Purchasing and Procurement: What's the difference? How do they contribute to the supply chain?

you hello welcome to this evenings webinar my name is Micah Bhatia and I work with Informer as training producer thank you for joining us for purchasing and procurement what’s the difference as you know this webinar will be led by our very popular course director Ian moody but before we start I’d like to take you through a few housekeeping rules thank you okay so just to give you an idea the slides will be recorded at the recording of the webinar and the slides will be emailed to you through a link after the webinar takes place there will be an automatic post webinar survey survey that will pop up on your screens please take the time to complete that for us with regards to questions you can type your questions throughout the session and we will allocate time at the end of the session for the speaker to address your questions I just like to introduce your speaker this evening Ian Moody well what can I say about him he is one of our very very popular course directors runs a run several procurement and supply chain related courses for us he is also the lead tutor with CIPS Chartered Institute of procurement and supply you’ve probably already read his bio by now I’m going to pass this on to Ian now over to you enjoy the webinar you thanks Megha hi everybody oh we were well Omega I will while we are there sigh did have a slight technical problem with microphones always the same right I hope everybody’s well good to be here most of a little talk about this whole issue related to supply chain itself for a few moments there’s been major major changes in the way that we consider the role of supply chain procurement purchasing buying all these various terminologies over the last few years one of the biggest issues has been the professionalization of supply chain in procurement activity for a long long time it was seen to be simply a support function within businesses often reporting into the finance department over the recent years there have been more and more corporate problems related to supply chain and procurement activity both within large organizations and also within the public sector so we start to think about how we should consider the actual roles of supply chain purchasing procurement buying what do we actually do what are the differences between these terms you know often find in many organizations they start calling procurement securement purely because that’s what everybody seems to say because they necessarily understand what procurement does not because they know it’s different from purchasing activity but it’s just because it’s become fashionable let’s think about it in simple terms here we’ve got a simple slide showing an organization as an open system it’s not difficult it’s relatively easy organizations or organizations doesn’t matter what you do go through the same processes you put things in you do something to them and you put them out input input inputs impulse what is input come from well it comes from the people that work in the organization it comes labor force it comes through financial resources to the information it comes from information resources that come into the information comes through all materials componentry consumables equipment many many different factors when you look at that suddenly realize that the majority of these are being bought to use a terminology they’re being bought in they’re being attained acquired in fact what is happening is they’re being purchased so inputs inputs then you look at processes those are in processes we we design things we manufacture things

we assemble them we sell them we’d use treatments such as staff development culture etc to help us to put those out to the market and what goes out to the market the products the services the information the profits when we do that we have an environmental impact so you look at supply chain supply chain is the input and the output that’s exactly what supply chain is supply chain deals with the inputs and the outputs if you get the inputs right you’ll get the outputs right if you get the inputs wrong you’ll get the outputs right wrong if you have no input you simply have no output so in simple terms we need to start to understand the importance of getting it right so people try to define supply chain if you look you’re quite obviously able to look as much as anybody else’s and you will find a hundred among different definitions of of supply chain but in simple terms it’s the process by which we bring goods materials and services into businesses put them through transformation and send them out to the customer it’s that simple the cob ylim Commons in supply chains is when we start to look at the length of supply chains the problem today is we work in a globalized marketplace and even if we’re not buying on a globalized basis we are working with a global supply chain because our suppliers will be buying on a global basis whatever happens in their supply chains will impact upon our supply chains it has a major knock-on effect one of the classic explanations of that extremely well-known one is something that happened only last year which everybody thought was quite amusing but in its own way was actually very serious that was the story of the horse meat fiasco in the meat for lasagne Findus pues vendors foods a very hold a long-established company more than 130 years old famous for various things but basically frozen foods while their biggest products happens to be fish fingers but the lasagna in a normal way of course we would have people going around checking food standards so that’s exactly what happened British government in this case went into a supermarket and checked the standard of the product on the shelf for public hygiene and safety reasons when they checked the so-called beef lasagna it was discovered that it wasn’t beef at all it had large proportions of horse meat well they then went to Findus and they said explain what’s happening you manufactured this product they said well we didn’t actually we didn’t manufacture it we bought it in from one of our suppliers in France oh well you sold it you’re responsible well our suppliers responsible we can’t know what our suppliers doing yes you can you’re responsible Oh we’ll go to the supplier and we ask the supplier and the supplier said well actually we receive processed beef from another factory somewhere in France oh but we go there we’ll look well we received actual meat from a company somewhere in Hungary well yeah then we looked there well we received our meat from a slaughterhouse somewhere in Romania and so on and so on and so on okay well I actually had the knock-on effect of this Findus food created such a problem that when the government starts looking greater detail they discovered that many products actually were not what they were meant to be this then became a pan-european problem ended up with questions being asked in the European Parliament it costs Findus foods in France alone in one week 1 million euros that wasn’t cost of putting it right that was to the profit the company lost in the first week 1 million euros because of a lack of understanding of their supply chain too many people misunderstand they think is all about let’s buy the cheapest we can if you do that you will give yourself

nothing but a problem it doesn’t work on price we have the Findus food fiasco imagine if my various friends and colleagues who were muslim and had that product tested and it had been discovered there were traces of pig as opposed to traces of horsemeat what kind of problem with that of caused now we go deeper another issue about supply chains was the problem in Bangladesh when the factory collapsed in Bangladesh 1,100 people died 1,100 people died the current death toll because of injuries in hospital later of 3,500 3,500 people died why because of so poor supply chain management on behalf of Primark Primark knew what they did wrong they’ve tried to fix it by giving compensation to the survivors of that factory it is a supply chain problem the video listen a little bit more about that maybe the screens they can come out in questions later but these are very serious issues so we can talk about things like fenders food we can talk about human life because of people not understanding the nature of their supply chains and how they work so this is serious stuff and that is why we have to start to understand professionalism within our supply chains when you look at it this is what happens things come from up and down stream upstream simply means what it says further up the new and the problem is how far upstream do we go literally maybe we need to know exactly where the product is coming from when it’s mined out of the ground or where the farmers doing before we sell the bread in the shop because the bread is used to make flour wheat that sorry the wheat is made to use flour the flour is made to use bread the bread goes into the shop and then it’s then sold on to the public what exactly is happening we need to start to understand the principal flows of supply chains and we need to understand that in fact whilst that shows it has a flow diagram in reality is not it’s a series of networked nodes every time an organization buys it doesn’t just buy from upstream of itself it buys some downstream of itself downstream you buy insurance from an insurance company that’s downstream so it doesn’t matter where you are you’re going to be buying from different companies have got different stations all over the world all over my different markets different functions and it becomes extremely complicated these things put businesses at risk not only do they put businesses at risk they can destroy companies and as I’ve just explained when they get them very wrong they can destroy human life this very serious issue this supply chain and its associated disciplines of which procurement and purchasing are some must not be treated as some form of second-class function it is strategic to the future survival of business business is future the survival of nations and nations economies are part of what is the global economy we’re all interlinked and that’s never been more than it is today with global supply chains in this region we are used to the fact that we work in global supply chains because we have to wear very little option than to work with suppliers of Health side of the region because we don’t yet have the high level of SMEs working here so we have to go out faded to understand the nature of our supply chains is business suicide that’s what it is and it’s not just your business is the whole economy in recent years there’s been a big change this this particular slide comes from a book written by cold body in Langley it was actually written in 2002 the 2002 date is in the cut off data just as relates to the book and they were looking back from 2002 and seeing what’s been happening over the to generation periods before a business generation is basically considered to be 20 years so if we move back 20 years in 2002 to 1982 that it started to be an integration of supply chain activity if you go back to 1962 supply chain

activity was considered as a series of separate actions so what is supply chain what is in it well demand forecasting purchasing requirements planning production manufacturing inventory warehousing materials handling industrial packaging finished goods inventory distribution planning order process is transportation customer services all these are functions of supply chain basically this is business that’s what it is is running a business for every business does in one way or another doesn’t matter who you are you do those things it’s just how much of those you do and by 1992 we’ve actually started to consider them and bring them together under two key areas one is known as materials and management materials management led to certain managerial supply chain techniques such as Mr P and M are P 2 then we have the idea of physical distribution itself so they started to bring the disciplines under one we have one basic banner and today that’s been brought together under one single banner which is known as logistics now in this case the word logistics does not mean transport and distribution that terminology has been borrowed by transport and distribution companies and they’ve started to call themselves logistic companies much in the way that some organizations are calling purchasing procurement without understanding is not the same thing what logistics means it comes from the word of logic a series of logical processes that come together to create an integrated function that’s what it means so logistics involves all of these elements all of them demand forecasting purchasing requirements planning production planning etc all of these are logistics they’re all part of what is logistics logistics companies as I say have simply Bo the term they’re doing one area of this or two areas of this normally only one or two yeah that is to say they are doing things like transportation services warehousing services is some very advanced companies they might be doing production planning as well with in logistics areas but fundamentally it’s about warehousing materials handling transportation alright but logistics doesn’t actually mean that in the case of this slide this is the management of logistics processes that is to say the management of business the supply chain is about the management of business it’s about how do I gain a competitive advantage by making myself better at any part of my business function through input to transformation of the know sometimes in its operations to output what do I do so over recent years has been some major changes in the way of thinking services have become so much more important organizations are beginning to realize that services are key it’s not about how quickly or cheaply I can make a product is how much service I can add to my customer in that process is about designing and producing a quality that matters not about how cheap I can do it not about what the prices is about what the value is and the word value doesn’t mean price the word value means the very difference or the relationship between price and performance so what is he giving me how did it perform what is it that you have that nobody else has if you think about it only this morning we had the results out for certain key companies um this morning whilst is eating my breakfast I was listening to Bloomberg and I noticed that apples results were released for the quarter year Apple have just posted the largest single corporate profit for a quarter year of any organization anywhere ever in the world then that includes all of the oil and gas companies Apple are not cheap manufacturers of electrical and computer goods they’re at the top but they have created a reputation for service and it’s served more than anything that have created in Apple’s place in the marketplace three weeks ago my son bought a new iMac um it’s had a very small problem with one

of the keys he took it back to a local Apple store they said we won’t fix it we’ll send it to the factory to find out what’s going on here is a new one he said he was shocked because actually it was a very small problem it was a sticky key and that’s all it was but that’s what they did service service service service service and they recognized that and people will pay for it we are sick most of us anyway are sick of being treated like idiots we have the right to good products we have the right to good services and we have to receive them another area of supply chain activity is to realize that information can replace the need for infantry when we put things into inventory we increase our costs by an average of 30% if you buy something for $100 you put it in inventory is close to 130 I recently did an exercise during a finance course that I was running with a particular company here in the Gulf who didn’t believe that number so we calculated it it was actually 49% poor guy nearly had a heart attack especially as he was the inventory manager um information can replace inventory all right you heard of SAP you have Oracle that’s what they’re for that’s exactly what they’re for services are increasingly out sourced this is an absolute reality of life outsourcing contracts are a major element of business focus today because the last even functions that we cannot develop up-to-date contemporary thinking fast enough to be able to guarantee that we can get it inside when you put the service contract inside what happens is they become cost conscious not service conscious so if you look at changes in outsourcing of service contracts for years companies have used auditors throughout sorts mainly because that is a legal requirement um however then we started to think about outsourcing in more detail transport distribution warehousing the whole of the retail industry woke up and realized we could not afford to do it ourselves it’s not what we’re there for if we’re retailers we’re there to select products and put them into shops to sell to people not there to build warehouses so they’ve outsourced you look there today most of the major retailers of the world by which I mean the big boys I’m talking about the wall marks the car Falls that it all these the test goes of this world the big retailers they outsource it has their name on the side of the truck it has their name on the warehouse but is not theirs they’ve outsourced it’s too expensive it’s too costly in capital and it’s too costly in resources then we look at other areas of outsourcing inevitably things like training get out sourced because people can’t keep enough trainers with enough skill internally to make it economically so they outsource it right the biggest single growth area in outsourcing at this very moment in time is in procurement the bigger boys that by which I mean the big consultancy the big for PwC Deloitte’s KPMG all have major outsourcing companies within procurement and they’re working for government’s they’re working for large organizations this is big business seriously big business because of the risk I just explained within actually the supply chain itself people who understood they need to get these skills I currently amongst many my other things work with a major university in London I have over 250 students work within the House source division of KPMG and they’re my students studying for professional qualifications in supply chain and procurement they have to have it it’s not an if is not about they have to have it and then trying to find ways of combining automation without sourcing to enable networks to work to use portal systems to create virtual service organizations to create virtual networking these are major trends in

supply chain so being able to back to the subject to buying what is buying what do we mean by organizational buy that’s very simple it’s finding out where we use the resources and getting them to the right place at the right time to the right quality in the right way that’s what it’s do it involves working with others it involves creating a set of complex Network relationships if you look at buying and buying activity in the big retailers by which I mean especially the big fashion companies over the years they’ve long understood the procurement purchasing buying activities is the number one business function if you go and look at the CEOs of the major retail companies they are the buyers they are the guys who make the decisions such as rity giclees quick strategically direct the company into his future if they buy the wrong fashion item in the wrong color the company sells 0 they know what they’re doing this is what this is about when we look at organizational buying as a discipline and we start to break it down into its areas it starts to break down to procurement and purchasing so what is this procurement procurement is about planning the purchase it’s not about making it is about planning it is about determining standards it’s about developing specifications is about researching supplier markets it’s about selecting an appraising for the right suppliers before we ask them to bid don’t wait to bid and then appraise appraised before you ask you’re wasting your time it’s too late once you ask someone to do it you’re putting a fire out not stopping it’s third is about value analysis and remember value does not mean price it’s about value analysis means creating the right level of financial means negotiating prices when necessary it means forming and working with the purchasing team to make the purchase it means it’s about contract administration and administrating contract contract management is not about just dealing with big big things contract management is still contract management if you just bought a bottle of water is managing the contract the contract is the buy that’s what it means is about controlling inventory in stores is about making sure you understand about disposable and all the related functions procurement activity is the whole corporate overview of the input to output function of any business it is strategic in nature it is a strategic business function it impacts on survival of businesses that’s what it does and that is procurement and is not purchasing purchasing is simply the function by which we do it so if we look in detail at what procurement is procurement activity is a main strategic function in the business which is integrated into supply chain function for business success it is a proactive function it looks and tries to find out where the problems may come and then tries to find ways to resolve them before they even start it’s the same old story you know if you have a headache what do you do you take an aspirin or do you stop the head a starting if you wait for the aspirin you’ve got a problem so look it another way who is the procurement person the procurement person is the ultimate risk manager he’s the GP when you’re sick you go to see your general practitioner your general practitioner has a broad range of understanding about all of the functions that may affect you medically he then selects the appropriate specialist for you to go and see that is procurement is a very broad understanding of all elements of business activity and they then understand who they need to go to to get the right different solutions to help them what is purchasing itself then it follows the key requirements to actually acquire those goods is about accomplishing certain key organizational goals and it has very serious objectives is about maintaining quality and value is about minimizing the tight cash tied up in inventory is about maintaining flows through businesses and it’s about helping to his own function to help the organization to strength its competitive position the reality is purchasing

itself works as a reactive function to procurement it reacts to need so is purchasing indeed it may also get itself into development in reviewing the work of the procurement people we cease processing advertising for bids evaluation it’s about all of these elements that are very much more clerical administrative part of what the big human function actually does we may think about procurement and purchasing as a set of disciplines responsible professionalism effectiveness efficiency a set of key disciplines that we need to embed into our activities and the last slide is a slide that is designed by the Chartered Institute of procurement and supply the world’s lead leading bickerman to supply Institute the only academic professional institute of its kind in the world and this is one that looks at the processes that actually are undertaken you’ll notice from the slide that it takes you through 13 key elements 13 key elements those key elements are a process mapping all organizations have a procurement cycle if you have SAP someone would have sat down and designed the procurement cycle that’s what they do it goes through the processes and it you will notice that ever Sanel again about the process at every link it says g r dr means before you do something else stop think go back ask are we could spend hours going through that very model that’s in front of you and I frequently have to do that with students in fact probably not hours even weeks or years because it’s a very complex set of procedures it’s not as simple as it may first look but it just gives you an idea of what’s involved in simple terms the external environment you can see what’s going on this is procurement work this is what kakyoin does it’s far more detailed than people believe and it’s incredibly important as I explained when we started earlier on about just over four or five minutes ago there nearly 30 minutes ago there’s a path so as we come to the end of that I think the thing to do is find out is does anybody have any questions please now type your questions I’m just waiting to see you you you you you you you you you you okay I seem to have one one person’s actually asked for additional clarification about the difference between purchasing and procurement I think what we just what we do is send that out as a note I’m clearly quite complex I mean we’ll probably take far too long beyond what I’ve already told you so we can send a simple note and post it all right we’ll

be putting that on when we post up the details okay just to support this and clarify okay so unless there’s any more questions I just want to thank you all for attending