, highly
integrated company whose hallmarks were speed, efficiency, and innovation. In 1999,
the company won Purchasing magazine's medal of Professional Excellence, one of the
most respected purchasing awards given.
28
3.2 INTERNAL INTEGRATION
Purchasing, sourcing and supply managers today face multiple challenges. However,
159
what often causes them the most worry, at least psychologically, is the lack of accep-
tance and involvement in their own enterprise. When significant business matters are
being decided upon, supply management often is not at the table. They are excluded
from the decision-making process and, at best, become involved at a later stage when
it's time to execute the decisions from a procurement standpoint. More often than not,
this involvement comes much too late for the purchasing, sourcing and supply manage-
ment professionals to approach the relevant supply markets in a truly strategic manner.
Purchasing, sourcing and supply management's absence at the decision-making table

160
and their lack of interaction with other key corporate functions does more than cause the
supply manager a lot of mental anguish. It's long been suspected that these factors can
also cause massive economic damage to the company. That a more strategically and bet-
ter integrated supply management function can drive both organisational efficiency and
effectiveness is almost universally assumed. But with this assumption comes a dilemma:
purchasing, sourcing and supply management's ability to prove its strategic relevance
and impact on corporate performance depends on its degree of integration. However,
other functions will give up authority and involve supply management only when the
positive performance implications resulting from such integration can be verified.
The prescribed book addresses this issue by reviewing supply management's communi-
161
cation flows and linkages with the following departments:
yy Operations
yy Quality assurance
yy Engineering
yy Accounting and finance
yy Marketing/sales
yy Legal
yy Environmental management, health and safety
3.3 EXTERNAL INTEGRATION

Once an organisations' purchasing, sourcing and supply management function has es-
162
tablished their internal communication flows and linkages it is time to move beyond the
boundaries of the organisation itself. Supply management represents the external face of
the organisation and also serves as the primary vehicle to integrate suppliers and other
entities into the organisation.
29 MNP3701/1
3.3.1 Supply management's external linkages
Purchasing, sourcing and supply management acts as a liaison with parties on multiple
163
fronts, including suppliers, the government and local communities.
3.3.2 Collaborative buyer-seller relationships

What constitutes a buyer-seller relationship? A buyer-seller relationship comprises any
164
interaction between a buying organisation and a supplier, usually with good and bad
characteristics. The most successful relationships are those where buyers and suppli-
ers develop trust and an understanding of their respective requirements and interests,
accompanied by a concern for both learning from and providing assistance to each other.
Where such conditions exist, the ultimate outcome should be the creation of established
and dependable collaborative buyer-seller relationships. Such relationships are the basis
of networks and provide competitive advantages for both parties.
That is obvious. What is not quite as clear is the nature of the buyer-seller relationship
165
– normally a result of cause and effect, which is either managed or accidental. A wide
relationship spectrum can be identified based on the type of interaction between the
buying organisation and the supplier. A good categorisation of these relationships
was done by Burt et al. (2010) who divided them into three principles classes, namely
transactional, collaborative and alliance buyer-seller relationships that identified in their
continuum of buyer-seller relationships. Figure 3.1 provides a summary of the activities
and attributes common to each.
30
Figure 3.1: Characteristics of the three principle classes – transactional, collaborative
and alliance buyer-seller relationships
166
TRANSACTIONAL COLLABORATIVE ALLIANCE

RELATIONSHIPS RELATIONSHIPS RELATIONSHIPS
Communication High potential for problems Systematic approach to

enhance communication
Competitive Low High
advantage
Connectedness Con- Independence Interdependence
tinuous Little A focus on
improvement
Contributions to Few Many/early supplier
new product involvement
development
Difficulty of exit Low Difficult/high impact
Duration Short Long
Expediting Reactive Proactive
Focus Price Total cost
Level of integration Little or none High or total
Level of trust Low High
Number of Many One or few
suppliers
Open books No Yes
Quality Incoming inspection Design quality into system
Relations Inward looking Concern with each other's
well-being
Resources Few/low skill level Professional
Service Minimal Greatly improved
Shared forecasts No Yes
Supply disruptions Possible Unlikely
Technology inflows No Yes
Type of interaction Tactical Strategic synergy
Source: Dobler et al. (2010:66).
31 MNP3701/1
3.3.3 Advantages of closer buyer-seller relationships
There are an infinite number of advantages of closer buyer-seller relationships. Trust and
167
long-term contracts are discussed in the prescribed book.
3.3.4 Obstacles to closer buyer-seller relationships

There are also a vast number of obstacles to overcome when trying to establish a closer
168
buyer-seller relationship. They include:

yy confidentiality
yy limited interest by suppliers
yy legal barriers
yy resistance to change
3.3.5 Critical elements for supplier relationship management
Now consider this – if a buyer-seller relationship is a managed one with advantages and
169
obstacles – who is doing the managing, and what does it entail? Will it be the buying
organisation or the supplier? Traditionally, suppliers did a better job of managing their
customers (the buying organisations). This can be due to the fact that in examining their
buyer-seller relationships, buying organisations conventionally placed too little emphasis
on regular communication between the purchasing, sourcing and supply departments
and the various other departments within the organisation. This lead to a lack of common
infrastructure to support cooperation and progress regarding buyer-seller relationship
matters. This resulted in a contorted focus on managing purchasing and supply transac-
tions, rather than an overall strategy to establish and sustain buyer-seller relationships to
ensure superior performance of suppliers throughout the span of their association with
the buying organisation.
However, buying organisations have drastically changed their view of supplier relationship
170
management in recent years and is currently enforcing strategic management of their

supplier base towards the implementation of supplier performance measurement. This
is largely a result of the intensely competitive marketplace in which all organisations are
presently operating in, and the reality that they are consequently looking to gain every
advantage possible in leveraging their supplier base to improve their own competitive
stature worldwide.
The traditional price-based relationship with suppliers are changing – giving way to
171
long-term relationships based on total cost, trust, flexibility, innovation, quality and con-
stant amendment. These relationships are assisting organisations to positively impact
on customer satisfaction, financial performance, innovation and organisational growth.
This requires a considerable amount of commitment by the buying organisation. It is
worth the effort however as an increasingly large percentage of the value of a product
or service comes from suppliers in today's business world, prompting organisations to
realise the significance of sustaining strategic relationships with first-tier and, in some
cases even second-tier, suppliers by means of constructive management.
32
This answers the question of who needs to do the managing. Now what does supplier
172
relationship management entail? The following skills are required for effectively manag-
ing buyer-seller relationships:
yy the ability to adopt a shared understanding between partners.
yy the ability to recognise the level of cultural match between partners.
yy the skills to foster high quality relations.
yy the ability to manage relationships through changes in contractual obligations.
yy the skills to manage consortium-based relationships.
Other important factors are (1) motivating employees; (2) motivating lower and middle
173
management; and (3) enabling employees to improve their performance.
Supplier relationship management can be regarded as a buying organisation's strategic

174
management philosophy for interacting with its supply base with the objective of sustain-
ing superior performance throughout the span of their association. Supplier relationship
management is regarded by a large number of people as a software solution driven
process. It is important to highlight the fact that this is not true. It is vital to understand
the dynamics of managing buyer-seller relationships first, and then enhance this activity
with the use of appropriate technology.
Now turn your attention to your prescribed book – which continues to outline the critical
175
elements for supplier relationship management.
Study pages 126 to 131 in Monczka, et al. (2016).
3.4 THE CRITICAL ROLE OF CROSS-FUNCTIONAL SOURCING

TEAMS
In business, the simplest definition of a cross-functional team is a group of people with
176
different functional expertise working toward a common goal. It may include people from
finance, marketing, operations, and human resources departments. Typically, it includes
employees from all levels of an organisation. Members may also come from outside an
organisation (in particular, from suppliers, key customers, or consultants). Cross-functional
teams often function as self-directed teams responding to broad, but not specific direc-
tives. Decision-making within a team may depend on consensus, but is often led by a
manager/coach/team leader.
A non-business, yet good example of cross-functional teams are music bands, where
177
each element plays a different instrument (or has a different role). Songs are the result
of collaboration and participation, and the goals are decided by consensus. Skills to play
all the instruments involved are not required since music provides a standard language
that everybody in the team can understand. In short, music bands are clear examples of
how these teams work.
33 MNP3701/1
The movie maker is the best example to show the relation between the team members
178
from different experiences. The director actually is the team leader but if he said action
and at the same time the sound manager found some distortion or noise or anything
which he is not convinced within his job he can take the decision to stop until this prob-
lem is solved – so every expert is the leader or the manager of the whole operation when
there is a problem related to his speciality.
Activity 3.1
Can you think of any fundamental elements that would need to be in place before cross-
functional teams can operate successfully?
Feedback
For cross-functional teams to succeed, several factors have been identified that are imperative:
yy team members must be open-minded and highly motivated

yy team members must come from the correct functional areas
yy a strong team leader with excellent communication skills and a position of authority is
needed
yy the team must have both the authority and the accountability to accomplish the mission
it has been given
yy management must provide adequate resources and support for the team, both moral
and financial
yy adequate communication must exist
Without any one of these elements, any cross-functional team would be fighting an uphill
battle to succeed.
3.4.1 Benefits sought from the cross-functional team approach

Cross-functional teams have become more popular in recent years for three primary
179
reasons: they improve coordination and integration, span organisational boundaries, and
reduce the production cycle time in new product development. Bringing people together
from different disciplines can improve problem solving and lead to more thorough deci-
sion making. The teams foster a spirit of cooperation that can make it easier to achieve
customer satisfaction and corporate goals at the same time.
The prescribed book discusses the following benefits sought from the cross-functional
180
team approach:
yy reduced time to complete a task
yy increased innovation
yy joint ownership of decisions
34
yy enhanced communication between function or organisations
yy realising synergies by combining individuals and functions
yy better identification and resolution of problems
yy the need to build internal relationships through teams
3.4.2 Potential drawbacks to the cross-functional team approach
Cross-functional teams have become an integral part of the business landscape in many
181
industries in recent years. But observers point out that their use can have unintended
drawbacks if companies are not watchful. For example, analysts note that cross-functional
teams can actually limit the professional growth of team members because they have
a narrow focus on one area. One company profiled in Nation's Business found that after
two years of serving on the same team, team members were becoming bored and were
learning only about the clients or the business categories handled by their team.
The solution? Once or twice every year, team members were reorganised into new teams
182
so that they could learn new skills. As a result of the new team environment, revenue-per-
employee rose 70 per cent, while clients reported in questionnaires that the company's
performance met or exceeded their goals 97 per cent of the time. Ninety two per cent of
clients rated the company better than the competition when it came to service.
Some companies try to hand off projects to cross-functional teams that are simply too large
183
in scope and are essentially doomed to failure from the start. Such large projects lack the
focus needed for cross-functional team success, and trying to make such a project work
in that environment can sour an entire organisation on using cross-functional teams for
other projects. Another sure pitfall is to establish a cross-functional team without impos-
ing either project deadlines or interim reporting deadlines. Without a sense of urgency
to complete a project, the project will almost certainly stall and fail.
Converting employees to a new compensation system when cross-functional teams are

184
implemented can be difficult as well. When team incentives replace individual merit in-
creases, team members often complain, even though more money can be earned in the
team-based system. Employees often feel that they have very little control over whether
or not the company's profits actually increase, therefore they have no control over earn-
ing a raise. Additionally, many employees balk at giving up their own merit increase for
the sake of the team. They may see the team plan as a way to demand more from teams
than from individuals without giving anything back in return.
There are also a number of potential drawbacks from the cross-functional team approach
185
discussed in the prescribed book:

yy negative effects on individual members
yy poor team decisions
yy team process loss
3.4.3 When to form a cross-functional team
All organisations face resource constraints that affect the number of cross-functional
186
teams they can establish. Focus on the discussion in the prescribed book to establish
when to from a cross-functional team, and when not to!
35 MNP3701/1
3.4.4 Improving sourcing team effectiveness
When executed properly, the cross-functional team approach can bring together the
187
knowledge and resources required for responding to new sourcing demands, something
traditional functional structures are often incapable of doing. However, groups and teams
can accomplish much that is good, or they can do great harm. There is nothing implicitly
good or bad, weak or strong, about teams, regardless of where an organisation uses
them. Because most organisations expect to use teams to support purchasing, sourcing
and supply decision making, it is important to understand how to effectively manage
the cross-functional sourcing team process.
Unfortunately, researchers who study teams rarely reach the same conclusions about
188
the key factors affecting team success. The study of teams is complex because no two
teams or organisations are the same. A factor affecting one team may have little impact
on another. Each team is a unique entity displaying its own behaviour and nuances. The
prescribed book, however, includes a set of questions that will assist you to improve the
sourcing team's effectiveness within your own organisation.
3.5 INTEGRATING SUPPLY MANAGEMENT, ENGINEERING AND

SUPPLIERS TO DEVELOP NEW PRODUCTS AND SERVICES
The prescribed book discusses the involvement of supply management, engineering

189
and suppliers to jointly work to develop new products and services under the following
sub-headings:
yy Common themes of successful supplier integration efforts
-- Formalised process for selecting items for supplier integration
-- Use of cross-functional team for supplier evaluation and selection
-- Early supplier selection for design and volume work
-- Supplier membership and participation on the team
-- Direct cross-functional intercompany communication during the project
-- Co-location of buyer and supplier personnel
-- Formal business unit trust development efforts
-- Sharing of technology between buyer and supplier companies
-- Joint education and training efforts
yy Supplier integration into customer order fulfilment
yy Supplier suggestion programmes
yy Buyer-seller improvement teams
yy On-site supplier representative
yy Potential benefits of on-site supplier representatives
Read the examples on pages 152 to 153 in Monczka et al. (2016).
36
CONCLUSION
Imagine that a company decides to manufacture in China. The CEO assigns the task to
190
a manufacturing vice president, and within two years, the company has a plant up and
running in Guangdong. But our hypothetical company has no overall end-to-end supply
chain capability to account for the fact that its lead times have increased by four weeks.
This, in turn, has an impact on how the company sells its products, takes orders, plans
distribution, sizes warehousing, and manages inbound and outbound logistics throughout
the global markets being served by the Chinese plant. In short, although the company
has lowered its product costs, it has increased its supply chain risk and possibly raised its
total cost of ownership – taking into account the impact on lost sales.
Our hypothetical organisation would have greatly benefited from the information on
191
supply management integration supplied in this study unit. We looked at integration –

internally and externally. The focus was on the critical roles of buyer-supplier relationships
and cross-functional teams. You also learned to value the integration of supply manage-
ment, engineering, and suppliers to develop new products and services.
This concludes part 2 of the study guide. You should now have a sound knowledge of
192
purchasing operations and structure. We now move on to investigate the concept "Stra-
tegic sourcing", and will start by evaluating supply management and commodity strategy
development in study unit 4.
3ASSESSMENT
(1) Define the concept "integration".

(2) List and explain supply management's internal communication flows and linkages.
(3) List and explain the supply management's external communication flows and
linkages.
(4) Explain what collaborative buyer-supplier relationships entail.
(5) List the advantages of buyer-supplier relationships.
(6) List the obstacles of buyer-supplier relationships.
(7) Explain what the critical elements of supplier relationship management are.
(8) Identify the critical role of cross-functional sourcing teams.
(9) Compile a checklist of the benefits from the cross-functional team approach.
(10) Identify potential drawbacks from the cross-functional team approach.
(11) When does an organisation need to form a cross-functional team?
(12) Identify and explain ways to improve sourcing team effectiveness.
(13) Provide an in-depth discussion on integrating supply management, engineering and
suppliers to develop new products and services. Use the following sub-headings:
yy Common themes of successful supplier integration efforts

yy Supplier integration into customer order fulfilment
yy Supplier suggestion programmes
yy Buyer-seller improvement teams
yy On-site supplier representative
yy Potential benefits of on-site supplier representatives
Also attempt to answer the discussion questions on pages 154 to 155 of Monczka
et al. (2016).
37 MNP3701/1
193
38
195
196
194
PART 3
199
197
STRATEGIC SOURCING
198
Study unit 4
Category strategy development
Study unit 5
Supplier evaluation and selection
200
Study unit 6
Supplier quality management
Study unit 7
Supplier management and development: creating a world-class supply base
201
39 MNP3701/1
Study unit 4
CATEGORY STRATEGY DEVELOPMENT
CONTENTS
202
203 Study unit aim

205 Key concepts
4.1
207 Aligning supply management and enterprise objectives
4.2
208 What is a category strategy?
4.3
209 Category strategy development (strategic sourcing)
4.4
210 Types of supply management strategies
4.5
211 E-Reverse auctions
4.6
212 Evolving sourcing strategies
213 Conclusion
214 Assessment
STUDY UNIT AIM

The aim of this study unit is to outline the relation between supply management and com-
215
modity strategy development.
yy clarify the alignment of supply management and enterprise objectives

yy explain what a category strategy is
yy conduct a spend analysis
yy evaluate a spend analysis spreadsheet
yy explain the various steps of category strategy development with the aid of a diagram
yy distinguish between the different types of supply management strategies
yy discuss e-Reverse auctions in detail
yy explain the stages of supply management strategy evolution with the aid of a diagram
216
40
KEY CONCEPTS
yy aligning supply management

yy enterprise objectives
yy integrative strategy development
yy translating supply management objectives
yy supply management goals
yy category strategy
yy spend analysis
yy spend analysis spreadsheet
yy category strategy development
yy strategic sourcing
yy team
yy project charter
yy conduct market research
yy strategy development
yy contract negotiation
yy supplier relationship management
yy types of supply management strategies
yy supply base optimisation
yy supply risk management
yy global sourcing
yy longer-term supplier relationships
yy early supplier design involvement
yy supplier development
yy total cost of ownership
yy e-Reverse auctions
yy evolving sourcing strategies
yy supply management strategy evolution
GETTING AN OVERVIEW
Read the case study on pages 192 to 193 in Monczka et al. (2016).
We have now established that the true benefits of purchasing, sourcing and supply
217
management were almost unknown within industry a couple of years ago. Manufactur-
ers usually made most of the parts that went into their finished products. When they
needed to buy materials or services, they relied on purchasing departments that were
seen primarily as order takers and order placers. These departments had little visibility,
had little perceived value to the bottom line, and enjoyed little respect from other parts
of the organisation.
41 MNP3701/1
That scene has changed dramatically. Although few companies are as strategic as they
218
need to be, and few apply best practices to maximum benefit, almost every company
today understands the link between supply management principles and strategic goals.
More and more companies now understand the concept of becoming lean – the ability
and competitive necessity of getting waste out of processes. They understand why inte-
grating suppliers into new product development are important. Over time, the tactical
purchasing function has given way to supply management processes in which highly
trained professionals take a systemic, strategic approach to the drivers of total value.
The reason for the change? A changing world.

219
As demands increased for better quality, faster delivery, and better overall value, a few
220
visionary leaders began to deliberately distinguish between the things that created value
and the things that did not. What they discovered was that the supply chain was a huge
opportunity waiting to happen. Their companies adopted best practices such as supplier
development, cost management, supplier integration, strategic sourcing themselves and
value engineering to stay ahead of competitors and position for future success.
Other companies resisted change too long and were forced to make traumatic adjust-
221
ments when competitive and economic challenges left them two choices: manage more
efficiently or fail. (A burning platform is always an effective catalyst for improvement.)
Whatever the reason for change, companies that implement purchasing and supply
222
management best practices find that they can make their total spend go 20 per cent to
30 per cent further. Imagine Vodacom saved 20 per cent or more on the R100-million
state-of-the-art data centre that the organisation unveiled in November 2008 in Johan-
nesburg. The 1 000 square metre facility has the capacity to host up to 20 000 dedicated
client servers or up to 650 000 virtual machines, allowing companies to do away with
their own costly data centres.
This study unit will help us achieve exactly that, by clarifying the alignment of supply
223
management and enterprise objectives, explaining what a category strategy is and outlin-
ing the various steps of category strategy development. We will also distinguish between
the different types of supply management strategies, address e-Reverse auctions and
explain the stages of supply management strategy evolution.
4.1 ALIGNING SUPPLY MANAGEMENT AND ENTERPRISE

OBJECTIVES
You have already learnt in Purchasing Management (MNP2601) and Supply Chain Man-
224
agement (MNP2602) that purchasing management, supply management and supply

chain management objectives are subordinate to corporate objectives. Therefore these
objectives need to support and contribute to the corporate objectives. Likewise, should
business unit, functional strategies (sub-strategies) and even to a lower level product-
line/commodity strategies, support and be in line with corporate strategies?
Organisations use integrative strategy development to develop corporate strategies,

225
business unit strategies, supply management strategies and commodity strategies.
42
4.2 WHAT IS A CATEGORY STRATEGY?

Once an organisation has established their supply strategies and goals, it is often applied
226
to categories – or in other words, general families of purchased products or services. A

variety of commodity examples is included in your prescribed book!
The most important aspects addressed in this section include conducting a spend analysis
227
and the spend analysis spreadsheet.
Read the sourcing snapshot on pages 206 to 208 in Monczka et al. (2016).
4.3 CATEGORY STRATEGY DEVELOPMENT (STRATEGIC

SOURCING)
This is one of the most important issues in the module.
Once the decision has been made to outsource a product or service, organisation will
typically use a process known as strategic sourcing to decide to whom to outsource
the product or service, as well as the structure and type of relationship that should be
established.
Most authors define strategic sourcing by describing or highlighting the principal elements
229
or activities, or describing it as a process. Some definitions focus on supplier relations,

while others emphasise the concept of applying long-term business objectives to sourcing
decisions. Furthermore, there is evidence that what is viewed as strategic sourcing varies
according to organisational and personal understanding of the concept. The reason for
this could be that firms find themselves on various levels of maturity in strategic sourcing.
Strategic sourcing is also seen as a systematic process that directs purchasing, sourcing
230
and supply managers to plan, manage and develop the supply base in line with a firm's
strategic objectives. Strategic sourcing is the application of current best practices to
achieve the full potential of integrating suppliers into the long-term business process.
The process of strategic sourcing starts with the establishment of cross-functional teams
231
who analyse the supply market situation, develop a strategy, negotiate contracts and
manage relationships with suppliers.
43 MNP3701/1
As indicated above strategic sourcing is a process that involves cross-functional teams to

232
identify, develop, manage and integrate an organisation's supplier base. The prescribed
book discusses the process according to 5 steps:
yy Step 1: build the team and the project charter
yy Step 2: conduct market research on suppliers
yy Step 3: strategy development
yy Step 4: contract negotiation
yy Step 5: supplier relationship management
Study this section by focussing on exhibit 6.9 on page 209.
4.4 TYPES OF SUPPLY MANAGEMENT STRATEGIES

As supply management becomes more involved in strategic decisions, an understanding
233
of the various strategies that it can employ is crucial. Strategies such as increased inte-
gration, information sharing and collaboration among supply chain members are most
likely to be implemented and will have the largest impact on organisations leading to
significant improvements over the next 5 to 10 years. However, this integration will not
include joint investment or asset sharing, will be limited to one tier in the supply chain,
and will not heavily involve e-markets and electronic auctions.
234 The prescribed book discusses seven other types of supply management strategies:
yy Insourcing/outsourcing
yy Supply base optimisation
yy Supply risk management
yy Low-cost country sourcing
yy Longer-term supplier relationships
yy Early supplier design involvement
yy Supplier development
yy Total cost of ownership
4.5 E-REVERSE AUCTIONS

Many private sector organisations (eg BMW and Nestlé) and public sector organisations
235
(eg the Gauteng Shared Services Centre (GSSC) and universities) use e-Reverse auctions
in an attempt to achieve direct cost reductions of externally sourced goods. In e-Reverse
auctions, the purchaser invites pre-selected suppliers who compete against each other
to supply a specified good or service thus, driving down the supply price through di-
rect competition. The potential savings are significant typically ranging from 5% to 30%,
or in some cases even more far reaching.
44
Traditional e-Reverse auctions processes comprise four key stages; opportunity assess-
236
ment, market making, transaction and implementation, which are fully recordable for
issues of traceability and transparency. e-Reverse auctions can be quick to instigate, have
a potentially low entry cost and encourage good procurement practice. Whilst e-Reverse
auctions are not necessarily indications of procurement excellence, they can be a catalyst
to support the introduction and continued operation of best practice and benchmarking.
A reduction in the purchase price of goods and/or services is the main component of a
business case for the use of e-Reverse auctions. Such a reduction in cost can occur in real-
time through competitive bidding between suppliers, in a similar way to eBay through
peer-to-peer models. This can be through improved pricing terms for spot purchase or
for the duration of the contract for longer term strategic agreements. It is not always
however true that the cheapest price is the best deal. Factors other than price need to
also be considered, such as quality, delivery, product warranty, service and specification.
Whilst many e-Reverse auctions are used as price reduction strategies, only such an ap-
237
proach can use a blended weight bidding format for combinations of these criteria thus,
ensuring that the best value (as determined by the purchaser) is attained. Effectively, the
e-Reverse auctions process which is clearly dynamic provides reassurance that the organ-
isation is buying at market rates rather than using traditional static tendering processes.
4.6 EVOLVING SOURCING STRATEGIES

The four phases of supply management strategy evolution is discussed in the prescribed
238
under the following sub-headings:
yy Phase 1: basic beginnings

yy Phase 2: moderate development
yy Phase 3: limited integration
yy Phase 4: fully integrated supply chains
239 Study this section by focusing on exhibit 6.14 on page 237.
Read the practical example on pages 240 to 241 in Monczka et al. (2016).
45 MNP3701/1
CONCLUSION
Basically, it is crucial to ensure that supply objectives are fully aligned with enterprise
240
objectives to ensure an increase in revenue and decrease in costs. These supply objec-
tives should then be translated into measurable supply goals that can be put into action.
Once a category strategy is identified, the strategic sourcing process can be implemented.
Fundamentally, strategic sourcing is a process that helps companies analyse how they
purchase products and services to lower costs, improve profits, and improve their sup-
ply chain. Strategic sourcing recognises that people, including innovative suppliers, are
a valuable part of an organisation and focuses on reducing waste or non-value-added
costs. While most organisations implement strategic sourcing initiatives for the purposes
of saving money, other reasons include improving supplier performance, minimising risk
and gaining a significant competitive advantage.
This study unit helped us understand the alignment of supply management and enterprise
241
objectives, by explaining what a category strategy is and outlining the various steps of
category strategy development. We also distinguished between the different types of
supply management strategies, addressed e-Reverse auctions and explained the stages
of supply management strategy evolution.
We will outline the variables influencing the supplier selection and evaluation process
242
in study unit 5.
4ASSESSMENT
(1) Clarify the aligning of supply management and enterprise objectives by using the
following sub-headings:
yy Integrative strategy development

yy Translating supply management objectives into supply management goals
(2) What is a category strategy?
(3) Explain all the aspects to take into consideration when conducting a spend analysis.
(4) How does an organisation produce a spend analysis spreadsheet?
(5) Explain the various steps of category strategy development with the aid of a diagram.
(6) Distinguish between the different types of supply management strategies.
(7) Provide an in-depth discussion about the concept "e-Reverse auction".
(8) Explain the stages of supply management strategy evolution with the aid of a dia-
gram. Use the following sub-headings:
yy Phase 1: basic beginnings

yy Phase 2: moderate development
yy Phase 3: limited integration
yy Phase 4: fully integrated supply chains
Also attempt to answer the discussion questions on pages 242 to 243 of Monczka et al.
(2016).
46
Study unit 5
SUPPLIER EVALUATION AND SELECTION
CONTENTS
243
244 Study unit aim

246 Key concepts
248 5.1 The supplier evaluation and selection process
249 5.2 Key supplier evaluation criteria
250 5.3 Developing a supplier evaluation and selection survey
251 5.4 Reducing supplier evaluation and selection cycle time
252 Conclusion
253 Assessment
STUDY UNIT AIM

254 The aim of this study unit is to explain the supplier evaluation and selection process.
yy outline the supplier evaluation and selection process

yy list and explain the key supplier evaluation criteria
yy develop a supplier evaluation and selection survey
yy outline the critical issues in supplier selection
yy suggest ways to reduce supplier evaluation and selection cycle time
KEY CONCEPTS
yy supplier evaluation
yy supplier selection process
yy recognise the need for supplier selection
yy key sourcing requirements
yy sourcing strategy
yy potential supply sources
yy sourcing alternatives
yy limit suppliers in selection pool
47 MNP3701/1
yy reach agreement
yy key supplier evaluation criteria
yy management capability
yy employee capabilities
yy cost structure
yy total quality performance, systems, and philosophy
yy process capability
yy technological capability
yy environmental regulation compliance
yy financial stability
yy production scheduling and control systems
yy e-commerce capability
yy Black Economic Empowerment
yy black ownership/control
yy black management
yy skilled black personnel as a percentage of all skilled personnel
yy purchases from black and BEE suppliers
yy black female management, and
yy employment of the black disabled.
yy supplier's sourcing strategies, policies, and techniques
yy longer-term relationship potential
yy supplier evaluation and selection survey
yy supplier evaluation categories
yy identify and weigh sub-categories
yy scoring system for categories and sub-categories
yy evaluate supplier directly
yy review evaluation results
yy make selection decision
yy review and improve supplier performance
yy reducing supplier evaluation
yy selection cycle time
yy map current supplier evaluation and selection process
yy integrate with internal customers
yy data warehouse
yy third-party support
yy new organisational design features
yy preferred supplier list
yy electronic tools
yy predefined contract language and shorter contracts
GETTING AN OVERVIEW
Poor supplier performance can be an immeasurable pit for precious organisational re-
255
sources – including time, money and effort. You won't have to work so hard if you apply
certain proven techniques for evaluating and selecting the right supplier from the out-
48
set – and improving the buying organisations' chances of obtaining adequate or even
outstanding supplier performance as a result.
If you have wanted to implement a supplier evaluation and selection programme but
256
had difficulty getting started, this study unit is going to prove very valuable to you. We
will examine the supplier evaluation and selection process in this study unit by taking
a closer look at the key supplier evaluation criteria, a supplier evaluation and selection
survey, the critical issues in supplier selection and by suggesting ways to reduce supplier
evaluation and selection cycle time.
You might find the headings and sub-headings in this chapter (Ch 7) in the
prescribed book confusing. Therefore please follow the study guide where we
clearly distinguish between headings and sub-headings.
5.1 THE SUPPLIER EVALUATION AND SELECTION PROCESS

A generic supplier evaluation and selection is discussed in detail in the prescribed book,
258
under the following sub-headings:
259 Step 1 Recognise the need for supplier selection

260 Step 2 Identify key sourcing requirements
261 Step 3 Determine sourcing strategy
262 Step 4 Identify potential supply sources
yy Current suppliers
yy Sales representatives
yy Information databases
yy Experience (organisational knowledge)
yy Trade journals
yy Trade directories
yy Trade shows
yy Second-party or indirect information
yy Internal sources
yy Internet searches
263 Step 5 Sourcing alternatives
yy Manufacturer vs. distributor
yy Local or national or international suppliers
yy Large or small suppliers
yy Multiple or single sourcing
yy Evaluate critical issues
264 Step 6 Limit suppliers in selection pool
yy Financial risk analysis
yy Evaluation of supplier performance
yy Evaluation of supplier-provided information
49 MNP3701/1
265 Step 7 Determine the method of supplier evaluation and selection
yy Evaluation from supplier-provided information
yy Supplier visits
yy Use of preferred suppliers
yy External or third-party information
266 Step 8 Select supplier and reach agreement
5.2 KEY SUPPLIER EVALUATION CRITERIA

Purchasing, sourcing and supply professionals usually evaluate potential suppliers across
267
multiple categories using their own selection criteria with assigned weights. The prescribed
book discusses some of these evaluation criteria including:
yy Management capability
yy Employee capabilities
yy Cost structure
yy Total quality performance, systems, and philosophy
yy Process and technological capability
yy Environmental regulation compliance
yy Financial stability
yy Production scheduling and control systems
yy E-commerce capability
yy Supplier's sourcing strategies, policies, and techniques
yy Longer-term relationship potential
In South Africa, another important supplier evaluation criterion is the evaluation of the
268
potential suppliers' ownership/control status in terms of Black Economic Empowerment

(BEE). Let us take a closer look at this, by considering the practice employed by Eskom –
South Africa's electricity provider.
When applying for registration as suppliers, and again on every occasion when they
269
submit a tender to Eskom, suppliers provide a statement of their ownership/control and

internal Black Empowerment Programme, which will be used in supplier assessment and
in assessing tenders along with technical and commercial offerings. Any changes to the
make-up of the potential supplier or to their Black Empowerment Programme that will
improve their BEE status but that occur after the tender closing date and time and before
order/contract placement will not be taken into consideration in tender evaluation, even
if these changes were under consideration at the time of tendering. However, if a supplier
loses its BEE status at any time, Eskom must be informed within seven (7) working days.
50
270 Areas that will receive specific attention during BEE status evaluation are:
yy Black ownership/control
yy Black management
yy Skilled black personnel as a percentage of all skilled personnel
yy Purchases from black and BEE Suppliers
yy Black Female Management, and
yy Employment of the black disabled.
To establish whether a large supplier, that is a supplier with an annual turnover of more
271
than R25 m, qualifies as a BEE Supplier, a points rating system is used. Large suppliers with
a rating of 9 or more will be deemed to be BEE Suppliers. To qualify as a large BEE supplier
at least one point must be scored in the criteria for Black ownership, Black management,
percentage of skilled Black personnel, and purchasing from BEE Suppliers.
Small suppliers, with an annual turnover of R25 m or less, in manufacturing, construction,

272
mining/extraction or management or professional consulting may request, in writing, that

Eskom measure them according to the points system set out in table 5.1 rather than by
the ownership requirement. This will be at Eskom's discretion.
This rating will be updated with every tender received, and used in evaluating the ten-
273
ders, taking economic value to Eskom and the economy at large into consideration. This
rating will also be used in formal supplier performance appraisal meetings. Only Black
Supplier Programme personnel may qualify a supplier as BEE and register it as such on
the Eskom Vendor Master.
Table 5.1
274Eskom's bee rating criteria for supplier and tender evaluation
CRITERIA 1 2 3
Black Ownership 10% to <20% 20% to 50% >50%
Black Management 10% to <20% 20% to 50% >50%
Black Skilled Personnel 10% to <20% 20% to 50% >50%
Procurement from Black/BEE 5% to <10% 10% to 20% >20 %

Suppliers
Black Female Management 1% to <5% 5% to 10% >10%
Other BEE Initiatives One point at Eskom's discretion
Employment of the Black Disabled One point at Eskom's discretion (see note
below)
Source: http://www.eskom.co.za/content/ESKADAAT6_REV4b%5B1%5D.doc
51 MNP3701/1
5.3 DEVELOPING A SUPPLIER EVALUATION AND SELECTION
SURVEY
Why evaluate supplier performance? There are various reasons for the evaluation of
276
purchasing, sourcing and supply performance being important, such as:
1. Evaluation can significantly improve supplier performance. When properly done,

supplier performance management can provide answers to questions such as the
following.
yy Who are the highest-quality suppliers?
yy How can relationships with the best suppliers be enhanced?
yy How can supplier performance be incorporated into total cost analysis?
yy How can buyers ensure that suppliers live up to what was promised?
yy How can feedback be shared based on experience with a supplier?
yy How can underperforming suppliers' problems be tracked and fixed?
2. Evaluation assists decision making regarding when a supplier is retained or removed

from an approved list.
3. Evaluation assists in deciding with which suppliers a specific order should be placed
4. Evaluation provides suppliers with an incentive for continuous improvement and
prevents performance "slippage".
5. Evaluation can assist in deciding how to distribute the spend for an item among
several suppliers to better manage risk.
What needs to be evaluated? Traditionally, the key performance indicators (KPIs) for the
277
evaluation of supplier performance have been price, quality and delivery. While these are
still basic to supply evaluation, such developments as just-in-time, lean manufacturing,
integrated supply chain and e-procurement have made the fuller evaluation of supplier
relationships an important consideration. Such relationships include such qualitative
factors as intercompany communication and high levels of trust, which are not easy to
assess other than subjectively. Apart from subjectivity, qualitative evaluations are often
subject to "halo effects" – which is the tendency to bias in favour of particular supplier
due to irrelevant considerations, such as the friendly approach its sales representatives.
There is, however, an element of subjectivity in all evaluation systems.
The seven steps employed to develop a supplier evaluation and selection survey are
278
discussed in the prescribed book. They include:
yy Step 1: identify supplier evaluation categories

yy Step 2: assign a weight to each evaluation category
yy Step 3: identify and weigh sub-categories
yy Step 4: define a scoring system for categories and sub-categories
yy Step 5: evaluate supplier directly
yy Step 6: review evaluation results and make selection decision
yy Step 7: review and improve supplier performance continuously
52
It is useful when selecting a supplier to have a check list with which to evaluate the sup-
279
plier's suitability. How much of the checklist is used and how thoroughly will depend on
every organisation's own needs. However, even a brief review using this check list may
help raise points that could otherwise be overlooked and become issues later. Consider
the following example of a supplier selection check list.
This check list has been designed primarily for suppliers that offer IT development services,
280
such as consultancy; application design and software development and implementation.

It also has relevance to services, software support, application hosting, IT services (running
infrastructure) and IT product suppliers. Remember that this checklist is primarily for use
as an aid and is not designed to be an exhaustive list of all possible issues to consider.
The format of this check list has been designed to provide a simple list of issues for you
to consider.
1 SUPPLIER STATUS
281
yy Employees
-- How many are there?
-- Where are they based?
-- Are any of them critical?
yy Geography
-- How widespread are the offices?
-- What is the nature of the offices?
yy Credibility
-- Reputation in the market
-- Who are their reference clients?
-- Who have they worked with before on similar projects?
-- Talk to these clients
-- Are there other clients that they don't quote as references?
-- Have they done any work for your competitors?
yy Partners
-- What is the quality and range of their formal partnerships?
-- If this is weak–do they have an informal network that can be called upon to provide
additional or specialist resources?
yy Strategic direction
-- Is it appropriate or necessary to develop a long-term relationship with this supplier?
-- If so, do they have the vision to innovate in the way you would like?
yy Existing relationship
-- Is there an existing relationship with the supplier?
-- Who are the account managers?
-- What work has been done?
-- What are the terms and period for any co-operation?
282 2 DELIVERY CAPABILITY
yy Services
-- Can the supplier provide the complete range of services required for completing the
project?
-- Typical implementation time for this scale of project? Project Management? Support?
Graphic design? Design creativity? Application hosting?
53 MNP3701/1
yy Quality of Deliverables
-- Can they produce evidence of good quality work?
-- Does it comply with their standards?
yy Resources
-- Are there enough to execute the work?
-- Is it clear what dependence there is on key individuals?
-- Is contingency included in the resource planning?
-- Would they be able to deal with the unexpected?
-- Are specific, named, resources allocated?
yy Geography
-- Is there an appropriate geographical presence to execute the project?
yy Customer interface
-- Are there suitable customer interfaces for the project?
284 3 PROCESSES
-- Do they have robust, repeatable, measurable processes for creating their deliverables?
-- Are they formally certified?
-- Are project tracking and reporting procedures in place?
yy Project Management
-- Do they recognise the proposed work as a project?
-- How do they carry out project management?
-- Do they fit with your own project control procedures, or can they be modified to do so?
yy Account Management
-- How is the relationship managed outside the context of specific projects?
-- How are projects planned within a portfolio?
-- How do you take advantage of economies of scale across projects?
-- What complaints/problem escalation procedures exist?
-- How willing are they to invest in a long-term relationship?
-- Is there a user group? Is it independent?
yy Design/Build
-- Are there formal processes?
-- Do they have standards?
-- Do we understand the methodology that they will use?
-- Do you have the capability to interpret and sign off the design documents that they
will create?
4 TECHNICAL STATUS
285
yy Infrastructure
-- Do they have the necessary technical infrastructure to develop the application?
-- Can they test in an environment compatible to yours?
-- Is there portability across operating systems?
-- Are the system management tools used in support industry standard?
yy Development Environment
-- Do they use appropriate standards or proprietary tools?
-- Will the output be supportable at reasonable cost?
-- Will it generate re-usable modules for them and for your developers?
-- How productive are they?
54
-- Do they provide the ability to review progress on-line, securely?
-- Is their documentation clear enough for hand-over to others?
yy Security
-- Is their environment secure to the level required by the application and its content?
286 5 SUPPLIER CULTURE
yy Professionalism
-- What aspects constitute as “professionalism” depends on the business environment
and may need to be judged by other people in the same field?
yy Flexibility and Commitment
-- How well will they handle schedule upsets, changes to requirements and so forth?
This may be best judged in informal discussion and by checks with reference clients.
yy Open/Friendly
-- How honest are they about problems faced and overcome?
-- Are they suitably discrete about their other clients?
-- Do you feel comfortable with them?
-- Do they appear to communicate openly and freely internally?
yy Integrity
-- Do they stand by their offerings?
-- Are they consistent in what they say: during trade-off negotiations and about their
capabilities?
-- Are they happy to be technically/financially audited if necessary?
yy Understanding Your Business Goals
-- Does the supplier really understand why you want to do this project, from a business
perspective?
yy Proactive
-- Do they offer sensible and appropriate advice on potential solutions?
yy Understands Business Environment
-- Are they willing to work with other 3rd Party development environments and yours?
-- Where relevant, the supplier should understand multilingual requirements for content
delivery and its impact on maintenance complexity.
yy Innovative
-- Look for an approach that is imaginative, flexible, and problem solving driven.
6 FINANCIAL/COMMERCIAL
yy
287
Sustainability
--
Will they exist for the length of time we need them?
yy Ownership structure/history
-- How new are they?
-- Who owns them?
-- Services such as Dun and Bradstreet can help in this assessment.
yy Cash flow
-- Will they go broke during the project/product lifecycle?
-- Can be tested by checking whether they can accept payment at the end of the project.
yy Intellectual property
-- Is there a clear agreement about the ownership of any deliverables?
55 MNP3701/1
yy Non-disclosure
-- Is an appropriate security agreement in place to protect your and the supplier's
interests?
yy Competitive Pricing
-- Consider daily rates, and how these may vary.
-- Headline rates are not the whole story – consider ability to execute.
-- Trade off fixed price against time and materials.
-- Consider balance between cost, time and quality.
yy Schedule Compliance
-- Do they have the ability to execute within the project time-frames?
7 SUPPORT
288
-- Decide what support will be required from the supplier, if any.

-- What will the user helpdesk role be?
-- Will the solution be created in a way that permits others to support it?
-- Is there a standard SLA with various levels of service?
yy Costs
-- Fixed
-- Variable
yy Availability
-- Work hours
-- Holidays
-- Response times
-- Help desk functions – who, how, where
-- Do they have proper call management processes?
-- Are the escalation procedures clear?
Source: http://www.projectsmart.co.uk/docs/supplier-selection-checklist.pdf
5.4 REDUCING SUPPLIER EVALUATION AND SELECTION CYCLE

TIME
Across almost all business applications, competitive and customer pressures are forcing
290
reductions in the time it takes to perform a task or carry out a process. The prescribed
book addresses some of the tools and approaches available to reduce the supplier evalu-
ation and selection cycle time:
yy map the current supplier evaluation and selection process

yy integrate with internal customers
yy data warehouse with supplier information
yy third-party support
yy new organisational design features
yy supplier categorisation
yy electronic tools
yy predefined contract language and shorter contracts
56
Read the example on pages 280 to 281 in Monczka et al. (2016).
CONCLUSION
Activity 5.1
Can you identify an organisation operating within South Africa and determine its position
on supplier evaluation and selection?
Feedback
Afrox is the largest gas and welding products supplier in South Africa and one of the coun-
try's most trusted brands, with products and services that form part of most manufacturing,
industrial and construction processes. With its African operations, Afrox is the largest gases
and welding company in sub-Saharan Africa. Afrox is part of a global group, Linde, one of the
world's leading gas companies. Linde operates in 50 countries worldwide on five continents.
Afrox is proudly South African. As part of a global company, Linde, they also embrace the
global sourcing of products as a global group.
Their position on supplier selection, evaluation and performance appraisal is as follows:
The acronym SESPA stands for "Supplier Evaluation, Selection and Performance Appraisal.
Worldwide the BOC Group adopted the SESPA methodology as the standard for selecting
suppliers and evaluating suppliers’ performance. A formal criteria exists that sets guidelines
for the application of SESPA.
SESPA provides transparency and objectivity to the selection of suppliers and provides a
measurement tool in the supplier performance management process. It provides a consistent
and structured approach to the selection of suppliers. The SESPA process is applied by a cross-
functional team so decisions are agreed and jointly owned. A decision against the responses
received to the Request For Information (RFI)/Request for Quotation (RFQ) consists of the
weighting of seven characteristics by a sourcing team, each of them bring a particular com-
petency or skill to the process.
The seven characteristics are:
yy commercial
yy administrative and business management
yy responsiveness
yy delivery/cycle time
yy quality
yy technology
yy safety/environmental
SESPA forms the basis for continuous improvement by providing the criteria for on-going
measurement of the supplier. The SESPA process enables Afrox to benchmark suppliers, man-
57 MNP3701/1
age and mitigate supply and business risk. It also ensures that high performing suppliers are
suitably rewarded.
The SESPA process support the Afrox values (ACTS) and the Afrox Code of Conduct/Ethical
Purchasing Policy."
Source: http://www.afrox.com/downloads/about_us/Becoming_an_Afrox_supplier.pdf
We examined the supplier evaluation and selection process in this study unit by taking
291
a closer look at the key supplier evaluation criteria, a supplier evaluation and selection
survey, the critical issues in supplier selection and by suggesting ways to reduce supplier
evaluation and selection cycle time.
292 Supplier quality management will be the focus in study unit 6.
5ASSESSMENT
(1) Outline the supplier evaluation and selection process. Use a diagram to substantiate
your answer.
(2) List and explain the key supplier evaluation criteria.
(3) Develop a supplier evaluation and selection survey.
(4) Outline the critical issues in supplier selection.
(5) Suggest ways to reduce supplier evaluation and selection cycle time. Use the follow-
ing sub-headings:
yy Map the current supplier evaluation and selection process

yy Integrate with internal customers
yy Data warehouse with supplier information
yy Third-party support
yy New organisational design features
yy Supplier categorisation
yy Electronic tools
yy Predefined contract language and shorter contracts
Also attempt to answer the discussion questions on pages 282–283 of Monczka et al. (2016).
58
Study unit 6
SUPPLIER QUALITY MANAGEMENT
CONTENTS
293
294 Study unit aim

296 Key concepts
298 6.1 Overview of supplier quality management
299 6.2 Factors affecting supply management's role in managing supplier quality
300 6.3 Supplier quality management using a total quality management perspective
301 6.4 Pursuing six sigma supplier quality
302 6.5 Using ISO standards and MBNQA criteria to assess supplier quality systems
303 6.6 Basic content of a supplier quality manual
304 Conclusion
305 Assessment
STUDY UNIT AIM

The aim of this study unit is to highlight the important aspects associated with supplier
306
quality management.
yy define the concept "supplier quality"

yy list the reasons why supplier quality is so important
yy list the factors affecting supply management's role in managing supplier quality
yy write a detailed report on supplier quality management by using a total quality
management perspective
yy explain how to use ISO standards and MBNQA criteria to assess supplier quality
systems
KEY CONCEPTS
yy supplier quality management

yy supplier quality
yy factors affecting supply management's role in managing supplier quality
59 MNP3701/1
yy total quality management perspective
yy Deming's 14 points
yy pursuing quality at the source
yy objective measurement and analysis
yy subjective measurement and analysis
yy prevention of defects
yy detection of defects
yy process
yy output
yy process capability
yy striving for zero defects
yy cost of quality
yy continuous improvement
yy responsibility
yy pursuing six sigma supplier quality
yy ISO standards
yy MBNQA criteria
yy ISO 9000:2000 registration
yy ISO 14000 standards
yy the Malcolm Baldrige national quality award
GETTING AN OVERVIEW
Supplier quality management has emerged as one of the leading business practices
307
in the past few years. World-class manufacturers are making significant investments in
systems and processes to improve supplier quality. Organisations such as Boeing – the
world's leading aerospace company and the largest manufacturer of commercial jetliners
and military aircraft combined. Additionally, Boeing designs and manufactures rotorcraft,
electronic and defence systems, missiles, satellites, launch vehicles and advanced infor-
mation and communication systems. Boeing has customers in more than 90 countries
around the world and is one of the largest American exporters in terms of sales.
Their vision for supplier quality management is: "Our commitment to steady, long-term
308
improvement in our products and processes is the cornerstone of our business strategy.
Maintaining customer satisfaction and enhancing shareholder value is a mutual goal of
both Boeing and its suppliers. To achieve this objective, we must continuously work to-
gether to improve the overall efficiency and productivity of our design, manufacturing,
administrative, and support organisations."
This study unit focuses on supplier quality management by addressing what supplier
309
quality is, and why we should be concerned with supplier quality. We then proceed to
list the factors affecting supply management's role in managing supplier quality. An in-
depth discussion on supplier quality management using a total quality management
perspective follows. We will also consider pursuing six sigma supplier quality, and using
ISO standards and MBNQA criteria to assess supplier quality systems.
60
Read the case study on pages 286 to 287 in Monczka et al. (2016).
6.1 OVERVIEW OF SUPPLIER QUALITY MANAGEMENT

Why is supplier quality management critical? With companies outsourcing their manufac-
310
turing to strategic partners across the globe, the supply chains have become very long.
Many consumer products are manufactured in Mexico or the Far East and then shipped
to North American markets using multiple logistics providers via ocean, air and roads. It
can take weeks for a finished product to reach the store shelves from a supplier in the
Far East. In addition, many of these manufacturers have streamlined their supply chain
and implemented lean inventory techniques. As a result, any issue in supplier quality can
quickly result in stock-outs.
Companies that sell industrial products need to preserve their preferred supplier status
311
to continue to be considered for future business. As a result they are under pressure to
ensure that their products continue to meet or exceed acceptable requirement thresholds
set by their customers. We can therefore see why managing their own supplier's quality
is very high on the agenda for these organisations.
Now turn your attention to the prescribed book in order to answer the questions: "What
312
is supplier quality?" and "Why be concerned with supplier quality?"
6.2 FACTORS AFFECTING SUPPLY MANAGEMENT'S ROLE IN

MANAGING SUPPLIER QUALITY
A number of factors affect how much attention supply management should commit to
313
managing supplier quality:
yy the ability of a supplier to affect a buyer's total quality

yy the resources available to support supplier quality management and improvement
yy the ability of a buying firm to practice world-class quality
yy a supplier's willingness to work jointly to improve quality
yy a supplier's current quality levels
yy a buyer's ability to collect and analyse quality-related data
314 These are discussed in this section of the prescribed book.
61 MNP3701/1
6.3 SUPPLIER QUALITY MANAGEMENT USING A TOTAL
QUALITY MANAGEMENT PERSPECTIVE
Total quality management (TQM) is a business management strategy aimed at embedding
315
awareness of quality in all organisational processes – especially when addressing aspects

concerning suppliers. You need to pay close attention to this section in the prescribed
book as discussed under the following headings:
yy Defining quality in terms of customers and their requirements
yy Deming's 14 points
-- Point 1: Create a vision and demonstrate commitment
-- Point 2: Learn the new philosophy
-- Point 3: Understand inspection
-- Point 4: Stop making decisions purely on the basis of price
-- Point 5: Improve constantly and forever
-- Point 6: Institute training
-- Point 7: Institute leadership
-- Point 8: Drive out fear
-- Point 9: Optimize the team efforts of teams
-- Point 10: Eliminate exhortations
-- Point 11: Eliminate numerical quotas and measurement by objective
-- Point 12: Remove barriers to pride in workmanship
-- Point 13: Encourage education and self-improvement
-- Point 14: Take action
yy Pursuing quality at the source
yy Stressing objective rather than subjective measurement and analysis
yy Emphasising prevention rather than detection of defects
yy Focusing on process rather than output
yy Basics of process capability
yy Striving for zero defects
yy Cost of quality
yy The seven wastes
yy Establishing continuous improvement as a way of life
yy Making quality everyone's responsibility
We suggest that you start this section by reviewing exhibit 8.1 and 8.2 in the prescribed
316
book.
6.4 PURSUING SIX SIGMA SUPPLIER QUALITY

The total quality management principles discussed in the previous section is only suc-
317
cessful if organisations are able to operationalize them and demonstrate tangible results.
Six Sigma is today's version of total quality management. What does the approach entail?
Six Sigma is a business improvement culture, originally developed by Motorola, which
today enjoys widespread application in many sectors of industry.
62
Six Sigma seeks to identify and remove the causes of defects and errors in manufacturing
318
and business processes. It uses a set of quality management methods, including statisti-
cal methods, and creates a special infrastructure of people within the organisation who
are experts in these methods. Each Six Sigma project carried out within an organisation
follows a defined sequence of steps and has quantified financial targets (cost reduction
or profit increase).
Obtaining the set Six Sigma objectives is an extraordinarily task. Fortunately, reaching Six
319
Sigma is not actually the point of the Six Sigma program. The real accomplishments come
from the journey to Six Sigma, not from the statistics. With the support of top manage-
ment, the right tools and methodology and total corporate commitment, Six Sigma can
significantly improve your organisation's growth through better quality and business
processes as well as by reducing cost, improving cash and delighting your customers.
6.5 USING ISO STANDARDS AND MBNQA CRITERIA TO ASSESS

SUPPLIER QUALITY SYSTEMS
With the current interest in ISO 9000 standards, some organisations have sought to replace
320
or modify their improvement programmes to meet the ISO standards. This has brought
an apparent reduction in interest in total quality management initiatives. But is this di-
version justified by market forces or simply wishful thinking on the part of beleaguered
organisational management?
The intent of the ISO 9000 series requirements is simple. The standard requires that a basic
321
quality system be implemented to ensure customers that suppliers have the capabilities
and systems to provide quality products and/or services.
ISO 14001: 2004 is designed to promote environmental awareness and protection as well
322
as pollution prevention.
The benchmark for TQM models is the Malcolm Baldrige National Quality Award (MBNQA)
323
criteria. A major goal of the MBNQA is to increase American competitiveness worldwide.

The MBNQA is essentially a search for "role models" with superior records of quality.
324 These concepts are adequately explained in the prescribed book!
6.6 BASIC CONTENT OF A SUPPLIER QUALITY MANUAL
Study pages 315–316 in Monczka et al. (2016).
63 MNP3701/1
CONCLUSION
The increasingly global nature of the supply chain adds another dimension to the com-
325
plexity issue. As companies large and small have turned to global markets to keep material
costs low they find themselves facing new challenges. Weak safety standards and less
developed infrastructures abroad leave manufacturers vulnerable to contamination or
counterfeiting. A strong supplier qualification process is necessary to ensure quality in a
global, complicated supply chain.
The guarantee of product quality has long been considered a pillar of corporate respon-
326
sibility. However, recent events have demonstrated that ensuring the integrity of raw
materials purchases is a growing challenge for many organisations. As supply chains
continue to globalise, the need for robust supplier qualification and supplier manage-
ment programmes becomes increasingly critical.
327 By addressing the challenges of supply quality, companies can benefit in many ways:
yy First and foremost, a strong supplier quality programme reduces business risk.
yy Secondly, understanding and documenting the supply chains of your critical suppliers
will help identify improvement opportunities.
yy Strong quality documentation will ensure there is a path of resolution and recourse
if there is an issue.
yy Finally, you can stay in front of the quickly changing regulatory environment.
This study unit focused on supplier quality management by addressing what supplier
328
quality is, and why we should be concerned with supplier quality. We then proceeded
to list the factors affecting supply management's role in managing supplier quality. An
in-depth discussion on supplier quality management using a total quality management
perspective followed. We also considered pursuing six sigma supplier quality, and using
ISO standards and MBNQA criteria to assess supplier quality systems.
In study unit 7, we will outline supplier management and supplier development as the
329
tool for creating a world-class supply base.
6ASSESSMENT
(1) Define the concept "supplier quality".

(2) List the reasons why supplier quality is so important.
(3) List the factors affecting supply management's role in managing supplier quality.
(4) Write a detailed report on supplier quality management by using a total quality
management perspective.
(5) Explain how to use ISO standards and MBNQA criteria to assess supplier quality
systems.
Also attempt to answer the discussion questions on pages 318 of Monczka et al. (2016).
64
Study unit 7
SUPPLIER MANAGEMENT AND DEVELOPMENT:
CREATING A WORLD-CLASS SUPPLY BASE
CONTENTS
330 Study unit aim

332 Key concepts
334 7.1 Supplier performance measurement
335 7.2 Rationalisation and optimisation: creating a manageable supply base
336 7.3 Supplier development: a strategy for improvement
337 7.4 Overcoming the barriers to supplier development
338 7.5 Managing supply base risk
339 7.6 Managing sustainability in the supply base
340 Conclusion
341 Assessment
STUDY UNIT AIM

The aim of this study unit is to familiarise you with supplier management and develop-
342
ment as the platform for creating a world-class supply base.
yy provide a detailed explanation of supplier performance measurement

yy explain the use of rationalisation and optimisation as a platform for creating a man-
ageable supply base
yy outline supplier development as a strategy for improvement using a South African
example
yy provide suggestions to overcome the barriers to supplier development
yy explain the various categories of supply risk
yy make suggestions how to overcome supply risk
yy outline the critical issues in the managing of sustainability in the supply base
KEY CONCEPTS
yy supplier performance measurement

yy supplier measurement decisions
yy supplier measurement techniques
yy rationalisation
65 MNP3701/1
yy optimisation
yy a manageable supply base
yy supplier development
yy Competitive Supplier Development Programme
yy a process map
yy buyer-specific barriers
yy buyer-supplier interface barriers
yy supplier-specific barriers
yy supply risk
yy supply base sustainability
GETTING AN OVERVIEW
Supplier management and development is gaining more and more attention within South
343
African organisations, and even the government has placed a high-level of importance
on ensuring that supplier's capabilities are of world-class standard. As shareholder rep-
resentative on behalf of Government, the Department of Public Enterprises (DPE) has a
mandate to provide oversight management of nine State Owned Enterprises (SOE): Alexkor,
Broadband Infraco, Denel, Eskom, the Pebble Bed Modular Reactor, South African Airways,
South African Express Airways, South African Forestry Company (Ltd) and Transnet.
What will you learn from this study unit? We will provide a detailed explanation of sup-
344
plier performance measurement; explain the use of rationalisation and optimisation as

a platform for creating a manageable supply base; outline supplier development as a
strategy for improvement with the aid of a South African example and provide sugges-
tions to overcome the barriers to supplier development.
Read the case study on page 323 in Monczka et al. (2016).
7.1 SUPPLIER PERFORMANCE MEASUREMENT

Supplier performance measurement is the process of measuring, analysing, and manag-
345
ing supplier performance for the purposes of reducing costs, mitigating risk, and driving
continuous improvements in value and operations. The prescribed book discusses this
section as follows:
yy Supplier measurement decisions
-- What to measure
-- Measurement and reporting frequency
-- Use of measurement data
yy Types of supplier measurement techniques
-- Categorical system
-- Weighted-point system
-- Cost-based system
66
Study pages 324 to 332 in Handfield et al. (2016).
7.2 RATIONALISATION AND OPTIMISATION: CREATING A

MANAGEABLE SUPPLY BASE
The basic question to answer in this section is: "Is your organisation's supply base the right
346
size?" Rationalising and optimising the supply base means utilising both the right num-
ber of suppliers and the right suppliers. This requires you to categorise your spend and
identify current and potential suppliers for each category. After completing these tasks,
you have five options for the supply base in each category according to Dominick (2006):
yy Reduce it
Many think of this as the only rationalisation option, but it's not. This option works
best when you already have enough qualified suppliers and are sure that no others
can offer a cost, quality, or other advantage. You just consolidate spend with a subset
of currently-used suppliers. But don't assume that you're already using the best sup-
pliers. With global sourcing, buyers can find top vendors across the planet.
yy Increase it
Despite common teachings, fewer suppliers isn't always better. By blindly following
the supplier reduction trend, you might award business in one category to a supplier
who performs well in another category. This strategy is flawed when the supplier
is not as competent in the second category. In many cases, it is better to have two
suppliers who can deliver great performance in two categories than one supplier
who performs well in one category but poorly in the other. When analysing your
categorised spend, find suppliers who appear across categories. Ask if they are truly
the best choice in each category and what the measurable advantages are to using
them across categories.
yy Maintain it
If you've done a good job, there is no need to change. Period.
yy Keep the size, change the mix
Many organisations set "number-of-suppliers goals" and measure success simply
by the numbers. But the quality of suppliers is more important than the quantity of
suppliers. Even if you have the right number of suppliers, you may need to replace
the poor performers with good ones.
yy Expand then reduce
Sometimes, you are under pressure to reduce the supply base. But the suppliers you
are currently using are so inadequate that you just can't imagine depending more
heavily on any of them. So, you may have to introduce more suppliers to identify
the best ones in the market before you start ousting the poor performers. But you
also need to make sure you're not trading one problem for another. New suppliers
must prove themselves, so you add them to the list to allow more choice for a future
supplier reduction. There is nothing wrong with this plan. Just communicate it as a
two-step approach to good supply base rationalisation.
67 MNP3701/1
The prescribed book discusses the advantages of a rationalised and optimised supply base,
347
the possible risks of maintaining fewer suppliers, the formal approaches to supply base
rationalisation and ends of with a summary of supplier rationalisation and optimisation.
7.3 SUPPLIER DEVELOPMENT: A STRATEGY FOR

IMPROVEMENT
Supplier development is generally considered to be an organisation's undertaking to
348
improve its supplier's capabilities – more specifically, it may be interpreted as a firm's at-
tempt to transfer (or replicate) some aspects of its in-house organisational capability across
firm boundaries. This requires not only financial and resource commitment, but also a
distinctive organisational and governance structure that facilitates long-term cumulative
learning. In the automobile industry, automakers may send their own engineers to the
supplier's shop floor to help solve a problem with a specific component in order to meet
the product launch date. They may provide training courses for suppliers' employees in
techniques such as TWI, Quality Circles, Value Engineering, and simultaneous engineer-
ing. They may also ask a supplier to work on a specific production line for an extended
period with a view to learning heuristics to achieve cost reduction, inventory reduction
or quality improvement (Sako 2003).
349 This concept is discussed in the prescribed book under the following sub-headings:
yy A process map for supplier development

-- Step 1: identify critical commodities for development
-- Step 2: identify critical suppliers for development
-- Step 3: form cross-functional development team
-- Step 4: meet with supplier's top management team
-- Step 5: identify opportunities and probability for improvement
-- Step 6: define key metrics and cost-sharing mechanics
-- Step 7: reach agreement on key projects and joint resource requirements
-- Step 8: monitor status of projects and modify strategies as appropriate
yy Supplier development efforts that sometimes don't work
68
7.4 OVERCOMING THE BARRIERS TO SUPPLIER
DEVELOPMENT
The prescribed book highlights the following categories of barriers to supplier develop-
350
ment: (1) buyer-specific barriers; (2) buyer-supplier interface barriers; (3) supplier-specific
barriers and (4) lessons learned from supplier development.
7.5 MANAGING SUPPLY BASE RISK

All supply and sourcing decisions contain some risks that should be anticipated and
351
action should be taken to limit the risks. There are two basic questions to be answered
in this section: (1) what are the common sources of risk, and (2) how can they be manage
effectively.
352 The prescribed book addresses the following categories of risk:

yy political risk
yy market risk
yy sourcing risk
yy financial risk
yy supplier company risk
There are various management tools that can be used by managers to manage risk
353
effectively. The prescribed book addresses the following management tools to reduce
supply base risk.
yy Inventory
yy Multiple sourcing
yy Use of third party intermediaries
yy Scenario analysis
yy Currency hedging
yy Insurance
yy Automated visibility and early warning systems
Study pages 349 to 357 in Monczka, et al. (2016)
7.6 MANAGING SUSTAINABILITY IN THE SUPPLY BASE

Media coverage and warnings on global warming have been on the increase and this leads
354
put pressure on organisations to produce in a more sustainable manner and to source

from sustainable conscious suppliers. Sustainability consists of economic considerations
69 MNP3701/1
but also environmental and social considerations, promoting the long term survival of
industries and organisations.
CONCLUSION
What did you learn from this study unit? We provided a detailed explanation of supplier
355
performance measurement; explained the use of rationalisation and optimisation as a

platform for creating a manageable supply base; outlined supplier development as a
strategy for improvement and provided suggestions to overcome the barriers to supplier
development.
Topic 4 addresses the strategic sourcing process, and we will start of the discussion with
356
strategic cost management in study unit 8.
7ASSESSMENT
(1) Provide a detailed explanation of supplier performance measurement.

(2) Explain the use of rationalisation and optimisation as a platform for creating a
manageable supply base.
(3) Outline supplier development as a strategy for improvement. Use a South African
example to substantiate your answer.
(4) Provide suggestions to overcome the barriers to supplier development.
(5) Identify and discuss the general categories of risk.
(6) Identify the tools available to reduce, analyse, identify and to monitor supply base risk.
(7) Outline the critical issues in the managing of sustainability in the supply base.
(2016).
70
358
359
360
363
361 PART 4
362 STRATEGIC SOURCING PROCESS
Study unit 8
Strategic cost management
Study unit 9
Purchasing and suply chain analysis: tools and techniques
Study unit 10
Contract management
357
71 MNP3701/1
Study unit 8
STRATEGIC COST MANAGEMENT
CONTENTS
364
365 Study unit aim

367 Key concepts
369 8.1 A structured approach to cost reduction
370 8.2 Price analysis
371 8.3 Cost analysis techniques
372 8.4 Total cost of ownership
373 8.5 Collaborative approaches to cost management
Conclusion
374
Assessment
375
STUDY UNIT AIM

376 The aim of this study unit is to examine the strategic cost management approach.

yy explain a structured approach to cost reduction with the aid of a diagram
yy outline the variables that directly and indirectly influence an item's price
yy distinguish between the different cost analysis techniques
yy provide an in-depth discussion of total cost of ownership
yy distinguish between the collaborative approaches to cost management
KEY CONCEPTS
yy a structured approach to cost reduction

yy price analysis
yy market structure
yy economic conditions
yy pricing strategy of the seller
yy market-driven pricing models
yy price volume model
72
yy market share model
yy market skimming model
yy revenue pricing model
yy promotional price model
yy competition pricing model
yy cash discounts
yy producer price index
yy cost analysis techniques
yy cost-based pricing models
yy cost mark-up pricing model
yy margin pricing model
yy rate-of-return pricing model
yy product specifications
yy reverse price analysis
yy break-even analysis
yy total cost of ownership
yy building a total cost of ownership model
yy opportunity costs
yy collaborative approaches to cost management
yy target pricing
yy cost-savings sharing pricing
yy an example of target pricing and cost-savings sharing
GETTING AN OVERVIEW
In today's competitive environment the most efficient companies view all of their spend
377
(direct and indirect) as an investment; they make smart spending decisions based on a
strategic vision and their internal capability to deliver value from that investment. Tra-
ditionally companies have been under pressure to cut costs in the short term without
really thinking about sustainable change and integration with the overall business strat-
egy. In the current business environment of increased global competition, new markets,
increasing regulation and changing demographics, successful companies must develop
a multifaceted and renewable cost competence.
The old way of viewing all spend as simply a cost is not effective today. Yesterday's tacti-
378
cal solutions, despite consuming considerable resources, have failed in many organisa-
tions to deliver the planned reductions to the cost base and have not contributed to the
creation of true competitive advantage in the long term. In many cases the cost savings
achieved in the short term have leaked away and the cost base has returned to previous
high levels, but with the result of considerable damage to corporate structure, image,
culture and morale.
It's time to adopt some new thinking – and consider cost as a strategic issue. It needs to
379
be continuously optimised in the context of the entire business model of the organisa-
73 MNP3701/1
tion. Often, the very business model itself may need to change to ensure the organisation
remains competitive.
In addition, execution of any chosen strategy has to be carefully managed to ensure the
380
appropriate balance between revenue growth and cost. Organisations that are taking
the investment approach to managing cost are thriving in this new environment, striking
a balance between a competitive cost structure, cost effective strategic execution and
investment in the future. They are delivering a robust response to the cost challenge.
Consultants, such as PricewaterhouseCoopers, are currently helping companies to in-

381
troduce and embed an integrated strategic cost management approach. You can also
have an impact in this area after studying the following aspects: a structured approach
to cost reduction; the variables that directly and indirectly influence an item's price; the
different cost analysis techniques; total cost of ownership and collaborative approaches
to cost management.
Read the case study on pages 410 to 411.

Also read the introduction on pages 411 to 412.
We suggest that you start this section by reviewing exhibit 11.3 and 11.4 in the prescribed
382
book.
8.1 A STRUCTURED APPROACH TO COST REDUCTION

383 In the introduction in your study guide you have learnt the following equation:
384 Value = (Quality + Technology + Service + Cycle time) ÷ Price
Keep this equation in mind while you study through this study unit. This study unit focuses
385
on the 'price' component of the equation. Price is a function of the costs of procuring or
producing a product or service.
8.2 PRICE ANALYSIS

The prescribed book discusses the concept "price analysis" adequately under the follow-
386
ing sub-headings:
yy market structure
yy economic conditions
yy pricing strategy of the seller
74
yy market-driven pricing models (price volume model; market share model; market skim-
ming model; revenue pricing model, promotional price model, competition pricing
model and cash discounts)
yy using the producer price index to manage price
Do not forget to use the figures (exhibits) to assist you to understand concepts.
387
The examination paper might require you to use figures, diagrams or sketches
to illustrate an explanation of concepts.
8.3 COST ANALYSIS TECHNIQUES

More and more organisations are shifting their attention away from price management
389
and toward cost management. In so doing, there may be opportunities to reduce costs
that are not available when the discussion focuses only on price. The prescribed book
deals with this section as follows:
yy cost-based pricing models (cost mark-up pricing model, margin pricing model and
rate-of-return pricing model)
yy product specifications
yy estimating supplier costs using reverse price analysis
yy break-even analysis (including an example)
yy building a should-cost model
8.4 TOTAL COST OF OWNERSHIP

Total Cost of Ownership (TCO) modelling is a tool that systematically accounts for all costs
390
related to a product, service or capital equipment that are incurred over its expected life.
The prescribed book addresses the following issues:
yy building a total cost of ownership model

yy the importance of opportunity costs
yy important factors to consider when building a TCO model
yy example of a TCO model
75 MNP3701/1
8.5 COLLABORATIVE APPROACHES TO COST MANAGEMENT
Outstanding purchasing, sourcing and supply professionals often learn the hard way that
391
the most effective way to reduce costs for strategic commodities is not through price
haggling, but through effective collaboration. The prescribed book addresses this issue
by discussing the following aspects:
yy defining target pricing defined
yy defining cost-savings sharing pricing defined
yy indicating prerequisites for successful target and cost-based pricing when to use col-
laborative cost management approaches
yy explain an example of target pricing and cost-savings sharing
CONCLUSION
Strategic cost management has become an essential area nowadays. While formulating
392
the strategy for the accomplishment of organisational overall objectives, different cost
drivers should be clearly identified. Identification of key cost drivers helps companies
to focus on key activities that will constitute almost 90% of the total costs. In view of
this, the importance of strategic cost management should not be underestimated. This
implies that organisations should be installing an appropriate framework of strategic
cost management to reduce its costs in key areas on which the success of organisation
is heavily dependent.
This study unit addressed the following aspects: a structured approach to cost reduction;
393
the variables that directly and indirectly influence an item's price; the different cost analysis
techniques; total cost of ownership and collaborative approaches to cost management.
We will provide all the tools and techniques required for purchasing and supply chain
394
analysis in study unit 9.
8ASSESSMENT
(1) Explain a structured approach to cost reduction with the aid of a diagram.
(2) Outline the variables that directly and indirectly influence an item's price.
(3) Distinguish between the different cost analyses techniques.
(4) Provide an in-depth discussion of total cost of ownership distinguish between the
collaborative approaches to cost management.
(2016).
76
Study unit 9
PURCHASING AND SUPPLY CHAIN ANALYSIS: TOOLS
AND TECHNIQUES
CONTENTS
395 Study unit aim

397 Key concepts
399 9.1 Project management
400 9.2 Learning-curve analysis
401 9.3 Value analysis/value engineering
402 9.4 Quantity discount analysis
403 9.5 Process mapping
404 9.6 Value stream mapping
405 Conclusion
406 Assessment
STUDY UNIT AIM

The aim of this study unit is to explain the tools and techniques utilised when doing
407
purchasing, sourcing and supply analysis.

yy define the concept of project management
yy distinguish between the various project phases with the aid of a diagram
yy outline project planning and control techniques
yy grasp the rules for constructing a project management network
yy discuss project management with time estimates
yy provide an in-depth discussion on learning-curve analysis
yy explain the concept "value analysis/value engineering" in detail
yy outline quantity discount analysis
yy explain process mapping
yy explain value stream mapping
KEY CONCEPTS
yy project management
yy project success
77 MNP3701/1
yy project phases
yy project planning and control techniques
yy project management network
yy project management example: sourcing strategy
yy project management with time estimates
yy learning-curve analysis
yy experience curve
yy learning curve illustrated
yy learning-curve problem
yy value analysis
yy value engineering
yy value analysis process
yy quantity discount analysis
yy process mapping
yy value stream mapping
GETTING AN OVERVIEW
No purchasing, sourcing and supply professional can afford to be unaware of purchasing
408
and supply chain analysis tools and techniques. Traditionally, the mechanics of purchas-
ing and supply analysis was carried out by hand: typing up data, photocopying them,
"coding" by marking them up with markers or pencils, cutting and pasting the marked
segments onto file cards, sorting and shuffling cards, and typing up the results of the
investigation in a report.
Read the case study on pages 460 to 461 of Monczka et al. (2016).
Activity 9.1
In order to simplify the purchasing and supply analysis concept and help you to under-
stand the aim of the effort, choose an item that you purchase for your personal use, track
your purchasing habits for a period and try to identify some trends in order to pinpoint
improvements in your spending from your data.
Feedback
Comic books are an art form with unique origins planted firmly in America. One American,
Justin, decided to track and analyse his purchasing and collecting habits of comic books for
a complete calendar year. Here are his results:
SUMMARY SINGLE ISSUE COMIC BOOKS
Total single issues purchased: 259
78
Total spend single issues: $777
Average single issues purchased per week: 4.98
Average spend single issues per week: $14.94
SUMMARY TPB/GN COMIC BOOKS
Total TPB/GN purchased: 55

Total spend TPB/GN: $1,200
Average TPB/GN purchased per week: 1.06
Average spend TPB/GN per week: $23.08
CATEGORY EXPLANATIONS
Keep: Something I intend to keep in the format it was originally purchased in.
Upgrade: Something I'll upgrade to a better format, it's then divided into the "Keep" (new
format) and "Giving" (old format) categories, a temporary category.
Giving: Something I didn't like enough to keep, but is okay to give away to friends, family
or co-workers.
Selling: I don't sell single issues (Silver Age excluded) since they're not worth anything,
but TPBs/GNs are sold to my LCS for cash or credit.
Trashing: Something that was so dreadful I couldn't in good conscience even give it away;
it finds a home in the recycle bin.
SINGLE ISSUE CATEGORY BREAKDOWN
Keep: 13% or 33 issues

Upgrade: 7% or 18 issues
Giving: 68% or 176 issues
Selling: 0% or 0 issues
Trashing: 12% or 32 issues
TPB/GN CATEGORY BREAKDOWN
Keep: 25% or 14 items

Upgrade: 0% or 0 items
Giving: 24% or 13 items
Selling: 51% or 28 items
Trashing: 0% or 0 items
TRENDS
yy I'm giving away quite a few comics, particularly single issues, which comprise a huge
quantity and dollar amount. I think this is evidence that I'm a fairly adventurous consumer
and try a lot, but wow, I need to drive that number down. Looking at the numbers, if I
had given away only the things I'd upgraded to a better format, it would have been just
46 issues given away for free, and not 176.
yy I'm giving away more than half, nearer to 2/3 actually, of the single issues I buy, which is
either foolishly generous or generously foolish. The numbers did trend down later in the
year when gas prices went up and I really tried to be selective and cull my pull list; I expect
it to continue to trend down over 2009 due to the economic crunch.
79 MNP3701/1
yy Speaking purely from a project management standpoint, "Upgrade" was a stupid category
to track because it's transitory and temporary and really holds limited value, other than
to comment on how many books I was buying more than once for the same content.
I could have basically put single issues in the "Keep" (rather than "Upgrade") category
and then put the replacement into the "Keep" category, while the upgraded single issues
eventually moved into the "Giving" category.
yy The "Trashing" category is certainly amusing, but I should really just try to avoid it alto-
gether. It basically comes down to the fact that there are some things I just want to read
to be familiar with the content (like say, an issue of Nightwing for guilty pleasure and a
childhood fondness for the character), but I know deep down that there's no way in hell
I'm going to keep the book long term just by looking at it, so why buy it in the first place?
yy Overall, I only keep about 20% of what I buy, which isn't very good odds. Essentially, there's
only a 1 in 5 chance that something will make the grade and stay in my collection long term.
yy I sell about 50% of the TPBs and GNs I buy, give away about 25%, and keep roughly 25%
long term.
yy I try a ton of stuff, there's good diversity with the breadth of publishers represented. I keep
a relatively small percentage of items, and there's no easily identifiable trend available
from this data. It must be according to some combination of my weird byzantine criteria
and dwindling storage space.
yy I did learn some things about my buying habits that enabled me to save some money and
be an even more selective buyer. You can extrapolate which companies have a statisti-
cal probability to produce products that I'm likely to keep or upgrade … of course that's
based on wildly unstable criteria, such as the creators or characters involved and I didn't
track to that level of detail. Though I thought about taking it that one step further, you
could track additionally by artist, writer, or even genre.
yy In closing, let me just stress that this was a ton of work – something that I will not be
repeating in 2009, save for tracking my total quantity of purchases and corresponding
dollar amounts so that I can compare year over year changes. You have to be very dis-
ciplined about including every single purchase made, placing it in the correct category,
then reviewing periodically when the categories change. You also have to be willing to
build an insane Excel spreadsheet to track all of this, and track it for an entire year!
It is difficult to believe that the advanced, complicated purchasing and supply analysis tools and
techniques available today had their origin in such simple beginnings. The goal of purchasing
and supply chain analysis remains the same, however, to complete an in-depth investigation
into the acquisition of goods and services in order to establish trends and improve performance.
Let us concentrate on some of one of these useful tools and techniques by defining the con-
cept of project management; by distinguishing between the various project phases with the
aid of a diagram; outlining project planning and control techniques; grasping the rules for
constructing a project management network and discussing project management with time
estimates. We will also focus on other tools and techniques for purchasing and supply analysis,
including learning-curve analysis, value analysis/value engineering, quantity discount analysis
and process mapping.
This chapter in the prescribed book, although theoretically sound, is presented in a very prac-
tical manner. You should be able to recognise the examples from your own organisational
experience!
80
9.1 PROJECT MANAGEMENT
Project management is a carefully planned and organised attempt to accomplish a spe-
409
cific effort or usually, a number of related efforts.
410 Projects can be classified as follows:

yy civil engineering, construction, petrochemical, mining and quarrying projects that
are normally undertaking at a site, exposed to the elements and remote from the
contractor's office
yy manufacturing projects aimed at the production of a piece of equipment or machinery,
ship, aircraft, land vehicle or some item of specifically designed hardware
yy management projects operations involving the management and coordination of activi-
ties to produce an end result that is not identifiable principally as an item of hardware or
construction, such as the relocation of offices or installation of a new computer system
yy research projects aimed at extending the boundaries of current scientific knowledge
that are high risk because the outcomes are uncertain.
Project management includes developing a project plan, which includes defining project
411
goals and objectives, specifying tasks or how goals will be achieved, what resources are
needed, and associating budgets and timelines for completion. It also includes imple-
menting the project plan, along with careful controls to stay on the "critical path", that
is, to ensure the plan is being managed according to plan.
412 The concept is discussed in your prescribed book as follows:

yy Defining project success
yy Project phases
yy Project planning and control techniques
yy Rules for constructing a project management network
yy Project management example: sourcing strategy
yy Project management with time estimates
9.2 LEARNING-CURVE ANALYSIS

Learning curves are a graph that depicts the rate of learning, especially a graph of prog-
413
ress in the mastery of a skill against the time required to understand it. It is sometimes
also referred to as a skill acquisition or experience curve. Fundamentally, it encapsulates
the saying "skill comes from doing". The prescribed book provides a clear explanation
on this subject by concentrating on:
414 Components of the learning or experience curve

yy When to use the learning curve
yy Learning curve illustrated
yy Learning-curve problem
81 MNP3701/1
9.3 VALUE ANALYSIS/VALUE ENGINEERING

What is value analysis or value engineering? It is an orderly and creative method to in-
415
crease the value of an item. This "item" can be a product, a system, a process, a procedure,
a plan, a machine, equipment, a tool, a service or a method of working. The value of an
item is how well the item does its function divided by the cost of the item:
416 Value of an item = performance of its function/cost
An item that does its function better than another, has more value. Between two items
417
that perform their function equally well, the one that costs less is thus more valuable.
The prescribed book addresses the following:
yy Who is involved in value analysis?
yy Tests for determining value in a product or service
yy The value analysis process
9.4 QUANTITY DISCOUNT ANALYSIS

Are discounts for larger quantities real or illusionary? What is the maximum quantity you
418
should buy in each price break? In specific quantities pricing there is a price for each quan-
tity on the price list or quotation (1 unit for R10.00, 2 units for R9.50 each etc). Quantity
discount analysis calculates the incremental price difference for each quantity and price.
This process shows the real price that is being charged for the next quantity rather than
average price for the entire quantity.
This analysis either confirms that you are in fact getting an increasing lower price as the
419
unit volume increases or that the incremental unit price is increasing and decreasing as
volume increases (irrational behaviour). What you would like to see are two lines starting
from the same point with a gap between increasing as volume increases. Perform a QDA
analysis on all pricing to determine if the price schedule you are analysing is rational (the
discount is consistent with larger volumes) or irrational (the discount is not consistent
with larger volumes).
82
9.5 PROCESS MAPPING
Process mapping is one of the oldest, simplest and most valuable techniques for stream-
420
lining work. It is also subtle and requires experienced facilitators for best results. A process
map visually depicts the sequence of events to build a product or produce an outcome.
It may include additional information such as cycle time, inventory, and equipment
information.
The prescribed book provides a brief discussion of process mapping by using a very
421
practical example from the automobile industry.
9.6 VALUE STREAM MAPPING

Value stream mapping is a flow diagram that will show each step of a specific process in a
422
manufacturing environment. Which will indicate the value and non-value-adding steps?
Value stream mapping is seen as the ultimate tool to identify waste, reduce process cycle
times and implement process improvement. Value stream mapping document, analyse
and improve the flow of information and or materials to produce a product or service for
a final customer. It is seen as a lean manufacturing technique.
GOOD PRACTICE EXAMPLE
Read the practical example on page 490 to 492 in Monczka et al. (2016).
CONCLUSION
Purchasing and supply chain analysis has at its core to complete an in-depth investiga-
423
tion into the acquisition of goods and services in order to establish trends and improve
performance. We concentrated on defining the concept of project management in this
study unit by distinguishing between the various project phases with the aid of a diagram;
outlining project planning and control techniques; grasping the rules for constructing a
project management network and discussing project management with time estimates.
We also focused on other tools and techniques for purchasing and supply analysis, includ-
ing learning-curve analysis, value analysis/value engineering, quantity discount analysis
and process mapping.
83 MNP3701/1
424 Study unit 10 will establish the fundamentals of contract management.
9ASSESSMENT
(1) Define the concept of project management.

(2) Distinguish between the various project phases with the aid of a diagram.
(3) Outline project planning and control techniques.
(4) What are the rules for constructing a project management network?
(5) Discuss project management with time estimates. Include an example to substan
tiate your answer.
(6) Provide an in-depth discussion on learning-curve analysis. Use the following
sub-headings:
yy Components of the learning or experience curve

yy When to use the learning curve
yy Learning curve illustrated
yy Learning-curve problem
(7) Explain the concept "value analysis/value engineering" in detail.
(8) Outline quantity discount analysis.
(9) Explain process mapping with the aid of an example.
(10) Explain "value stream mapping" in detail.
Also attempt to answer the discussion questions on page 493 of Monczka et al. (2016).
84
Study unit 10
CONTRACT MANAGEMENT
CONTENTS
425 Study unit aim

427 Key concepts
429 10.1 Elements of a contract
430 10.2 How to negotiate and write a contract
431 10.3 Types of contracts
432 10.4 Long-term contracts in alliances and partnerships
433 10.5 Non-traditional contracting
434 10.6 Settling contractual disputes
435 Conclusion
436 Assessment
STUDY UNIT AIM

The aim of this study unit is to emphasize the important aspects of contract management
437
relevant to a purchasing, sourcing and supply professional.
yy list and explain the elements of a contract

yy outline how to go about writing a contract
yy differentiate between the different types of contracts
yy list and explain the benefits of long-term contracts
yy list and explain the risks of long-term contracts
yy outline the contingency elements of long-term contracts
yy provide an in-depth discussion on non-traditional contracting
yy suggest ways to settle contractual disputes
KEY CONCEPTS
yy elements of a contract
yy how to write a contract
yy types of contracts
yy fixed-price contracts
85 MNP3701/1
yy cost-based contracts
yy long-term contracts
yy alliances
yy partnerships
yy benefits of long-term contracts
yy risks of long-term contracts
yy contingency elements of long-term contracts
yy non-traditional contracting
yy IT systems contracts
yy minority- and women-owned business enterprise contracts
yy consulting contracts
yy construction contracts
yy other types of contracts
yy settling contractual disputes
yy legal alternatives
yy arbitration
yy conflict resolution
GETTING AN OVERVIEW
Read the case study on pages 534 to 535 of Monczka, et al. (2016).
Contracts provide a framework (the terms, pricing, and service levels of the stakeholder)
438
by which an organisation manages and mitigates risk in its supplier relationships. As a

result, contracts have become the living breathing documents that control the dynam-
ics of everyday business in an ever increasing fashion. Although you do not have to be a
contract specialist as a purchasing, sourcing and supply professional, you will have to be
well-versed in all the important areas of contract management in order to ensure that the
correct type of contract is drawn up for the specific agreement reached with the supplier.
This study unit will help you with that aim by explaining the elements of a contract, how
439
to go about writing a contract and the different types of contracts. We will further ad-
dress the benefits and risks of long-term contracts, as well as outline the contingency
elements of long-term contracts. An in-depth discussion on non-traditional contracting
will be included. Lastly, we will suggest ways to settle contractual disputes.
86
10.1 ELEMENTS OF A CONTRACT
440 We often see deals between large organisations make the headlines.
However, we seldom know what exactly such a contract consists of. This is addressed in
441
this section of the prescribed book.
10.2 HOW TO NEGOTIATE AND WRITE A CONTRACT

You've noticed the changes in purchasing over the past few years–the changes that have
442
purchasers doing less order processing and more contracting and relationship building
with suppliers? This new role requires that you have a new skill set – contract writing.
Yet most purchasing, sourcing and supply professionals don't know how to write a con-
tract. This is troublesome – because if you aren't familiar with the advanced techniques
of contract writing, you can put your organisation at risk and be committed to a poor
performing supplier for years.
10.3 TYPES OF CONTRACTS

According to the prescribed book, purchasing contracts can be classified into different
443
categories based on their characteristics and purpose. Focus your attention on the ma-
jor types of contracts discussed in this section and the considerations when selecting
contract types.
We suggest that you start this section by reviewing exchibit 14.1 in the prescribed book.
444
This exhibit depicts the type of contracts.
10.4 LONG-TERM CONTRACTS IN ALLIANCES AND

PARTNERSHIPS
A common method of classifying industrial buying contracts is based on the length of
445
the contract term, either spot contracts, short-term contracts or long-term contracts.
87 MNP3701/1
446 The prescribed book discusses long-term contracts under the following headings:
yy Benefits of long-term contracts

yy Risks of long-term contracts
yy Contingency elements of long-term contracts
10.5 NON-TRADITIONAL CONTRACTING

In addition to long-term contracts, organisations must also create special types of con-
447
tracts with certain suppliers. These are discussed in the prescribed book:
yy Minority- and women-owned business enterprise contracts
yy Consulting contracts
yy Construction contracts
yy Purchasing agreements
yy Online catalogues and e-commerce contracts
10.6 SETTLING CONTRACTUAL DISPUTES
We suggest that you start the section by reviewing exhibit 14.4, “the means of settling
448
Contractual Disputes” in the prescribed book.
Read the practical example on page 567 in Monczka et al. (2016).
CONCLUSION
Contract management requires the systematic management of contract creation, ex-
449
ecution, compliance and analysis to maximise performance and minimise risk. With the
increase in the complexity of doing business coupled with the increase in transaction
volumes and value in an ever tightening regulatory framework has resulted in businesses
taking note of the importance of establishing proper contracts with their suppliers.
88
We explained the elements of a contract, how to go about writing a contract and the
450
different types of contracts in this study unit. We addressed the benefits and risks of long-
term contracts, as well as outline the contingency elements of long-term contracts. An
in-depth discussion on non-traditional contracting was included. Lastly, we suggested
ways to settle contractual disputes.
10ASSESSMENT
(1) List and explain the elements of a contract.

(2) Outline how to go about writing a contract.
(3) Differentiate between the different types of contracts.
(4) List and explain the benefits of long-term contracts.
(5) List and explain the risks of long-term contracts.
(6) Outline the contingency elements of long-term contracts.
(7) Provide an in-depth discussion on non-traditional contracting. Use the following
sub-headings:
yy Minority- and women-owned business enterprise contracts
yy Consulting contracts
yy Construction contracts
yy Purchasing agreements
yy Online catalogues and e-commerce contracts
(8) Suggest ways to settle contractual disputes.
(2016).
GENERAL CONCLUSION ON THE MODULE

This brings us to the end of this module, in which we aimed to help you gain insight
451
into strategic sourcing within a supply management context. We have now established
that increasing dynamics of corporate markets and the effects of global competition
have caused significant changes in the constellation of the business environment and
put increasing pressure on companies to improve performance. In order to stay glob-
ally competitive companies are enforced to adapt to changing market environments
more quickly and to seek for sustainable competitive advantage continuously. To improve
overall corporate performance organisations aim to focus on core competencies, shifting
away from vertical integration toward smaller, leaner operations.
Organisations strive to outsource non-core items by choosing to procure these goods

452
and services from other firms rather than producing them internally and thus integrat-
ing competitive advantage of other companies (eg cost advantages, know-how advan-
tages, innovation potentials and so forth). Accordingly a shift from generating total value
added within the firm to a generation of total value added within supply chain networks
can be observed. As a result, an increase of purchasing, sourcing and supply's strategic
relevance due to the large impact of external spend on operating profit.
89 MNP3701/1
After studying this module you should be able to:
453
yy provide an overview of purchasing and supply chain management

yy outline the purchasing process
yy explain supply management as a tool for creating competitive advantage
yy differentiate between supply management and commodity strategy management
yy discuss supplier evaluation and selection
yy discuss supplier quality management
yy assisting to create a world-class supply base
yy develop, illustrate and explain the strategic sourcing process model
yy discuss strategic cost management
yy compile a checklist for contract management
yy discuss the purchasing of services
SOURCES USED
Burt, DN, Petcavage, S & Pinkerton, R. 2010. Supply management. 8th edition. Singapore:
McGraw-Hill.
Ferrer, J, Karlberg, J & Hintlian, J. 2007. Integration: The Key to Global Success. Supply
Chain Management Review. Available from: http://www.scmr.com/article/CA6428529.
html?q=integration (Accessed on 29 January 2009).
Hugo, WMJ & Badenhorst-Weiss, JA. 2011. Purchasing and supply management. 6th edi-
tion. Pretoria: Van Schaik.
Lysons, K & Farrington, B. 2006. Purchasing and supply chain management. 7th ed. Essex,
England: Pearson Education Limited.
National Treasury. 2005. Strategic Sourcing Methodology. Unpublished document.
National Treasury (a). 2005. National Treasury Strategic Plan. Available from: http://www.trea-
sury.gov.za/publications/strategic%20plan/strat%20plan%202005%20to%202008.
pdf (Accessed on 29 January 2009).
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454 PART 1 INTRODUCTION 1

456 PART 2 PURCHASING OPERATIONS AND STRUCTURE 15

459 PART 3 STRATEGIC SOURCING 39

464 PART 4 STRATEGIC SOURCING PROCESSES 71

THE STUDY MATERIAL

STUDY UNIT CORRESPONDING CORRESPONDING

1 1 1

2 2 2

3 4 4

4 6 6

5 7 7

6 9 8

9 8 12

sometimes quite different to the challenges of those in other countries. We therefore

13 Wishing you every success studying this module!

ICONS USED IN THIS STUDY GUIDE

Activity. These self-assessment activities should be performed in

Study. The Study icon indicates which sections of the prescribed

Assessment. The assessment criteria indicate on what aspects of the

Mind map. Mind maps illustrate relationships between various parts

Key concepts. Attention is drawn to certain keywords or concepts

Learning outcomes. The learning outcomes indicate what aspects

Feedback. Feedback is provided on the self-assessment activities.

15 STRATEGIC SOURCING (MNP3701)

18 PART 2 PURCHASING OPERATIONS AND STRUCTURE

20 Study unit 3 Supply management integration for competitive advantage

21 PART 3 STRATEGIC SOURCING

22 Study unit 4 Category strategy development

23 Study unit 5 Supplier evaluation and selection

24 Study unit 6 Supplier quality management

25 Study unit 7 Supplier management and development: creating a world-class supply

26 PART 4 STRATEGIC SOURCING PROCESSES

29 Study unit 10 Contract management

32 Learners must be able to

yy provide an overview of purchasing and supply chain management

37 Study unit aim

411.1 A new competitive environment

Good practice example: Taking an entrepreneurial approach to purchasing at Babson

STUDY UNIT AIM

STUDY UNIT LEARNING OUTCOMES

After studying this study unit, you should be able to

Study chapter 1 in Monczka et al. (2016).

1.1 A NEW COMPETITIVE ENVIRONMENT

ment in Africa and South Africa.

"Global impacts on supply chain management in Africa and South Africa"

1.2 WHY PURCHASING IS IMPORTANT

Study pages 8 to 11 in Monczka et al. (2016).

Study pages 11 to 17 in Monczka et al. (2016).

1.4 ACHIEVING PURCHASING AND SUPPLY CHAIN BENEFITS

Study pages 17 to 20 in Monczka et al. (2016).

measurable by relating the success of the Apple computer.

"Cement demand expected to remain 'reasonably' resilient – PPC”.

Source: ht t p: // w w w. e n g in e e r in g n ew s . co. z a /a r ti cl e /ce m e nt- d e m a n d - e x p e c te d - to -

1.5 THE SUPPLY CHAIN UMBRELLA

Study pages 18 to 20 in Monczka et al. (2016).

Exhibit 1.6 depicts the four pillars with examples.

1.7 THE EVOLUTION OF PURCHASING AND SUPPLY CHAIN

The purchasing function originated as an independent, clerical activity mainly concerned

As managerial philosophies advanced, the purchasing function acknowledged the con-

Then the world of purchasing changed. Purchasing management became a proactive

25 Study unit 7 Supplier management and development: creating a world-class supply

Source: ht t p: // w w w. e n g in e e r in g n ew s . co. z a /a r ti cl e /ce m e nt- d e m a n d - e x p e c te d - to -