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Module 7 Purchasing and Business Strategy

The document discusses the strategic importance of purchasing and supply management, emphasizing its role in creating competitive advantage through effective supplier relationships and resource management. It explores various theories, including Transaction Cost Economics and Resource Dependency Theory, while outlining different purchasing strategies such as performance-based partnerships and global sourcing. Additionally, it highlights the need for companies to integrate purchasing with other business functions to enhance overall performance and innovation.

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Joana Claire P. Manalansan
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Module 7 Purchasing and Business Strategy

The document discusses the strategic importance of purchasing and supply management, emphasizing its role in creating competitive advantage through effective supplier relationships and resource management. It explores various theories, including Transaction Cost Economics and Resource Dependency Theory, while outlining different purchasing strategies such as performance-based partnerships and global sourcing. Additionally, it highlights the need for companies to integrate purchasing with other business functions to enhance overall performance and innovation.

Uploaded by

Joana Claire P. Manalansan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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THE STRATEGIC ROLE OF PURCHASING

Transaction Cost Economics theory (Williamson, 1981): Companies can benefit from economies of scale,
learning effects and lower cost by purchasing supplies externally.

Outsourcing: Due to the increased outsourcing of business activities, purchasing and supply management has
developed into a functional domain of strategic relevance.

Suppliers are becoming more important for competitive positioning of companies.

Strategic Purchasing: focuses on integrating the purchasing and supply function with other domains in the
firm.

The purchasing and supply domain still focuses on purchasing's 'bottom line' impact through cost reduction,
quality development and technology as companies are unsure of how much involvement they want from
suppliers.

– How do companies create value for their supplier networks?

– How do they mobilize their supplier networks to create sustainable competitive advantage?

IS PURCHASING STRATEGIC OR NOT

Resource-based view of the firm: Theory that business success is primarily achieved through deploying a
company’s unique resources.

John Ramsey (2001a) argued that purchasing was strategically irrelevant according to resource-based theory,
as it could never generate above normal returns.

Ramsey (2001b) argued it is possible for all sizes of companies could develop superior performance compared
to competitors and achieve ‘competitive advantage’ that provides for a strategically important role.

PURCHASING ROLE IN STRATEGIC MANAGEMENT THEORY

STRATEGIC PLANNING AND MARKETING THEORIES


COMPETITIVE STRATEGY
Michael Porter (1980)
- Value chain concept
- Differentiated between primary activities: inbound/outbound logistics, operations management,
marketing and after-sales services.
- Support activities: technology, development, human resources management, procurement and
infrastructure.
- Preferred ‘procurement’ not purchasing.
- Size of company not only factor in profitability.
- Introduced purchasing-supplier management as a driver of competitive performance.

INNOVATION & COMPETENCE MANAGEMENT


How is it possible that within one sector some players consistently outperform their competitors?
Resource-based view:
 Rumelt (1991) and Wernerfelt (1984) argued differences in performance and innovation between
companies isn’t primarily to be attributed to their products or market environment. Resources and the
way they were used caused differences in performance.
 Prahalad and Hamel (1990) argued that companies should focus on their core competencies, whilst
outsourcing their non-core competencies to suppliers who do specialize in these non-core
competencies.
o Core competencies - Those activities through which the company achieves sustainable competitive
advantage.
o Non-core competencies - Those activities that are conducted within the company that do not
contribute to sustainable competitive advantage.

FROM INTERNAL TO EXTERNAL RESOURCE MANAGEMENT


Resource Dependency Theory:
- Looks beyond the boundaries of an individual firm.
- the firm’s dependence on other external parties, such as suppliers, is central.
- Suppliers are necessary for adapting to and anticipating the developments in the supply chain’s
environment.
- Securing effective relationships with suppliers leads to securing the external resources required to
foster the firm’s competitiveness (Pfeffer and Salancik, 1978)
- Theory that business success is primarily achieved through deploying a company’s external and internal
resource.
STRATEGIC MANAGEMENT THINKING

TOWARDS PURCHASING EXCELLENCE


STRATEGIC MANAGEMENT PROCESSES
ENABLING PROCESSES

PURCHASING PORTFOLIO ANALYSIS: PRINCIPLES


KRALJIC’S (1983) PURCHASING PORTFOLIO
 Purchasing turnover and the supplier base are analysed on two variables:
o Purchasing’s impact on the bottom line to the company.
o The supply risk.

FIGURE 7.6 PURCHASING PRODUCT PORTFOLIO

PURCHASING PORTFOLIO
 Leverage Products
o Products that can be obtained from various suppliers at standard quality grades.
o The contractor has freedom of choice regarding his selection of suppliers.
 Bottleneck Products
o Can be obtained from only one supplier.
 Routine Products
o Usually have a small value per item and there are many alternative suppliers.
FOUR SUPPLIER STRATEGIES
1. Performance-based partnership
- Goal is to create a mutual participation based on pre-planned & mutually agreed cost and
operational improvement targets.
- ‘Open costing’ is preferred (Buyer discusses how to improve supplier’s cost position. Supplier
efficiency programmes developed)
- Supply risks high.
- Selection of supplier is important in this process.
2. Competitive Bidding
- ‘Corporate or co-ordinated approach’. Long-term contracts and annual agreements are combined
with ‘spot’ purchasing.
- Buyers adopt a multiple sourcing strategy
- buying at a minimum price while maintaining quality level and continuity of supply.
- Outsider regularly introduced to avoid price arrangements with suppliers.
- Price changes are monitored closely
3. Securing continuity of supply
- Focus on this for bottleneck products at additional cost if necessary whilst looking into ways to
reduce dependence on suppliers.
- Costs often outweigh gains.
- Risk analysis of most important products performed and contingency plans made (consigned stock
agreements/alternative transportation).
4. Category management
- Defined as ‘an interactive business process whereby retailers and manufacturers work together in
mutual cooperation to manage categories as strategic business units within each store’.
- Routine, maintenance, repair and operating supplies (MRO) products require a purchasing strategy
which is aimed at reducing administrative and logistic complexity.
- Buyers will have to work out simple but efficient ordering and administrative routines

GLOBAL SOURCING
Includes two types of activities:
- Re-allocating purchasing volumes from domestic to international suppliers
- Co-ordination of common items, materials and suppliers across worldwide purchasing, engineering and
operating locations

Advantages: Lower unit cost, benchmarking current suppliers, developing new suppliers to stimulate
competition, access new markets.
Disadvantages: Complicated distribution and logistics, increased handling costs due to customs
regulations/other formalities, problems from dealing with different cultures, contractual problems, higher
carbon footprint, higher uncertainty about on time delivery and quality of product.

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