- Learning Objectives
- Introduction and History of Purchasing
- Why Is Purchasing Important?
- How Can the Appropriate Relationships with Suppliers Create Value?
- Purchasing and Supply Management and Return on Investment (ROI)
- Purchasing and Information Technology (IT)
- The Purchasing Process
- Strategic and Tactical Roles of Purchasing
- Types of Purchases
- Conclusion and Chapter Wrap-Up
- Key Terms
The Purchasing Process
Purchasing is a highly complex organizational process with objectives that reach far beyond the traditional belief that purchasing’s primary role is to obtain goods and services in response to internal needs. The overall goals of purchasing can be categorized in five major sections: supply continuity, manage the sourcing process efficiently and effectively, develop supply base management, develop aligned goals with internal stakeholders, and develop integrated purchasing strategies that support organizational goals and objectives.28
Development of a strategic sourcing plan is driven by the recognition that tactical sourcing will not succeed in yielding a supply base that results in the benefits of collaborative relationships and strategic alliances. The basic steps in the strategic sourcing process follows:
- Discover potential suppliers.
- Evaluate potential suppliers.
- Select suppliers.
- Develop suppliers.
- Manager supplier relationships.
Discovering Potential Suppliers
The ability to discover qualified and competent suppliers has increased exponentially with the introduction of the Internet. However, purchasers should not ignore other sources of information that are available to ensure that the supplier pool consists of the most appropriate suppliers whether domestic, nearshore, or offshore. Following is a list of resources to use in establishing a robust list of potential suppliers:
- Supplier websites
- Supplier information files
- Supplier catalogs
- Trade registers and directories
- Trade journals
- Phone directories
- Mail advertisements
- Sales personnel
- Trade shows
- Company personnel
- Other supply management departments
- Professional organizations
Other strategic issues to consider in determining the list of potential suppliers include
- Company policy on single versus multiple sourcing
- Company policy on buyer’s share of supplier’s capacity
- Company policy on buying from minority- and women-owned business enterprises
- Company policy on environmental, health, and safety (EHS)-qualified or certified suppliers
Evaluating Potential Suppliers
After developing a comprehensive list of potential suppliers, the supply manager’s next step is to evaluate each supplier individually. The type of evaluation varies with the nature, criticality, complexity, and dollar value of the purchase to be made. In 1983, Peter Kraljic developed a matrix that helped to describe the type of relationship with the supplier according to the criteria mentioned previously.29 Figure 1-5 is an adaptation of this matrix.
Figure 1-5 Kraljic’s 1983 portfolio matrix
This step in the strategic sourcing process is key because there is a direct relationship between supplier relationship management and supplier performance, risk management, and brand and image. Purchasing’s relationship with the supplier depends on the classification of the commodity in the matrix. The vertical axis is based on the importance of the purchase to the buying organization, usually talked about in terms of total spend. However, it can be high in importance because if you can’t find the item, you cannot produce your product or service. Complexity is determined by the number of available suppliers. Fewer available suppliers make the purchase more complex. This matrix is discussed more in depth in Chapters 2, 3, and 4 and is used extensively by sourcing professionals.
Many of the uncomplicated, low-dollar-value items require only a cursory evaluation process because of the low importance and low risk to the firm. The role of the purchaser in this case is to buy at the lowest price. The idea is to streamline the buying process for these items. Locating suppliers for items in this category may include review of the supplier website or a look at a business database such as Mergent OnLine to gather relevant information.
In comparison, for complex or high-dollar or other critical purchases, the evaluation process is more involved, time-consuming, and costly. A key first step is to establish some knock-out criteria: In other words, what are some important concerns that if the supplier doesn’t have these, they can’t do business with your organization? Some examples include the size of facility, location of facility, past experience with similar requests, and litigation or EHS issues. There are a number of other evaluation techniques used to assess the suppliers, as shown in Table 1-4.
Table 1-4 Evaluation Techniques for Potential Suppliers30
Surveys ask a number of questions of the supplier, including referrals, references, P&L history, defect rate, and quality management system.
Financial condition analysis
Financial analysis can often prevent the expense of further study. This analysis includes key financial metrics and ratios that assess the financial stability of the supplier. Credit ratings can also help determine whether the supplier can meet the demands.
Trained third-party organizations are often hired to evaluate and audit suppliers or even processes like handling of hazardous waste.
Face-to-face discussion can help clarify specifications and determine whether a supplier can meet the demands of a complex purchase.
Many suppliers look good on paper, but visiting a site can help determine whether there are inefficiencies. These visits usually include a crossfunctional team with both strategic and tactical participants from the buying firm. Weighted scorecards are often used during evaluation.
Quality capability analysis
The quality department and top management help to shape the quality capabilities of a firm. Understanding the supplier quality philosophy and past quality performance can help determine whether the supplier is in alignment with the buying company.
The supplier’s strategies must also be aligned with the strategies of the buying organization. A supplier scorecard is usually cross-functionally developed with weights assigned to the different areas. (The scorecard and evaluative criteria are also discussed further in Chapter 2.) The final score on the scorecard helps to narrow the supplier pool but also allows the evaluator to focus on those things that are critically important to the buying organization.
The four focus areas listed (early supplier involvement, ethical considerations, environmental considerations, and social considerations) need additional consideration with each of the suppliers. It often depends on where the commodity or service is classified on the matrix, what type of relationship you have with the supplier, and where the supplier is geographically located because legal and cultural laws influence all these criteria.
When the supplier pool is reduced to a manageable level and one or more potential suppliers has passed the initial evaluation process, the purchasing manager or sourcing team can invite potential suppliers to submit bids or proposals. Purchasers have to decide whether to use bidding or negotiation, or some combination of both. Reverse auctions are often utilized here (depending on the classification).
As mentioned earlier, the final selection of suppliers is often based on a supplier scorecard or weighted factor analysis. Developing a weighted scorecard consists of four primary activities:
- Develop the factors that serve as the selection criteria and the weight that each of those factors carries in decision making. What areas are critical to your organization for this type of commodity or service? For example, a paper company has to buy significant quantities of starch for its manufacturing process. Starch is truly a commodity and the primary consideration is price.
- Expand the subfactors or performance factors within the broader selection criteria and the weighting of those factors. An example might be financial performance and key ratios of inventory turnover, return on assets, or even profitability.
- Establish a scoring factor to evaluate potential suppliers. This is generally the scale used for evaluation: 1 through 5, for example. The raters have to be clear on what a 1 is compared with a 5.
- Score and evaluate each supplier. This is generally done individually by those who have a relationship with the supplier and for those who have access to the information. For example, on-time delivery may not be known by all members, but the person responsible rates the supplier. The scores are all compiled and totaled to get to the scorecard “number.”
Careful evaluation of the suppliers using the scorecard enables the appropriate selection of the supplier that clearly supports the needs of the buying organization. It is possible that the highest number is not the best supplier simply because the highest priority factor is what actually matters (for example, quality).
Supplier development is any activity undertaken by a buyer to improve a supplier’s performance or capabilities to meet the buyer’s short- and long-term supply needs. There is sometimes conflict between the buying firm and the supplying firm, especially if a supplying firm does not see the need for post-development. Also, it is critical for purchasers to have a defined set of performance metrics that are transparent to the supplier and established goals for development. Effective supplier development requires the commitment of financial capital and skilled personnel, timely and accurate information sharing, and process improvement. More detail on supplier development is provided in later chapters.
Key performance metrics are in place to help manage the suppliers. However, purchasers must assess the supplier’s capabilities to meet the firm’s long-term needs. The buyer must be willing to ask the supplier about general growth plans, design capabilities, and future production capacity. An important part of managing the supplier is building and maintaining the appropriate relationship. More detail on supplier management is provided in later chapters.