An Essay in Consideration of the Following Statement:
It has been argued that “the purchasing function is not strategically important in enabling organisations to gain competitive advantage.”
In consideration of this statement, the argument presented below is one which opposes the contention that the purchasing function is not strategically important in enabling organisations to gain competitive advantage. This stance has been taken following a thorough literature review and consideration of the statement relative to pertinent models, tools and techniques. Furthermore, it has been considered with a view towards current thinking and debate in the field of strategic purchasing.
A process that goes back to early civilisation, it’s only in recent times the importance of efficient purchasing has been realised – and even later still, the acknowledgement of its strategic importance (Lysons & Farrington, 2006). The traditional model of purchasing was that of a tactical process – no more than a clerical function. However, purchasing is now seen as a function which plays an important role in achieving the strategic objectives of the organisation for reasons which we will go on to clarify.
The work of Porter (1980) – specifically his 5 Forces Model of external factors from which a firm’s strategy may in part be derived – led to a realisation of the link between some of the key features of this framework and the purchasing function. Three of these forces – namely, the bargaining power of suppliers, the bargaining power of customers and the threat of new entrants all implicate a linkage with the purchasing role. In terms of the threat of new entrants, if an organisation does not manage their suppliers well, they may involve themselves in downstream investment – thereby becoming competitors of the firm (Mol, 2003). Therefore, through the work of Porter and the identification of factors which determine industry profitability, the importance of the purchasing function began to be appreciated. This realisation led to a growing awareness of the strategic significance of the function in assisting the organisation gain and sustain competitive advantage.
Kraljic’s purchasing portfolio model (1983) categorises purchases with each category requiring a particular approach and yet another approach is required to bring about the relocation of a product/service from one category to another. The firm’s purchasing function can use this model to determine strategy so that it can exploit purchasing power and reduce risk – thereby providing a strategic contribution towards gaining competitive advantage.
The Total Cost of Ownership (TCO) Model provides a means of determining the effects of the relationship of a company with its suppliers. It is a holistic approach to purchasing which encompasses consideration of more than just quantitative factors or transactional costs of products and services in establishing what represents value to the organisation. Cousins et al (2008) identify TCO as a strategic initiative which has led to firms creating dedicated strategic purchasing departments due to its benefits and contribution towards achieving competitive advantage.
Organisational dynamics have changed in so far as supply side goods & services now account for some 60% of total business costs (Jahns, 2006). This has come about as a result of a move away from vertical integration towards outsourcing. A trend in recent years away from in-house manufacturing towards outsourcing – or the outsourcing of non-core areas – has emphasised the strategic importance of purchasing (Hunter, Bunn & Perreault, 2006). Part of this movement towards outsourcing has involved a shift from product purchasing to solution purchasing. This has resulted in the nature of this process being less transactional and more strategic. Its importance comes to full recognition when purchasing is involved in make-or-buy decisions or consideration of purchasing in relation to core/non-core issues (Van Weele, 2009).
To a large degree, companies now have access to similar resources. With this comes the realisation that the competitive interface pitches supply chain against supply chain, with purchasing becoming vital due to the impact it can have on a company’s bottom line (Heinrich, 2003). Consequently, it becomes a critical factor in achieving sustainable competitive advantage. As Lysons & Farrington (2006, p.19) put it, “when purchases form a high proportion of total costs, a modest saving on bought out items will result in a similar contribution to profits as would a substantial increase in sales.” A �1 increase in sales does not lead to �1 additional profit whereas a �1 reduction in purchases does.
Globalisation is also a factor in the increasingly strategic nature of purchasing. Global purchasing is now seen as a weapon in the pursuit of enhanced profitability and performance by way of technological improvement and price advantage (Fagan, 1991). It has led to the role of purchasing becoming more strategic due to international competition for resources and raw materials on the one hand and lower labour costs on the other. (Sheth et al, 2009). According to Smith (1999), global procurement can also provide strategic advantage by way of gaining knowledge of foreign markets, exploiting tax and currency opportunities and through improved availability & quality.
Firms are increasingly looking to suppliers to create added value. Their pursuit of added value follows the example shown through the success of Japanese Production Systems in the ’80’s (Ellram & Carr, 1994). They have seen their management of supplier relations bring about cost advantage (Taylor, 1994) – triggering a greater appreciation of the strategic value of purchasing. Buyer-supplier relationships have clearly become an integral part of the purchasing function. As outlined by Mota & De Castro (2005), such relationships are of strategic relevance due to the need to integrate knowledge within and across organisational boundaries. Their management has assumed greater importance, meaning that reactive relationship management is no longer effective (Hallikas et al, 2005). Relationships built up with existing suppliers are likely to be strategically relevant due to the part they have the potential to play in the development of capabilities over time. (Mota & De Castro, 2005).
Present day organisations depend heavily on their supplier network – therefore, supplier sourcing is critical, playing a pivotal role in the achievement of corporate competitive objectives. Accordingly, the identification, selection and control of suitable sources of supply are of strategic importance for that very reason.
In recent times, adoption of Japanese production systems has gone further than simply a focus on supplier relationships. The adoption of Lean & Just-in-Time (JIT) production practices has been widespread. The move to JIT & Lean Manufacturing requires dependable suppliers with the capability to provide high quality products when and where they are needed. Managing supplier capability effectively leads to improvements in terms of operational flexibility and a technology based point of advantage (Clark, 1989). This has contributed to the need for strong supplier relationships as it involves a rationalisation of supplier base – which requires stronger supplier commitment and cooperation (Lamming, 1993).
Dependency on fewer suppliers together with the lean concept of carrying minimal inventory increases supply risk. This is compounded further due to the move towards globalisation and outsourcing. These factors make the purchasing function’s task of buying items at the right price, from the right supplier, at the required specification, in the right quantity, for delivery at the right time to the right customer much more complex (Monczka et al., 1998). Its role in this system is critical and is now seen by senior management as strategic in terms of maintaining competitive advantage.
The lean philosophy concerns itself with continuous quality improvement, lead time reduction & cost reduction (Van Weele, 2009). Purchasing has a role to play in this respect through the incorporation of performance measurement into its strategic approach to supplier development – thus contributing towards a functional lean system.
Aspects of the points raised above contribute to the realisation of a need for purchasing – and its objectives – to be aligned with the corporate strategy. As Gonzalez-Benito (2007) confirms, the extent of purchasings contribution to business performance is dependant upon the degree that the purchasing effort is aligned with the business strategy and strategic fit is achieved. Narasimhan & Das (2001) confirm the strategic roll of purchasing – demonstrating that the alignment of purchasing strategy with competitive strategy results in performance improvement in the overall network. Furthermore, they suggest that external purchasing initiatives such as leveraging of the supply base, development of strong buyer-supplier relationships and supplier performance evaluation elevate purchasing into a strategic function.
Managers are increasingly coming to recognise that purchasing & operations are intrinsically linked. The operations management system depends on inputs procured by the purchasing function from the organisation’s suppliers. (Krause, Pagell & Curkovic, 2000). As it supports operations through an uninterrupted supply of materials and services, purchasing needs a strategy – one that is aligned and consistent with the Operations strategy. They must be able to support the competitive strategy at corporate level. It’s reasonable to assume from this that purchasing is very much of strategic importance.
Earlier I alluded to the fact that the current competitive environment pitches entire supply chains against each other. With this in mind, purchasing’s involvement in a company’s strategic decision-making process may well be considered a primary requirement for achieving supply chain integration. Strategic benefits by way of competitive supply chains, innovative and responsive product development can only be achieved through the integration of purchasing and supply chain management according to Sheth et al (2009). A strategic purchasing function can promote open communication between supply chain partners and foster conditions orientated to achieve mutual gains (Chena et al, 2004).
With regard to getting new products to market faster, the early involvement of purchasing in new product development has been found to be a factor of competitive advantage for those firms that adopt this approach. It assists in speeding up the development process with less quality defects and reduced costs (Dyer, 1996). Supplier involvement is normally required at a very early stage in lean organisations where new product development is concerned (Van Weele, 2009). In order to facilitate this, purchasing needs to move beyond simple transactional procurement processes to develop strong customer-supplier relationships.
The educational and demographic structure of the purchasing department has changed (Cousins and Rutter, 1998). Purchasing staff are now better qualified and more professional in their outlook and approach to the task. The structure of the function has also changed in recent times. Purchasing departments of medium to large organisations had an average of 60 buying personnel but by the late 1990s this had changed to 15 strategic supply personnel. This change reflected a decentralisation of the function with devolution of non-strategic purchases and centralisation of strategic purchases (Cousins and Rutter, 1998). All of these developments allow the purchasing department the opportunity to provide more resources to facilitate the strategic aspects of the function.
Growing awareness of environmental issues can be related to overall business efficiency and have strategic implications for purchasing (Hampson & Johnson, 1996). Green et al (1996) suggest that the current interest in environmental supply chains is based upon increased understanding of environmental issues, the increasingly strategic importance of purchasing and the movement towards cooperation and partnership approaches involving customers and suppliers.
Advances in information technology have enabled purchasing departments to provide a strategic input toward departmental and corporate goals. Electronic procurement applications such as Electronic Data Interchange (EDI) based systems have allowed non-strategic purchasing to be decentralised, provide data in real time. Furthermore, such systems make so much more data available. With the right interpretation, an organisation’s purchasing department can help the firm toward achieving competitive advantage. Electronic systems have minimised much of the transactional work associated with the traditional purchasing department – allowing purchasing professionals more time to concentrate on making a strategic contribution to the objectives of the firm (Lim & Palvia, 2001). The objective of e-Procurement is not to force suppliers to cut their margins but to realise savings for both buyer and supplier in material and administrative costs (Kothari et al, 2005).
Supply chain integration has largely been enabled due to technological advances such as EDI and internet-based applications. These systems have also enabled purchasing to play a more effective role in supporting firms who have adopted the lean production philosophy – holding minimum inventories and facilitating just in time deliveries.
In relation to current debates ongoing with regard to this subject, Ramsay & Croom (2008) maintain that the term strategic is misunderstood and in practice, organisations can have a purchasing function which may be either strategic or operational. However, Rozemeijer (2008) maintains that all aspects of purchasing are now strategic. A lack of control over operational processes will create difficulties in establishing potential collaborative benefits with suppliers. Consequently, even operational interactions with suppliers can be of strategic relevance.
According to Lysons & Farrington (2006), the strategic importance of Purchasing & Supply Chain Management will increase in the future – particularly in terms of key activities such as supplier evaluation, selection and management.
On a concluding point, purchasing has become a strategic factor in part due to the fact that it now has senior management support. Laios & Moschuris (2001) confirm that the extent to which purchasing resources are used efficiently is currently an important concern of management. Gl�ckner et al (2005) put it well when they state that purchasing has only recently “come out of the backroom into the boardroom”. In the evaluation of this statement, I close this discussion on the basis that the overwhelming evidence is to the contrary. Purchasing is strategically important in enabling organisations to gain competitive advantage.
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Coursework 1: BSM520/Strategic Purchasing