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Introduction and History of Purchasing

Purchasing is one of the basic processes common to all organizations. It is the process of acquiring goods, services, and equipment from another organization in a legal and ethical manner.1 Purchasing was initially a tactical contributor to the organization, focusing on transactional relationships and low price (Table 1-1). However, over time the role of the purchaser, and the purchasing department, has changed significantly and the function has become strategic to organizational competitiveness.

Table 1-1 History of Purchasing2

Period

Status

Late 1890s

Purchasing rarely used as a different department except in the railroad.

Early 1900s

Purchasing considered clerical work.

World War I and II

Purchasing function increased in importance due to the importance of obtaining raw materials, services, and supplies to keep the mines and factories running.

1950s and 1960s

Continued to gain stature, processes more refined, and more trained professionals. Still considered order placing clerical in a staff-support position.

Late 1960s–early 1970s

Integrated materials systems introduced, materials became part of strategic planning, and importance of department increased.

1970s

Oil embargo and shortages of basic raw materials turned the focus of the business world to purchasing.

1980s

Advent of just-in-time with an emphasis on inventory control and supplier quality; quantity, timing, and dependability made purchasing a cornerstone of competitive advantage.

Early 1990s

Value proposition of purchasing continued to increase; cost-savings became the buzzword.

Late 1990s

Purchasing evolved into strategic sourcing, contracts were more long term, and supplier relationship building and supplier relationship management started.

2000s

Purchasing shifted its myopic focus on cost to much broader terms. Some of the widely used developments: spend analysis, low-cost country sourcing, procurement technology evolved (ERP, e-sourcing), procurement outsourcing evolved (P2P), total cost of ownership, data mining and benchmarking, and lean purchasing.

Globalization has forced companies to improve their internal processes, such as supply management, to remain successful. The level of competition in the marketplace expanded to include both domestic and international markets. Purchasers no longer discuss “lowest price” but share information, collaborate, and talk to their suppliers about total costs, life-cycle costs, and cost reductions. This requires a focus on process improvements instead of short-term relationships and price reductions.

The primary goal of the purchasing organization is to purchase the right item or service, in the right quantity, at the right price, and at the right time. An abundance of competitors and seasoned customers demand higher quality, faster delivery, and products and services customized to their needs, at the lowest total cost. These demands are made at an even greater speed because of the influx of technology and social media into business-to-business applications. Information and data flow between supply chain members are increasing, making it challenging for organizations to continuously adapt to the ever-changing needs of the customer.

Getting products to customers at the right time, place, cost, and quality constitutes an entirely new type of challenge. Technology and an improved logistics network have opened up a world of opportunity to better enable competition through an expanded, globally oriented network of suppliers. The availability of low-cost labor and other alternatives in emerging countries has led to unprecedented shifts toward outsourcing and offshoring (discussed further in Chapter 5). China has become a major world competitor, introducing even more challenges for United States organizations in both the manufacturing and services sectors. The services sector now accounts for approximately 70 percent of the Gross Domestic Product (GDP), introducing more opportunity for effective supply management involvement in this sector3 (Table 1-2). In the manufacturing sector, the vast majority of materials are purchased from sources outside the firm. Because of this, the supply management function has grown in importance and in complexity.

Table 1-2 U.S. GDP and Private Services-Producing Industries4

Millions of Dollars

2008

2009

2010

2011

2012

U.S. Gross

$14,291,543.00

$13,973,681.00

$14,498,922.00

$15,074,667.00

$15,684,764.00

Domestic Product

Private

$ 9,715,905.00

$ 9,609,550.00

$9,968,918.00

$10,357,395.00

$10,778,324.00

Service-Producing Industries

68.0%

68.8%

68.8%

68.7%

68.7%

All these changes and challenges have helped propel supply management to the forefront of strategic decision making. The importance of appropriate management of suppliers that provide materials and services has become a key consideration for executives. There are many instances seen daily in which companies have received negative publicity due to the actions of suppliers, the location of suppliers, or the performance of suppliers. Competition is now between supply chains.5 The companies that configure the best supply chains, with a highly performing supply base, will be the market winners and gain competitive advantage.

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