Using the organisation in which you are employed, provide a brief overview of its business, size and structure as well as the industry in which it competes. With reference to this organisation you have selected, identify and describe the main internal and external factors that affect purchasing.
(i) Explain using examples where appropriate, if purchasing plays a reactive or proactive role in the organisation.
(ii) Examine the ways in which purchasing supports organisational goals.
(iii) Using one of the Purchasing Evolution Models analyse the organisation as regards its purchasing stage of development.
I am currently employed by a Kilkenny based company called Veolia Water Ireland, who deal mainly in the design, build and operation of water and wastewater treatment plants in the Republic of Ireland for over the past 30 years. We are a leader in the water and wastewater solutions market to local authorities throughout Ireland. Veolia Water Ireland (VWI) are a business unit of the larger parent company Veolia Environnement who have over 330,000 employees worldwide. VWI themselves have 2 separate entities, the design build function known as Bowen Water Technology and the Operations side of the business known as Veolia Water Operations Ireland Limited. VWI in its entirety has over 150 employees at our Kilkenny headquarters and 30 operations sites nationwide and has an annual turnover of approximately â‚¬27 million. Each of the respective business units has its own Managing Director and Senior Management and accounts staff with the exception of a communal Financial Director who performs the accounts for both entities. They are not only involved in the municipal market but also the industrial sector, servicing and domestic water metering.
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Internal & External factors that affect Purchasing
In any company there are 4 functions or management. These are planning, controlling, organizing and leading. All organisations or businesses work within two specific environments, that being the internal and external environment. As failure to adjust to environmental developments can have disastrous consequences for companies as successful firms seek to identify its strengths and weaknesses (from an internal perspective) and appraise and respond to opportunities and threats (from an external perspective). Successful companies endeavour to capitalise on their strengths, eliminate or reduce their weaknesses, and as I have previously stated appraise and respond to their opportunities and threats.
(IIPMM; The Commercial Environment, 2012) “By studying the internal environment firms can determine what they can do with their resources and capabilities. The second involves the organisation’s wider, external environment which is shared with other organisations and stakeholders. By studying the external environment organisations identify what they might choose to do”
Internal driving forces are those kinds of events that occur inside the business, and are generally under the control of the company. Examples of these for Veolia Water Ireland would be as follows. The companies’ stakeholders, company goals and objectives, technological capacity in the market and innovation, organizational culture, management systems in the company, the financial management of the company and employee morale to name but a few. I will now describe for the main points I have stated above how these internal driving forces can affect the purchasing function.
Company goals and objectives affect purchasing by defining the direction and type of purchasing performed. For example, it determines whether purchasing has a proactive or reactive role in the company. A major push was made on the Veolia purchasing process over the past few years at a corporate level and now our key steps in the purchasing process stages have been detailed as: identify the need and the action; launch the action; analyse needs and markets; define a purchasing strategy; launch a tender, contract; deploy the contract; guarantee continuous improvement. So, much more emphasis has now been put on purchasing as it have been observed that for every euro saved in purchasing, it then goes directly to the bottom line where only a portion of every euro earned in turnover has the same positive impact on the aforementioned bottom line or profits.
Organisational culture also played a large part in how purchasing has developed. Purchasing is only a four years young function here at Veolia Water Ireland and at the beginning, as with most new processes, it was difficult but over time the main players realised that “the way they were performing activities” was not as efficient as it could be and although change is not often welcomed it was observed that the added value the purchasing function brought allowed others to concentrate on their own areas of responsibility.
External driving forces are those kinds of situations or events that occur outside of the company and are by and large beyond the control of the company. Examples of external driving forces for VWI would be as follows; the industry itself, the economy, competition, government laws and regulations. For any external analysis then a PEST analysis is to be performed. The acronym PEST stands for political, environmental, economic and technological. These external influences or factors affect purchasing and as such the following questions must continually be asked; what is the competition doing? What are the needs, wants, and desires of the customer? How is the industry performing? What is the effect of the economy currently (in a period of growth or recession)? Is there any political movement or interference?
Specifically for Veolia the external aspects that would affect purchasing would be any strategic alliances that there may be and as we have various global framework agreements over numerous products and services then this would have a large bearing on companies VWI would select as potential suppliers. VWI also prides itself on being at the cutting edge technologically and as such we have developed an “Actiflo Technology” so as to maintain our competitive advantage over any of our current competitors in the market.
Purchasing role in the Organisation
As previously stated the purchasing function for VWI is only 4 yrs young and it has been evident in that period that the function has moved from being an administrative function and reactive to the demands of others to a “proactive function, leading and initiating purchasing strategies of benefit to the organisation.” This itself, is evident from the time spent between what is seen as basic administration or paper pushing to a more proactive approach and to added value of the function. Hand in hand with this change has also been the strategic idea of “total cost and value are key variables”. There is no point is sourcing an extremely competitive one off purchase, the idea is to form strategic partnerships between ourselves and our suppliers to ensure continuity of supply and to ensure continued benefits for both companies because if it does not benefit both sides then ultimately the relationship will not last. However, coupled with this move from reactive to proactive purchasing there is one further essential aspect and that is technology. That is not technology of the proposed engineering solution but the technology available within the company. Currently we have an in-house system that is dated and although the intention is to move away from reactive buying there is still the labour intensive requirement of inputting and amending of purchase orders, subcontracts and also any changes to orders that may occur after placement. This is in the process of being changed at the moment but currently this aspect must still be classed as reactive purchasing as the administration time required currently is excessive.
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Purchasing as a support to Organisational Goals
An organisational goal or strategic goal and objectives are long run open ended attributes that the organisation seeks and which satisfy the organisations’ mission. See Figure 1 on the next page for a graphical representation of the Organisational Objective Hierarchy. Purchasing, however, has only received the recognition of being an integral part of the process in the past few decades. This is due in the main to the realisation in most organisations of the contribution purchasing can have in achieving success in business. One of the main reasons why purchasing has evolved is its response to industry challenges. As Veolia Water Ireland is part of the global Veolia group then the effects of globalisation, competition pressures and volatile markets have all impacted on it but it’s the effect that responses such as partnership sourcing, global sourcing, benchmarking and the need to add value to name but a few, in purchasing, each have aided in Veolia achieving its goals of being a market leader in the industrial and municipal markets both here in Ireland and also now in the UK due to further recent changes in the Veolia Group.
Figure 1 Example of Organisational Objective Hierarchy
It is an obvious statement that purchasing strategy must be aligned with organisation goals for it to succeed. This requires a formal process of setting objectives and defining a strategic plan for the function. Please refer to SMART objectives detailed in Appendix. It is the “Five Rights” definition of purchasing objectives which allow any company like Veolia to achieve “value for money”. These five rights are:
(IIPMM, 2012) “To purchase the right quality of material, at the right time, in the right quantity, from the right source at the right price”.
Although this is thought to be a basic interpretation it does give a basis for purchasing personnel to follow and along with the SMART objectives detailed in provides a more stable base for purchasing to aid in the organisational goals of the company.
Purchasing stage of Development – Purchasing Evolution
Well to analyse the stage of purchasing development in Veolia I would have to employ the purchasing evolution model from Jones 1997. “His research indicated that purchasing had five stages of measurable development. These he called
(1) Infant (2) Awakening (3) Developing (4) Mature and (5) Advanced.
The model his research resulted in showed the measurement of a company’s development against 18 different areas. It indicated where the company was now and identified any shortcomings. Then it facilitated development of an “ideal” profile and finally identified where developments were needed”(Jones 1997). Although as I have previously stated that the Procurement Department in VWI is only 4 years old I can confirm that I feel we are currently at the mature stage of development. This is indicative of the aspect of selected negotiations of the 80/20 or Pareto rule where 80% of a category of spend is with 20% of the vendors. We have definitely moved on from the developing stage where a “shot gun” approach was used to achieve some savings but with excessive quantities of work. We have found now that as we have moved away from the purely clerical or order processing routine works to a more strategic and proactive focus then the more performance has improved and the greater its movement from efficiency to effectiveness and this in turn has improved Purchasing (or Procurement’s) standing within the organisation. This has also been backed up by Farmers third law concerning the importance of purchasing which is reflective of Veolia Water Ireland’s business focus;
(David Farmer, 1981) “Purchasing is important when an organisation spends a significant proportion of its income on purchasing goods and services to allow it to do business”.
As this is true for the VWI business model, it has also proven to be correct in its determination of its importance for the continued growth of the company.
If there is anything that is stead fast and unchanging, it is change itself. Change is inevitable, and those organizations who do not keep up with change will become unstable, with long-term survivability in question. Whether they are internal or external driving forces, one thing is certain for both; change will occur. A company must be cognizant and aware of these changes, be flexible, and willing to respond to them in an appropriate way. One way that has shown the way over the past few decades is the increasing importance of purchasing in the industrial sector. These areas have been indentified and now are in the process of being rectified so further progression and improvement can be achieved on an ongoing basis.
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