The Purchasing Function Business Essay
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Published: Mon, 5 Dec 2016
The purchasing function is described by Lysons and Gillingham (2003) as a function with resource to procure supplies. It is usually argued that the purchasing function is not strategically important to enable organisations to gain competitive advantage. Carr and Pearson (2002) described nonstrategic purchasing as a function that is clerical in nature, reactive to other functions and focusing on short-term issues. Ramsay and Croom (2008) on the other hand saw purchasing as a strategic function that contributes to the overall organisational competitive advantage. But Reck and Long in Carr and Pearson (2002) argues that purchasing function of a firm can operate between strategic and nonstrategic levels within an organisation. There is now a question as to whether purchasing should still be considering the nonstrategic role of the purchasing function. This paper will be looking the role of purchasing that make makes it strategic and how purchasing function is strategically important in gaining competitive advantage for the organisation with the aid of model and tools/techniques for purchasing.
Purchasing is usually defined as obtaining the right quality material, at the right time, in the right quantity, from the right source, at the right place (Lysons and Gillingham 2003; Baily et al. 1998). Van Weele (2005) also defined purchasing as the management of the company’s external supply of goods, services, capabilities necessary for running, maintaining and managing the company’s primary and support activities is secured at the most favourable conditions. Although, there is no agreed definition of purchasing from literature, these definitions indicate that there is need for supply requiring to determination of specifications, supply continuity by choosing a suitable supplier, efficient buying (worth the value), and relationship to ensure supply at the right time to manage inventory and monitor efficiency of suppliers thereby defining the purchasing function.
Many authors in the literature have identified the developments in purchasing. Reck and Long in Lysons and Gillingham 2003 identified that purchasing passes through stages from passive (no strategic direction and supplier selection based on price and availability), independent (purchasing having functional efficiency with no regards to firm’s competitive strategy), supportive (supports the corporate strategy with regards to the competitive objective) to integrative (full integration of purchasing strategy into the firm’s corporate strategy) stages to become a competitive weapon for an organisation. Van Weele (2005) also identified that need for reduced costs, product standardisation, innovation, stock reduction, increase flexibility, and purchasing synergies can improve an organisation’s competitive position. In addition, changes in trade pattern, customer demands, technology, competitor activity in the have wider business context has affected the development of purchasing. An indication of this is that an increase the importance of purchasing gives the organisation the capability to satisfy its customers’ needs by focusing on activities that ensures quality products of good values are produced in line with the organisation’s competitive strategy.
Carr and Smeltzer (1997) were able to make a distinction between purchasing strategy and strategic purchasing. Defining purchasing strategy as the specific actions the purchasing function may take to achieve its objectives. While strategic purchasing was defined as the process of planning, evaluating, implementing, and controlling strategies the purchasing follows. It is gathered from these definitions that the actions of the strategy of the purchasing function must be in line with the overall corporate strategy of the organisation be it cost or differentiation as identified by Porter (1985) and that the strategic purchasing must be able to direct the purchasing functions to ensure that the long-term goals are achieved and the organisation remains competitive. Although, there may be nonstrategic purchasing functions due to the low status and spend of the organisation (Carr and Pearson 2002), strategic purchasing functions must be given top management consideration as it is proactively involved achieving the firm’s goals and adding value to the organisation. However, this may only happen when the purchasing function is integrated into the firm’s strategic planning process and is thought of as important to achieve and maintain a sustainable competitive advantage as concluded by Goh, Lau and Neo (1999).
Strategic purchasing has been seen by many authors as impacting firm performance, especially in relation to supplier involvement. It was argued by Chen, Paulraj and Lado (2004) that strategic purchasing gives a competitive advantage by fostering closer working relationships with a limited number of suppliers; promote open communication among supply-chain partners; develop long-term strategic relationship orientation to achieve mutual gains. Carr and Pearson (2002) also argued importance of purchasing to new product development as regards to selecting qualified suppliers as well as the involvement for product development while McGinnis and Vallopra (1999) argued that purchasing and supplier involvement contributes to higher product quality, achievement of cost objectives, and reduce new product time-to-market. Also Brookshaw and Terziovski (1997); Krause, Pagell and Curkovic (2001) were able to argue that strategic purchasing is capable of retaining a firm competitive priorities of quality, cost, delivery, reliability through the relationship with suppliers In other words, strategic purchasing with regards suppliers involvement can improve an organisation’s performance and customer responsiveness if involved in the planning process thereby increasing the firm’s profits while gaining competitive advantage.
Increase in organisation’s costs spent on purchasing activities from external sources as identified by Ramsay and Croom (2008); Baily et al. (1998) indicates the need for reduction in direct materials cost and net capital employed by organisations. Purchasing is able to achieve these reductions with the use of purchasing policies like competitive bidding and collaboration with suppliers to make decisions that ensure quality and logistics arrangement thereby saving cost and adding to the organisation’s bottom line. Strategically placing purchasing in organisations’ decision making process gives it control on purchasing costs and ability to choose a supplier base that is competitive and better than competition.
The need for strategic cost management and collaborative innovation and designs, which may require working with external supplier has made organisations rethink their position in the value system and has resulted in the business decision of automating or outsourcing non-critical functions leaving more strategic purchasing tasks. Outsourcing comes from a decision of an organisation to focus on its core activities (Van Weele 2005). This decision is reached when the organisation discovered that performing a function in-house can no longer be carried out competitively, so outsourcing the function to a more proactive organisation allows the advantage to be gained (Baily et al. 1998).
In addition, it is not just enough to make outsourcing decisions, the selection of suppliers that will contribute to the organisational goals is critical. Before selecting suppliers, Gadde and Håkansson (1994) argued that the purchasing strategy must be decided, be it single, parallel, multiple sourcing. But Svahn and Westerlund (2009) emphasised that the characteristics of the purchasing strategy, efficiency (cost-driven) or effectiveness (innovation and value-adding), affects supplier selection and way purchasing manages the relationship with suppliers in line with the organisations competitive strategy. Purchasing must be able to assess the capabilities of the suppliers through a series tools like e-procurement, purchasing portfolio management, collaborative tools to identify suppliers that can enable the firm gain competitive advantage.
Drake and Lee (2008), through the use of Analytic Hierarchy Process (AHP) were able to emphasise the importance of aligning purchasing strategy with business strategy. They argued that purchasing through AHP is able to prioritise the importance of components for manufacturing or impact on the strategic priorities and that purchasing is able to ensure the uninterrupted flow of materials through selection of suppliers in such a way to meet the corporate strategy and competitive priorities (quality, cost, speed, flexibility) of the firm.
Purchasing portfolio analysis suggested by Kraljic (1983) is an important model for strategic purchasing. Kraljic was able to argue that a firm’s supply strategy depends on two factors: profit impact and supply risk and with that identified 4 portfolio quadrants: strategic, leverage, bottleneck and routine. This model proposes that purchasing strategies must be chosen for each supplier. Van Weele (2005) also emphasised that a company’s spend can be categorised using the 20:80 rule; which says 20 percent of suppliers provide 80 percent of supplies and evaluate suppliers according to priority. From these two views, purchasing must be able to identify the suppliers of critical to non-critical products and develop strategies that ensure minimal supply risk and increase buying power. Also, Baily et. Al (2005) suggested that tiering of suppliers can help identify important suppliers and improve partnership with them. Wagner and Johnson (2004) argued that carefully configured, developed, and managed supplier portfolio can contribute to the firm’s value creation and competitive advantage. At this point, purchasing must have a proactive approach to making sure that it identifies supplier that contributes to the organisation the competitive advantage needed.
Another importance of purchasing especially when buying capital goods is that it focuses on total cost management. Most buying processes are usually based on the price as indicated by Baily et at. (1998); Van Weele (2005). Baily et at. (1998) sees purchasing as of strategic importance as it able to focus on the total acquisition cost than price and bears in mind the total cost of ownership of capital goods like cost of maintenance, spare parts in the long term. Purchasing is able to contribute to the specifications by informing to other functions of delivery reliability, assuring timely supply of necessary inputs to ensure that the initial purchase price alone is considered but rather the total lifetime cost of equipments are considered to make sure purchasing is adding value to the organisation by reducing cost over time. Again mutual relationship with suppliers can bring about cost, price reduction and ultimately cost transparency as supported by Lamming (1993).
E-procurement is another strategic tool for purchasing that can contribute to competitive advantage due to its huge cost savings. William (2003) argued that E-procurement cuts across the whole purchasing process and helps facilitate early supplier involvement as well as minimise complexities and unnecessary costs as real-time information is shared between buyer and seller, it also gives top management visibility as they are concerned with the increased operational spend. E-procurement has contributed to the success of many organisations, for instance, Volvo’s supplier selection (Van Weele 2010) and Gap Inc. to reduce lead-time and overall operations of its retail channels (Demery 2006). Despite the benefits of e-procurement, if top management do not strategically initiate the need for e-procurement, the benefits of it giving an organisation competitive advantage are lost.
Conversely, after much consideration of the importance of strategic purchasing to gain competitive advantage, it is necessary to focus on non-strategic purchasing and why it is seen as not important to gain competitive advantage. A nonstrategic purchasing function is task-oriented, while a strategic function makes business decisions as argued by Carr and Smeltzer (2000). Carr and Pearson (2002) also argue that non-strategic purchasing has no contribution to the long-term goals of the firm, are insignificant and of low status. Indeed, if top management of an organisation does not see the importance in the purchasing role in contributing to competitive advantage, it will continue to be seen as non-value adding and just focusing of activities that are non-critical to the successful functioning of the organisation.
Altogether, the development in purchasing over time has shown that there is a need by organisations to incorporate into their corporate policies purchasing strategy. Strategic involvement of purchasing for the overall aim of controlling prices, reducing costs, managing supply proactively, and improving quality to successfully deliver goods and services that will satisfy the end-customers and enable the organisation gain sustainable competitive advantage is essential.
At the heart of conventional wisdom lies the argument that purchasing is not strategically important for the organisation to gain competitive advantage. This argument is seen as ungrounded due to the fact that purchasing is gaining importance within the academia and the business environment. The need for reduction of costs, improvement of value-added into the business, better bottom line has led to the improved relevance of purchasing to the performance of an organisation. Purchasing has over the years developed from non-strategic, transactional stage of procuring supplies to a strategic, integrated stage that focuses proactively on the total satisfaction of both internal and external customers of an organisation. Again, the change of purchasing to strategic purchasing, incorporating purchasing strategy into the corporate strategy, for achieving competitive advantage has changed the view of organisations and has led to a rethink of the organisation’s operation to decide the core competences and non-core competences and rather focus on the core ones and sources others from external sources. However, sourcing externally requires effective supplier relationship management. Purchasing in this aspect is able to select suppliers that with collaborate in meeting the organisation’s competitive strategy. Purchasing is also able to use tools and techniques like e-procurement and total cost of ownership approach along with their skills to manage purchasing costs and balance power and dependence between the company and supplier as well as work out strategies to use with different suppliers. Without giving a strategic importance of purchasing, an organisation’s opportunities of gain competitive advantage may be missed.
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