Dupont Model Of Procurement Impact On Organization Business

1. INDRECT PROCUREMENT

3.1 Procurement impact on organization business

Procurement plays a key role and has a significant impact on the bottom-line of business financial and operational performance. A. Weele (2014, 12) emphasized the importance of procurement especially in manufacturing firms by acknowledging that 50 percent of the cost of goods sold (COG) deprived from expenses of materials and services. If accumulating this amount with additional expense generated from other business activities such as marketing and sales, the result will increase up to 60-80 percent.

In addition to statistic-proven impact of procurement on COG, A. Weele (2014, 13) also uses DuPont model, a calculation to measure the impact of procurement cost on company’s

Lysons (1992, 10) defines that “the classic definition of the overall purchasing functions is to obtain materials of the right quality in the right quantity from the right source delivered to the right place at the right time at the right price”. However, he extends his argument further by detailed explaining the multiple goals behind core roles of procurement department in a typical manufacturer industry with following points:

• To maximize the profitability, productivity and competitiveness of organization by buying materials or services aiming at highest cost saving but prioritizing quality on top

• To ensure inventory kept in the lowest buffer stock level to minimize holding costs but still at a secure level for emergency

Procurement of direct materials and service associates with the process of procuring all materials and services that directly and countably contribute to the end-product of a firm. Direct buyer will be in charge such items like raw materials, machine and equipment, semi-finished components and so on.

2. Procurement of indirect materials and service is, in another word, is the procurement activity that indirectly and unmeasurably contribute to the actual end-product of a firm. For example, indirect procurement will be responsible to buy MRO (Managing, repairing and operating materials) items such as maintenance machine or cooling oil or packaging materials and safety gloves, ORM items (Operating Resource Management) such as office supply and company utility.

Even though both ORM and MRO are purchased under the same indirect procurement group, these two types of items should be managed differently because ORM belongs to white collar (indirect office supplies) while MRO belongs to blue collar (indirect industrial good). Therefore, they have to distinguishing procurement process due to the levels of complexity and enormous variance in cost and volume. For example, MRO items are sometimes listed as stocked items in inventory and accompanied with more complicated and fundamental specifications