pag.: 1 van 11
code: LEV-TCO-art-017-bl
Value creation and purchasing strategy 1
Bron:
Auteur(s):
Eindhoven University of Technology, Faculty of Technology Management
A.J. van Weele
Executive Summary
One of the reasons why purchasing management is being assigned a more prominent position in
corporate policy is closely connected with the strategic reorientation that many companies are
involved in. After the diversification strategy of the seventies, today’s motto seems to be:
‘concentrate on your core business’. The advantages are self-evident: many activities can be
carried out at lower cost by specialized suppliers, the company gains flexibility, and management’s
attention can focus on the ‘core business’. These considerations are the reason why purchasing
activity is receiving more attention from top management circles now than it did a few years ago.
As companies have sourced out more of their activities, they have become more dependent on the
competitiveness of their supply base. Purchasing’s strategic role therefore is to develop a
worldwide competitive supply base and to integrate these suppliers effectively in the company’s
business processes.
The purchasing strategy that is to be developed cannot be separated from the corporate policy or
from competitive strategy. Extremes of the strategic continuum are cost leadership and
differentiation. These strategies cannot be pursued simultaneously, as their organizational
requirements are completely different. They pose different requirements on the purchasing
function.
Whatever business strategy is developed, they need to position the company against its three
major groups of stakeholders, i.e. its customers, competitors and suppliers. Over the past decade
there has been a large interest from managers and academics for marketing management and
competitive strategy. Depending on the business strategy purchasing managers need to focus in
their purchasing strategies on three issue i.e. COST, RISK and VALUE. Traditionally purchasing
managers have focused on the first issue, the second issue gains more and more interest. Value
based sourcing is in most companies in the initial phase. However, increasing customer value
through integrated supplier relationships seems a very promising area for the near future.
The interest for purchasing and supply (chain) management as a prime concern for top
management is fairly recent. However, it is growing fast.
In the discussion on how to develop leverage in purchasing and supply management, we support
the ideas as developed by Monczka. He suggested a programme where companies would
preferably go through eight different steps. Key to his ideas are that purchasing and supply
management is recognized as a major area of business and is managed that way. Elements of his
approach are to develop corporate commodity strategies and article group strategies, to develop a
supplier base which is ‘world class’ and to actively manage this supplier base. Supplier integration
in new product development processes and the operational processes of the company are part of
this activity.
Introduction
Increasingly, suppliers are being acknowledged as important sources for competitive
advantage. This article discusses the strategic role that purchasing and supply
management may represent to manufacturing companies and how to develop differentiated
supplier strategies to support the company’s overall product/market and business
strategies.
1
An earlier version of this article was published in Boutellier, R. and Wagner. S. (2005).
pag.: 2 van 11
code: LEV-TCO-art-017-bl
Purchasing and competitive strategy
Over the past decades the competitive situation of West European industry has changed
dramatically. First, European manufacturers experience far more competition from
countries that were not considered as major producers until some years ago (e.g. Korea,
Hong Kong, Singapore, Thailand, Taiwan and China). Second, industry in Western Europe
seems to be under-represented in the areas of new technologies and emerging new
industries (e.g. the computer industry, telecommunications, chips). Looking at most
industrial sectors in Europe it seems that many industries are the stage of market
saturation or decline.
As a result of this situation, the long-term strategy of many companies nowadays focuses
on ‘selective growth’, i.e. a combination of enhancing the core activity and starting up new,
promising activities. One consequence of this strategy is that companies sell off those
activities that are not considered to belong to their ‘core business’.
In general, the following reasons may underlie this trend (Van Weele (2005), p.139-140):
Increased subcontracting, as a result of make-or-buy studies
Based on internal and external cost price studies, carried out in the context of a so-called
‘competitive benchmarking programme’, a manufacturer of office equipment discovered
that particular manufacturing activities could not be carried out competitively any longer.
The internal manufacturing costs appeared to be much higher than the costs of external
suppliers. This prompted the manufacturer to start a ‘make-or-buy’ programme. As a result
the company decided to focus its manufacturing on a higher level of assembly. At present,
modular components are being sourced from a limited number of preferred suppliers. The
company focuses on design, assembly, marketing and sales, and most component
manufacturing has ceased.
Buying of finished products instead of components
Due to the high labour costs level in some European countries, it is hard for some
enterprises to compete. For example, Western Europe is expensive for the textile industry
to operate in. This industry is experiencing heavy competition from ‘low-wage countries’
and in recent years there has been a shift of production capacity to developing countries.
Large retailers buy the raw materials, which are then sent together with the design to lowwage countries, where the end products are made.
Turnkey delivery
Manufacturers of specialized optical instruments often have to supply their products
including sophisticated measuring devices. As a rule these costly devices need to be
purchased by the manufacturers from specialized suppliers. To cite another example:
manufacturers of industrial fences need to deliver their products’ turnkey (at the buyer’s
request), which means that they have to take care of all installations including safety and
surveillance equipment (camera’s, keyless entry systems). These relatively expensive
products also need to be obtained from specialist suppliers. As a result the purchasing
share for these manufacturing companies in the project cost is gradually increasing.
pag.: 3 van 11
code: LEV-TCO-art-017-bl
Technological development
In some industries the technology develops at such a pace that even large manufacturers
cannot afford the investments needed to keep up. Take for example the computer
manufacturers who obtain their microprocessors from specialized suppliers, or the
manufacturer of compressors who has to rely on specialized foundries to be able to benefit
from new developments in casting technology.
In summary, the changed competitive situation in many West European industries requires
that management of many manufacturers focus on their core activities. Specialist activities
outside the scope of these core activities are increasingly farmed out. As a consequence,
purchasing’s share in the cost price of many end products has increased. Hence,
purchasing decisions will have an even greater influence on the company’s financial result.
That is why management has become increasingly aware of the purchasing function. The
consequences of these developments for integrating purchasing in the company policy will
now be discussed.
The agenda of purchasing and supply management has changed…
Gradually, the traditional agenda of purchasing and supply management has changed from
a) traditional const cutting, b) to an orientation towards managing the downside business
risks, to c) a true value orientation. See Figure 1.
figure 1: traditional agenda of procurement is gradually changing… (© prof. Arjan van Weele)
Value improvement:
-Business orientation
-Improving customer
value proposition
-ESI in NPD
-Alliance management
Materials cost reduction:
-Purchasing savings
-Doing more with less
-Agressive sourcing
-Contract management
Value
Value
Risk management:
Cost
Cost
Risk
Risk
-Single vs multiple sourcing
-Performance based contracting
-Buyer dependence
-Supplier dependence
-Financial position
-Proprietary knowledge
pag.: 4 van 11
code: LEV-TCO-art-017-bl
The traditional cost orientation in purchasing can be substantiated by a focus on material
cost reduction, aiming for realising purchasing savings through doing more with less
suppliers, global sourcing, aggressive sourcing and electronic tendering and contract
management. Gradually, however, purchasing managers need to pay more attention to
managing the downside risk of their business related to single sourcing, early supplier
involvement, outsourcing and partnership agreements. Until this stage however, many
purchasing managers will experience that their effort will still not be integrated with other
business activities. This will happen when purchasing managers are going to focus on
challenging supplier to provide superior value to the company i.e. to improve the value
proposition of the company. At this stage, the company’s product/market strategies are
taken as a point for departure in negotations with suppliers. Future product plans and
investment plans are shared and suppliers are encouraged to present how to are going to
support the realisation of these plans. Supply chain integration and early supplier
involvement in new product development will be the result of those efforts. As a
consequence traditional boundaries between purchasing and other business disciplines will
blur; the relationship with the supplier will develop into a strategic one and may over time
grow into one of a strategic alliance.
Figure 2 provides a list of topics that may be dealt with when dealing with cost, risk and
value in purchasing.
figure 2: cost-, risk- and value drivers of purchasing
Cost drivers in
purchasing
Risk drivers in purchasing
Value drivers in purchasing
• Packaging cost
• Labor productivity
• Logistics and transport
policy : way of shipping
• Design layout
• Weight
• Labor cost
• Duties
• Taxes
• Raw material cost
• Company structure:
overhead
• Energy
• Ordering process
• Scarcity (balance
supply and demand)
• Currency
• Storage requirements
• Scale of production lot,
size of production lot vs
size of equipment
• Leadtime
• Number of suppliers
• Volume
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Unskilled buyers
Custom products
Single sourcing
Social economic factors
Exposure
Supplier financial status
Unclear specification
Lack of capacity
Currency
Political risk
Logistics and transportation
policy
Packaging
Quality requirements
Corruption ie bribe
Monopolistic markets
•
•
•
•
•
•
•
Early supplier involvement
Quality improvement
Supplier management
Savings & On time Delivery
Contracting
Ordering
Negotiation
People skills and expertise
Management commitment
Communication
Improved profitability
Risk management
Strategy
Branding, image, reputation
Exclusive pricing
Number of similar me too
products vs exclusive product
Unique packaging
Utility, convenience, ease of
use, functionality
Performance per unit of
measure
Customer loyalty
Consumer preference
100% availability
Product innovation
pag.: 5 van 11
code: LEV-TCO-art-017-bl
Integrating purchasing into company policy
In designing their overall business strategy top management will have to make explicit
decisions about the company’s positioning vis-a-vis its three major stakeholders. Some
authors have added a fourth group of stakeholders, namely ‘employees’ or ‘unions’. As
more and more companies see knowledge and human capital as key success factors for
their organization, the Strategic Triangle may develop into a ‘Strategic Quadrant’ in the
future. The following stakeholders constitute what we would call the ‘strategic triangle’ (see
Figure 3).
Primary customer groups or target groups
This touches upon the issue of market positioning and segmentation. Products and
services will have to be tailored increasingly to the needs of more differentiated customer
target groups, which requires specific product/market strategies. This subject is not
elaborated here but can be studied in the specialized marketing literature, for example
Kotler (1997).
Major competitors
Companies must not only be able to respond to customer needs; they also need to respond
in such a way that they achieve a so-called ‘distinctive, sustainable competitive advantage’.
This may explain why customers are turning to the company, instead of its competitors. A
competitive advantage may be derived from a superior cost position (South East Asian car
manufacturers), a superior brand image (many top consumer brands), superior product
quality (Rolls Royce), superior logistics performance and customer service (DHL, UPS,
Federal Express). To guarantee that customers will turn to the company, they must be able
to clearly differentiate the company’s products and services from the offerings of their direct
competitors. In order to be able to do so continuous benchmarking of the company’s overall
performance is required against that of direct competitors and those companies who are
considered to be best-in-class in a specific activity.
Major suppliers
Developments within the supplier markets necessitate continuous review of the company’s
core activities. Management will have to ask itself continually to what extent core and noncore activities (both production activities and support services) are carried out
competitively. If the conclusion is that current (production) activities cannot be carried out
competitively in the long run, it will be necessary to investigate subcontracting options
and/or possible partnerships with suppliers (in the shape of so-called ‘focused sources’). As
a result supply chain strategies and specific supplier strategies need to be developed.
One example is a European automobile manufacturer who transfers the design and
production of compressor valves for the automatic gearboxes of a new generation of cars
to a specialized supplier. With financial support from the subcontractor, this supplier has
built a factory to enable just-in-time deliveries based on call-off orders. Both parties are
completely dependent on each other for the supply of this type of components; the
relationship has developed from an adversarial, arm’s length relationship into a long-term
partnership relationship.
The conclusion from the foregoing is that the ultimate competitive position of a company is
thus a result of (a) the company’s positioning relative to its major customers, (b) its
sustainable, distinctive advantage compared with direct and indirect competitors, (c) its
positioning versus its major suppliers and its supply chain strategies.
pag.: 6 van 11
code: LEV-TCO-art-017-bl
Although many companies have an explicit customer orientation and competitive strategy
has become a major theme, there are only very few companies that systematically
benchmark the performance of their key processes against those of specialist suppliers.
This may explain the growing interest currently seen for supply chain management and
supplier strategy.
In shaping the relationship with suppliers two elements play a major role. The first is ‘costs’.
Large companies are looking increasingly for suppliers who can produce at minimum total
cost of ownership. In trying to find the most competitive sources of supply most
manufacturers have adopted a global sourcing approach at the expense of their
traditionally ‘nationally’ oriented sourcing strategies. The second element is superior
customer value and service. At the same time manufacturers are looking for suppliers who
can support their value proposition and logistics and just-in-time programmes. Some
authors (for example Fisher (1997)) have demonstrated that in structuring their supply
chain and supplier strategies, manufacturers need to differentiate between functional
products (commodities) and innovative products (‘specialities’). Generic, basic products
have a rather predictable demand and have a rather long lifecyle, whereas demand for
innovative, specialty products barely can be predicted due to their short lifecycle. Managing
supply chains for the latter requires a highly structured, local supplier network. Due to the
fact that customer demand can be predicted much better for generic products, supply
chains need to be less responsive. Hence, global sourcing for this type of product is an
option.
In many cases manufacturers develop and sell a mix of both functional and innovative
products. Therefore, they need to manage different supply chains at the same time. This
obviously explains why most companies have adopted both a local and a global approach
in their dealings and relationships with suppliers.
figure 3: the strategic triangle (Van Weele, 2002, p. 142)
Customers
Marketing
Company
Competitive
benchmarking
Competitors
Make vs Buy
Strategic sourcing
Suppliers
pag.: 7 van 11
code: LEV-TCO-art-017-bl
Towards leveraged purchasing strategies
When adopting a value orientation purchasing strategies definitely need to be linked to
overall business strategies. In doing so the author is following the ideas of Monczka and
Trent ((1991)(1992)), who have published extensively on this subject. Based at Michigan
State University Monczka launched a Global Procurement and Supply Chain Benchmarking
Initiative in the early nineties. The idea behind this initiative was that companies
participating in it would be able to compare their purchasing and supply processes, to
exchange experiences and to learn from ‘best-practices’. A number of large manufacturing
companies (such as Shell, Philips, Motorola and Coca-Cola) subscribed to this initiative
and worked with the researchers from Michigan State University to leverage their
purchasing and supply strategies. In doing so they went through several stages or cycles of
the programme (see Figure 4).
figure 4: towards leveraged purchasing and supply strategies - eight
strategic management processes (source: Monczka, 2002, p. 59)
Develop
Commodity/
Article Group
Strategies
Insourcing/
Outsourcing
II
III
Establish and
Leverage a worldclass Supply Base
Develop and
Manage Supplier
Relationships
IV
I
Manage Costs
strategically across
the Supply Chain
INTEGRATED,
ALIGNED AND
GLOBAL
Integrate Suppliers
into the new Product/
Process Dev. Process
VIII
V
VI
Supplier
Development
and Quality Mgt
VII
Integrate Suppliers
into the Order
Fulfillment Process
critical integrated
supply chain processes
Insourcing/outsourcing
During the first step companies need to decide what activities to handle inside or outside
the company. The decisive criterion is the question whether the activity concerned
contributes to achieving a competitive advantage. If this is not the case the company
should decide to bring that specific activity outside the company. The reverse, however,
may also be true. Insourcing means that the company may decide to take over strategic
activities that previously were performed by suppliers.
pag.: 8 van 11
code: LEV-TCO-art-017-bl
Develop commodity strategies
At this stage the company needs to develop a clear and detailed picture of its purchasing
spend. On what commodities do we spend the most money? And on what suppliers? How
many suppliers do we have per commodity and are we happy about the outcome of this
analysis? Commodity is used here in its broadest sense since it may relate to raw
materials, technical and high-tech components and standard, off the shelf products. A
commodity strategy should then be developed. Such a strategy provides guidelines on
whether or not to pursue product standardization and reduce the product variety, whether
or not to reduce the number of suppliers, what type of relationship should be developed,
etc. Of course the strategy for each commodity should be in line with and support the
company’s overall business strategy. It should be absolutely clear what benefits should be
expected when the commodity strategy is implemented. Therefore a commodity plan maps
out who will be responsible for each activity, a detailed timeframe and how progress will be
monitored.
Establish and leverage world class supply base management
Supply base management is part of every commodity strategy. Supply base management
covers how many suppliers will be dealt with for a certain commodity, what conditions and
qualifications the best-in-class suppliers should meet and how the best suppliers will be
selected. At this stage suppliers are investigated and benchmarked and, often, submitted to
a detailed audit.
Develop and manage supplier relationships
In order to do so suppliers need to be grouped into distinctive categories. Philips
Electronics may serve as an example here, as a company which differentiates between:
• Commercial suppliers: these suppliers just need to deliver the goods and services
according to the agreed terms.
• Preferred suppliers: mutual objectives and improvement programmes are developed
and agreed by both parties. The preferred status is reciprocal.
• Supplier partners: these suppliers work intensely with Philips to develop new
technologies, products and business opportunities. Usually, it concerns a limited number
of suppliers, who are considered to be crucial in supporting Philips’ overall business
strategies and core-technologies.
As will be seen later, developing partnerships is a very difficult issue and takes a long time
between parties to develop. In general a major step forward is reached when suppliers no
longer suspect that their customer is simply trying to find out and cut back their profit
margins.
Integration of suppliers in product development. Having carefully selected the best-in-class
suppliers, companies next should focus their efforts on building constructive relationships
with suppliers in the area of new product development. This implies that technical experts
from the suppliers will become part of the research and development teams and other
project teams and vice versa. Often both parties are confronted with difficulties in
collaborating effectively together, which relate to differences in working methods,
management style and culture.
pag.: 9 van 11
code: LEV-TCO-art-017-bl
Supplier integration into the order fulfilment process. Motorola is one of the few companies
which integrates suppliers into their Customer Focus Teams. The idea behind this is that
manufacturer and supplier in the end have one mutual objective which is to satisfy the final
consumer as best as they can. Joint teams work on issues like how to increase
responsiveness and customer service, how to improve asset utilization, how to reduce
pipeline inventories in the supply chain and how to improve communications and
transaction flexibility by applying modern ICT (information and communication technology).
Supplier development and quality management. At this stage suppliers are challenged
actively to provide new ideas for improvement. These ideas may relate to product design,
manufacturing technology and other business processes. Ideas and suggestions from
suppliers are carefully considered and action is taken to implement them. Suggestions from
suppliers are no longer considered as criticism but as sources for innovation and
improvement. Motorola refers to this process as the ‘Open Kimono’ approach. This is the
reason why it often asks its suppliers to value Motorola as a customer to work for. As
experience has shown, adopting such a practice is not without risk. If suppliers feel that
ideas are not taken seriously or good ideas simply are not being implemented, they will no
longer support this type of programme (see Van Weele and Rozemeijer (2002).
Strategic cost management. This concept includes the identification of all costs, cost
drivers and strategies aimed at reducing or eliminating costs throughout the supply chain.
Developing cost models and value stream mapping are important concepts and vehicles at
this stage. The idea behind this is that both parties (or clusters of suppliers) work jointly
with their customer to realize cost savings. Obviously, this will only work when each party
may share some benefits of this exercise. Otherwise, this will lead to a clear lack of
motivation for such initiatives in the future.
Through this eight-step process some leading-edge manufacturers have actually been able
to integrate suppliers into their business processes. Based upon experience the author in
general agrees with the approach as suggested by Monczka. However, in most cases the
author feels that supplier development and quality management need to get a higher
priority in the procedure. Preferably, it should be placed after the third part of the suggested
programme. In order to be able to implement these strategic processes successfully,
purchasing managers need to give attention to six enabling processes (see Figure 5).
figure 5: towards leveraged purchasing and supply strategies - six
enabling processes (source: Monczka, 2002, p. 62)
II
Develop
organization and
teaming strategies
Establish globally I
integrated and aligned
purchasing and supply
chain strategies + plans
Establish Human VI
Resource development and training
Deploy
globalization
INTEGRATED,
ALIGNED AND
GLOBAL
Develop and V
implement enabling
IS/IT systems
III
Develop pur- IV
chasing and supply
chain measurements
pag.: 10 van 11
code: LEV-TCO-art-017-bl
When developing supplier strategies Kraljic’s purchasing product portfolio may be very
helpful (Kraljic (1983)) (Gelderman and Van Weele (1993). It recognizes that different
products require different supplier strategies. It starts with a thorough analysis of both
product groups and supplier base based on two criteria: (1) purchasing’s impact on
company profitability and (2) the degree of supply risk associated with the purchase of a
specific item. An analysis of these aspects provides the first clue for the purchasing
strategy which has to be developed. The second step is to further analyse the four product
categories: (1) strategic products, (2) leverage products, (3) bottleneck products, and (4)
normal products. For each of these products different supplier strategies can be developed.
The value of this approach is that it explains that partnership and competitive bidding
should be seen as complementary strategies rather than mutually exclusive. It also shows
that the four basic supplier strategies serve different objectives.
Summary
One of the reasons why purchasing management is being assigned a more prominent
position in corporate policy is closely connected with the strategic reorientation that many
companies are involved in. After the diversification strategy of the seventies, today’s motto
seems to be: ‘concentrate on your core business’. The advantages are self-evident: many
activities can be carried out at lower cost by specialized suppliers, the company gains
flexibility, and management’s attention can focus on the ‘core business’. These
considerations are the reason why purchasing activity is receiving more attention from top
management circles now than it did a few years ago. As companies have sourced out more
of their activities, they have become more dependent on the competitiveness of their supply
base. Purchasing’s strategic role therefore is to develop a worldwide competitive supply
base and to integrate these suppliers effectively in the company’s business processes.
The purchasing strategy that is to be developed cannot be separated from the corporate
policy or from competitive strategy. Extremes of the strategic continuum are cost leadership
and differentiation. These strategies cannot be pursued simultaneously, as their
organizational requirements are completely different. They pose different requirements on
the purchasing function.
Whatever business strategy is developed, they need to position the company against its
three major groups of stakeholders, i.e. its customers, competitors and suppliers. Over the
past decade there has been a large interest from managers and academics for marketing
management and competitive strategy. Depending on the business strategy purchasing
managers need to focus in their purchasing strategies on three issue i.e. COST, RISK and
VALUE. Traditionally purchasing managers have focused on the first issue, the second
issue gains more and more interest. Value based sourcing is in most companies in the
initial phase. However, increasing customer value through integrated supplier relationships
seems a very promising area for the near future.
The interest for purchasing and supply (chain) management as a prime concern for top
management is fairly recent. However, it is growing fast.
pag.: 11 van 11
code: LEV-TCO-art-017-bl
In the discussion on how to develop leverage in purchasing and supply management, we
support the ideas as developed by Monczka. He suggested a programme where
companies would preferably go through eight different steps. Key to his ideas are that
purchasing and supply management is recognized as a major area of business and is
managed that way. Elements of his approach are to develop corporate commodity
strategies and article group strategies, to develop a supplier base which is ‘world class’ and
to actively manage this supplier base. Supplier integration in new product development
processes and the operational processes of the company are part of this activity.
Literature
Boutellier, R. and Wagner. S. (2005), ‘Chancen Nutzen, Risiken Managen’, SVME, Band 4, Zurich,
pp. 197-215.
Fisher, M.L. (1997), What is the right supply chain for your product?, Harvard Business Review,
March-April, pp. 105-116.
Gelderman, K. and Van Weele, A.J., Handling measurement issues and strategic directions in
Kraljic’s purchasing portfolio model, Journal of Purchasing and Supply Management, 9, 5-6, pp.
209-216.
Kotler, Ph. (2004), Marketing Management: Analysis, Planning, Implementation and Control,
Prentice Hall,11th edition, Upper Saddle River.
Kraljic, P. (1983), Purchasing must become supply management, Harvard Business Review, SeptOct., pp. 109-117.
Monczka, R.M. and Trent, R.J. (1991), Global sourcing: a development approach, International
Journal of Purchasing and Materials Management, 27 (2), pp. 2-8.
Monczka, R.M. and Trent, R.J. (1992), Worldwide sourcing: assessment and execution,
International Journal of Purchasing and Materials Management, 28 (4), pp. 9-19.
Monczka, R.M. (2002) as quoted by NEVI (2002), Nederlandse bedrijven op weg naar Purchasing
Excellence, Resultaten Project 1, Zoetermeer.
Rozemeijer, F.A. and Van Weele, A.J. (2002), Mirror, mirror on the wall, let suppliers guide you
towards improvement, DILF Orientering, June, pp. 12-18.
Van Weele, A.J. (2002), Purchasing and Supply Chain Management: Analysis, Strategy, Planning
and Practice, Thomson Learning, 3rd edition, London.