Robert Gordon University

The Purchasing Function is Not Strategically Important in Enabling Organisations to Gain Competitive Advantage

Dennis Bours - 1114091

BSM520 Strategic Purchasing (A) Carol Air March 25, 2013

Bours 2

Dennis Bours - 1114091 Carol Air BSM520 Strategic Purchasing March 25, 2013 The Purchasing Function is Not Strategically Important in Enabling Organisations to Gain Competitive Advantage Over the past 40 years the purchasing function has developed from a separate function aimed merely at the successful procurement of goods and services for the successful operation of an organization towards a more strategic role as one of the organizations boundary-spanning functions (Chen, Paulraj and Lado 505-09; Long 1-4; Paulraj, Chen and Flynn 107; Quayle 1-19). The purchasing function and its competence gives access to external markets and through its networks it can identify new materials, new suppliers, new markets and changes in market conditions, which can in turn be used as valuable competitive intelligence informing corporate strategic decisions (Chen, Paulraj and Lado 517-18; Rodrigues, Fernandes and Martins 1-6). External relationship management as well as relationships with other internal functions can make the purchasing function a spider in the web of strategic decision making (Chen, Paulraj and Lado 514-19; Dubois and Wynstra 4-10). But is the purchasing function directly adding value to the corporate mission and strategy, or only to other functional areas within the organization? Is the purchasing function involved in strategic decision making or is the function mainly involved in those decisions that affect purchasing? While informing other functional areas, is the purchasing function equally wellinformed, and if so, is that to better support the need of other functional areas or to actually inform strategic decisions to gain competitive advantage? How many senior purchasers are taking part in top executive strategy meetings or top management market entry analyses?

Bours 3 My goal in this essay is to provide evidence showing that the purchasing function has little to no strategic importance in enabling organizations to gain competitive advantage, with the exception of a limited number of big firms in which the purchasing function reached strategic maturity and is strategically aligned with and informs the corporate strategy. To further analyze the purchasing function and its role towards enabling competitive advantage on the organizational macro-level, I have organized my essay into three sections. In the first section I look at what we see as the purchasing strategy and the strategic element of the purchasing function. In the second section, the purchasing function and its role in corporate strategic decision making is being analyzed. I end my essay with a third section that offers concluding remarks towards the importance of strategic alignment and inclusion of the purchasing function in strategic decision making.

PURCHASING STRATEGY VS. STRATEGIC PURCHASING FUNCTION When focusing on the purchasing function and its definitions it becomes clear that these definitions do not yet embrace the strategy-element of the purchasing function. Lysons and Farrington (4) define the purchasing function as in a business context [the purchasing function] involves acquiring raw materials, components, goods and services for conversion, consumption or resale. Van Weele (3) defines it as [the purchasing function] managing the companys external resources in such a way that the supply of all goods, services, capabilities and knowledge which are necessary for running, maintaining and managing the companys primary and support activities is secured at the most favourable conditions. Discussing the strategic element of purchasing Van Weele focuses on Porters three basic business strategies (185) and mainly discusses how purchasing strategies should be linked to overall business strategies by means of analyzing the purchasing portfolio and developing supplier strategies in line with the overall business strategies (190-204), but he

Bours 4 does not mention whether or how the purchasing function should inform the corporate strategy development process. Lysons and Farrington do discuss the strategic stages of the development of a purchasing function (11 -12). Their focus is also mostly on the purchasing strategy and how it connects with the firms corporate strategy and to a lesser extend on whether and how the purchasing function is considered strategic as contributing to and participating in the firm's strategic planning processes (Carr and Pearson 1032-35). What is the difference between implementing a purchasing strategy (Thompson 6) and acting strategically as purchasing function? James Brian Quinn defines strategy as the pattern or plan that integrates an organizations major goals, policies, and action sequences into a cohesive whole (Ruiz de Lira, 14), while Carr and Smeltzer (200) define purchasing strategy as comprehending the specific actions the purchasing function may take to achieve its objectives. I mplementing a purchasing strategy can be translated into executing or putting into effect the actions needed for the purchasing function to achieve its objectives. It should be pointed out that the definition of purchasing strategy seems much more operational than the definition of strategy, which perhaps comes down to the character of the purchasing function. Acting strategically as purchasing function would mean to act in line with the organizations major goals, policies and action sequences on a macro level. At this point it is important to clearly state the difference between purchasing strategy and purchasing as strategic function . The purchasing strategy comprehends the specific actions the purchasing function may take to achieve its objectives, while purchasing as strategic function refers to the purchasing function being viewed as strategic, [being] linked to and integrated in the firm's strategic planning process (Carr and Smeltzer 201). Paulraj, Chen and Flynn (114-16) define three stages of the strategic purchasing function, exemplified in table 1 on the following page.

Bours 5

Table 1 Stages of strategic purchasing Stage 1: The nascent stage of the strategic purchasing function Purchasing personnel is cognizant of the firms strategic goals to a certain extent, but the purchasing departments are not included or trained in the corporate strategic planning process. Moreover, they are considered to have a passive role in the business organization. Accordingly, they do not necessarily have a long-term strategic focus. In essence, the purchasing function is not considered on par with the other strategic units of the firm such as marketing, finance and production. Though considered an important partner, they do not seem to have the support and power to pursue their strategic initiatives, and are riddled with cost-based priorities. Stage 2: The tactical stage of the strategic purchasing function The purchasing function is actively involved in the strategic planning process and plays a very important role in formulating and executing corporate strategy. Since the purchasing function is seen as a key contributor to many corporate initiatives, the purchasing professionals are trained in elements of competitive strategy and the upper echelons have high visibility among top management. Purchasing departments are highly evolved in the elements of strategic involvement, and visibility/status. The purchasing function, at this stage, cannot be considered inferior to other functions within the firm. On the other hand, due to the absence of long-term proactive actions, it cannot be considered as highly strategic either.

Bours 6

Stage 3: Most evolved and advanced strategic purchasing function

Firms in this group are the only ones that have a true long-term focus. Purchasing departments have evolved significantly in all dimensions of strategic purchasing. Purchasing assumes more of a proactive role in working with other functional departments in formulating the competitive strategies for the firm. Rather than being cost-based, the purchasing strategy is linked directly to company-wide long-term strategies and goals. Thus purchasing influences the competitive factors including quality, cost/price, timely and reliable delivery, and cycle time reduction.

Purchasing functions operating in stage three can be seen as having a high level of strategic importance and do enable organizations to gain competitive advantage. The question now is whether there are actually that many companies whose strategic purchasing function is operating in stage three.

STRATEGIC DECISION MAKING AND THE PURCHASING FUNCTION In 2004 John Ramsay of Sta ordshire University (Ramsay, really a strategic function? 1) wrote the following in an open letter to Supply Management Magazine:

Almost 30 years ago [Supply Management Magazine] began efforts to raise the status of the purchasing function within companies. The tactic selected back then was to stress the contribution that purchasing can make to a firm's strategic success. This tactic has been pursued to this day, and it is still accompanied by lamentations about the failure of the higher management in many companies to take the function seriously.

Bours 7

This is in line with his earlier findings (Ramsay, purchasings strategic irrelevance 257-62) concluding that the purchasing function is intrinsically operational in nature rather than strategic, adding to its inability to play a significant strategic role. Trent and Monczka (25-26) also conclude in their research that most corporations expect to progress towards more advanced purchasing functions, but most lack the ability or even the need to operate at the highest strategic level. Dubois, Gadde and Mattsson (409-16) similarly come to the conclusion that the purchasing function is rarely proactive towards strategy development and is more playing the role of an intermediate between suppliers and other functions in the company. A recent position paper of the Chartered Institute of Purchasing and Supply (CIPS 1-4) started with the sentence CIPS is expressing beliefs on linking purchasing and strategy in order to encourage the development of the purchasing and supply management contribution to corporate strategy, clearly indicatin g with their hopes and beliefs that this link between corporate strategy and the purchasing function is currently missing and needs to be developed. In those rare circumstances in which the linkage between purchasing function and corporate strategy development exists this is mainly the case in large global corporations and not in the dominant form of companies in our economies, being small and medium-sized enterprises (Ramsay agenda for change 567 -69). Gonzlez-Benitos research (787-92) finds that strategic purchasing objectives pursued can explain a statistically significant portion of business performance, but at the same time he is clear that this positively depends on firm size as control variable, ie. strategic purchasing objectives mainly have a positive relationship with business performance in big firms. He is equally straightforward when stating that business performance also depends on a vast number of other variables and the explanatory power of the model and relationship is regarded as quite low (787). Trent and Monczka (26)

Bours 8 also conclude that particularly small and medium-sized enterprises with limited geographical reach have no need to move beyond the tactical strategic level of the purchasing function.

CONCLUSIONS It becomes clear from the previous sections that the purchasing function in small and medium-sized enterprises has limited to no strategic importance towards enabling these firms to gain competitive advantage. And in Europe for example small and mediumsized enterprises are the backbone of the economy, with 20.7 million small and medium-sized firms accounting for more than 98 percent of all enterprises, 87 million jobs being 67 percent of total employment and 58 percent of European gross value added (Wymenga et. al. 9-11). Stage three of strategic importance of the purchasing function is mainly reached by purchasing departments of big firms and even then mostly lacks the ability or even the need to operate at the highest strategic level; the purchasing function mainly plays the role of intermediary between suppliers and other functions in the company. Batenburg and Versendaal conclude in their study titled Alignment matters - improving business functions using the procurement alignment framework that (1) performance of the purchasing function is positively related to five corporate business dimensions when aligned, but they also indicate that (10) the remarkably weak correlation between [corporate] strategy & policy maturity score and procurement performance deserves future research, ie. the performance of the purchasing function has a very weak correlation with corporate strategy and policy in explaining competitive advantage. Alignment has been defined as the degree of maturity reached within and between five business dimensions and their relation with procurement performance. Ruiz de Lira (38) comes to the same conclusion as Batenburg and Versendaal, and Gonzlez-Benito, stating that there is a positive relationship between purchasing

Bours 9 performance, strategic alignment and business performance, but the explanatory power of the relationship is very low. This guides me to the conclusion that the purchasing function is not strategically important in enabling small and medium-size enterprises being over 98 percent of all firms in Europe to gain competitive advantage. The results of Gonzlez-Benito (78792), Paulraj, Chen and Flynn (116), Batenburg and Versendaal (1) and Ruiz de Lira (38) show there is a positive relationship between the strategic purchasing function and it enabling big firms to gain competitive advantage, as long as the purchasing function is strategically aligned with the corporate strategy for it to have any influence towards the firms competitive factors. But even then business performance also depends on a vast number of other variables and the explanatory power of the relationship between the strategic purchasing function and it being an enabling factor in gaining competitive advantage should be regarded as quite low.

Bours 10 Works cited Batenburg, Ronald, and Johan Versendaal. Alignment matters Improving Business Functions Using the Procurement Alignment Framework Part of the Workshop Inkoop Onderzoek Nederland (WION) (2006). Web. 22 March 2013. < http://igitur-archive.library.uu.nl/math/2007-1219-214623/ batenburg_06_alignmentmatters.pdf>. Carr, Amelia S., and John N. Pearson. "The Impact of Purchasing and Supplier Involvement on Strategic Purchasing and it s Impact on Firms P erformance" International Journal of Operations & Production Management 22.9 (2002): 1032-53. Web. March 13 2013. Carr, Amelia S., and Larry R. Smeltzer, An Empirically Based Operational Definition of Strategic Purchasing European Journal of Purchasing & Supply Management 3.4 (1997): 199-207. Web. March 13 2013. Chen, Injazz J., Antony Paulraj, and Augustine A. Lado. Strategic Purchasing, Supply Management, and Firm Performance Journal of Operations Management 22 (2004): 505-23. Web. March 18 2013. CIPS. Linking Strategy and Purchasing CIPS Position Paper (2007). Web. March 21 2013. <http://www.cips.org/Documents/Resources/Knowledge%20Summary/Linking %20Strategy.pdf>. Dubois, Anna, Lars-Erik Gadde, and Lars-Gunnar Mattsson. Change and continuity in the supplier base: a case study of a manufacturing firm 1964-2002 Journal of Customer Behaviour 2.3 (2003): 409-32. Web. March 14 2013. Dubois, Anna, and Finn Wynstra. Organising the Pu rchasing Function as an Interface between Internal and External Networks Paper Presented at the 21 st

Bours 11 Industrial Marketing and Purchasing Conference (2005). Web. March 16 2013. <http://www.impgroup.org/paper_view.php?viewPaper=4683>. Gonzlez-Benito, Javier. "Supply Strategy and Business Performance: An Analysis Based on the Relative Importance Assigned to Generic Competitive Objectives" International Journal of Operations & Production Management 30.8 (2010): 774-97. Web. March 17 2013. Knudsen, Daniel. Aligning Corporate S trategy, Procurement Strategy and E-procurement Tools International Journal of Physical Distribution & Logistics Management 33.8 (2003): 720-34. Web. March 14 2013. Long, Brian G. Reinventing the Purchasing Function: The Transition from Traditional to Strategic Presentation at the 89 th Annual International Supply Management Conference (April 2004). Web. 14 March 2013. <http://www.ism.ws/files/ Pubs/Proceedings/AGLong.pdf>. Lysons, Kenneth, and Brian Farrington. Purchasing and Supply Chain Management. 7th ed. Harlow, Essex: Pearson Education Limited, 2006. Print. Paulraj, Antony, Injazz J. Chen, and James Flynn. Levels of Strategic Purchasing: Impact on Supply Integration and Performance Journal of Purchasing & Supply Management 12 (2006): 107-22. Web. March 19 2013. Quayle, Michael. Purchasing and Supply Chain Management: Strategies and Realities . London: IRM Press, 2006. Print. Quinn, James Brian. Strategies for Change: Logical Incrementalism . Irwim, Homewood: The McGraw-Hill Companies, 1980. Web. March 23 2013. Ramsay, John. Purchasings Strategic Irrelevance European Journal of Purchasing & Supply Management 7 (2001): 25763. Web. March 08 2013.

Bours 12 Ramsay, John. Is Procurement Really a Strategic Function? Open Letter to Supply Management Magazine (May 2004): 1-2. Web. March 21 2013. <http://www.supplymanagement.com/analysis/features/2004/is-procurementreally-a-strategic-function/>. Ramsay, John. Purchasing Theory and P ractice: An Agenda for Change European Business Review 20.6 (2008): 567-69. Web. March 09 2013. Rodrigues, Cristina S., Edite M.G.P. Fernandes, and F. Vitorino Martins. The Dimensions of Purchasing Competence: A Synthesis from Literature Universidade de Minho Repositorium (31 July 2006). Web. 15 March 2013. <http://repositorium.sdum. uminho.pt/bitstream/1822/5421/1/purchasing%20competence_Synthesis.pdf>. Ruiz de Lira, Jess M. The Strategic Role of the Purchasing Function, Strategic Alignment Master of Science Thesis INDEK 2011:93 KTH Industrial Engineering and Management, Industrial Management (June 2011). Web. 16 March 2013. <http://kth.diva-portal.org/smash/get/diva2:509639/FULLTEXT01>. Thompson, Matthew. "Effective Purchasing Strategy: The Untapped Source of Competitiveness" Supply Chain Management: An International Journal 1.3 (1996): 6-8. Web. March 21 2013. Trent, R. J., and Robert M. Monczka. Achieving Excellence in Global Sourcing Management Review 47.1 (2005): 24-32. Print. Van Weele, Arjan J. Purchasing and Supply Chain Management: Analysis, Strategy, Planning and Practice. 5th ed. Andover, Hampshire: Cengage Learning EMEA, 2009. Print. Wymenga, Paul. et. al. EU SMEs in 2012: at the Crossroads. Annual Report on Small and Medium-Sized Enterprises in the EU. Rotterdam: Ecorys Netherlands, 2012. Web. March 23 2013.