Strategic Procurement

The following academic paper highlights the up-to-date issues and questions of Strategic Procurement. This sample provides just some ideas on how this topic can be analyzed and discussed.

The traditional purchasing methods of procuring materials and services have evolved over the last 20 years and to-day is often referred to as “Supply Chain Management”. The simple definition of “supply chain management” is the “integration of all organisations involved in supporting the customer with a quality product utilising inventory in the most effective and efficient manner”.

This concept is vague because it embraces a number of procedures and policies within an organisational structure and senior executives in many corporations often fail to understand the important role of the supply chain function

This paper will attempt to answer the questions posed by J.R. Electronics, a Scottish electronics company established in the 1980’s who feel that that a new competitive advantage must be developed to maintain the company’s position as a market leader.

The management of the company have identified the four key strategic procurement activities of location and liaison with world class suppliers, global sourcing, E-commerce and a lean or agile approach to procurement as key initiatives that they believe will form the basis of their ongoing advantage.

In writing this paper I have assumed that J.R. Electronics are a medium sized company with limited experience in strategic procurement activities.

1. Location and liaison with “world class” suppliers.

Strategic Procurement Process

J.R. Electronics must attempt to understand what the definition of a “world-class” supplier is before they begin to re-engineer their current procurement processes.

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The common answer to this question by both buyers and suppliers ” is that to attain “world-class” status a supplier will offer outstanding performance in price, quality and delivery” (Tim Minahan, 1998). Terry A. Carlson, Vice President of Purchasing for the Maytag Corporation argues, “that to be considered as “world-class” a supplier must possess the following 3 characteristics:”

1. A formal (and demonstrable) company wide effort to continually improve products and processes.

2. The ability and willingness to align, products, processes and business strategies with customers for mutual success.

3. The proven ability to be an industry leader in developing new technologies and products.

Genuine “world-class” suppliers share a common vision of continual improvement and a commitment to continually improve both their products and their processes. Continuous improvement is a way of life from the shop floor worker to the managing director.

The senior management of J.R. Electronics should not underestimate the task of identifying “world-class” suppliers to compliment their supply base. The process of selection will require a number of meetings to determine if the potential supplier is genuine in its quest for “customer excellence” and is capable of meeting all of their clearly defined expectations.

J.R Electronics will need to consider the following points during the selection of a prospective “world-class” supplier.

1. Is the supplier committed to continuous improvement? Do they have a formal process to achieve year on year improvements?

2. Are they a technology leader within their market sector?

3. How adaptable are they and are they willing to invest in new equipment as they develop new technologies?

J.R. Electronics must also recognise the need to develop the relationship through mutual trust and respect. Working with a “world-class” supplier should be considered a long-term partnership as opposed to a short-term arrangement. They must clearly define their expectations and measure the performance to their targets and be prepared to offer assistance when required. More importantly J.R. Electronics must be prepared to reward good performance. This can be in the form of long-term contracts and the sharing of cost savings.

2. A move from international to global sourcing

To maintain a competitive advantage in the market place J.R. Electronics need to consider supply management strategies that will include long-term global supplier partnerships that extend beyond the traditional “buyer-seller” relationships into a multi-tiered world wide network. The term “international sourcing” has largely been replaced with the broader philosophy “global sourcing” which has been defined by (Monczka and Trent, 1991) as “the integration and coordination of procurement requirements across worldwide business units, looking at common items, processes, technologies and suppliers”. They also distinguish international and global sourcing by recognising that international is lack of coordination of requirements between worldwide business units.

The evolution to global supply management can be broken down into three distinct stages.

* Stage One: International Purchasing – J.R. Electronics will focus on increasing volumes, minimising prices and managing their inventory costs. These are key characteristics of an organisation first entering the global sourcing arena.

* Stage Two: Global Sourcing – At this stage J.R. Electronics will place more emphasis on supplier capability, supporting production strategies and servicing customer markets.

* Stage Three: Global Supply Management – J.R. Electronics will optimise their supply networks through effective logistics and capacity management. Risks are minimised at this point and suppliers can be considered strategic partners. Corporations at this stage are sourcing for technology leadership.

The main benefits to be gained from adopting a global sourcing strategy are as follows: –

1. By adopting a global sourcing policy buyers will be able to purchase parts cheaper in other parts of the world. This is as a result of cheaper labour rates, lower overheads, lower raw material costs, higher productivity and reduced transportation costs.

2. Sourcing on a global basis will increase the number of potential suppliers to select from. Increased competition will make it easier to form reliable long-term partnerships with suppliers of potentially low cost materials.

3. Improved lead times due to increased availability of parts.

4. Technology is often more advanced and it is quite possible to obtain the latest technology from a global source.

5. The quality of parts purchased globally is often higher than those bought on the domestic market.

The main problems that J.R. Electronics may encounter with global sourcing are: –

1. Cultural issues that can cause problems due to differences in business etiquette

and spoken language. This can lead to misunderstandings that potentially hinder and prolong the negotiation process.

2. Legal systems differ from country to country and this can lead to considerable

problems. Intellectual property theft is currently a major problem in The Far East particularly in countries such as China and Taiwan.

3. Global sourcing can lead to difficulties when dealing with foreign currencies. Exchange rate fluctuations often impact the actual price paid for parts,

4. Logistics and more importantly the transportation of parts due to the availability and reliability of freight forwarders although most major international freight companies including BAX Global, Danzas and Schenker have all established local offices and hubs on a worldwide basis.

Many major corporations have successfully implemented global sourcing strategies and these include: Motorola, IBM, Volkswagen and Dell.

3. E-Commerce approach to procurement.

Technological advancement in the field of information technology coupled with the growth of the “Internet” and particularly The “World Wide Web” has led to many companies shifting away from paper based, people intensive purchasing processes to electronic buying methods. It is assumed that J.R. Electronics have had little or no exposure to e-commerce and are not fully aware of the potential benefits to be gained by adopting this strategy.

The benefits of e-commerce do not come without a cost. There is the initial investment required to purchase the necessary hardware and software. The implementation process requires substantial resource to revise the internal business processes that will include system integration and employee training. J.R. Electronics may wish to hire an I.T. consultant who is fully conversant in the installation of a “web based” system to ensure that every aspect of the project is planned thoroughly in advance of the implementation. It is also critical that senior management of the company communicate these changes effectively as employees generally feel threatened with the introduction of new technology.

Advantages of E-commerce

* Cost reduction is achieved as efficiency improves within the purchasing function. Order processing times and costs are reduced considerably. J.R. Electronics may chose to implement an Electronic Data Interchange (EDI). This system if implemented can integrate the company to specific suppliers and automate the parts ordering process, order status reporting and invoicing through electronic transmission.

* Due to the transparency of e-commerce it is possible to consider a large number of different suppliers quickly taking into account both price and lead-time. New or alternative suppliers can be found quickly. E-commerce is available 7 days per week 24 hours a day.

* There a number of parts brokers who utilise the “world wide” web to sell various parts and services. Goodrich Aerospace based at Prestwick frequently utilise e-commerce to source suppliers and are members of the Inventory Locator Service (I.L.S.), a favoured parts search medium for aerospace companies.

* Competitive bidding or “E-auctions” on the Internet has become very popular over the last few years. Companies that adopt this approach to procurement effectively tender their requirement on the Internet and potential suppliers bid against each other to win the business.

* Communication with suppliers is improved. Utilising electronic mail (e-mail) would enable J.R. Electronics to send and receive information from the supply chain quicker, eliminating the need for time consuming letters.

Potential Disadvantages of E-commerce

* Costs and benefits can be hard to quantify and therefore confusion can be created within the supply chain.

* Purchasing professionals must be properly trained. This takes considerable effort, time and money. J.R. Electronics may have to recruit specialist procurement personnel who are already experienced in e-commerce.

* Employees and current suppliers may be resistant to change, as they are often comfortable using their more traditional methods of phoning, faxing and meetings.

* International e-commerce can be difficult due to currency differences, import and export restrictions and legal implications.

As J.R. Electronics begin to realise the full potential of e-commerce their supply chain will become more efficient and integrated with both their suppliers and their customers. The positive implications will soon outweigh the negatives.

Adopting a more “lean” or “agile” approach to procurement.

Lean and agile procurement are two different yet related aspects to supply management. The Collins English dictionary defines lean as “lacking fat; thin or meagre” whereas agile is described as “nimble or quick”.

Both lean and agile approaches to supply management require high levels of product quality. Lead times must be minimised from the point that a customer order is received until it is fulfilled. Lead-time reduction in a lean process must be achieved as by definition excessive lead-times is waste and a lean process demands the elimination of all waste. Agile supply chains seek to operate to customer demand as opposed to forecasting and promote the free flow of information with its partners.