ADDED VALUE OF PROCUREMENT

Added Value of Procurement



Table of Content

Introduction3

Value is becoming more important to the organization3

Analysis on value added4

Implementing Added Value of Procurement7

Objectives of Added Value of Procurement9

Approaches and Strategies11

Factors affecting value added13

Conclusion14

References16

Added Value of Procurement

Introduction

Value based purchasing focuses the decisions of purchasing professionals on the creation of value, rather than on the traditional objectives of cost savings and efficiency. Most of the purchasing researchers see purchasing as a strategic contributor to the added value of the organizations but only a few contributions discuss the possible kinds of values that the purchasing department could actually add to the organization. This paper tries to fill this gap and reviews the traditional and strategic concepts of values added by purchasing and the factors affecting value added. Furthermore the paper presents a conceptual model of factors affecting value added by the purchasing department.

Value is becoming more important to the organization

Driven by the fearful competition on the marketplace, organizations are giving more attention to the 'value' concept. They are attempting to increase the value of their products and services and reduce non-value-added activities, both in terms of cost and in number. One function that has a tremendous impact on these efforts is purchasing. The role purchasing plays in the organization is crucial, and the outcome of the purchasing decisions made can have a profound impact on the value of the organization. In the value chain analysis developed by Porter (1985), procurement is viewed as a support activity that contributes to the competitive advantage of a business unit by adding value. The purchasing function uses various inputs to perform value-adding processes (market and value analyses, sourcing, negotiation, etc) and to provide output like quality, services, materials, etc. If purchasing performs these activities effectively, this output provides the organization with a competitive advantage (see figure1). The value-chain demonstrates that the purchasing function has a major role in adding value to the organization. Most of the purchasing researchers see purchasing as a strategic contributor to the added value of the organizations. But only a few articles/researchers discuss the possible kinds of values that the Purchasing Department could actually add to the organization (Porter, 1985).

Analysis on value added

Many authors discuss the 'value' concept but there are many differences in the way they define and treat the concept. When it first appeared, the use of 'value added' was put forward as an alternative to profitability or return on investment supported by accountants who were seeking an alternative measure of company performance (Wood, 1978). So, purchasing performance on providing added value to the company was measured and evaluated on changes in the purchasing price of materials and the cost of the departmental operation. Farmer (1987) writes about the traditional concept of value of purchasing which was obtaining the right materials in the right quantity, for delivery at the right time and right place, from the right source, with the right service, and the right price. Later on the strategic concept of the value of purchasing was explored by Ellram ...