Explain Pareto’s Law and how does it relate to add the classification of A-, B-

Question

1. Explain Pareto’s Law and how does it relate to add the classification of A-, B- and C-products Christopher [1998].
2. Explain why it is important for an industrial company to have full management attention for its purchasing process.
3. Discuss differences and relative advantages of buyer-centric and seller-centric procurement models.
4. List the key advantages of an e-procurement solution.
5. Name advantages of integrating e-procurement with a company’s ERP-system.

1. Explain Pareto’s Law and how does it relate to add the classification of A-, B- and C-products Christopher [1998].
2. Explain why it is important for an industrial company to have full management attention for its purchasing process.
3. Discuss differences and relative advantages of buyer-centric and seller-centric procurement models.
4. List the key advantages of an e-procurement solution.
5. Name advantages of integrating e-procurement with a company’s ERP-system.

Explanation / Answer

Pareto's principal also called as 80-20 rule which is simplest and most powerful management tool .This rule is helpful in specialised quality management such as six sigma,planning,decision-making and general performance management .It is also helpful reference or 'check' in business/organizational planning and project management too.Leadership is a lot easier and effective when pareto principles are kept in mind ,and this applies to every form of leadership theory and approach.
The pareto principle suggest that where 2 related data sets or groups exist for example -
80 percent of output is produced by 20 percent of input
80 percent of outcomes are from 20 percent of causes
80 percent of contribution comes from 20 percent of the potential contribution available
In fact pareto principle does not demand that the 80:20 ratio applies to every situation ,and neither is the model based on a ratio in which the two figures must add up to 100

The importance of purchasing in any firm is largely determined by the four factors :
Availability of materials
Absolute dollar volume of purchases
Percent of product cost represented by materials
Types of materials purchased
Purchasing must concern itself with whether or not the materials used by the firm are readily available in a competitive market or whether some are bought in volatile markets that re subject to shortages and price instability.
The most important of the four factors is the amount of control purchasing and supply personnel actually have over materials vailability,quality,costs and services .
Purchasing can also be seen as either strategic or transactional. Also, the words "direct" and "indirect" have been used to distinguish the two types. Strategic (direct) buying involves the establishment of mutually beneficial long-term relationship relationships between buyers and suppliers. Usually strategic buying involves purchase of materials that are crucial to the support of the firm's distinctive competence. This could include raw material and components normally used in the production process. Transactional (indirect) buying involves repetitive purchases, from the same vendor, probably through a blanket purchase order. These orders could include products and services not listed on the bill of materials, such as MRO goods, but are used indirectly in producing the item.
In more specific terms, today's purchasing departments are responsible for:

    coordinating purchase needs with user departments
    identifying potential suppliers
    conducting market studies for material purchases
    proposal analysis
    supplier selection
    issuing purchase orders
    meeting with sales representatives
    negotiating
    contract administration
    resolving purchasing-related problems
    maintenance of purchasing records

These functions obviously entail no insignificant amount of responsibility.

As the role of purchasing grows in importance, purchasing departments are being charged with even more responsibilities. Newer responsibilities for purchasing personnel, in addition to all purchasing functions, include participation in the development of material and service requirements and related specifications, conducting material and value-analysis studies, inbound transportation, and even management of recovery activities such as surplus and scrap salvage, as well as its implications for environmental management.
In progressive firms, purchasing has a hand in new product development. As a part of a product development team, purchasing representatives have the opportunity to help determine the optimal materials to be used in a new product, propose alternative or substitute materials, and assist in making the final decision based on cost and material availability. Purchasing representatives may also participate in a make-or-buy analysis at this point. The design stage is the point at which the vast majority of the cost of making an item can be reduced or controlled.

Whether or not purchasing had an impact on a product's design, the purchasing agent's input may certainly be needed when defining the materials-purchase specifications. Specifications are detailed explanations of what the firm intends to buy in order to get its product to market.

Buyer-Centric models are characterized by the adoption of software that creates a single catalogue with which the suppliers would deal.There are several advantages to this model.
It allows the centralisation of the financial administration and automates the entire process making it faster, reducing the costs of business and increasing the value of the company apart from sales. It allows the easy comparison of prices for suppliers and reduces the cost for them--savings that can then be transferred back to the buyers.
The most distinct disadvantage of this model are the limited choices in dealing with a single buyer with a single catalogue. The cost of maintaining this single catalogue in terms of specialized manpower and resources also makes this an early model in the evolution of E-Procurement. This model offers the benefits of automation and speed of access but appears to be of limited dimension, preventing the exploitation of all of the growing possibilities of the internet.

Seller-Centric E-Procurement models place the administrative software with the seller. This model reduces the cost for the buyer in terms of keeping the catalogue up to date as well as delivery which is all performed by the supplier. There are,however, many organisational problems apart from the advantages.

In this arrangement, the buyer is forced to to use different sites from the many different suppliers, a clearly inefficient process since the logistics of dealing with different sites and different searches quickly becomes disorganised.

There are problems for the buyers as well. Since the software system sits with the seller the buyers financial enterprise does not gain the efficiency of that technology. As Haller points out, Amazon.com provides a very good example, of a Seller Centric E- procurement model. It offers a large catalogue where buyers can choose host of products and order their choice.

The third and most sophisticated E- procurement model is is the marketplace E- procurement model. In this model, buyers and sellers make their financial exchanges on a separate platform. An independent platform provides software where catalogues are offered and various buying capabilities are all offered on the software program.

Of all the Models seen so far seen so far the marketplace E procurement model offers the greatest multiplicity of buyers and sellers coming together; however, this is not to say that every exchange is perfect since with this wide-ranging model, individual needs cannot be perfectly addressed in the broad service nature of the model.

Perhaps the best-known of the marketplace E- procurement model, is E-Bay . With this company, buyers and sellers are brought together in a market that attempts to offer the best prices and products to the maximum number of customers and suppliers based on how their respective purchasing and selling behaviour determines the market price. In this sense, it is a microcosm of classical textbook economics, showing market forces in action.

There are total 7 benefits of e-procurement process-
1. Reduced Costs
It will saves you money by preventing duplicate spending,leveraging volume buying and saving you costs associated with paper based systems.

2. Transparent Spending
Electronically conducting your procurement makes it easier to write and analyze reports on your procurement systems,meaning you can ensure that your procurement procedures conform to your policies.

3.Increased Productivity
It is less time consuming than traditional procurement .

4.Eliminating Paperwork
With e-procurement everything can be saved and stored electronically.

5.Increased Transaction Speed
As the electronic handling of tasks supports and simplifies the purchasing process ,transaction speed is increased.

6.Standardized Buying
Purchasing electronically makes it easier for every department to conform to company procurement standards

7.Reduced Errors
Electronic paperwork is streamlined and thus easier to check for errors.

E-procurement is an addon module in an ERP system.Using E-procurement with ERP could support both purchase to pay and source to contract business processes. On the other hand, an e-Procurement system is designed specifically to meet the procurement needs of the organisation (sourcing, spend analysis, vendor management, contract management, purchasing). As a result, a dedicated e-procurement system’s advantages easily outweigh those of an ERP system with integrated e-procurement module.

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