CIPS Knowledge Insight
High-performance Purchasing:
A move to Strategic Purchasing and
Specialisation
Purchasing is being recognised as a key
route to adding value to a firm’s
activities, and to satisfying stakeholder
and customer demands
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High-performance Purchasing: A move to Strategic Purchasing and
Specialisation - CIPS Knowledge Insight
Table of Contents
IINTRODUCTION ..................................................................................................................2
DEFINITIONS........................................................................................................................2
Purchasing..................................................................................................................................... 4
Procurement ................................................................................................................................. 4
EXPLANATIONS AND CONTEXTUALISATION ................................................................................ 5
Academic approaches to purchasing: .......................................................................................... 5
Supply............................................................................................................................................ 5
Supply Management .................................................................................................................... 5
Supply Chain (Networks) Management (SC(N)M) ....................................................................... 5
Being Strategic: ............................................................................................................................. 7
Fig. 4 Porter’s diamond ................................................................................................................ 9
Supply and Purchasing as Strategic: ............................................................................................ 9
IMPLICATIONS............................................................................................................................. 12
Making supply strategic: ............................................................................................................ 12
1. Taking a whole supply chain view: ........................................................................................ 12
2. Think supply networks not supply chains:............................................................................. 13
3. Concentrate on the firm’s core competencies: ..................................................................... 13
Fig. 5 Total acquisition costs ...................................................................................................... 16
4. The firm is an unsatisfactory unit of analysis ........................................................................ 17
4. Personal Effectiveness ............................................................................................................ 19
SUMMARY................................................................................................................................... 19
Developing and achieving a high-performance purchasing strategy: ...................................... 19
REFERENCES ................................................................................................................................ 21
Acknowledgements .................................................................................................................... 23
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High-performance Purchasing: A move to Strategic Purchasing and
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INTRODUCTION
There is an abundance of literature which argues that purchasing is undergoing significant
transformation. This transformation is thought to be coming about primarily because of a shift
in the nature of the business environments in which buying and selling goes on. The mass
production of the past brought stable organisational routines, and economies of scale, as well
as predictable (or at least plentiful) customers. However, today’s markets demand flexibility,
innovation and show rapid swings in demand. Firms must be leaner, quicker and more
proactive to keep abreast of things, and avoid being left behind by competitors and customers.
As a response, evidence suggests that purchasing is moving from fulfilling the specific and
narrow function of buying external resources, with suppliers chosen on the basis of lowestprice decisions, into a position of centrality in the core activities of the firm. Even greater than
this, purchasing is being recognised as a key route to adding value to a firm’s activities, and to
satisfying stakeholder and customer demands (See CIPS’ Knowledge Insight on Value
Generation and Management). The idea of purchasing specialisation is one such response. The
idea of differentiating between different types of resources, such as IT, or commodities, and
having buyers specialise in one particular area is another. However, much of the academic
literature about the changing nature of purchasing takes an opposite view. They argue that
purchasing can, in fact, incorporate activities, and move away from a narrow focus on
purchasing resources, to integrate strategic planning, inter-organisation relations, and
identifying market opportunities. In this sense, purchasing is set to become an important
contributor to organisation-wide goals and firms’ strategic direction.
The aim of this paper is to review current literature in order to throw some light on the
reasons for, and issues surrounding, this move to positioning purchasing as a strategic activity,
which creates high-performance purchasers. Starting with an outline of the contexts in which
purchasing activity is situated, and the debates over purchasing’s role within the wider
activities of the firm as a whole, the paper will then go on to look at the idea of strategic
purchasing, before finally teasing out some of the specific implications of becoming strategic
for purchasing practitioners.
DEFINITIONS
The changing contexts of purchasing
In the late 1960s and 70s, purchasing was generally considered to be a service to production
(Farmer 1997). This was reflected across academic literature, professional examination syllabi,
and the functional organisation of firms. Purchasing was seen as operational, in that it was
specifically oriented to manage a firm’s inputs, such as materials, components and services.
The function of purchasing was to ensure that inputs were of the required levels of quality;
also that they were purchased at a competitive price and were delivered on time. Essentially,
purchasing was positioned in a supporting role to the manufacturing or production activities of
the firm. An administrative, rather than strategic activity (Ansoff 1970), and one which was
purely transaction based, quantified and specified.
However, a number of events stimulated a rethink of this positioning. Partly this came from
changes in the economic market places in which firms operated. Resource shortages, such as
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the oil crisis of 1973, highlighted the importance of supply inputs, and the problems that could
come from under-estimating its contribution to firms’ activities. Also, the impact of Japanese
manufacturing on the expanding markets in areas such as automotive manufacture began to
show the weaknesses of the traditional functional organisation of the Western firm. The
Japanese model of supply was one where the purchasing firm sought to influence and shape
the actual activities of supplier organisations, rather than just interact through hands-off
purchasing of goods and services. Longer term and more collaborative relationships between
purchasers and suppliers allowed greater coordination and synergy between them. These
relationships were more than just market- or price-based selection. Another version of this
extension of the relations between firms is outsourcing – buying in components and
assembling them, rather than making everything under one roof. This has its origins in the ‘buy
rather than make’ approach of William Durant, the founder of General Motors (Chandler,
1962).
Similarly influenced changes were seen within organisations as well. The breakdown of the
highly structured and differentiated organisation in favour of cross-functional and crossdisciplinary teams blurred the distinctions between functions. Thinking of work activities
holistically, from conception and design, through to finished product, and even as far as
distribution and marketing, became more and more common. In addition, communication
between activities, both intra- and inter-organisationally, had become a key consideration. For
example, within the construction sector, reports outlined the problems of relying only on
contractual obligations to coordinate work (Banwell 1964) and of inefficient and fragmented
organisation of activities (Higgin & Jessop 1965).
According to some practitioners, these wider changes have had a significant effect on the
activities of purchasers. In the 1995 Gower Handbook of Purchasing Geoffrey Smith estimated
that the activities of purchasing professionals had been greatly expanded.
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Traditional
Role
Admin
Quality
problems
% of
buyers
time
Expediting
information
and parts
delivery
New Role
Cost reductions
and cost
planning
activities
Supplier
measurement
and
improvement
activities
Additional
new
activities
Supplier
strategies
Component
development
strategies
Market testing
via competitive
quotes
Admin
Price negotiations
Negotiations
Fig 1: Traditional and new roles within procurement Source: Adapted from Smith, 1995
The old functional and administrative roles of purchasing are seemingly squashed into a small
portion of the new workload for purchasers, which include planning activities, supplier
measurement, and improvement work and so on. This is a much broader portfolio of tasks
than traditional interpretations of purchasing function.
CIPS provide separate definitions to explain purchasing and procurement. These are as
follows:
Purchasing
Often used interchangeably with procurement. Purchasing is to acquire goods, works or
services from a nominated supplier. Purchasing is a component of the wider function of
procurement and consists of activities such as ordering, expediting, receipt and payment.
Procurement
Often used interchangeably with Purchasing. Procurement is the totality of acquisition, starting
from the identification of a requirement, to the disposal of that requirement at the end of its
life. It therefore includes pre-contract activities, for example, sourcing and post contract
activities, such as contract management, supplier relationship management activities.
However, it does not include stores management and logistics which are aspects of the wider
subject of Supply Chain Management. Procurement generally relates to goods, works and
service(s) requirements.
For the purposes of this paper, and to avoid any confusion, the author will refer to purchasing.
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EXPLANATIONS AND CONTEXTUALISATION
Academic approaches to purchasing:
Within this changing context comes a re-conceptualisation of purchasing within
academic literature. The focus moves from the single, dyadic relationship between two
firms, to think of supply as a chain or pipe (Farmer 1985). This is a significant step, as it
places the specific purchaser (the X in fig. 2.) within a wider context of numerous
organisations involved in producing a product or service, and moves away from seeing
purchasing as a series of one-off and dislocated transactions with specific firms. The
main thrust is towards integration of purchasing activities, rather than further
differentiation, and the idea of purchasing specialisation is not taken up within this
literature. This move has, however, prompted a plethora of academic and practitioner
attention towards the idea of supply chain management (SCM).
CIPS provides a number of definitions regarding supply, supply chains and networks.
These are shown below:
Supply
The main definition, courtesy of CIPS and the Official Dictionary is: “(verb) the provisioning,
administration, service, stock control, storage, handling and distribution, and all associated
operations connected with supplies, services and materials management.” The definition for
the noun is “all goods, materials and services that come into the possession of an enterprise as
the result of contracts for purchase, hire or procurement by other processes and for which the
enterprise has responsibility”.
Supply Management
Supply Management is the purchasing, expediting, inventory management, delivery and
receipt of goods, and quality control.
Supply Chain and Networks
In essence the supply chain starts with the extraction of raw material (or origination of raw
concepts for services) and each organisation within the supply chain adds value to the product
or concept in some way, as it passes from one organisation to the other. The supply chain
extends through to the final sale and delivery to the final customer and through to disposal.
Supply Chain (Networks) Management (SC (N) M)
SCM is the management of all activities aimed at satisfying the end consumer; via the total
management of the Supply Chain (Networks). As such it covers almost all activity within the
organisation. It includes a number of key success factors that include a clear procurement
strategy, effective control systems, and development of expertise. SCM therefore represents
and reflects an holistic approach to the operation of the organisation. In other words, SCM
relates to the entire procurement cycle, not just at the end. In particular, it has a pivotal role to
play in the development of an initial sourcing strategy.
The aim of SCM is:
“To increase productivity and reduce inventory and cycle time, while the long-term strategic
goal is to increase customer satisfaction, market share and profits for all members of the
virtual organisation” (Tan, 2001: 42)
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To allow these goals to be realised, the purchasing function of the organisation acts as the link
between sources of supply and the organisation itself, where the overlapping of activities
between supplier and purchaser can improve efficiency.
X
Dyadic
X
Chain
Network
X
Fig 2: Conceptualising supply structure
Source: Adapted from Harland et al 1999
Concurrent engineering is one such model of SCM, where activities are simultaneously
undertaken in a number of different firms, which are coordinated by purchasing practitioners.
The aim is to speed up the time it takes to get a particular product from raw
material/inception through to finished article. Rather than having a linear process where once
X finishes Y can begin, tasks are undertaken in parallel, shortening development and
production times. Another area where the coordinative aspects of purchasing can contribute is
in research and development (R&D), where utilising supplier’s technology or knowledge at
manufacturing design stages can lead to innovation in process or streamlining activities and
hence better competitive edge. In general, it has been found that implementing these
practices can positively affect corporate performance. The goal of SCM here is to eliminate
waste, both internally within a single organisation and externally between suppliers and
purchasers. This reduces the duplication of the same processes, like quality checking, across
firms and by adapting internal processes to coordinate better with external partner firms. But
also, crucially it allows new configurations of skills, components and products to be put
together. Competition between firms shifts to become competition between supply chains, or
between larger units of virtual firms.
A further move away from dyadic thinking comes from treating the extended landscape of
organisations within which specific firms collaborate and compete as a network. The focus is
directed towards the inter-relations between firms, where, for instance, supplier and procurer
roles are interchangeable (firms generally both buy resources in and sell outputs on). The
work of the Industrial Marketing and Purchasing group (IMP) is key here, and shows again the
shift from defining purchasing as a narrow function to a broader, coordinative role:
“the relationship between buyer and seller is frequently long term, close and
involving a complex pattern of interaction between and within each company. The
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marketer’s and buyer’s task in this case may have more to do with maintaining
these relationships than with making a straightforward sale or purchase” (Ford,
1990: 11)
The emphasis is upon the relationship between firms, purchasers and suppliers, rather than on
either of the parties. Competitive edge can be seen to stem not only from the organisation of
internal resources and activities, but also how these are combined with external ones.
Decisions such as what to retain in-house, and what to outsource, are therefore highly
important in enabling efficient inter-organisational supply chains. This also links to other
literature on managing organisational interfaces. Araujo et al (1999) look at the costs and
potential interdependencies arising from different types of inter-organisational relationships.
The least resource intensive is the standardised interface, which is fixed, hands-off and
virtually costless. This is the simple purchasing of the products or services another firm offers.
The second type, specified interfaces, involves some customisation, generally by the supplier,
to meet the requirements of the purchaser. This entails commitment of some resources to
undertake the customisation. Translational interfaces involve the transfer of knowledge from
buyer to seller, in order to allow the supplier to understand the buyer’s requirements. This
brings with it costs of training and time to transfer this knowledge, as well as the potential risk
of becoming dependent on the supplier for a specific service, which is vital to the activities of
the buying organisation. Finally, the most costly interface is the joint learning interface, where
two (or more) firms work together to pool knowledge and resources and jointly develop
specifications and products or services. This not only introduces relational costs but also
demonstrates a high degree of interdependence between the involved organisations.
This is useful in pointing out some of the potential problems and costs as well as advantages of
enlarging purchasing activities. Although occupying a central position within the managing and
coordination of a firm’s activities, there are also issues of the costs and resource intensity of a
range of buyer-supplier relationships.
Being Strategic:
Much of the discussion over the new roles and activities of purchasing emphasises moving
towards becoming a strategic activity. So in order to unpack what this means for purchasing, it
is first useful to discuss the idea of being strategic, and the concept of strategic management.
Although specific definitions can vary, they all relate strategy to the overarching goals of the
organisation1. For instance Thompson and Strickland (1990) state: strategy is the pattern of
organisational moves and management approaches used to achieve organisational objectives
and to pursue the organisation’s mission.
Strategic management has been defined as: A system of corporate values, planning
capabilities, or organisational responsibilities, that couple strategic thinking with operational
decision making at all levels and across the functional lines of authority (Gluck et al, 1980)
In this sense, strategy and strategic management incorporate a number of different concerns
or levels of activity within an organisation, and the strategic management process is one of
setting goals, establishing strategies, analysing the environment and evaluating different
strategies as well as implementing and managing them (Carr and Smeltzer, 1997). Functional
considerations are still important, but day-to-day activities also need to be integrated with the
overall goals and direction of both specific business units and the firm as a whole. This
strategic focus is therefore a broader one, where an understanding of an organisation’s overall
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aims, such as its positioning within wider markets and environments, the potential
opportunities and threats that it faces, all need to be considered. These elements need to be
aligned, in order to allow the highest levels of organisational strategy to be consistent and
complementary.
Fig 3: Strategic thinking within the firm
Source: Carr and Smeltzer, 1997
This reinforces the view that strategy must go beyond functional activities and contribute to
the competitiveness of the organisation as a whole. Porter’s well-known ‘diamond’ (fig 4) is a
representation of the different elements of competition. This goes beyond figure 3 to show a
number of different internal and external dynamics and structures which constitute a
particular firm’s competitiveness, or otherwise. Factor or input conditions include human,
capital and natural resources which are central to the role of purchasing, as well as
administrative infrastructures. Demand conditions involves the anticipation of future or
potential demand, as well as understanding the different markets and niches that might be
exploited. Related and supporting industries include suppliers, or localised clusters of firms, as
well as access to them, and hence connects with the importance of inter-organisational
relations discussed above. These all influence the contexts of firm level strategy, structure and
the patterning of competition and rivalry.
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Firm strategy, structure
and rivalry
Factor (input) conditions
Demand Conditions
Related and supporting
industries
Fig. 4 Porter’s diamond
We can see from fig 4 the potential spaces where purchasing can contribute to the overall
strategic manoeuvring of an organisation. The access of both hard resources, such as materials
and components, and softer ones, such as different supply chains or supplier networks, and
different sets of skills and competencies, is a significant element within the contexts of being
strategic and competitive. The diamond model also shows how these are directly connected to
demand conditions. There is no separation between the existing and potential markets for
services or products and the process of designing or assembling them.
Supply and Purchasing as Strategic:
So can supply and purchasing be transformed into a strategic process? Academic research now
considers purchasing as an important element of the strategic management of firms, not just
as functional. This emphasises the notable moves to thinking about supply as a chain or pipe,
and seeing organisations as embedded within wider networks that offer opportunities as well
as competition. Table 1 charts in more detail some key academic research which has
contributed to approaching supply as a strategic process from the mid-70s.
Authors
Type of Study
Description and Findings
Farmer (1973)
Empirical
Linking purchasing to the strategic mechanism of the firm
Spekman (1981)
Conceptual
Browning et al
(1983)
Conceptual
Burt and Soukup
(1985)
Conceptual
Integrate purchasing into strategy, but first, purchasing
itself must develop strategically
Purchasing linked to corporate strategy in terms of
monitoring and interpreting supply trends, identifying
ways to support strategy and developing supply options
Purchasing can have an impact on achieving success in
new product development if purchasing is involved in
development process
Caddick and Dale
Empirical Case
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(1987)
Landeros and
Monczka (1989)
Carlson (1990)
Reid (1990)
Study
Empirical
(interviews)
Empirical Case
Study
Conceptual
St. John and Young Empirical Survey
(1991)
Ellram (1994)
Saunders (1994)
Macbeth and
Ferguson (1994)
Burt and Doyle
(1994)
Empirical
Conceptual
Empirical Case
Study
Conceptual
Hines (1994)
Empirical Case
Study
Nishigushi (1994)
Empirical Case
Study
Conceptual
Rich & Hines
(1998)
Harland, Lamming Conceptual /
and Cousins (1999) Delphi
questionnaire
Pearson (1999)
Survey
Humphreys,
McIvor and
McAleer (2000)
Empirical Case
Study
Table 1: Developing Supply Strategy
and corporate strategy
Purchasing can support firm level strategic positioning
using cooperative buyer-seller relationships
Purchasing strategy important in product development
and long term, firm level goals
Purchasing should be involved early in the development of
firm level strategy, in order to develop purchasing
strategies that are compatible with wider, long-term
strategic plans
Purchasing (and production and production planning)
professionals agree on direction of long range strategy,
but day-to-day activities are inconsistent with this long
term view
Measuring the levels of strategic competence in supply
Purchasing no longer a service function
Development of strategic relations, internal and external,
within purchasing
Purchasing should become part of the Japanese keiretsu
2
culture. Implementation of the keiretsu approach to
supply chain activities of the firm
The need for strategic rationalisation of the supply chain,
especially the appropriation of Japanese-style methods of
integrating supply chains by UK purchasing
Study of Japanese coordination of supply chains directly
for competitive advantage
Firms are placing structure and roles ahead of strategy
and process
Focus on single firm and its externalities insufficient.
Global markets present new and complex challenges
Move from individual decisions to team-based planning
needed in contemporary business contexts
More training and development of purchasing
professionals needed as firms move from functional
structuring to flexible, dynamic environment
Source: Part adapted from Cousins
Looking through the table, several key themes identify a need for purchasing to change, and to
focus on the bigger landscape of firm-level strategy and inter-organisational supply chains.
Additionally, looking especially towards Japan, it can be seen how purchasing can be done
more effectively as a strategic process. But there is also an indication of the rhetoric and reality
of being out of step. For instance, in the inconsistency between acknowledgement of longterm strategy and actual day-to-day practice on the ground (StJohn and Young, 1991). Also,
the issues of transferring very different cultural perceptions, expectations and ways of working
from one place, (that is Japan) to another (that is the UK), have never been entirely convincing
or successful. However, table 1 gives a good indication of the breadth of work being done
during this period, and the steps in the shifting of perceptions about what purchasing is, and
what its contribution to the firm as a whole should or could be.
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Moving nearer to today, there seems to be a number of issues in contemporary business
contexts and environments which set some important and difficult challenges to firms.
Purchasing can help in confronting and addressing these issues. To think more about these, we
can turn to Monczka and Morgan (2000) who outlined six specific strategic issues for
purchasing which are critical to achieving competitive advantage and success in 21st century
business worlds.
1. Purchasing, procurement and sourcing must be linked to the financial planning or
economic value-added construction of the business. Implementation of new processes
and practices must demonstrate the adding of value in some way. The organisation,
therefore, also needs to develop the ability to measure or trace the effects of sourcing
and purchasing strategy on the business.
2. E-business could become a driving force, and firms which do not exploit the use of
tools such as the Internet may lose competitive edge. E-business here is defined
broadly to include information handling. Firms that cannot extract value from using IT
will lose out to those who can. This is seen not just in service sectors in the use of
electronic call handling or order processing, but also in inter-organisational
collaboration and sharing of information.
3. Companies must think and act on a global scale, not just in terms of extending supply
chains, but also to see global markets as opportunities to work with other
organisations, and actors in the design and production of products and services, in
order to increase competitiveness within world-wide markets.
4. The decision to retain competencies within the firm, or to outsource those capabilities,
cannot be made on purely financial terms, as this can seriously hamper the ability of
firms to grow and prosper. A more strategic and wider view must be taken, which
considers the overall goals of the organisation and long-term development of the firm
as a whole. This involves taking into account the particular resources, human and
material, that an organisation possesses, and what activities and outputs it is aiming to
improve upon, extend or add within the context of an overall strategic plan.
5. The implications for cost management is to take a more critical view of assessing
where the heaviest costs lie within organisational and inter-organisational activities.
These must be balanced against what the most crucial, distinctive or core activities of
the firm are, and to look for ways to reduce cost and improve efficiency based on this
understanding.
6. Part of this is to assess how the organisation and its activities differentiates itself from
others, and how it provides unique or competitive solutions for customers. Mapping
how different service or product functions respond to customer needs is crucial.
Certain products or services may stand out as significantly contributing to the
positioning and competitiveness of the firm, whilst others may provide less advantage,
or have higher costs, or be less competitive. The key is to focus on the former, and,
perhaps, to consider reducing commitment to, or outsourcing, the latter. This process
is intended to produce a more focused and differentiated portfolio of products and
services, and provide indications of areas to build upon in the future.
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There is a need to consider issues such as decisions to make or buy, the overall structure and
coordination of supply chains and, perhaps most importantly, the relationship between the
organisation and its customers. In summary, the message is that as purchasing moves towards
being strategic, rather than functional, the way purchasing related decisions are made needs
to change significantly.
IMPLICATIONS
Making supply strategic:
So far we have gained a good indication of the issues facing purchasing practitioners, the
potential for the expansion of procurement activities way beyond function and hands-off
purchasing, the important connections between the activities of procurement and the overall
position, competitiveness and goals of the organisation as a whole, and the consideration of
inter-organisation as well as internal relations through the development of supply structures
involving the coordination of multiple firms. But in order to make the right decisions some
further unpacking of what these issues mean is required. The following section therefore
discusses in more detail the implications of these issues, based around four themes identified
by Cox and Lamming (1997).
1. Taking a whole supply chain view:
The customer or consumer is at the end of what can be a long chain of firms and activities,
each component of which should add value to the product or service being produced. Any part
of the chain which is inefficient or too costly passes on this cost to the final customer, even if
they are several steps further along. Some of these costs may be hidden or masked by the
interfaces and relationships within the chain. For instance, one particularly efficient activity
might compensate for another inefficient one, with the result that the problem is not apparent
in the overall process and total supply chain. Also, inefficiencies in one organisation’s
operation might be hidden, for instance, by demanding lower prices from its suppliers to
compensate. Again, the impact upon the final product or service may not show this up. Also
this can only be a short-term fix which could eventually lead to customers switching to
competing firms or supply chains which might offer more streamlined processes and hence
more competitive products or services. Firms may think that, internally, they are operating
efficiently, when in fact the total supply chain of which they are a part might be uncompetitive
compared to others. It also suggests that within a supply chain there could be significant room
for cost cutting or improving efficiency.
In order to identify potential problems, purchasers and supply chain managers must make
themselves aware of the activities going on both upstream and downstream, which in turn
shows that the knowledge and understanding of purchasing professionals must extend into
the other organisations within the supply chain. SCM becomes the alignment of all involved
organisations to ensure that the maximum efficiency is gained, and costly or ineffective
activities are weeded out. This also includes making the interfaces between firms as effective
as possible, where a lack of mutual understanding or agreement, or legal or bureaucratic
processes, could hinder the transitions between firms. Value flows along the chain (this is
where Farmer’s use of the supply pipe is a somewhat better metaphor) and any impediments
to its smooth flowing need to be removed. This leads into the next consideration.
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2. Think supply networks not supply chains:
Although it has become part of the standard terminology of purchasing and business more
generally, it is perhaps better to think about supply networks rather than chains. The chain
supposes a linear process from end to end, but the reality of an organisation’s purchasing
activities may not be quite so straight, or straightforward. Firms can be involved in many
different supply chains, and might have simultaneous roles of supplier and buyer. Construction
firms are a good example of this, where participation in many simultaneous projects, as
supplier, sub-contractor or contractor, is not uncommon. A network approach allows more
complex sets of relationships with other firms to be considered. This encourages the
purchaser to participate in the maintenance and improvement of relationships throughout the
network which involves both purchase and supply, rather than taking a unilateral view. This
emphasises the upstream interfaces with customers at the expense of relations with suppliers.
(See again fig 2).
3. Concentrate on the firm’s core competencies:
The firm can be viewed as consisting of core competencies which are essential in order to
compete in the market and to be differentiated from competition, and other, less important or
‘non-core’ competencies. This approach can be used to consider which skills and activities to
retain in house, and which to outsource. If the costs of owning a non-core competency are
higher than sourcing it externally, and the risks of non-ownership within the market are low,
then the activity can be safely outsourced, or bought in. But this is perhaps not as simple as it
might appear, and brings with it questions over how the organisations should be structured
and what the boundaries of the firm should be within a wider context of supply chains and
networks. Following Williamson’s (1975) theory of transaction cost management we can also
argue that certain forms of organisation are better suited to some organisational goals than
others, and different firms bring with them different types of transaction cost. As well as interorganisational relationships, the structuring and organisation of the firm itself are key in
attaining desired outcomes, and will be subject to continual change and adaptation as firms
strive for greater efficiency and competitiveness, and develop these relations.
Decisions need to be made about what type of external and internal relationships best fit with
an organisation’s goals, and strategic purchasing has an important part to play in these
decisions. Williamson argues that the criteria for making these types of decisions resides in the
scope for economising or what leverage exists for reducing input costs into the organisation,
and the specificity of the assets or what existing investments have been made in different
activities, and how these link to the core competencies, of the firm, and its differentiation or
positioning more generally in supply networks and markets.
However, although this poses a major challenge for the firm in reviewing, measuring, and
understanding the supply structures in which they are enmeshed, it doesn’t throw much light
upon how these decisions should or could be made. In fact, Williamson’s conception of sunk
costs based on previous transactions (or ‘the way we have always done things’) proposes that
existing or prior inter-organisational arrangements will configure present and future ones. This
is fine for stable and on-going transactions, whether internal or external to the firm, but
doesn’t really help when attempting significant and novel transformations or when responding
to quickly changing conditions, such as the introduction of new technologies or changes in
market demand. In cases such as these the decision on whether to do something new,
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demanded by the customer, cannot be based on what the firm has traditionally done (Cox &
Lamming, 1997:59).
This is especially pertinent given the wide-ranging implications of transforming purchasing
from functional to strategic activities. Rather than being grounded in traditional activities, a
more entrepreneurial model is required to aid decisions about large scale or significant
reorganisation of the firm and its external relations. The focus can be shifted to consider
whether the resources and knowledge a firm possesses can be combined to produce a
competitive and sustainable position within a specific supply chain, value chain or network.
This is not quite the same as just considering asset specificity as a process or relationship
which has had a large degree of resources directed at it. This may be either through
development of competencies in house, or investment in specific interfaces with other firms.
Spekman et al (1999) helpfully provide a list of ten key principles of outsourcing and supplier
management, which are useful in thinking about decisions to make or buy.
Integrate suppliers into the supply chain.
We now know that this involves more than a series of one-off transactions if firms are to
utilise their supplier networks effectively. Close collaboration and joint process design can:
reduce cycle times, improve quality, achieve greater end users value and enhance two-way
learning (Spekman et al, 1999: 105). Honda incorporate their suppliers closely in new
product design, as well as sharing innovations and R&D costs. They claim that in the design
of the new Accord in 1998 supplier contributions saved around 20% of the traditional cost
of development.
Share information.
Substituting inventory for information closely connects firms within the supply network,
and allows each to understand more effectively the activities going on in other firms. This
understanding can be used to find joint solutions to problems, show areas for
improvements and highlight some of the potentially masked inefficiencies discussed
above. But there are other issues to consider, in terms of giving outside firms access to key
internal competencies and processes. These sorts of relations have high start up and
maintenance costs and can introduce undesired interdependencies. The key is perhaps to
partner firms with complementary, rather than competing skills and resources. But this
leads to another crucial point:
Develop trust.
In a business landscape where lean supply methods, best practice, and advanced IT
solutions offer the potential for much closer inter-organisational collaboration, the main
problem is not about the process, but rather about developing trust between partner
firms. Trust is based on understanding (or having expectations about) how a partner will
act, given certain types of information, resource, or opportunities. Although virtually
impossible to define or measure, trust is a central pre-requisite in working with other
firms, outside of the functional and often problematic constricts of formalised contracts.
The most likely seat of such trust developing is through personal relationships and through
mutual adaptations over repeated interactions. In other words a long-standing
relationship. This can be facilitated with such simple measures as allocating time for
managers from the involved parties to meet and discuss ways of working together, often in
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an informal way and building on personal ties. Supporting this relationship are mutual or
complementary goals.
Organise effectively to achieve alignment.
This has intra- as well as inter-firm dimensions. Often defined as silo thinking, many
businesses are characterised by internal divisions and fiefdoms where control or authority
are contested. This could be a significant issue in the transformation of purchasing from
functional to strategic player. In addition, the positions of buyer and seller can be
misaligned, with both parties out to achieve the best deal from their own perspectives.
Effective supply management requires the expectations and understandings of all parties
to be, if not the same, then well aligned. One way to achieve this is for particular
individuals to take on the coordination of the supply network as a whole, looking to find
out the intentions of involved parties and to facilitate the alignment of expectations and
coordination of goals. In essence to bring all firms round to sharing the same strategic
vision for that network. Part of this is an organisation-wide acknowledgement of
purchasing’s role at a senior level and in the strategic positioning of the firm. Additionally
extra training for purchasing practitioners might be required to prepare them for the role
of coordinating the supply network.
Use commodity teams.
This can partly address the silo problem, as it advocates an enterprise-wide buying
process. This effectively allocates resources to the integration of both the purchasing
activities of the firm as a whole, and also of supply networks. The position is one of
thinking about whole life cycles of products or services, and total system costs across the
supply network. This allows the focus to be on the lowest total costs, rather than
emphasising purchase cost alone. End users or customers can be brought into the team, to
benefit from their knowledge and requirements, and to get them involved in supply
coordination beyond simply purchasing goods or services.
Look globally for advantage – global sourcing.
Global sourcing can be an important part of effective outsourcing and streamlining the
value chain. Information and capital can easily be transferred around the globe, breaking
the local or regional ties that have constrained inter-organisational collaboration in the
past. Factors to consider in global sourcing include purchase price, but also lead time
delivery, technology, flexibility in response, schedule change and economic and political
stability. For a global organisation, the supply network is part of its strategic infrastructure.
Again this is not without challenges, especially in coordinating across highly dispersed
supply networks.
Focus on total costs.
Taking advantage of changing markets requires more than just consideration of initial
purchase price. Quality, delivery and service are increasingly important to end customers
and users, and a source of competitive advantage for a particular firm, network or product.
It is, therefore. Often not enough to ensemble supply networks based only on the lowest
priced suppliers today.
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Total
Acquisition
Cost
Internal
Acquisition
Cost
Part Purchase
Price
Material
Cost
Labour
Cost
Overheads
Transportation
Quality
Costs
Inventory
Carrying
Admin
Costs
Fig. 5 Total acquisition costs
Rationalise the supply base.
The rationalisation process involves simplifying the purchasing process (bearing in mind
the total acquisition cost shown in fig 5) and looking for ways to eliminate waste and
redundancy in the supply network. The fundamental aspect of each supply network
relationship is how it contributes value, perceived by end-customers. The question
becomes one of who is best positioned within the network to perform particular activities.
This is about understanding in detail the whole supply chain, and hence much research
advocates moving towards dealing with a much smaller supply base. This would allow
more resources to be directed at improving the interfaces and understanding of the
activities of each one within the chain. Within this rationalisation process the interpersonal
connections and trust developed is important in considering who to work closely with, and
who to remove from the supply base:
“strong relationships with a limited number of high quality suppliers position the
enterprise to respond more quickly to market shifts and demands” (Spekman et
al, 1999: 107)
Let the suppliers manage it.
Closer ties within the supply base and a higher degree of trust allow activities to be
transferred to other firms within the network. This can include strategies such as
allowing suppliers to perform their own quality control, hence removing this activity
from the procuring firm, or allowing them to find innovative solutions to problems,
rather than developing and then prescribing supplier activities, processes or
components.
Leverage technology.
IT is a key enabler in building and improving strong inter-organisational relations.
Information can be captured at a single point within the network and then shared in
multiple contexts across partners. This can go beyond exchanges such as EDI
(Electronic Data Interchange) or paperless invoicing (although these aren’t without
their own cost savings) to allow sharing of work-flow information between firms,
and quick response times for adapting to changes or problems. But technology is
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only an enabler – it also requires the correct practices and ways of collaborating to
support it.
These ten principles provide a detailed outline of the implications of a move towards strategic
purchasing, and the challenges of effective outsourcing and supplier management, as well as
the potential benefits. They also show the interdependence between internal and external
activities, and how managing both of these are central in allowing purchasing to contribute
effectively to the strategic direction and organisation of the firm. This leads us back to the final
theme.
4. The firm is an unsatisfactory unit of analysis
The above discussion shows how the flow of value through supply chains or networks takes
place in a loosely aligned array of assets and competencies over which no single firm has
ultimate control. Regardless of how much financial power or managerial authority a firm or
purchasing department might possess, it is not possible to effectively coordinate purchasing
activities across supply networks without the partnership and cooperation of other firms.
Many of Spekman’s ten principles are directed toward developing interfaces with suppliers
using collaborative approaches, developing trust, using inter-organisational teams, allowing
other firms the room to develop their own approaches to developing effective interfaces and
processes. We have moved a long way from defining purchasing as a functional and
operational service to other activities within the firm. Cox and Lamming take this even further,
stating that: the firm is conceptualised as nothing more than a governance structure in which
the key strategic decision must be to assess the relative efficacy of alternative means of
contracting amongst and between potential suppliers of goods and services – both internal
and external (Cox and Lamming, 1997: 60).
This connects with Williamson’s positioning the firm as a nexus of contracts, although the
contracts in question can range from traditional hand-off purchasing to mutual and
collaborative transparent interfaces. In essence, the job of managing supply in a strategic
fashion concerns: the match between a firm’s unique resources and its relationship to an everchanging environment to attain best performance (Reve, 1990).
This unites the idea of core competencies with a fit for purpose approach to assets and
resources and leads to a series of practical questions.





Is something worth retaining?
How does it contribute to value as seen by the end user?
What resources have been sunk into it?
Who else performs similar activities or services?
Can it be outsourced effectively?
The firm, and purchasing professionals, must continually pose these questions. As well as
scanning for market changes and potential new customers, established operating procedures
must also be challenged. Even the boundaries of the firm can be challenged, through decisions
over outsourcing and delegating activities downstream to suppliers and where external
resource management contributes to market-driven initiatives. It is also worth reiterating the
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importance of information within these processes, and for effective supply networks to
operate.
To summarise, Harland et al (1999) provide an overview table (table 2) which outlines what is
entailed in a move from operations- or function-based purchasing to strategic supply network
management. It serves as a handy reminder of the enlargement of purchasing activities, and
the considerations that must be considered for strategic purchasing to contribute to value and
competitiveness.
Operations Strategy
Supply Network Strategy
Of the operation:
Of the end customer and each
supply network actor:
Price (Cost)
Dependability
Flexibility
Quality
Price (Cost)
Delivery Speed
Flexibility
Product Quality
Innovation
Range
Service quality
Reliability
Responsiveness
Competence
Access
Courtesy
Communication
Credibility
Security
Understanding
/
knowing the customer
Tangibles
Structure
Capacity – size, volume, timing
Facilities
Production equipment and
systems
Infrastructure
Internal / external sourcing
Human resource policies
Capacity – size, volume, timing
Supply network configuration
Supply network facilities config
– eg fleet, buildings, material
handling etc
Do or buy
Supply network HRM
Competitive
priority
Quality systems
Production planning and control
New product development
Organisation
Performance measurement
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Supply network quality systems
Supply network production
planning
New
product
/
service
development
Network organisation
Performance measurement
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Table 2: Extending operations management to supply network strategy. Source: Harland et
al 1999
Personal Effectiveness
Interpersonal skill and personal effectiveness are critical enablers of mature SCM processes
(Handfield et al 2007). Research by Handfield and McCormack has identified a correlation
between high performance SCM and the following factors:




Team spirit and esprit de corps (morale of a group)
Enterprise perspective
Supplier collaboration and cooperation
Productive internal business discussions
Without these factors supply chain maturity and the high performance of purchasing
professionals are unobtainable. To ensure that these “dependent variables” are achieved,
traditional mind-sets, management practices, competency models and behaviours, which may
have previously been successful, will need to be altered or otherwise they can become a
hindrance. This could include changes to well-respected competencies such as ethical
behaviour, the focus on cost reduction, results orientation and business process analysis and
re-engineering.
During the review of the CIPS qualifications ladder in 2005, a number of interpersonal skills
were identified and these were some of those identified as core for the procurement
professional:







Leadership
Influencing
Negotiation
Team building
Training needs analysis
Managing conflict
Effective communication
Undoubtedly, the high-performance organisations will be those organisations which create a
culture more suited to higher levels of internal coaching and consultancy. They will recruit
purchasing professionals with a higher emotional intelligence (Reynolds 2003) and heightened
interpersonal skills. A combination of both environment and the right people will ensure the
organisation demonstrates the dependent variables as provided by Handfield and McCormack.
SUMMARY
Developing and achieving a high-performance purchasing strategy:
There are some key tenets that can be distilled from our discussion, which are crucial in
considering the ways to achieve, and the implications of, strategic purchasing, and which
extend quite far beyond the idea of purchasing specialisation. These can be summarised as:


Purchasing is about strategy, not just function
This goes beyond purchase price to consider the overall value in products and services
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






Purchasing strategy extends beyond the boundaries of the single organisation
Information flow across inter-organisational interfaces is key to developing better
relationships
Developing collaborative relationships with suppliers also requires the allocation of
specific resources such as team members and shared IT
Supplier management is about mutual adaptation and collaboration, not control of
one firm by another
Learning, sharing and trusting are key elements to better relationships
The costs and benefits of internal and external activities need to be measured and
understood in order to achieve the most competitive supply networks and products or
services
Purchasing needs to be carried out by professionals utilising effective interpersonal
skills.
These bring with them a range of consequences to consider. Partnership with suppliers can
lead to interdependencies which might not be desired, and can require the sharing of
potentially sensitive information about internal operations and processes. There may be
individuals within the supply network who are resistant to widespread change, or to elevating
the importance and role of strategic purchasing. For strategic purchasing to work effectively,
not only the organisation, but the whole supply network must be working together towards
widely understood and shared goals.
There is a great deal of consonance within academic literature on the changing nature of
purchasing in the 21st century, and about the challenges this presents, both within the firm and
more widely, in the supply networks in which firms interact. There is also no shortage of
recommendations, both from academia and more practitioner-oriented sources. For instance,
the recent FPA3 (Future Purchasing Alliance) report is specifically oriented to connecting
purchasing strategy with shareholder value. It outlines how leaders within organisations must
be sought to pursue new purchasing strategies, and to incorporate value-creation mapping
and best practice. It acknowledges the softer skills of persuasion and alignment required to do
this (FPA, 2003).
However, another piece of work (Quayle, 2002), a survey of purchasing activities in SME’s
(Small to Medium Enterprises) shows some alarming results for strategic purchasing. Although
issues such as leadership, waste reduction and team working came out as high priorities in the
firms sampled, purchasing, supplier development, EDI and benchmarking came out near the
bottom of the list. Purchasing was ranked 14th out of 19 issues. This is quite astounding given
the extensive literature discussed above which identifies not only the benefits of effective
purchasing strategy in terms of competitiveness and adding value for the firm, but also that
this is essential to compete, survive and grow in contemporary business environments. It also
demonstrates the potential scale of the challenge ahead for purchasing professionals just in
convincing their organisations of the importance of strategic purchasing. But this can be seen
as much as an opportunity than as a problem – if it shows how little consideration is given to
strategic purchasing within some firms, it also demonstrates the extensive latent benefits that
could be tapped through adopting a strategic view of purchasing at firm and inter-firm level.
1
Note here that given the different sorts of inter-organisational relations that purchasing can
involve, often goals, and hence strategy, can extend beyond the single organisation
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2
Keiretsu is a Japanese term, referring to a set of companies with interlocking business
relationships, interests and resources. Coming out of Japan’s phenomenal growth after WWII,
while operating as a large number of independent companies, firms such as Mitsubishi and
Mitsui retain common names and a common corporate image, and give each other
preferential treatment in business dealings. This idea obviously connects strongly with the
strategic view of purchasing as the management and coordination of inter-organisational
supply chains.
3
Future Purchasing Alliance 2003 connecting purchasing and supplier strategies to shareholder
value
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Acknowledgements
CIPS acknowledges Chris Harty, Loughborough University who authored this paper on behalf
of CIPS and Helen Alder and Ian Schollar of CIPS for their additions and amendments to this
paper.
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