Cost management across firm boundaries

For most companies the costs of purchased goods and services have come to account for the main part of total costs. The primary driving force underlying this development is the increasing reliance on outsourcing, making efficient purchasing activities of crucial importance for the financial performance of companies. Therefore, Monczka and Morgan (2000) argue that there must be an ‘absolute linkage of sourcing, purchasing, and the supply chain – to the financial plan’ and thus the financial outcome of the operations of the firm. The authors conclude that increasing attention to cost management is the most important of six strategic factors of crucial importance for the future of purchasing and supply management. They also refer to numerous examples where companies have been able to reduce procurement costs. In most cases these efforts have concerned the direct purchasing costs, such as price, transportation costs, etc. However, sometimes the indirect costs associated with purchasing (for example costs of warehousing, administration of paper work, supplier handling costs, etc.), represent greater potential for rationalisation. The problem is that these costs are more difficult to affect because most of them can be tackled only through joint efforts with suppliers. Consequently these costs are often neglected and Monczka and Morgan conclude (p. 55):