Strategic Supply and the Management of Inter and Intra Organisational Relationships

As companies attempt to shed old habits and begin to view procurement as a strategic resource from which a competitive advantage can be gained, there is a great deal of corporate baggage that must be shed. More importantly, there is a new mindset that must be instilled both in procurement and across the firm. Strategic supply symbolizes the importance of enterprise wide thinking where functional units inside the firm and key suppliers from the firm’s supply chain all work in concert to bring value to the marketplace. This paper presents data from the US and the UK that helps us better understand and address issues that are key to managing across an independent supply chain partners. We also address some of the barriers to implementing such a supply strategy. These barriers exist inside the firm as well between the firm at its key suppliers. Whilst we acknowledge that progress is being made but the data suggest that the journey is far from over. Introduction and the Development of Purchasing This paper uses research conducted on two continents (Europe and the USA) to gain insight into the evolution and development of strategic procurement, and its effect on the management of inter and intra firm relationships. The focus on procurement is based on the fact that firms are slowly acknowledging the value added capabilities of a function that is typically responsible for procuring assets that equal about 65% of the average manufacturing company’s sales. To view procurement as a cost savings activity only is to sentence one’s company to competitive failure. Purchasing has long been thought of as the management of a firm’s inputs i.e. raw materials, services and sub-assemblies, into the organisation (Burt and Soukup 1985; Farmer 1985; Dobler and Burt 1990). These goods and services have to be purchased from approved sources of supply and would have to conform to required quality levels and delivery schedules. It was Purchasing’s job to make sure that this happens on time, to the required quality levels and at the cheapest price. This traditional purchasing model was based on the efficient management of the workflow of goods and services in support of the manufacturing activities of the firm. This view of purchasing, as a service department, performing predominantly a clerical role is rapidly changing (Farmer 1981; Kraljic 1983;; Caddick and Dale 1987; Reck and Long 1988; Ammer 1989; ; Lamming 1992; Burt and Doyle 1994; Dumond 1994; Nishiguchi 1994; Saunders 1994; Carr and Smeltzer 1999; Cousins 1999), Purchasing in today’s organisations, is often viewed as a dynamic, high profile job with a professional career path (Cousins 1992). Despite these gains and greater exposure among senior management, there is still a lack of strategic focus and many companies still fail to think, and act, beyond performance metrics that are based on price driven measures. The objective of this paper is to explore how, why and to what purchasing is evolving. Our findings will suggest that firms are moving away from managing the flow of goods and services into the organisation, to the management of the supply process. The distinction is that the supply process permeates the entire organisation and takes responsibility for managing those resources that are held within the firm and which are outsourced. In addition, the supply process has relevance for the decisions guiding the firm’s future competitive posture (see Cousins 2000). For example, if the firm decides that it is no longer an assembler, it is now a design house (which has become apparent across a range of industries such as aerospace, automotive and retail) then the supply structure will have to change to facilitate this strategic move. Beyond the discussion to determine the core competence of the firm, its focus would be more on finding, developing and leveraging external resources to help achieve the goals of the firm. Supply management is, therefore, concerned with the flow of goods and services through the organisation with the aim of making the firm more competitive. Ultimately, the goal is to contribute to end-use customer satisfaction. To achieve such objectives involves not only purchasing goods and services at competitive prices, but focusing on cost reduction techniques, improving cycle times and reducing time-to-market. In addition, procurement activities will lead in the development of its supply base to ensure that its suppliers are world class and that it can leverage their skills and capabilities bring value to the marketplace. As customers face pressures in their markets, they have demanded that their suppliers provide a set of value adding attributes and capabilities that enable them both to gain a competitive advantage. Forces of Change for Purchasing to become strategic The need to be increasingly competitive, flexible and efficient has been exacerbated by the global village phenomenon. Now the comparison point is ascertained by benchmarking with the best in the world. In addition, recent economic problems have led firms to look at their entire value chain. It was clear in the late 1980s that inefficiencies in production and the management of supply could not be passed onto the customer in the form of increased prices. In order for firms to truly compete on a global basis they must not think that they are protected from events that occur in other parts of the world. Companies need to compete on a global basis for resources, markets and talent. The ability to move production and sourcing around the globe is a key source of real competitive advantage. Virtual firms are not an illusion and have replaced the bureaucratic vertically integrated company. Companies do not compete manufacturer to manufacturer, the true competitive battle occurs supply chain to supply chain. A Company is as strong as its weakest supply chain partner. The realisation that with managing supply strategically firms can save huge amounts of money (typically a 1% cost saving by purchasing equates to a 10% increase in sales), has led firms to begin to invest in this area of management. The creation of strategic purchasing departments has given purchasing a ‘new lease of life’. They are being viewed as a strategic business process (Cousins 1999; Hines, Lamming et al. 2000). Nonetheless, there is a distinct difference between purchasing implementing strategies and purchasing being strategic. As Ellram and Carr (1994) succinctly put it: “...it is critical to under that there is a difference between purchasing strategy and purchasing performing as a strategic function. When purchasing is viewed as a strategic function, it is included as a key decision maker and participant in the firms strategic planning process...”. The Evolution From Purchasing to Supply Management. The evolution of purchasing to a strategic process is well noted in the literature. In addition, the way that we think about the management of supply has also become more strategic and more complex. Figure 1 shows a model (Harland, Lamming et al. 1999) that is helpful in illustrating how supply thinking has changed. Figure 1. Supply Structure