The information age has brought forth convenience of global sourcing and purchasing. This approach has motivated to accessing new sources of procurement, cost reduction where raw materials and services can be obtained from low-cost regions, and the opportunity to acquire newfound knowledge and technology from global suppliers.
This article highlights the importance of having an effective procurement or purchasing functions within the business, and how they will optimize the supply chain performance, and in turn, elevate the position of business and push them to stay ahead of the curve.
Terminology of Procurement versus Purchasing
The terminology of Procurement vs Purchasing can perhaps be best explained using the PP Organogram, as shown in the diagram below. This article will focus on the terminology of Purchasing where discussions are focused on system and process, and the terminology of Procurement will be used where discussions are focused on the interaction with suppliers, as well as with internal customers.
The Changing Role of Traditional to Contemporary Purchasing
Purchasing in the past are not more than just clerical duties, where purchasing function, at a much smaller scope, are only concerned with the right price, and delivery of the right quantity of items to the right place.
This system does not advocate buyer-seller bonding, instead purchases are made in small quantities from various suppliers with the intent to ignite price wars between suppliers and the intensification will further objectify the desires of the purchasing firm.
This obsoleted procedure caused myriads of issues such as sequence of non-value adding clerical activities, excessive administration costs & processing time, and finally product defects where quality was not prioritized in the purchasing process.
Critical Success of Strategic Sourcing
To stay relevant in today’s ever-changing business environment, purchasing firms had revamped to a value-added process in adopting modern purchasing, or otherwise also known as strategic sourcing.
This purchasing function instils greater responsibilities to the purchaser and as well as the purchasing department, as it involves full compositions of studying ways to reduce cost by thoroughly understanding the buyer’s market, establishing interdepartmental strategic liaison when making purchasing decisions, and contemplation of inventory carry costs and storage requirements aftermath of the purchases.
With these in mind, it is essential for the purchasing department to involve all departments within the supply chain as this would lead to a uniformed commitment to help the company obtain product quality, in the right quantity and with the right price. With hindsight, the formation of the supply chain synchronization has also provided clearer perspectives when undertaking of roles & responsibilities from each individual.
A Case of Poor Procurement
A railway company’s purchase of new designed carriages that could accommodate more passengers went awry. The approach had unfortunately caused major setbacks as the new two-deck carriages was unable to pass each other in 16 locations, due to the design being 30cm wider than the previous model. The rectification processes saw the railway company having to widen the tracks by 16cm, replace or shift overhead wires, signals, signs, platform covers and tiling in those affected locations. The intent of the company’s strategic direction was to enhance the service experience, however it had instead led to an insurmountable loss of at least 57 million euros, which has also effect to a substantial decrement in the company’s revenues.
Implication of Poor Procurement
The attribution from haphazard performance by the purchasing department can adversely snowball to long-term issues that will gravely dampen the performance of the operating company. The chain impact does not only amount to loss of money and profitability, but the negative publicity would inevitably tarnishes the reputation of the company as mentioned in the earlier case. The recovery process is not guaranteed immediately and it usually requires huge amount of spending, efforts and time period before regaining the confidence of the stakeholders and the general public.
Importance of Purchasing to Organization
The earlier case has exemplified the critical role of purchasing and why it is regarded as the most important function in the organization. Purchaser needs to be proactive and critically evaluates the buying motive in a holistic manner. This includes getting the supplier involved in the initial phase of purchasing, so as to thoroughly understand the specifications of the product to purchase and determine that it is the right product that the business requires and not one which will ripple effect to a devastating outcome for the business.
Within the purchasing department, it is the responsibility of the purchasing manager to supervise and ensure that the procurement policy framework, are being religiously adhered to by the purchasing executives when performing the purchasing process. This principle is one key determinant to bringing effectiveness to the purchasing process, as it also helps to alleviate detrimental consequences to the purchasing operation in the event of any unprecedented hiccups.
Evolution of Purchasing In the Digital Age
The advancement of technology has had a profound impact on how businesses are being functioned. It can greatly help purchasing department avert many unnecessary chores and streamline their daily purchasing activities from standardizing the buying process, eliminating paperwork and reducing errors which are usually made by manual labour.
The most notable advantage of fusing the internet and purchasing system allows the user to be timely informed and can provide an edge of competitive advantage in supporting planning & decision making within the organization.
Automated purchasing software also provides transparency and help to reduce on maverick spending as the layers of control set in place by the administrator entails centralized tracking of transactions, enabling full reporting on purchase orders. The radical change in the purchasing structure meant that information can be access ubiquitously from any location, via any devices; to increasing transaction speed that leads to time-saving, efficiency and realizing high productivity in the whole operation.
A Case of Developing Buyer-Seller Relationship
Honda Motor involved their suppliers in the product development process in the design of the Honda Accord. The inputs were both material in nature and process-oriented. It was proven that the early involvement in the product development stages helped to save more than 20 percent of the cost of producing the car.
Poor communication can lead to costly problems for any organization, therefore it is imperative for organizations seeking to create a competitive advantage, understand the importance of developing effective communication with the supplier. The buyer-seller relationship can be dynamic and often volatile if not handled carefully, thus selecting the right supplier and cultivating on one is another key determinant to helping the business attain their goals faster.
It was found that early involvement of suppliers in the initial phase of the operation not only helped businesses to save time and cost but also in many instances, improved the quality of the product finishing. Suppliers are more familiar with and aware of what is required from the buyer. They are able to meet the demand ahead of schedule, and are reactive to situations of last minute request for product replacement or even when the business has to adopt a Just-in-time inventory approach.
As elucidated from the write-up, the internal aspect of the purchasing process encompasses the reliance on up-to-date technological advancement that will conveniently create a high degree of strategic fit between the supply chain strategy and the company’s strategy.
Complementing with a good management of supplier quality, it would help to establish the reputation of the business as reliable supplier is more than just one who supplies and deliver the needed materials, but their role today has far exceeded traditions, and has morphed into a more relational approach that contributes to innovating ideas which would continuously improve the business value. A solidified partnership with key suppliers would improve performance, and achieve sustainable competitive advantages in the external environment.
Poh, Philip (1988), “Defining and Clarifying the use of Terminologies”, International Federation of Purchasing and Materials Management conference, Brisbane.
Erik, K., & Stefan, P. (2011) “Logistics and Skanska Xchange: Supply change improvements in the construction industry” Royal Institute of Technology, Stockholm, Sweden.
Case study 1 extracted from: Arjan J. Van Weele (2005). “Purchasing & Supply Chain Management: Analysis, Strategy, Planning and Practice”, fourth edition Eindhoven University of Technology, The Netherlands, Thomson Learning.
Case study 2 extracted from: Spekman, et al. (1999). “Toward More Effective Sourcing and Supplier Management”. European Journal of Purchasing and Supply Management, 5 (2), pp. 103–116.