- 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
How Can the Appropriate Relationships with Suppliers Create Value?
Purchasing can use its relationship with suppliers in many ways to help improve organizational value. This function has the capability to develop the appropriate relationships with suppliers that then become a competitive advantage for the firm.
Building Relationships and Driving Innovation
As purchasing continues to evolve as an important contributor to organizational success, the traditional approach of driving a hard bargain for price reductions has changed into a more relational approach with suppliers. This means that purchasing develops strong relationships with suppliers to jointly pull costs out of the product or service. This may be in the form of material changes to the product, process changes at the supplier’s facility, raw material changes, or potentially process-oriented changes in transport.
It is this joint effort between the buying firm and supplying firm that maximizes the benefit. The expectations for suppliers continue to evolve as well. For example, suppliers are expected to, and generally are measured on their ability to, contribute innovative ideas, such as process improvement or cost reduction, which continually add value to the firm’s products and services. Buyers are constantly searching to attract, retain, and maintain the best suppliers from around the globe.
Improved Quality and Reputation
Organizations are focusing on core competencies and their own areas of specialization. Because of this, outsourcing is increasing on both materials and services to find suppliers with core competencies that complement the firm. The relationships among purchasing, suppliers, and quality is becoming even more important than it was previously. These important relationships cross multiple tiers of suppliers, and lapses in managing supplier quality can tarnish a firm’s reputation. The appropriate level of supplier quality can help to improve market share and increase sales.
Reducing Time to Market
Marketing research has shown that the first firm to introduce a successful new product will hold more of the market share after competition enters the picture. So, the first to market wins the majority of the market share.15 Purchasing plays a key role in reducing the time to market by cross-functionally participating on product and service development teams. In many cases, carefully selected suppliers, as previously mentioned, are part of this development team.
Purchasing acts as the liaison between suppliers and engineers, trying to minimize engineering changes after introduction, and purchasers can also help to improve product and process designs by potentially suggesting standardized components or alternative materials, for example. An organization’s ability to introduce new products can be constrained by a supplier’s ability to meet demand, so suppliers have to be ready, willing, and able to ramp up production of new products. The development and management of competent, responsive suppliers are critical to get products to market quickly and also to respond to increasing or fluctuating demand.
Lower Total Cost of Ownership and Life Cycle Costs
Total cost of ownership includes all the costs of acquiring, owning, or converting an item of material, piece of equipment, or service and post-ownership costs.18 This includes the disposal of hazardous and other manufacturing waste and the cost of lost sales as a result of a reputation for poor product quality caused by defective materials or purchased services that are incorporated in the end product or services. Purchasing can influence the costs in many areas, including product design through early involvement, acquisition, and risk costs through effective supplier selection decisions. Purchasing can also influence cycle time, conversion, supply chain costs, and even post-ownership costs.
Working with suppliers (or potential suppliers) and recognizing the total cost elements can also help in negotiations. There are often creative ways to reduce the items that are a large percentage of the total cost. Also, purchasing is taking a more strategic role in identifying opportunities to reduce the environmental footprint of a product over its life cycle. These opportunities help organizations meet the ever-increasing regulations and also help to build brand and reputation for the consumer.
The key is to communicate environmental goals to suppliers to ensure that they focus on energy performance and environmental performance of their products and services. Incorporating metrics into the supplier scorecard that evaluate environmental and energy performance can start the process. Purchasing can be involved in the reduction of total costs, life cycle costs, and therefore carbon in many ways.