In 2004 – the year Greece very unexpectedly won the European soccer championship – Adidas distributed more than 1.45 thousand Greece team jerseys throughout the European market. This was impossible without the very efficiently centralized supply chain that helped Adidas pull off this exceedingly impressive global procurement effort. The reason for this was the company’s flexible supply chain strategy, which helped them delivered at “low risk, avoiding any significant investment in materials or finished product” (Niezen & Weller 2009, p. 22). The case of Adidas is an unavoidable success of procurement and its use of leveraging supply chain management (SCM) to an integral part of the company strategy. Recent research points out to the increasing scope of procurement, which includes shorter cycle time, innovative product, enhanced product quality and productivity, and generation of increased revenue through close coordinated working with the sales division (Niezen & Weller 2009).
As there are changes in external environment, changes in international relations, and governmental policies, and off course, technology, purchasing is headed for a new direction. The need for purchasing function to evolve into supply chain had long been foreseen by Peter Kraljic (1983). As organizations search for new means of gaining competitive advantage, in the present phase of recession and financial doldrums it is necessary to reduce cost and improve performance of the company supply chain. Especially in a world which has become smaller and globalization of sourcing has become the new name of the game. Globalization has opened new avenues for global integration of functions like operations, logistics, procurement, and marketing in the upstream part of the supply chain (Trent & Monczka 2003). However, this view differs from a more narrow view of purchasing as this new means of assimilation of purchasing in the supply chain in order to gain strategic competitiveness is not what the traditional view of purchasing aims at. Rather this new view is expected to help companies successfully implement global sourcing strategy in order to achieve material cost savings, which is expected to be at least 15 percent, compared to the traditional viewpoint of purchasing (Trent & Monczka 2003). Further, with new technology, purchasing has taken an electronic form wherein e-procurement has become the latest trend (Chien & Ahrens 2001). Again the issue boils down to saving costs as online purchasing provides cost saving and increases productivity.
Thus, the main drive in the purchasing function is to make it strategic to business goals and increase its value added to the business in terms of cost cuts and increased productivities. This essay show the direction at which purchasing is headed and how it can be transformed as, strategic function of tomorrow in order to gain the competitive edge that Adidas received in 2004.
In order to understand the importance of purchasing it is essential that we go through a brief background and history of the function. During the 1980s and 1990s, international purchasing gained prominence. The increased importance of the function can be directly linked to the declining competence of Western companies and there arose a popular belief that international purchasing had the potential to revive the declining phase of the firms. Thus, academic literature on purchasing literature during the period addressed the need for firms to undertake sourcing offshore as they faced stiff competition from skilled foreign labor (Rajagopal & Bernard 1991; Kotabe 1994). Today global sourcing has become a requirement and cannot be confined a luxury to business competitiveness.
What is purchasing?
Purchasing is a group of functions. This group performs many various activities in order to deliver maximum value to the organizations. A few examples of the functions of purchasing are identification and selection of the right supplier, buying, negotiation, contracting, supply market research, etc. purchasing may be defined as “getting the right quality, in the right quantity, at the right time, for the right price, from the right source” (Monczka, Handfield & Giunipero 2009, p. 8). In this essay the term procurement and purchasing has been used similarly.
In the new concept of supply chains, which is a more inclusive concept, purchasing is identified as a support activity. This implies that purchasing aims at providing a service to the internal customers of the organization. Today the trend of purchasing is moving towards sourcing indirect goods and services, which are required by internal customers.
Thus, the concept encompassing purchasing has evolved and today it has become a part of the supply chain. The enablers of purchasing are human resources, organization design, information technology, and measurement (Monczka, Handfield & Giunipero 2009).
Importance of Purchasing
Through the 1960s and 1970s there has been a development of market strategies which focused on the creation and capturing of customer loyalty (Monczka, Handfield & Giunipero 2009). Soon companies realized that they required strong backend operations to support their customer interfaces. As there was, an increase in demand for new products through the 1980s, organizations had to become flexible in order to change according to the products, services, and processes or develop new products to meet ever-changing customer demand (Monczka, Handfield & Giunipero 2009).
It was not until 1990s that companies started to realize that material and service inputs had a major impact on maintaining competitiveness in order to meet ever-changing consumer demand. This led to an increased focus on the supply base and importance of purchasing as a function. Thus the realization dawned on organizations that it was not enough to provide quality product, but to do so at the right time, quantity, cost, and condition posed a whole set of new challenge. With globalization, the cost effectiveness of purchasing evolved and information technology brought forth a new time reducing logistic networks that could help meet the new challenge.
Various factors demonstrate the importance of purchasing. First is cost and availability of information resources that erases the time delays in the supply chain network. Second, it helps in making organizations fast and agile both in domestic and international market. Third, it helps in effective fulfillment of customer demand, which is increasing every day. Fourth effective purchasing will help companies to respond to any unwarranted demand or problems in the supply chain. Thus, the importance of purchasing has become t the upstream of companies supply chains.
Purchasing and supply chain has a major impact on product and quality of service. In many cases, companies are seeking to outsource their business functions (e.g. automobile industry in the US outsourced its parts and components units to Mexico) in order to concentrate on its own specialization and competence. This increases the importance of purchasing, as the firms are no longer manufacturers, rather buyers of these parts and components from ancillary firms.
Purchasing can also help in improving the product and process design when engineers and suppliers cooperate (Monczka, Handfield & Giunipero 2009). For instance, purchasing and the suppliers helped Quantum Corp. design a T-Rex disk drive, which provides faster performance and is 30 percent smaller (Minahan 1998). As has been stated by one of the company’s purchasing managers: “At Quantum, [purchasing] not only acts as a liaison between engineering and suppliers, but is key in determining the feasibility of a design and influencing the design team into the most effective choices of suppliers and materials.” (12 March 1998, p. 42)
Other cases where collaboration between purchasers and suppliers helped cut cost and increase productivity were observed for Chrysler that helped the company reduce the new vehicle development cycle by more than 40 percent and reduce cost. IBM shifted its purchasing division to work with the design lab, which immensely helped the company improve its product development cycles for hardware, software, and peripherals (Monczka, Handfield & Giunipero 2009). Harley-Davidson reduced its design cycle due to effective purchasing inputs (Monczka, Handfield & Giunipero 2009). Thus, a trend has been observed in business where effective collaboration between purchasing and suppliers has increased effectiveness of business. Thus, it has shifted its position as a mere purchasing function to a strategic function.
This section provided a brief idea as to where i.e. the importance of purchasing and how the function has evolved over the tide of time. The next question that arises to our mind is how the function will evolve in time to come. What are the expected trends of the function and the contributions to business they are expected to make?
Future of Purchasing
Change in Focus
What is it become of the function, which has grown out of its indistinguishable past to its glorious present? This has been a topic of debate, which has circled the argument of the future structure of purchasing and integrated supply chain management. The first trend that can be predicted is of organizations to remove all unnecessary hierarchies and move towards a horizontal process where the functional groups will perform core responsibilities. With a shift from the commodity, focus of the companies to an end item or process focus has ensured that purchasing function will more focus on purchasing wherein it will assume the role of purchasing focused on processes as well as end items required by the companies rather than commodities.
Thus, the organizational design based on purchasing function is the next step in the future. We have already experienced the increased benefit in innovation and product development that technical department of companies and suppliers can do. Therefore, the next step in future for purchasing will be to align the rest of the functionalities of the organization like operations, engineering, and marketing. Thus, a cooperation of purchasing and the internal customers of the company will increase the supplier performance, will reduce cycle time, cost, and increase quality, will ensure material specification, etc. Firms who increasingly coordinated organizational design and purchasing is expected to boost performance of firms according to research (Trent 2006).
As products sourced and purchased increases, there is an increased necessity to increase the collaboration between purchasers and suppliers in order to obtain improved performance outcome. On the other hand, leveraging purchasing strategies will directly affect performance outcomes, and will increase the need to invest in “resource-intensive collaborative relationships” (Cousins & Lawson 2007). A study of 142 manufacturing units in the UK shows that purchasing strategies require collaborative supplier relationships, which helps in attaining better relationship and increased business outcomes. The study also provides support towards aligning purchasing strategy with suppliers in order to increase performance.
With internet, revolution there has evolved a new class of procurement and has revolutionized corporate purchasing practices (Ageshin 2001; Versepej 2002; Panayiotou, Gayialis & Tatsiopoulos 2004). This helps in reducing transaction cost, taking better decisions, and deriving more value out of the purchasing process. One such company is Owens Corning, which is a global manufacturer of glass and building material has used e-procurement to cut costs by 20 to 60 percent (Versepej 2002). However, one challenge foreseen in the area is the link between supplier relations and e-procurement.
The essay shows how purchasing as a function has evolved through the history of business. The future trend in preaching is integration of all up-stream functions in the supply chain come in coordination with purchasing which will eventually make operations easier. Further, with advancements in information technology there has been a leap in the development of the new model for purchasing which is expected to make it even more efficient and helpful in attaining strategic goals of companies.
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