Purchasing and Supply Management

Purchasing and Supply Management
Introduction
Why is purchasing and supply management so important to a firm’s success? Burt (2010) perhaps puts it best: “Historically, supply management has been considered important because of its impact on costs” (p. 9). In other words, a firm seeking to be competitive and profitable must have a good purchasing and supply management process in place—otherwise it risks watching its bottom line whittle away due to costs that it did not try its hardest to reduce. This paper will discuss the importance and value of purchasing and supply management by 1) looking at how the function relates to selecting a qualified supplier, 2) selecting the best strategies for negotiating prices, 3) creating a project supply, service and material budget for detailed requirements, 4) discussing the benefits and costs of outsourcing, and 5) evaluating various organizations that are benchmarks in purchasing and supply management and identifying their best practices in the industry.
Importance of Purchasing and Supply Management
Suppliers needs purchasers and purchasers need suppliers—it is a symbiotic relationship that both should benefit from. However, because every company seeks to make a profit and increase its bottom line whenever it can, the relationship between supplier and purchaser can become strained and can even lead to impasses that prevent one or the other from being successful in business. This especially happens when a company is running low and cash, as was recently the case with Tesla, which asked suppliers for cash back in order to keep its own operations funded. This is something no supplier wants to hear, particularly when it is owed a great deal of money. In the business of purchasing and supply management, relationships are crucial and purchasing and supply management professionals must make every attempt to create a relationship in which both the purchaser and the supplier succeed.
The five most important goals for purchasing and supply management professional are: 1) to lower costs for the company by purchasing supplies at the lowest price possible from a reliable supplier; 2) to manage relations well so that the firm and its supplier can engage in meaningful and mutually beneficial business; 3) to improve quality for the firm; 4) to promote the pursuit of innovation; 5) to leverage new technology whenever possible; and 6) to reduce risk and to ensure the supplies will be there when needed (BDC, 2019). By pursuing these goals the purchasing and supply management professional can help the company keep operations going—though of course the company will also depend upon numerous other departments as well. So at the end of the day the supply manager will not make the company—but if he does not perform well he can certainly break the company.
How This Relates to Selecting a Qualified Supplier
Selecting a qualified supplier is the essence of the job in many ways. Though the purchasing and supply management professional will aim to get the best prices possible, it will sometimes be the case that the best price does not come from the most reputable supplier. Should the manager sacrifice quality and reliability for price? Never—doing so would present enormous risks: for instance, what if a much needed supply for the production line is needed and has not come in because the supplier failed to ship? The manager may have thought he was getting a great price and a deal by contracting with the cheapest supplier, but now he realizes his mistake: he is holding up the production line and the company is now losing money. In his attempt to save the company money by going with the cheapest supplier, he ended up costing the company a lot more money because production came to a halt. Had the manager selected a higher quality supplier, production would still be going strong. Thus, as in all things, quality typically costs more, and that is something a purchasing and supply manager must take into consideration when selecting a qualified supplier.
How to Select Strategies for Negotiating Prices
Negotiation typically involves how much an item will cost to ship and deliver: the supplier is going to want to cover his costs and make a profit, and the purchasing and supply manager is going to want to keep his costs down so as to allow his company to make a profit after production. The two will be able to negotiate price by focusing on other aspects of the deal—such as delivery time, schedule or frequency; payment terms; warranties and a merchandise return policy; and the ease of reordering or signing a long term contract based on performance (NC State University, 2003).
By asking competing suppliers for favorable terms, one can obtain a suitable offer to counter a supplier with and thus achieve a better outcome for one’s firm. This is what is known as obtaining the competitive advantage (Monczka & Handfield, 2016). The competitive advantage strategy for negotiating prices is one of the best when there are multiple suppliers that can supply the firm with what it needs. In a market where suppliers are few and thus have the advantage, competitive advantage is not going to be the best strategy to use. In any event, the aim should be to identify one’s bottom line and then to ask for more than one might expect to get. Starting high gives you room to walk down.
Creating a Project Supply, Service and Material Budget from Detailed Requirements
The first step in this process is to identify the needs—i.e., the requirements for supply, service and materials. This tells you what you must obtain in order for the project to go forward. Outside of those parameters the purchasing and supply manager will have room to work—that is, in terms of price, origination, and quality. The manager will want to check with various departments to determine exactly what is needed and when and he will also want to check on the quality desired. This can typically be easily obtained by looking at past purchasing records and double-checking with the relevant departments to see if the past products ordered were of a satisfactory quality. That will indicate the direction to go in.
The second step is to identify the range of options for purchasing the required items. In any market there will typically be more than one way to obtain the necessary materials. Prices and quality should be compared, but so too should the reputation of suppliers. Analyzing these factors will comprise the second step of the budget creation process as it shows what the pool is.
The third step will be to make the selections. The selections will be based on cost, time of delivery, quality of product, and reputation of supplier. The budget will take shape as the manger selects the items and sees how much room is left in the budget once the ideal list of supplies, services and materials has been created. If everything can be procured under budget, the job is done. If the list puts one over budget, the manager must go back and see where he can sacrifice cost, time of delivery, quality or reputation of supplier to get under budget.
Benefits and Costs of Outsourcing
One way to get under budget is to consider outsourcing. The benefit of outsourcing is that the third party will likely have more knowledge, more contacts and more ways to achieve the goals as it will be that firm’s primary function. That way the company seeking suppliers can focus instead on production, marketing, sales and other in-house operations. Costs can also be lower in the cases where supply management is outsourced, assuming the firm to whom it is outsourced does an exceptional job and procures quality suppliers and good rates. Outsourcing can also help the company to deal with production and demand issues and give the company more flexibility to consider its next steps with respect to production: the company develops its plans and then passes these on to the third party to execute via the supply chain.
The costs of outsourcing, however, can be risky. For one thing, there are unknowns: control of the supply chain is taken out of the hands of the company and put into the hands of another. The third party may charge fees for meeting certain necessary demands. They may increase shipping costs. They may end up hurting rather than helping the bottom line. The third party may also choose unrealistic time frames for delivery—i.e., promise more than it can actually perform. These are the risks of outsourcing supply management.
Growth Pattern of Outsourcing
While offshoring and outsourcing have become more popular in recent years, this does not necessarily mean that they have improved quality or reduced costs for companies that rely on outsourcing to meet goals. The reality is that outsourcing is typically done to cut costs: companies will offshore jobs because they can hire labor for cheaper overseas—and the downside to this is that quality often suffers. Services that come cheap are often cheap for a reason: the quality is not going to be as high as one might want or hope. Therefore, the growth pattern of outsourcing can be a deceptive trend. What it really means is that more and more companies are likely willing to sacrifice quality in order to reduce costs.
Evaluation of Various Organizations that are Benchmarks in Purchasing and Supply Management
Audi and Dell are two companies that have shown market leadership in purchasing and supply management. Each focuses on the relational strategy in their own ways because each is trying to cultivate a special relationship with their own consumers to whom they wish to sell their own products. When a firm desires to create brand loyalty with consumers it will likely seek to have a strong relationship with suppliers on the back end as well.
Audi is one of the best organizations in the auto manufacturing business when it comes to purchasing and supply management. It utilizes the just-in-time strategy, which is the opposite of the transactional purchasing strategy. Audi prefers the relational purchasing strategy as this allows its consumers to customize orders and gives Audi the ability to stay nimble and flexible. It also means that Audi must have a strong relationship with suppliers in order to manage the just-in-time supply chain network. This is why Audi’s manufacturing plant is right next door to its supplier: that is how closely the two work together in Germany. Holmlund and Strandvik (1999) observe that the more sequences a firm like Audi initiates with its supplier (for example, the more interactions it has, the more contracts it signs, the more product campaigns it develops, and the more projects it starts), the greater financial sense it makes to have a close relationship with the supplier, as this is what will basically become a symbiotic relationship and partnership.
Dell, too, focuses on building strong relationships with its suppliers so that it can meet the needs of its consumers more effectively. Dell launched a strategy of allowing consumers to custom order their computers, and this meant that Dell would need to work closely with its suppliers in order to deliver quality custom-made products in a fast time frame to customers. The idea behind this strategy and why it worked for both Dell and their suppliers was that it would allow Dell to minimize inventory (and thus reduce warehousing costs among other expenses) and still be appealing to suppliers because the company would be agreeing to long-term volume forecasts with suppliers. This is also known as the pull-to-order supply management method (MacNeil/Lehrer Productions, 1999).
Diversification of supply sources is another strategy that some companies use. It means that if one source goes down or falls offline for whatever reason, another option is still available to meet demand. This is a suitable strategy for managing risk in the supply chain and most companies utilize it to some degree whenever possible.
Best Practices
At the end of the day, there is no substitute for strong risk management for a purchasing and supply management professional. This is why companies like Audi and Dell develop strong relationships with suppliers: it takes the risk out of dealing with a bunch of other suppliers and not knowing when or how that supplier will fail one day. Harland et al. (2003) first defined supply network risk as “a chance of danger, damage, loss, injury or any other undesired consequences” (p.52). They elaborated on this definition by arguing that academic definitions of risk lagged behind in terms of real world application and therefore they offered a definition that utilized different perspectives and that involved looking at risk types, types of loss, how risks is assessed and how it is managed. Types of loss included financial loss, performance loss, physical loss, psychological loss, social loss and time loss.
As Benton (2013) shows in Supply Chain Focused Manufacturing and Planning, the management of risk is one of the most important aspects of supply chain management. Benton (2013) divides risk into categories slightly differently from the way Harland et al. (2003) do it, but essentially the idea is the same: Benton (2013) shows that risk can be divided into categories based on assessment, mitigation, monitoring, and contingency planning. From there the tool for managing risk is basically just as Harland et al. (2003) described their own.
This shows that Harland et al. (2003) provide a lesson in managing supply network risk that corroborates what Benton (2013) provides in his book. Looking at loss, risk management, and so on all help to provide a better view of how the supply chain can be hampered and how a company should be prepared to address the issues when it does occur. Benton (2013) provides a great deal more material for consideration, such as the role that lean manufacturing can play in the supply chain by developing a business strategy of “doing more with less” (p. xvii). However, the supply chain focused manufacturing planning model that Benton (2013) gives is fundamentally in line with the risk management tool given by Harland et al., (2003). Benton (2013) examines the cost, quality, delivery, safety and morale as drivers of lean manufacturing. The issue that Harland et al. (2003) fail to focus on is morale.
What this indicates is that in order to properly assess supply network risk, some attention should be given to workplace morale, as it will likely impact performance and weigh on the supply network. If performance is affected by a low morale, the supply network will experience hiccups or setbacks and the total cost of not having addressed morale issues early on will explode to be quite damaging to the bottom line. For that reason, it is evident that in order to properly manage supply chain focused manufacturing planning, the firm must have an adequate risk management tool in place like that conceived by Harland et al. (2003) but just with the added dimension of examining worker morale and its impact on performance.
Conclusion
Purchasing and supply chain management is one of the most important factors in a firm’s success. If done well, it will help the firm to keep costs down and the bottom line going up. If done poorly, it opens the firm to innumerable risks—from lost time on the production line to consumer flight to financial ruin. Supply managers must be cognizant of the overall goal of the company and what the company aims to do and be with customers. Just as Audi and Dell sought to have a special relationship with customers that would allow them to custom order products, a company that seeks this type of relationship with consumers will want to have a similarly close relationship with suppliers. However, it is always going to be most important to manage risk, to negotiate wisely and even to consider if outsourcing supply management is not the best option for a company that is not seeking to have a special relationship with consumers but rather simply wants to get its own products out to market fast as possible.
References
BDC. (2019). 6 ways the purchasing department can improve your business. Retrieved from https://www.bdc.ca/en/articles-tools/operations/purchasing/pages/purchasing-department-objectives.aspx
Benton, W. C. (2013). Supply chain focused manufacturing planning and control. Nelson Education.
Burt, D. N. (2010). Supply Management, 8th Edition. Devry.
Harland, C., Brenchley, R., & Walker, H. (2003). Risk in supply networks. Journal of Purchasing and Supply management, 9(2), 51-62. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.471.2910&rep=rep1&type=pdf
Holmlund, M. & Strandvik, T. (1999) Perception configuration in business relationship, Management Decision, 37(9), 686-696
MacNeil/Lehrer Productions (Producer). (1999). Your computer, your way: Dell and thedirect sales model [Video file]. Retrieved from https://libraryresources.columbiasouthern.edu/login?auth=CAS&url=http://fod.infobase.com/PortalPlaylists.aspx?wID=273866&xtid=10070
Monczka, R. & Handfield, R. (2016). Purchasing and supply chain management. Boston, MA: Cengage.
NC State University. (2003). Negotiating for success. Retrieved from https://scm.ncsu.edu/scm-articles/article/negotiating-for-success