Procurement & Supply Management
This article will focus on the relationship between purchasing, procurement and supply chain management. Many high profile organizations in the United States have implemented systems of supply chain management as a way of integrating strategic purchasing and logistics goals. Supply chain management is a tool which allows organizations to improve quality, customer service and competitive advantage within the 21st century. Gene Richter, a former chief procurement officer at IBM, developed a framework that defined four stages of maturity in the procurement function. His work allows procurements officials to understand what it means to be strategic in the purchasing/procurement/supply chain management process.
Keywords Logistics; Logistics Management; Procurement; Purchasing; Supply Chain Management; Value Chain
"Economic forces and technological advances have combined over the past 20 years to increase the impact of procurement/supply management on company profitability and long-term business success. Procurement is now in a position to affect company profitability faster and more dramatically than any other corporate function" (Fitzgerald, 2002, p. 1). Many high profile organizations in the United States have implemented systems of supply chain management as a way of integrating strategic purchasing and logistics goals. Supply chain management is a tool which allows organizations to improve quality, customer service and competitive advantage within the 21st century (Tan, Lyman & Wisner, 2002).
In the beginning, there was purchasing. Purchasing has been considered a part of the business function for years. However, it was not considered a management function until the early 1970s when the oil crisis and increased competition made it necessary for companies to manage purchasing in order to maintain their cost structure (Fung, 1999). The purchasing function focused on (1) how to buy cheaper materials and (2) how to buy and supply materials cheaply. Purchasing can be defined as the process from origination to fulfillment of needs (Baily, 1987). The overall objectives of purchasing are to buy quality materials at competitive prices, in bulk quantities, at the required time, and from reliable sources (Fung, 1999).
The traditional approach to purchasing focuses on the internal role of purchasing. Purchasing professionals oversee an operation which requires analyses of how the organization is able to acquire the necessary material at the lowest cost. This concept is used heavily in the government and service sectors. Unfortunately, this concept neglects the fact that the primary focus of most businesses is marketing the organization's products and services, not purchasing. In order for an organization to make money, it has to promote its goods and services to the customer base. Otherwise, there may not be any money to purchase material. The quality, price, quantity and time aspects of purchasing should be evaluated based on their relationship with the differentiation, value, lead-time and responsiveness strategies of the organization (Fung, 1999). Another downside of the internalized approach is that it does not fully recognize the efforts of marketing professionals soliciting and securing business. Although “proactive purchasing techniques can be developed within an integrated operations system” (Burt, 1984), there is a void for creative responses to internal customer requests. As a result, decision making in the purchasing area has been viewed as administrative versus strategic (Ansoff, 1987).
Evolution of Purchasing
The late 1990s were a high point for the purchasing departments. Since many companies were experiencing profitability, the purchasing departments did not have much pressure to stay within budget. Those days disappeared as organizations began to question the costs of purchases. As product life cycles began to shrink and global competition intensified, procurement officers became responsible for bottom line accountability. Manufacturers began collaborating with their suppliers in order to improve quality and lead time. In addition, wholesalers and retailers began integrating their logistics functions to improve their competitive advantage. The changes that were occurring in these two functions led to the idea of making the purchasing/procurement function more strategic.
In order to make the purchasing process strategic, there was a need to redefine the concept and process. Purchasing could be viewed in terms of the relationship between its internal and external exchange functions. Fung (1999) provides an example which captures the new concept using the following illustration:
- Every purchase is also a sale. In this example, the focus is on the internal exchange because it describes the transactional aspects of purchasing decisions that contribute to marketing and organizational goals. The internal exchange function of purchasing emphasizes the relationship between input and output of the organization. Every organization has to buy goods and services so that they can convert them into a product that can be sold. The organization needs to successfully master this process in order to survive in the business arena.
- Purchasing is more than buying. In this example, the focus is on the external exchange because it describes the interactional aspects of complex exchange relationships with suppliers in markets. The relationship between the purchaser and supplier is interactive based on the assumption that both have similar tasks. Both have to prepare purchase orders, locate material, negotiate and attempt to control the transaction. Often, short term exchanges between the purchaser and supplier can turn into long term institutional practices (Hakansson, 1982). Marketing strategies of suppliers can turn into purchasing strategies of buyers. In the "big picture," purchasing becomes more than buying and marketing becomes more than selling.
Purchasing as Supply Chain Management
Once the definition of purchasing was redefined in terms of the relationship between internal and external exchange functions, it became a part of the strategic focus of the organization. Other areas of the industrial purchasing process — “measuring internal customers' perception of purchasing's service quality” (Young and Varble, 1997), “making entrepreneurial ventures through innovation, risk-taking and proactiveness” (Morris and Calantone, 1991), and developing buyer/seller relationships that compliment an organization's competitive position (Landeros and Monczka, 1989) — can be combined with the new definition of purchasing. As a result, contemporary purchasing can be viewed as a part of the supply chain management system. Supply chain management (SCM) can be defined “as the chain linking each element of the manufacturing and supply process from raw materials through to the end user, encompassing several organizational boundaries and treating all organizations within the value chain as a unified virtual business entity” (Scott and Westbrook, 1991; New and Payne, 1995). The scope of supply chain management was further expanded to include recycling (Baatz, 1995). Supply chain management “focuses on how firms utilize their suppliers' processes, technology, and capability to increase competitive advantage” (Farley, 1997), “and the coordination of manufacturing, logistics, materials, distribution and transportation functions within an organization” (Lee and Billington, 1992).
According to Fung (1999), the corresponding functions become:
- Strategic procurement — aligning procurement tasks and suppliers' performance with the corporate and business strategies of the firm.
- Supplier-base management — managing the structure and culture of supplier relationship that is demonstrated in strategic purchasing.
- Lean supply organization — energizing organizational teams for strategic procurement and supplier-base management through flexible structures and responsive information systems.
Purchasing practices should be based on the following supply chain management principles:
- Supply chain as a single entity — the recognition of the supply chain as a single entity versus fragmented responsibilities being delegated to various functions such as purchasing, manufacturing, distribution and sales (Houlihan, 1985). Strategic procurement incorporates suppliers' performance with organizational strategies. Purchasing professionals will be required to (1) focus on strategic and critical materials that would give the best leverage opportunities; (2) perform organizational analyses for materials management activities in the value chain; and (3) appraise the two-way relationship between market conditions of strategic materials and the corporate and business strategies of the organization.
- End-customer focus — an integrated approach to the planning and control of material flow from...
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