- Email: [email protected]
At last purchasing is becoming strategic
At Last Purchasing is Becoming Strategic Robert E. Spekman, John W. Kamauff and Deborah J. Salmond
F
OR TWO DECADES PURCHASING managers have been directed, cajoled, and implored to ‘become more strategic’ in their views and more proactive in their contributions to the corporate planning process. Many argue that sourcing should play a significant role in developing a firm’s competitive advantage, particularly with regard to development lead time, quality and total systems c0st.l They argue that the strategic firm must include purchasing and supply considerations in its planning, development, and operation. This view is seen as especially important to firms attempting to improve their competitive positions in truly global arenas2 While such efforts make prudent business sense, there are other challenges facing senior management. Companies should not enter the next century with outmoded structures and processes. The practice of management is striving for a new plateau and is developing a series of concepts and techniques for further improving corporate performance into the twenty-first century. One cannot open a business periodical without reading about ‘mass customization’, ‘business process re-design’, ‘lean production’, the ‘learning organization’ or ‘corporate re-engineering’ as radical new visions for changing the direction of business practice. At each turn, managers are challenged by the threat of ‘the new competition’.3 These fundamental, albeit profound, changes in business practice raise the following question: What are the implications for the purchasing profession? The purpose of this paper is to explore this question and to offer insights into how the procurement related activities of the firm are likely to be affected. In addition, the paper will discuss a range of suitable responses for purchasing professionals so they can continue to be strategic assets for their firms. The
Pergamon
paper begins with a discussion of the components of ‘the new competition’, a presentation of the tenets of business re-engineering and mass customization, and a view of the learning organization. Then the implications for the purchasing professional will be presented.
The New Competition Although the term is taken from a book by Michael Best,3 the ‘new competition’ has been discussed in other recent work on US economic development since the Second World War;4 on the development and growth of the US and Japanese automobile industry; and on the rise of the intelligent enterprise as knowledge based or learning organizations.4 The new competition consists of four dimensions: organization of the firm; types of co-ordination across phases of the production chain; organization of the sector; and the patterns of industrial policy. The basic premise of the new competition is that firms will no longer compete in ways we have Long
0024~6301(93)E0012-F
Range
Planning
Vol. 27, No. 2, pp. 76 to 84, 1994
Copyright Printed
in Great
0 1994 Elsevier Britain.
Science
All rights
0024-6301/94
Ltd
reserved %.OO+.OO
witnessed in the past. Most bureaucratic and hierarchical firms are doomed. The new competition embodies global networks at the core of which are flexible, creative learning organizations whose managers proactively seek alternative interpretations of events, envision new ways of thinking about their business, and respond quickly to marketplace changes. Of greatest importance here, however, are the more micro-level concerns or those that can be managed by the firm. Types of co-ordination refers to the need to break down functional ‘silos’ or ‘chimneys’ and to view functional units as interdependent parts of the firm charged with meeting the needs of the marketplace. This co-ordination spreads to the relationship between buyers and suppliers and the needs to co-ordinate the supply chain. What evolves is a network in which firms are linked through a series of connections whose primary objective is to gain strategic advantage. Sector organization refers to the complex tension between firms as they simultaneously interact as partners and competitors. These two dimensions imply a strategy whereby firms acknowledge at the outset that it is often impossible to ‘go it alone’. In addition, the structural transformation that is required to face the ‘new competition’ extends beyond the natural functional boundaries (and barriers) of the firm and encompasses a complex web of inter-firm relationships that span the firm’s strategic activities. In the spirit of the new competition, firms restructure their internal organizations as well as redefine their relationships with vendors, customers, and even competitors. Yet, there are those who attempt to discredit the benefits of the co-operative single source by suggesting that many apparently co-operative, egalitarian relationships in Japan are actually deals made between unequals, with the buyers wielding huge amounts of power over their single sources. McMillan5 even counsels that the common belief that Japanese manufacturers predominantly use single sourcing may not, in fact, be true based on careful examination of the data. Others also caution that ‘it is not wise to be dependent on just one source of supply’ and ‘climbing on the bandwagon of single sourcing without putting forth the effort to create outstanding sources will produce nothing but disappointment’.‘j In addition, Newman emphasizes the risks associated with closer relationships between buyers and sellers.7 However, there exists a large and compelling body of evidence suggesting that in
response to the global challenges facing manufacturers, co-operative relationships between buyers and suppliers offer a potential source of competitive advantage.* The debate here should not centre on whether partnerships are a good idea; rather, it should focus on how best to manage and leverage the skills and talents of the partner. The purchasing as a broker of inter-firm information manager, exchanges rather than a transaction accountant; becomes a critical participant in the process, guiding both the formation and implementation of partnerships and inter-firm supply networks. Thus, the purchasing professional becomes an information manager and manager of external manufacturing with responsibility throughout the supplier value chain. He or she must gather and filter relevant procurement-related knowledge about products, processes, competition, and other factors that can affect the firm’s competitive posture.
Business Re-engineering Business re-engineering refers to a process or view of the firm in which all the old rules are out and managers are charged with finding new ways to manage the business.g In dynamic and complex environments, it is increasingly risky to live by a fixed set of rules and/or guidelines. One cannot anticipate the full range of contingencies that might confront the firm. One must instead develop processes for managing uncertainty. Rather than ask only how to do things faster, cheaper and better, managers are facing more fundamental questions of whether certain tasks or activities should be done at all and whether they can be done better by others. In this it is important to note the difference context, between business re-engineering and benchmarking. Benchmarking, as practised by most firms, is merely the pursuit of targets/goals (i.e. benchmarks of best practices); it often is predicated on short cuts and results in attempts to find the company which performs a particular task or function best and ultimately to emulate that firm. Strategic benchmarking, emphasizing a mutually beneficial exchange of information between partners, is similar to business re-engineering and takes the process one step further by addressing the fundamental nature of the task, or function, and questioning whether it is worthwhile even engaging in such an activity.‘O Re-engineering Long Range Planning Vol. 27
April 1994
acknowledges that being ‘world class’ at a particular activity is laudable and probably is a worthy pursuit; however, one should not seek such a goal blindly. One should question the basic processes underlying the task or business activity and first decide whether, in fact, they are useful or necessary. It would appear that both concepts are complementary and that benchmarking results can provide useful input into a business process re-design activity and into the evolution of the so-called learning organization. By exercising their access to information from outside the firm, purchasing professionals can be an important contributor to the process. Similar to the notion of functional co-ordination raised above, business re-engineering does not take the singular functional unit as sacrosanct. At the core of the process is a recognition that functions must co-operate and share in the responsibility of meeting the needs of the customer. A firm is unlikely to have isolated ‘purchasing problems’ or a ‘production problem’. In this regard, concurrent engineering or integrated product development have become widely accepted means for facilitating work flow between design and engineering.‘l Similarly, it is more likely that most supply problems transcend the purchasing function. For example, suppose there exists a problem whereby purchasing costs are thought to be excessive. The goal would be to have all relevant parties, internal and external, work together to solve the problem-in essence, concurrent procurement. This process would advocate that target costs should not be dictated to suppliers as they would not be to internal departments. Instead, the firm should work with the supplier to achieve targets over time and should be willing to provide the supplier with engineering support, technical assistance, process or materials innovation, or similar services which might be feasible and beneficial. In concurrent procurement, technology sharing describes the extent to which technical aspects are openly exchanged between buyer and seller. This critical element of a sourcing strategy consists of the tendency to share technology between buyers and suppliers, and it also refers to the depth and breadth of technology information exchanged (often including cost information as well). If partners are to help one another, particularly in product development, value-adding partnerships must have ways of sharing information. l2 If a partner’s costs are creeping At Last Purchasing
is Becoming
Strategic
out of line, others must know so they explore ways of helping with cost controls. Raising the level of technology is typically associated with a reduced or, more importantly, an optimum supplier base. At one end of this continuum, technology sharing is very formalized and is conveyed only through part numbers; relationships are transaction driven and are typified by Sequential design (Design/Source) while information is batch processed. Suppliers are only expected to ‘react’ to a customer’s requirements. A more moderate approach is typified by Build-to-print. This approach typically involves a more iterative design process (Design/Source/Redesign) and information is shared more frequently; the overall communications pattern is less directive and flows in both directions. Finally, shared or simultaneous design (using developmental specifications) and early supplier involvement often occurs. Mutually agreed specifications are developed. Firm and projected production schedules are shared. Long-term supplier capital investments are exchanged and are driven by strategy; the continued exchange of information, even to the extent of shared use of research facilities, often leads to greater understanding and compatibility for suppliers with large manufacturers’ production processes. In this environment, simultaneous two-way communication is the norm, and suppliers necessarily become more technologically proactive in their approaches. Upon investigation, many companies have determined that earlier supplier involvement in the design stage can reduce the cost of the component, or that greater information sharing permits the supplier to better manage its logistics and production scheduling, thereby also reducing costs. In a pivotal departure from previous practices, Boeing Commercial Airplanes has adopted a Design-Build Team approach that includes both key suppliers and customers throughout the project life cycle for its 777 programme. With clear advantages in terms of time and innovation, such changes have and will continue to have profound impacts on the purchasing profession.
Mass Customization It is difficult
to discuss the previous two topics without addressing the notion of mass customization since the three concepts are intricately linked and all
have a profound effect on the procurement activities of the firm. The concept of mass customization grows from a failure inherent in the mass production paradigm developed and espoused by bureaucratic organizations.13 While low costs are important and are a fundamental goal of the mass production paradigm, across a number of industries the premise upon which mass production is built is no longer valid. Markets are not homogeneous, they tend to be fragmented; product life cycles are shorter and cycle time has become a critical element of competitive response;14 and customers are demanding products and services that are tailored for them. Where mass production provided efficiency through stability and control, mass customization seeks variety and customization (at low costs) through flexibility and This new paradigm demands quick response). processes, systems and structures that are responsive marketplace and can be to changes in the implemented with little change in the cost structure of the product and/or service. Mass customization attempts to achieve the synthesis of two competing management forms. Low cost is achieved through both economies of scale and economies of scope. The goal is to minimize the penalty of individuality since unit costs fall with the increased volume achieved through the entire system. To be sure, there are limits to the degree of variety but the range is such that, depending on the product, a vast number of options are often availMotorola can robotically able. For example, assemble thousands of different pagers during a single shift with zero setup cost and with a true lot size of one. It should come as no surprise that mass customization is a result of the new competition and is a function of the firm’s ability to link product development and process development. In fact, the process of business re-engineering lies at the core of successful mass customization, i.e. a focus on fundamental processes allows a better grasp of the basic changes that affect the firm’s ability to compete and to meet the ever-changing needs in the marketplace. For the purchasing manager, it is critical to understand the concept of the value chain and to appreciate the full range of activities that go into the manufacturing of a component or finished product. It is again clear that functional integration takes precedent over individual functions and that cross-functional teams rise in importance. The question facing the purchasing
manager is one of how to assemble the internal resources to develop requirements for the best set of suppliers.
The Learning Organization In order to respond to the new competition and mass customization and to undertake the rigours of business process re-engineering, corporations are expanding their capacity as learning organizations. Based on the experiences of Ford, DEC, Apple, AT&T, P&G, and Shell Oil, Senge15 describes the set of skills required to turn a disabled organization into a learning organization. Learning organizations have transformed both what they think about and their way of thinking. The goal of these processes is to unfreeze managers’ mental models, call into question all theories-in-use and construct new frames of references to guide business decisions. For organizational learning to occur, individuals must share their personal insights, knowledge and mental models. A problem in organizations is that these models are often tacitly held, unexamined, and untested. In addition, managers often wrongly assume that people with whom they work rely on common views of reality. To be a learning organization, members must be skilled in creating, trading and understanding each other’s mental models. One’s mental models should be the product of systems thinking and should not grow from a more traditional cause-and-effect paradigm. The aim of systems thinking is to understand recurring patterns in a work process (such as purchasing) or in a network system [e.g. among a network of suppliers) in which managers discover where the leverage points exist to change the process or system. Systems thinking espouses the belief that actions taken at one point in time have consequences for other parts of organization systems at some future time. Purchasing managers are challenged to develop a ‘world view’ that encompasses the entire organization as a dynamic competitive entity. Systems thinking helps managers to understand the new competition since it presumes that the firm functions as a member of a larger network. Systems thinking is also an essential tool for process reengineering since it assumes that organizational goals can only be achieved when work tasks are considered simultaneously with fundamental processes. Long Range Planning Vol. 27
April 1994
Impact on purchasing
Dimensions Organization
of the firm
Global networks with cores based on flexible, creative learning organizations Designed to meet the needs of the marketplace
Types of co-ordination
Breakdown
of functional
barriers
Viewing functional units as interdependent parts Co-ordinating the supply value chain for competitive advantage Sector organization
Remove the tension between firms (partnering vs competing within the supply chain)
Patterns of industrial policy
Complex
inter-firm
relationships
Re-defining relationships with suppliers, customers and competitors
Such thinking elevates the role of each member of the organization who is involved in decision making since each part of the feedback process and each shares responsibility for problems generated by the process. Learning organizations, and the shared goals that emerge, are built from personal goals and visions. From the content of individual views, a common ground is discovered and it becomes the foundation for the firms’ decision and actions. These various effects of new competitive forces on purchasing activities are summarized in Table 1.
Organizational Transformation its Implications
and
There are a number of fundamental changes that will be needed if business is going to effectively adapt to the new competition. This transformation will occur at all levels of the firm and will affect each functional area. For the purchasing function, these changes are profound and are critical for the future well-being of the firm. A key aspect of the new competition is the firm’s ability to form linkages with other businesses which can provide competitive advantage. The purchasing professional can emerge as a key player in the process of nurturing and managing both internal and external relationships. At Last Purchasing is Becoming Strategic
Transforming the Purchasing Function To begin, senior management must engender a strong commitment to the firm’s mission and goals. Management must not only articulate its goals but must also have a plan for accomplishing these goals. Implementation is essential and each functional unit must understand precisely what its role gave in the process. No longer will ‘turf battles’ be tolerated and no longer will one area be able to easily work its will by leveraging perceptions of organizational status or power. It is apparent that the firm’s orientation must shift to the customer and to the marketplace. Each functional unit must subordinate its agenda to the greater purpose-sustained competitive advantage. For the purchasing manager, it requires a vision that spans the entire value chain beginning with purchased materials and ending with the customer. This vision must be congruent with and in support of the firm’s mission and goals. Many recognize that such consensus is no easy task and that achieving corporate goals within a framework of personal satisfaction remains a continuing management challenge.l’j Organizational learning skills promise to expand the capacity of firms to meet this challenge. A purchasing organization that is driven by measures of efficiency and that is rewarded by a singular focus on cost or initial purchase price is out of touch with the new competition, does not have a systems perspective, and is, over the long-term, a detriment to its firm. One must develop a systems view. Purchasing orders per buyer or other traditional measures of expense are important, but they do not add value in the marketplace. Such a focus fails to acknowledge that many of these expenseincurring activities are being automated and information technology is replacing these more mundane considerations. In a recent benchmarking effort designed to facilitate their movement toward commercial sourcing practices, Westinghouse Electronic Systems Group, a long-standing and highly regarded defense contractor, learned quickly that their purchasing metrics were outmoded. By re-examining their underlying purchasing processes and comparing them with leading-edge practitioners, they were able to quickly implement a more viable commercial procurement system. Similarly, EDI (electronic data interchange) and other systems intended to link firms electronically, have begun to fundamentally change many purchasing activities. This element refers to the reliance
upon electronic media for exchanging information between the buyer and supplier and the extent to which information is exchanged electronically between buyers and suppliers in terms of the amount, type and frequency. The key point here is that computers simply make it easier to communicate, share information, and respond quickly to shifts in demand. This use of design-based technology to extend a company’s logistics system can facilitate value-adding partnerships but alone does not create them.17 At one extreme, very little or no ED1 (sometimes used only for purchase orders) occurs and trading parties often rely on paper and batch transfers. At the other end of the spectrum, transfer of complete technical data for some or all products as well as video teleconferencing, E-mail, and other electronic means may occur. As an example, Boeing Defense & Space Group intends to have a completely ‘paperless’ infrastructure for the F-22 Advanced Tactical Fighter Program that will include the three primary team members, the eight largest suppliers and even the Air Force Program Office (Boeing’s customer). Some analysts contend that information batches are smaller and are exchanged more frequently in such an environment. In any case, what is urgently needed is for purchasing to participate in activities that question basic procurement processes. To be sure, work flow monitoring, inventory control and routine order processing are now computer driven and require very little managerial attention. Instead, purchasing must devote greater attention to those skills inherent in understanding and contributing to the firm’s value creating activities.18 While sourcing contributes to cost control, it also improves overall performance in quality, dependability, flexibility and innovation. Strategic sourcing is quite simply the process of creating value-adding supply relationships to provide a competitive advantage. As part of the learning organization, the purchasing manager becomes a source of knowledge regarding the process that comprise the value chain. Working in conjunction with other functional managers and as part of a learning organization, purchasing provides input to ‘make-or-buy or partner’ decisions. Whether the corporate objective is to pursue a strategy of cost leadership or differentiation, the roles purchasing can play in influencing the firm’s strategic posture are important in value analysis, and vendor comparisons and benchmarking. As sug-
gested above, these analyses are necessary but not sufficient. Purchasing must also participate in activities that question basic business processes. What emerges is a fundamental shift away from following work flow and controlling costs to contributing to organizational learning and a fundamental understanding of the firm’s core capabilities and skills. In an effort to re-engineer fundamental purchasing processes, questions go beyond the narrow issues of whether a component or sub-assembly should be made or bought. Purchasing should actively contribute to the store of knowledge from which the firm defines its core competencies and decides which set of skills and activities to keep and which ones to shed. What appears at the surface to be the ‘dis-integration’ of the firm typifies a key component of the new competition. Non-essential activities will flow from the firm to its network and this resultant web of firms will behave as though the work were done internally. Given purchasing’s understanding of the supply markets, it can help assess and manage the leverage points that contribute to competitive advantage. Thus, supplier management must be viewed in the context of a systemic process. Purchasing thus plays a role in protecting the firm’s competitive advantage, particularly as it relates to the body of corporate knowledge affected by the partnership. Purchasing must help set the parameters of information sharing and knowledge transfer between the partners. One must take care not to jeopardize the firm’s core skills and capabilities by outsourcing key processes or product elements, thereby losing that skill.lg One must also be watchful of partners who learn at your expense and gain information that places your firm at a competitive disadvantage. For example, a supplier could learn information that permits him to compete with you at a point further downstream, or in another segment or market. General Electric, in its commitment to labour and materials cost reduction, outsourced many critical components. This action not only caused their internal skills to atrophy, it gave birth to a set of competitors who had honed their production skills at GE’s expense. To fulfil this critical value-adding role, purchasing must understand the firm’s core competencies as well as the core competencies of the supply chain; concomitantly, purchasing must exercise its information brokering responsibilities to develop a complementary and Long Range Planning Vol. 27
April 1994
Evolving roles
Revolutionary roles
Transaction accountant
Information exchange broker
Administers inter-firm contracts
Guides the formation and implementation of partnerships and inter-firm supply networks
Primary ‘point of contact’ with suppliers
Manager of external manufacturing
Interface with first-tier suppliers
Responsibilities throughout the supplier value chain
Minimizes risk (e.g. disruption of supply, incoming defects, etc.) to the buying organization
Manages and leverages the skills of the supply chain
Competitor analyses
Strategic benchmarking of the supply chain
Continuously improving the existing procurement process
Questioning the supply chain process (re-engineering procurement)
Reacting to external stimuli (reactionary change)
Proactively accessing external information (proactive change)
Concurrent engineering
Concurrent procurement
Safeguarding proprietary/ critical information (transaction driven)
Enhanced information sharing throughout the value chain (early supplier involvement)
Unidirectional communication
Simultaneous two-way communication
Cross-functional co-ordination
Functional integration
Cause-and-effect problem solving
Systems thinking
Purchasing mentality
World view
proactive supplier network for the sole purpose of creating a sustainable competitive advantage. The purchasing function is thus transformed when tasks that add value are integrated into systemic processes and the dynamic interrelationship among purchasing decisions, core competencies, and customer satisfaction are understood. The sharp contrasts between prior roles and those now needed can be seen in Table 2. Transforming the Role of the Purchasing Professional Throughout this paper, we have alluded to the importance of partnerships and have implied a transAt Last Purchasing
is Becoming
Strategic
formation in how purchasing should approach its suppliers. We have also painted a picture of a network of companies in which information passes freely and ubiquitously. Clearly, the purchasing function plays a central role in managing the array of suppliers who comprise that network. As members of a learning organization, purchasing professionals can help articulate and clarify the firm’s vision and mission that is shared with external constituents. Earlier work has developed the notion of supplier selection and the criteria by which a reliable set of partners emerge from a potential set of suppliers. The focus here converges on managing the partnership through its development and growth and taking a very proactive role in seeking, nurturing, and managing these relationships. The level of analysis has shifted from the commodity class to the partner, or array of partners, who supply value to the firm’s products/services as it attempts to meet the needs of its customers and its customers’ customers. Purchasing not only manages the partner; it manages the range of possible support services the firm brings to the partnership as both parties attempt to work toward common goals. Using systems thinking, purchasing professionals gain a perspective on their role in the larger network and the potential value they add in delivering products and services to the customer. The purchasing manager should be the primary contact person between the firm and the supply partner through whom the initial scope and nature of the partnership is negotiated and implemented. Although the partnership might develop a ‘life of its own’ in that information ebbs and flows across different functions and organizational levels, purchasing has a role in orchestrating the initial contact. Frequently, the nature of these negotiations has significant consequences for the resulting structure of the relationship itself. Through the life of the relationship purchasing helps develop and monitor the performance criteria upon which partnership effectiveness is based. In this gatekeeper’s role purchasing is a key conduit through which certain partnership data ought to flow and be analysed. Purchasing is a logical storehouse for partnership information with which the firm can better assess potential relationships and appraise on-going relationships. In addition, the purchasing professional must develop the skills and techniques to cultivate and nurture mutually beneficial relationships. In the new compe-
tition, the concept of leverage within the supply chain, as has been advocated using the traditional Porter framework, is counterproductive and nonvalue adding. As champions of the supplier development process, purchasing professionals also serve the roles of special envoy and negotiator. Typically, supplier negotiations would converge on price, quality, delivery and the like. In the new competition, negotiations are much more broadly defined and cover a much wider range of issues such as cost reduction strategies over time, technology sharing and joint development, and issues germane to control and performance measures. The breadth and depth of these interactions require both strategic knowledge that typically insight and business exceeds the range of information now available to most purchasing managers. As the results of these negotiations have immediate strategic importance for the firm, purchasing’s responsibility goes far beyond the range of issues usually found in narrower market-based transactions. Beyond the substantive aspects of the negotiations, one must recognize that each member of the negotiation team shapes the tone for the partnership as it develops over time. Thus, the early phases of the negotiations in which partners’ motivations are understood, expectations are shaped, and future interactions are outlined become critical to the successful outcome of the partnership. As is the case in all on-going relationships, past behaviour affects future interaction. The process of negotiations
becomes very important. Notions of perspective taking, rapport building, trust, commitment, and information sharing become essential ingredients of partnership formation and nurturing. Purchasing managers must become much better skilled in these process related areas.
Conclusion We have attempted to describe the new competition and present the implications it holds for the purchasing manager. As businesses try to make fundamental changes in how they compete, purchasing faces major new challenges. Purchasing professionals must adapt to these changes and re-think the manner in which they formulate and execute purchasing strategy as a component of the larger corporate goals and objectives. Traditional views of suppliers and of other functional units are no longer valid. As functional and organizational boundaries become blurred, purchasing must acquire new skill sets and levels of expertise. The new competition raised the ante for success, but purchasing now faces new opportunities. Although we have seen marked improvement since the 1970s in both the level of professionalism and ability to think strategically, purchasing can no longer improve at a snail’s pace. The dynamics of competition are such that speed is essential. Lead time, time to market, cycle time are all key measures for the successful global player. Purchasing must accelerate the speed with which it adapts to changes in business practices.
References (1) Virginia T. Freeman and Joseph L. Cavinato, Fitting Purchasing to the Strategic Firm: Frameworks, Processes, and Values, Journal of Purchasing and Materials Management, Winter 8-10 (1990). (2) See, for example; Lisa M. Ellram, The Supplier Selection Decision in Strategic Partnerships, Journal of Purchasing and Materials Management, Fall 8-14 (1990); Robert Landeros and Robert M. Monczka, Cooperative Buyer/Seller Relationships and a Firm’s Competitive Posture, Journal of Purchasing and Materials Management, Fall, 10 (1989); Robert Spekman, Competitive Procurement Strategies: Building Strength and Reducing Vulnerability, Long Range Planning, 18, 94-99 (1985); and Robert E. Spekman, Strategic Supplier Selection: Understanding Long-Term Buyer Relationships, Business Horizons, 31 (4) (1988). (3) Michael Best, The New Competition, Harvard University Press, Cambridge, MA (1990). (4) For example, Michael Piore and Charles Sabel, The Second industrial Divide, Basic Books, New York (1984); Michael A. Cusumano, The Japanese Automobile industry; Technology & Management at Nissan & Toyota, Cambridge: Harvard University Press (1985); Kim B. Clark and Takahiro Fujimoto, Product Development Performance: Strategy, Organization, and Management in the WorldAuto industry, Harvard Business School Press, Boston (1991); Peter M. Senge, The Fifth Discipline: The Art & Practice of the Learning Organization, Doubleday Currency, New York (1990); and James Brian Quinn, The intelligent Enterprise, Free Press, New York (1993).
At Last Purchasing is Becoming Strategic
(5) John McMillan, Managing Suppliers: Incentive Systems in Japanese and U.S. Industry, California Management Review, Summer, 38-55 (1990). (6) Dean S. Ammer, Materials Management and Purchasing. 4th ed. Irwin, Homewood, Illinois (1980); and Kaoru lshikawa What is Total Quality: The Japanese Way, translated by David J. Wu, Prentice-Hall, Inc., Englewood Cliffs (1985). (7) Richard G. Newman, Single Source Qualification, Journal of Purchasing and Materials Management, Summer IO-17 (1988); and Richard G. Newman, Single Sourcing: Short-Term Savings Versus Long-Term Problems, Journal of Purchasing and Material Management, Summer, 20-25 (1989). (8) Dean Bartholomew, The Vendor-Customer Relationship Today, Production and inventory Management Journal, 25 (2). 106121 (1984); 8. Jackson, Build Customer Relationships that Last, Harvard Business Review, 6,120-128 (1985); Keki, R. Bhote, Supply Management: How to Make U.S. Suppliers Competitive. American Management Association Membership Publications Division, New York (1987). (9) This discussion is based in part on Michael Hammer and James Champy, Reengineering the Corporation: A Manifesto for Business Revolution, Harper Business, New York (1993); and J. Teng, et a/., Re-designing Business Processes Using Information Technology, Long Range Planning, 27 (1) (1994). (10) Steven B. Kramer and John W. Kamauff, Jr. Benchmarking: An Analysis of Benchmarking for Implementation at Westinghouse Electronic Systems, Darden School Working Paper (DSWP-93-09), 1993. (11) Kim B. Clark and Takahiro Fujimoto, Product Development Performance: Strategy, Organization, and Management in the World Auto Industry. Harvard Business School Press, Boston (1991); Stephen R. Rosenthal, Effective Product Design and Development: How to Cut Lead Time and increase Customer Satisfaction, Business One, Irwin, Homewood IL (1992); and Steven C. Wheelwright, Kim, B. Clark, Revolutionizing Product Development: Quantum Leaps in Speed, Efhciency and Quality, Free Press, New York (1992). (12) For additional information regarding technology sharing, please see David N. Burt and William R. Soukup, Purchasing’s Role in New Product Development, Harvard Business Review, September-October (1985); W. Edwards Deming, Out of Crises, 2nd ed. MIT Center for Advanced Engineering Study, Cambridge (1986); Somerby Dowst and Ernest Raia, Design Team Signals for More Supplier Involvement, Purchasing, March 27, 76-83 (1986); Keki R. Bhote, Supply Management: How to Make U.S. Suppliers Competitive. American Management Association Membership Publications Division, New York (1987); Susan Helper, How Much Has Really Changed Between U.S. Automakers and Their Suppliers?, Sloan Management Review, Summer (1991). (13) Much of this discussion is based on work by B. Joseph Pine, Mass Customization, Harvard Business School Press, Cambridge, MA (1991). (14) George Stalk, Jr. and Thomas M. Hout, Competing Against Time: How Time-Based Competition is Reshaping Global Markets, The Free Press, New York (1990). to Create (15) Senge, op cit., (1990); also see, for example, M. Beck, Learning Organizations-How Them, industrial and Commercial Training, 21 (3), 21-28; A. P. DeGeus, Planning and Learning, Harvard Business Review, 66, March-April, 70-74 (1989); and J. Brown and P. Duguid, Organizational Learning and Communities-of-Practice, Organization Science, 2 (I), 40-57 (1991). (16) For example, Robert H. Hayes and Steven C. Wheelwright, Restoring Our Competitive Edge: Competing through Manufacturing. Wiley & Sons, New York (1984); and F. Ian Stuart, Purchasing in an R&D Environment, Journal of Purchasing and Materials Management, Fall, 29-34 (1991). (17) For more information regarding the role of EDI in creating value-adding partnerships please see John F. Magee, William C. Copacino and Donald B. Rosenfield, Modern Logistics Management; Integrating Marketing, Manufacturing, and Physical Distribution. John Wiley & Sons, New York (1985); and Eric K. Clemons and F. Warren McFarlan, Telecom: Hook-up or Lose Out, Harvard Business Review, July-August, 91-97 (1986). (18) See for example L. O’Sullivan and J. M. Geringer, Harnessing the Power of Your Value Chain, Long Range Planning26 (2), 59-68 (1993); and Robert H. Hayes, Steven C. Wheelwright and Kim B. Clark, Dynamic Manufacturing: Creating the Learning Organization. The Free Press, New York: (1988). (19) Edward W. Davis, Global Outsourcing: Have U.S. Managers Thrown the Baby Out with the Bath Water?, Business Horizons, 35 (4), July-August, 58-65 (1992).
At Last Purchasing
is Becoming
Strategic
F
OR TWO DECADES PURCHASING managers have been directed, cajoled, and implored to ‘become more strategic’ in their views and more proactive in their contributions to the corporate planning process. Many argue that sourcing should play a significant role in developing a firm’s competitive advantage, particularly with regard to development lead time, quality and total systems c0st.l They argue that the strategic firm must include purchasing and supply considerations in its planning, development, and operation. This view is seen as especially important to firms attempting to improve their competitive positions in truly global arenas2 While such efforts make prudent business sense, there are other challenges facing senior management. Companies should not enter the next century with outmoded structures and processes. The practice of management is striving for a new plateau and is developing a series of concepts and techniques for further improving corporate performance into the twenty-first century. One cannot open a business periodical without reading about ‘mass customization’, ‘business process re-design’, ‘lean production’, the ‘learning organization’ or ‘corporate re-engineering’ as radical new visions for changing the direction of business practice. At each turn, managers are challenged by the threat of ‘the new competition’.3 These fundamental, albeit profound, changes in business practice raise the following question: What are the implications for the purchasing profession? The purpose of this paper is to explore this question and to offer insights into how the procurement related activities of the firm are likely to be affected. In addition, the paper will discuss a range of suitable responses for purchasing professionals so they can continue to be strategic assets for their firms. The
Pergamon
paper begins with a discussion of the components of ‘the new competition’, a presentation of the tenets of business re-engineering and mass customization, and a view of the learning organization. Then the implications for the purchasing professional will be presented.
The New Competition Although the term is taken from a book by Michael Best,3 the ‘new competition’ has been discussed in other recent work on US economic development since the Second World War;4 on the development and growth of the US and Japanese automobile industry; and on the rise of the intelligent enterprise as knowledge based or learning organizations.4 The new competition consists of four dimensions: organization of the firm; types of co-ordination across phases of the production chain; organization of the sector; and the patterns of industrial policy. The basic premise of the new competition is that firms will no longer compete in ways we have Long
0024~6301(93)E0012-F
Range
Planning
Vol. 27, No. 2, pp. 76 to 84, 1994
Copyright Printed
in Great
0 1994 Elsevier Britain.
Science
All rights
0024-6301/94
Ltd
reserved %.OO+.OO
witnessed in the past. Most bureaucratic and hierarchical firms are doomed. The new competition embodies global networks at the core of which are flexible, creative learning organizations whose managers proactively seek alternative interpretations of events, envision new ways of thinking about their business, and respond quickly to marketplace changes. Of greatest importance here, however, are the more micro-level concerns or those that can be managed by the firm. Types of co-ordination refers to the need to break down functional ‘silos’ or ‘chimneys’ and to view functional units as interdependent parts of the firm charged with meeting the needs of the marketplace. This co-ordination spreads to the relationship between buyers and suppliers and the needs to co-ordinate the supply chain. What evolves is a network in which firms are linked through a series of connections whose primary objective is to gain strategic advantage. Sector organization refers to the complex tension between firms as they simultaneously interact as partners and competitors. These two dimensions imply a strategy whereby firms acknowledge at the outset that it is often impossible to ‘go it alone’. In addition, the structural transformation that is required to face the ‘new competition’ extends beyond the natural functional boundaries (and barriers) of the firm and encompasses a complex web of inter-firm relationships that span the firm’s strategic activities. In the spirit of the new competition, firms restructure their internal organizations as well as redefine their relationships with vendors, customers, and even competitors. Yet, there are those who attempt to discredit the benefits of the co-operative single source by suggesting that many apparently co-operative, egalitarian relationships in Japan are actually deals made between unequals, with the buyers wielding huge amounts of power over their single sources. McMillan5 even counsels that the common belief that Japanese manufacturers predominantly use single sourcing may not, in fact, be true based on careful examination of the data. Others also caution that ‘it is not wise to be dependent on just one source of supply’ and ‘climbing on the bandwagon of single sourcing without putting forth the effort to create outstanding sources will produce nothing but disappointment’.‘j In addition, Newman emphasizes the risks associated with closer relationships between buyers and sellers.7 However, there exists a large and compelling body of evidence suggesting that in
response to the global challenges facing manufacturers, co-operative relationships between buyers and suppliers offer a potential source of competitive advantage.* The debate here should not centre on whether partnerships are a good idea; rather, it should focus on how best to manage and leverage the skills and talents of the partner. The purchasing as a broker of inter-firm information manager, exchanges rather than a transaction accountant; becomes a critical participant in the process, guiding both the formation and implementation of partnerships and inter-firm supply networks. Thus, the purchasing professional becomes an information manager and manager of external manufacturing with responsibility throughout the supplier value chain. He or she must gather and filter relevant procurement-related knowledge about products, processes, competition, and other factors that can affect the firm’s competitive posture.
Business Re-engineering Business re-engineering refers to a process or view of the firm in which all the old rules are out and managers are charged with finding new ways to manage the business.g In dynamic and complex environments, it is increasingly risky to live by a fixed set of rules and/or guidelines. One cannot anticipate the full range of contingencies that might confront the firm. One must instead develop processes for managing uncertainty. Rather than ask only how to do things faster, cheaper and better, managers are facing more fundamental questions of whether certain tasks or activities should be done at all and whether they can be done better by others. In this it is important to note the difference context, between business re-engineering and benchmarking. Benchmarking, as practised by most firms, is merely the pursuit of targets/goals (i.e. benchmarks of best practices); it often is predicated on short cuts and results in attempts to find the company which performs a particular task or function best and ultimately to emulate that firm. Strategic benchmarking, emphasizing a mutually beneficial exchange of information between partners, is similar to business re-engineering and takes the process one step further by addressing the fundamental nature of the task, or function, and questioning whether it is worthwhile even engaging in such an activity.‘O Re-engineering Long Range Planning Vol. 27
April 1994
acknowledges that being ‘world class’ at a particular activity is laudable and probably is a worthy pursuit; however, one should not seek such a goal blindly. One should question the basic processes underlying the task or business activity and first decide whether, in fact, they are useful or necessary. It would appear that both concepts are complementary and that benchmarking results can provide useful input into a business process re-design activity and into the evolution of the so-called learning organization. By exercising their access to information from outside the firm, purchasing professionals can be an important contributor to the process. Similar to the notion of functional co-ordination raised above, business re-engineering does not take the singular functional unit as sacrosanct. At the core of the process is a recognition that functions must co-operate and share in the responsibility of meeting the needs of the customer. A firm is unlikely to have isolated ‘purchasing problems’ or a ‘production problem’. In this regard, concurrent engineering or integrated product development have become widely accepted means for facilitating work flow between design and engineering.‘l Similarly, it is more likely that most supply problems transcend the purchasing function. For example, suppose there exists a problem whereby purchasing costs are thought to be excessive. The goal would be to have all relevant parties, internal and external, work together to solve the problem-in essence, concurrent procurement. This process would advocate that target costs should not be dictated to suppliers as they would not be to internal departments. Instead, the firm should work with the supplier to achieve targets over time and should be willing to provide the supplier with engineering support, technical assistance, process or materials innovation, or similar services which might be feasible and beneficial. In concurrent procurement, technology sharing describes the extent to which technical aspects are openly exchanged between buyer and seller. This critical element of a sourcing strategy consists of the tendency to share technology between buyers and suppliers, and it also refers to the depth and breadth of technology information exchanged (often including cost information as well). If partners are to help one another, particularly in product development, value-adding partnerships must have ways of sharing information. l2 If a partner’s costs are creeping At Last Purchasing
is Becoming
Strategic
out of line, others must know so they explore ways of helping with cost controls. Raising the level of technology is typically associated with a reduced or, more importantly, an optimum supplier base. At one end of this continuum, technology sharing is very formalized and is conveyed only through part numbers; relationships are transaction driven and are typified by Sequential design (Design/Source) while information is batch processed. Suppliers are only expected to ‘react’ to a customer’s requirements. A more moderate approach is typified by Build-to-print. This approach typically involves a more iterative design process (Design/Source/Redesign) and information is shared more frequently; the overall communications pattern is less directive and flows in both directions. Finally, shared or simultaneous design (using developmental specifications) and early supplier involvement often occurs. Mutually agreed specifications are developed. Firm and projected production schedules are shared. Long-term supplier capital investments are exchanged and are driven by strategy; the continued exchange of information, even to the extent of shared use of research facilities, often leads to greater understanding and compatibility for suppliers with large manufacturers’ production processes. In this environment, simultaneous two-way communication is the norm, and suppliers necessarily become more technologically proactive in their approaches. Upon investigation, many companies have determined that earlier supplier involvement in the design stage can reduce the cost of the component, or that greater information sharing permits the supplier to better manage its logistics and production scheduling, thereby also reducing costs. In a pivotal departure from previous practices, Boeing Commercial Airplanes has adopted a Design-Build Team approach that includes both key suppliers and customers throughout the project life cycle for its 777 programme. With clear advantages in terms of time and innovation, such changes have and will continue to have profound impacts on the purchasing profession.
Mass Customization It is difficult
to discuss the previous two topics without addressing the notion of mass customization since the three concepts are intricately linked and all
have a profound effect on the procurement activities of the firm. The concept of mass customization grows from a failure inherent in the mass production paradigm developed and espoused by bureaucratic organizations.13 While low costs are important and are a fundamental goal of the mass production paradigm, across a number of industries the premise upon which mass production is built is no longer valid. Markets are not homogeneous, they tend to be fragmented; product life cycles are shorter and cycle time has become a critical element of competitive response;14 and customers are demanding products and services that are tailored for them. Where mass production provided efficiency through stability and control, mass customization seeks variety and customization (at low costs) through flexibility and This new paradigm demands quick response). processes, systems and structures that are responsive marketplace and can be to changes in the implemented with little change in the cost structure of the product and/or service. Mass customization attempts to achieve the synthesis of two competing management forms. Low cost is achieved through both economies of scale and economies of scope. The goal is to minimize the penalty of individuality since unit costs fall with the increased volume achieved through the entire system. To be sure, there are limits to the degree of variety but the range is such that, depending on the product, a vast number of options are often availMotorola can robotically able. For example, assemble thousands of different pagers during a single shift with zero setup cost and with a true lot size of one. It should come as no surprise that mass customization is a result of the new competition and is a function of the firm’s ability to link product development and process development. In fact, the process of business re-engineering lies at the core of successful mass customization, i.e. a focus on fundamental processes allows a better grasp of the basic changes that affect the firm’s ability to compete and to meet the ever-changing needs in the marketplace. For the purchasing manager, it is critical to understand the concept of the value chain and to appreciate the full range of activities that go into the manufacturing of a component or finished product. It is again clear that functional integration takes precedent over individual functions and that cross-functional teams rise in importance. The question facing the purchasing
manager is one of how to assemble the internal resources to develop requirements for the best set of suppliers.
The Learning Organization In order to respond to the new competition and mass customization and to undertake the rigours of business process re-engineering, corporations are expanding their capacity as learning organizations. Based on the experiences of Ford, DEC, Apple, AT&T, P&G, and Shell Oil, Senge15 describes the set of skills required to turn a disabled organization into a learning organization. Learning organizations have transformed both what they think about and their way of thinking. The goal of these processes is to unfreeze managers’ mental models, call into question all theories-in-use and construct new frames of references to guide business decisions. For organizational learning to occur, individuals must share their personal insights, knowledge and mental models. A problem in organizations is that these models are often tacitly held, unexamined, and untested. In addition, managers often wrongly assume that people with whom they work rely on common views of reality. To be a learning organization, members must be skilled in creating, trading and understanding each other’s mental models. One’s mental models should be the product of systems thinking and should not grow from a more traditional cause-and-effect paradigm. The aim of systems thinking is to understand recurring patterns in a work process (such as purchasing) or in a network system [e.g. among a network of suppliers) in which managers discover where the leverage points exist to change the process or system. Systems thinking espouses the belief that actions taken at one point in time have consequences for other parts of organization systems at some future time. Purchasing managers are challenged to develop a ‘world view’ that encompasses the entire organization as a dynamic competitive entity. Systems thinking helps managers to understand the new competition since it presumes that the firm functions as a member of a larger network. Systems thinking is also an essential tool for process reengineering since it assumes that organizational goals can only be achieved when work tasks are considered simultaneously with fundamental processes. Long Range Planning Vol. 27
April 1994
Impact on purchasing
Dimensions Organization
of the firm
Global networks with cores based on flexible, creative learning organizations Designed to meet the needs of the marketplace
Types of co-ordination
Breakdown
of functional
barriers
Viewing functional units as interdependent parts Co-ordinating the supply value chain for competitive advantage Sector organization
Remove the tension between firms (partnering vs competing within the supply chain)
Patterns of industrial policy
Complex
inter-firm
relationships
Re-defining relationships with suppliers, customers and competitors
Such thinking elevates the role of each member of the organization who is involved in decision making since each part of the feedback process and each shares responsibility for problems generated by the process. Learning organizations, and the shared goals that emerge, are built from personal goals and visions. From the content of individual views, a common ground is discovered and it becomes the foundation for the firms’ decision and actions. These various effects of new competitive forces on purchasing activities are summarized in Table 1.
Organizational Transformation its Implications
and
There are a number of fundamental changes that will be needed if business is going to effectively adapt to the new competition. This transformation will occur at all levels of the firm and will affect each functional area. For the purchasing function, these changes are profound and are critical for the future well-being of the firm. A key aspect of the new competition is the firm’s ability to form linkages with other businesses which can provide competitive advantage. The purchasing professional can emerge as a key player in the process of nurturing and managing both internal and external relationships. At Last Purchasing is Becoming Strategic
Transforming the Purchasing Function To begin, senior management must engender a strong commitment to the firm’s mission and goals. Management must not only articulate its goals but must also have a plan for accomplishing these goals. Implementation is essential and each functional unit must understand precisely what its role gave in the process. No longer will ‘turf battles’ be tolerated and no longer will one area be able to easily work its will by leveraging perceptions of organizational status or power. It is apparent that the firm’s orientation must shift to the customer and to the marketplace. Each functional unit must subordinate its agenda to the greater purpose-sustained competitive advantage. For the purchasing manager, it requires a vision that spans the entire value chain beginning with purchased materials and ending with the customer. This vision must be congruent with and in support of the firm’s mission and goals. Many recognize that such consensus is no easy task and that achieving corporate goals within a framework of personal satisfaction remains a continuing management challenge.l’j Organizational learning skills promise to expand the capacity of firms to meet this challenge. A purchasing organization that is driven by measures of efficiency and that is rewarded by a singular focus on cost or initial purchase price is out of touch with the new competition, does not have a systems perspective, and is, over the long-term, a detriment to its firm. One must develop a systems view. Purchasing orders per buyer or other traditional measures of expense are important, but they do not add value in the marketplace. Such a focus fails to acknowledge that many of these expenseincurring activities are being automated and information technology is replacing these more mundane considerations. In a recent benchmarking effort designed to facilitate their movement toward commercial sourcing practices, Westinghouse Electronic Systems Group, a long-standing and highly regarded defense contractor, learned quickly that their purchasing metrics were outmoded. By re-examining their underlying purchasing processes and comparing them with leading-edge practitioners, they were able to quickly implement a more viable commercial procurement system. Similarly, EDI (electronic data interchange) and other systems intended to link firms electronically, have begun to fundamentally change many purchasing activities. This element refers to the reliance
upon electronic media for exchanging information between the buyer and supplier and the extent to which information is exchanged electronically between buyers and suppliers in terms of the amount, type and frequency. The key point here is that computers simply make it easier to communicate, share information, and respond quickly to shifts in demand. This use of design-based technology to extend a company’s logistics system can facilitate value-adding partnerships but alone does not create them.17 At one extreme, very little or no ED1 (sometimes used only for purchase orders) occurs and trading parties often rely on paper and batch transfers. At the other end of the spectrum, transfer of complete technical data for some or all products as well as video teleconferencing, E-mail, and other electronic means may occur. As an example, Boeing Defense & Space Group intends to have a completely ‘paperless’ infrastructure for the F-22 Advanced Tactical Fighter Program that will include the three primary team members, the eight largest suppliers and even the Air Force Program Office (Boeing’s customer). Some analysts contend that information batches are smaller and are exchanged more frequently in such an environment. In any case, what is urgently needed is for purchasing to participate in activities that question basic procurement processes. To be sure, work flow monitoring, inventory control and routine order processing are now computer driven and require very little managerial attention. Instead, purchasing must devote greater attention to those skills inherent in understanding and contributing to the firm’s value creating activities.18 While sourcing contributes to cost control, it also improves overall performance in quality, dependability, flexibility and innovation. Strategic sourcing is quite simply the process of creating value-adding supply relationships to provide a competitive advantage. As part of the learning organization, the purchasing manager becomes a source of knowledge regarding the process that comprise the value chain. Working in conjunction with other functional managers and as part of a learning organization, purchasing provides input to ‘make-or-buy or partner’ decisions. Whether the corporate objective is to pursue a strategy of cost leadership or differentiation, the roles purchasing can play in influencing the firm’s strategic posture are important in value analysis, and vendor comparisons and benchmarking. As sug-
gested above, these analyses are necessary but not sufficient. Purchasing must also participate in activities that question basic business processes. What emerges is a fundamental shift away from following work flow and controlling costs to contributing to organizational learning and a fundamental understanding of the firm’s core capabilities and skills. In an effort to re-engineer fundamental purchasing processes, questions go beyond the narrow issues of whether a component or sub-assembly should be made or bought. Purchasing should actively contribute to the store of knowledge from which the firm defines its core competencies and decides which set of skills and activities to keep and which ones to shed. What appears at the surface to be the ‘dis-integration’ of the firm typifies a key component of the new competition. Non-essential activities will flow from the firm to its network and this resultant web of firms will behave as though the work were done internally. Given purchasing’s understanding of the supply markets, it can help assess and manage the leverage points that contribute to competitive advantage. Thus, supplier management must be viewed in the context of a systemic process. Purchasing thus plays a role in protecting the firm’s competitive advantage, particularly as it relates to the body of corporate knowledge affected by the partnership. Purchasing must help set the parameters of information sharing and knowledge transfer between the partners. One must take care not to jeopardize the firm’s core skills and capabilities by outsourcing key processes or product elements, thereby losing that skill.lg One must also be watchful of partners who learn at your expense and gain information that places your firm at a competitive disadvantage. For example, a supplier could learn information that permits him to compete with you at a point further downstream, or in another segment or market. General Electric, in its commitment to labour and materials cost reduction, outsourced many critical components. This action not only caused their internal skills to atrophy, it gave birth to a set of competitors who had honed their production skills at GE’s expense. To fulfil this critical value-adding role, purchasing must understand the firm’s core competencies as well as the core competencies of the supply chain; concomitantly, purchasing must exercise its information brokering responsibilities to develop a complementary and Long Range Planning Vol. 27
April 1994
Evolving roles
Revolutionary roles
Transaction accountant
Information exchange broker
Administers inter-firm contracts
Guides the formation and implementation of partnerships and inter-firm supply networks
Primary ‘point of contact’ with suppliers
Manager of external manufacturing
Interface with first-tier suppliers
Responsibilities throughout the supplier value chain
Minimizes risk (e.g. disruption of supply, incoming defects, etc.) to the buying organization
Manages and leverages the skills of the supply chain
Competitor analyses
Strategic benchmarking of the supply chain
Continuously improving the existing procurement process
Questioning the supply chain process (re-engineering procurement)
Reacting to external stimuli (reactionary change)
Proactively accessing external information (proactive change)
Concurrent engineering
Concurrent procurement
Safeguarding proprietary/ critical information (transaction driven)
Enhanced information sharing throughout the value chain (early supplier involvement)
Unidirectional communication
Simultaneous two-way communication
Cross-functional co-ordination
Functional integration
Cause-and-effect problem solving
Systems thinking
Purchasing mentality
World view
proactive supplier network for the sole purpose of creating a sustainable competitive advantage. The purchasing function is thus transformed when tasks that add value are integrated into systemic processes and the dynamic interrelationship among purchasing decisions, core competencies, and customer satisfaction are understood. The sharp contrasts between prior roles and those now needed can be seen in Table 2. Transforming the Role of the Purchasing Professional Throughout this paper, we have alluded to the importance of partnerships and have implied a transAt Last Purchasing
is Becoming
Strategic
formation in how purchasing should approach its suppliers. We have also painted a picture of a network of companies in which information passes freely and ubiquitously. Clearly, the purchasing function plays a central role in managing the array of suppliers who comprise that network. As members of a learning organization, purchasing professionals can help articulate and clarify the firm’s vision and mission that is shared with external constituents. Earlier work has developed the notion of supplier selection and the criteria by which a reliable set of partners emerge from a potential set of suppliers. The focus here converges on managing the partnership through its development and growth and taking a very proactive role in seeking, nurturing, and managing these relationships. The level of analysis has shifted from the commodity class to the partner, or array of partners, who supply value to the firm’s products/services as it attempts to meet the needs of its customers and its customers’ customers. Purchasing not only manages the partner; it manages the range of possible support services the firm brings to the partnership as both parties attempt to work toward common goals. Using systems thinking, purchasing professionals gain a perspective on their role in the larger network and the potential value they add in delivering products and services to the customer. The purchasing manager should be the primary contact person between the firm and the supply partner through whom the initial scope and nature of the partnership is negotiated and implemented. Although the partnership might develop a ‘life of its own’ in that information ebbs and flows across different functions and organizational levels, purchasing has a role in orchestrating the initial contact. Frequently, the nature of these negotiations has significant consequences for the resulting structure of the relationship itself. Through the life of the relationship purchasing helps develop and monitor the performance criteria upon which partnership effectiveness is based. In this gatekeeper’s role purchasing is a key conduit through which certain partnership data ought to flow and be analysed. Purchasing is a logical storehouse for partnership information with which the firm can better assess potential relationships and appraise on-going relationships. In addition, the purchasing professional must develop the skills and techniques to cultivate and nurture mutually beneficial relationships. In the new compe-
tition, the concept of leverage within the supply chain, as has been advocated using the traditional Porter framework, is counterproductive and nonvalue adding. As champions of the supplier development process, purchasing professionals also serve the roles of special envoy and negotiator. Typically, supplier negotiations would converge on price, quality, delivery and the like. In the new competition, negotiations are much more broadly defined and cover a much wider range of issues such as cost reduction strategies over time, technology sharing and joint development, and issues germane to control and performance measures. The breadth and depth of these interactions require both strategic knowledge that typically insight and business exceeds the range of information now available to most purchasing managers. As the results of these negotiations have immediate strategic importance for the firm, purchasing’s responsibility goes far beyond the range of issues usually found in narrower market-based transactions. Beyond the substantive aspects of the negotiations, one must recognize that each member of the negotiation team shapes the tone for the partnership as it develops over time. Thus, the early phases of the negotiations in which partners’ motivations are understood, expectations are shaped, and future interactions are outlined become critical to the successful outcome of the partnership. As is the case in all on-going relationships, past behaviour affects future interaction. The process of negotiations
becomes very important. Notions of perspective taking, rapport building, trust, commitment, and information sharing become essential ingredients of partnership formation and nurturing. Purchasing managers must become much better skilled in these process related areas.
Conclusion We have attempted to describe the new competition and present the implications it holds for the purchasing manager. As businesses try to make fundamental changes in how they compete, purchasing faces major new challenges. Purchasing professionals must adapt to these changes and re-think the manner in which they formulate and execute purchasing strategy as a component of the larger corporate goals and objectives. Traditional views of suppliers and of other functional units are no longer valid. As functional and organizational boundaries become blurred, purchasing must acquire new skill sets and levels of expertise. The new competition raised the ante for success, but purchasing now faces new opportunities. Although we have seen marked improvement since the 1970s in both the level of professionalism and ability to think strategically, purchasing can no longer improve at a snail’s pace. The dynamics of competition are such that speed is essential. Lead time, time to market, cycle time are all key measures for the successful global player. Purchasing must accelerate the speed with which it adapts to changes in business practices.
References (1) Virginia T. Freeman and Joseph L. Cavinato, Fitting Purchasing to the Strategic Firm: Frameworks, Processes, and Values, Journal of Purchasing and Materials Management, Winter 8-10 (1990). (2) See, for example; Lisa M. Ellram, The Supplier Selection Decision in Strategic Partnerships, Journal of Purchasing and Materials Management, Fall 8-14 (1990); Robert Landeros and Robert M. Monczka, Cooperative Buyer/Seller Relationships and a Firm’s Competitive Posture, Journal of Purchasing and Materials Management, Fall, 10 (1989); Robert Spekman, Competitive Procurement Strategies: Building Strength and Reducing Vulnerability, Long Range Planning, 18, 94-99 (1985); and Robert E. Spekman, Strategic Supplier Selection: Understanding Long-Term Buyer Relationships, Business Horizons, 31 (4) (1988). (3) Michael Best, The New Competition, Harvard University Press, Cambridge, MA (1990). (4) For example, Michael Piore and Charles Sabel, The Second industrial Divide, Basic Books, New York (1984); Michael A. Cusumano, The Japanese Automobile industry; Technology & Management at Nissan & Toyota, Cambridge: Harvard University Press (1985); Kim B. Clark and Takahiro Fujimoto, Product Development Performance: Strategy, Organization, and Management in the WorldAuto industry, Harvard Business School Press, Boston (1991); Peter M. Senge, The Fifth Discipline: The Art & Practice of the Learning Organization, Doubleday Currency, New York (1990); and James Brian Quinn, The intelligent Enterprise, Free Press, New York (1993).
At Last Purchasing is Becoming Strategic
(5) John McMillan, Managing Suppliers: Incentive Systems in Japanese and U.S. Industry, California Management Review, Summer, 38-55 (1990). (6) Dean S. Ammer, Materials Management and Purchasing. 4th ed. Irwin, Homewood, Illinois (1980); and Kaoru lshikawa What is Total Quality: The Japanese Way, translated by David J. Wu, Prentice-Hall, Inc., Englewood Cliffs (1985). (7) Richard G. Newman, Single Source Qualification, Journal of Purchasing and Materials Management, Summer IO-17 (1988); and Richard G. Newman, Single Sourcing: Short-Term Savings Versus Long-Term Problems, Journal of Purchasing and Material Management, Summer, 20-25 (1989). (8) Dean Bartholomew, The Vendor-Customer Relationship Today, Production and inventory Management Journal, 25 (2). 106121 (1984); 8. Jackson, Build Customer Relationships that Last, Harvard Business Review, 6,120-128 (1985); Keki, R. Bhote, Supply Management: How to Make U.S. Suppliers Competitive. American Management Association Membership Publications Division, New York (1987). (9) This discussion is based in part on Michael Hammer and James Champy, Reengineering the Corporation: A Manifesto for Business Revolution, Harper Business, New York (1993); and J. Teng, et a/., Re-designing Business Processes Using Information Technology, Long Range Planning, 27 (1) (1994). (10) Steven B. Kramer and John W. Kamauff, Jr. Benchmarking: An Analysis of Benchmarking for Implementation at Westinghouse Electronic Systems, Darden School Working Paper (DSWP-93-09), 1993. (11) Kim B. Clark and Takahiro Fujimoto, Product Development Performance: Strategy, Organization, and Management in the World Auto Industry. Harvard Business School Press, Boston (1991); Stephen R. Rosenthal, Effective Product Design and Development: How to Cut Lead Time and increase Customer Satisfaction, Business One, Irwin, Homewood IL (1992); and Steven C. Wheelwright, Kim, B. Clark, Revolutionizing Product Development: Quantum Leaps in Speed, Efhciency and Quality, Free Press, New York (1992). (12) For additional information regarding technology sharing, please see David N. Burt and William R. Soukup, Purchasing’s Role in New Product Development, Harvard Business Review, September-October (1985); W. Edwards Deming, Out of Crises, 2nd ed. MIT Center for Advanced Engineering Study, Cambridge (1986); Somerby Dowst and Ernest Raia, Design Team Signals for More Supplier Involvement, Purchasing, March 27, 76-83 (1986); Keki R. Bhote, Supply Management: How to Make U.S. Suppliers Competitive. American Management Association Membership Publications Division, New York (1987); Susan Helper, How Much Has Really Changed Between U.S. Automakers and Their Suppliers?, Sloan Management Review, Summer (1991). (13) Much of this discussion is based on work by B. Joseph Pine, Mass Customization, Harvard Business School Press, Cambridge, MA (1991). (14) George Stalk, Jr. and Thomas M. Hout, Competing Against Time: How Time-Based Competition is Reshaping Global Markets, The Free Press, New York (1990). to Create (15) Senge, op cit., (1990); also see, for example, M. Beck, Learning Organizations-How Them, industrial and Commercial Training, 21 (3), 21-28; A. P. DeGeus, Planning and Learning, Harvard Business Review, 66, March-April, 70-74 (1989); and J. Brown and P. Duguid, Organizational Learning and Communities-of-Practice, Organization Science, 2 (I), 40-57 (1991). (16) For example, Robert H. Hayes and Steven C. Wheelwright, Restoring Our Competitive Edge: Competing through Manufacturing. Wiley & Sons, New York (1984); and F. Ian Stuart, Purchasing in an R&D Environment, Journal of Purchasing and Materials Management, Fall, 29-34 (1991). (17) For more information regarding the role of EDI in creating value-adding partnerships please see John F. Magee, William C. Copacino and Donald B. Rosenfield, Modern Logistics Management; Integrating Marketing, Manufacturing, and Physical Distribution. John Wiley & Sons, New York (1985); and Eric K. Clemons and F. Warren McFarlan, Telecom: Hook-up or Lose Out, Harvard Business Review, July-August, 91-97 (1986). (18) See for example L. O’Sullivan and J. M. Geringer, Harnessing the Power of Your Value Chain, Long Range Planning26 (2), 59-68 (1993); and Robert H. Hayes, Steven C. Wheelwright and Kim B. Clark, Dynamic Manufacturing: Creating the Learning Organization. The Free Press, New York: (1988). (19) Edward W. Davis, Global Outsourcing: Have U.S. Managers Thrown the Baby Out with the Bath Water?, Business Horizons, 35 (4), July-August, 58-65 (1992).
At Last Purchasing
is Becoming
Strategic