• Competitive Strategy • Competitive Priorities • Purchasing Criteria • Supply Chain Strategy • Supply Chain Relationship Quality • The Integrated Buyer Model • The Strategic Sourcing Plan • Purchasing Strategy Trends

1. Purchasing and Supply Chain Management
by W.C. Benton
Chapter Two
Purchasing Decisions And
Business Strategy
McGraw-Hill/Irwin Copyright © 2010 The McGraw-Hill Companies. All Rights Reserved.

2. Learning Objectives
1) To learn the role of purchasing in the corporate strategy.
2) To learn the most important elements of the strategic planning
process for purchasing.
3) To learn about the components of purchasing strategy.
4) To learn how sourcing is integrated into corporate strategy.
5) To learn how purchasing strategy is linked to other functional
areas.
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3. Learning Objectives
6) To understand the impact of purchasing decisions on supply
chain management.
7) To learn how the sourcing audit can be used to formulate
purchasing objectives and strategy.
8) To learn about the supply chain relationship pegging analysis.
9) To learn how to develop a strategic purchasing plan.
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4. Introduction to Purchasing Strategy
• In most industrial firms, material constitutes 60–80
percent of the total revenue dollars.
• Purchased inputs offer a potential source for helping
a company develop leverage against its competitors.
• Purchasing can give the firm advantages over its
competitors.
• In essence, firms must design their purchasing
actions to emphasize the competitive strategy.
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5. Purchasing and Competitive Strategy
Linkage
• Purchasing professionals are expected to develop options
that can help business units remain competitive.
• Purchasing managers need to devise purchasing actions such
that they are consistent with each other and with the firm’s
competitive strategy.
• The competitive priorities are a key determinant of the
importance given to different criteria in purchasing material.
• The buyer performance measures or reward criteria are other
factors that influence the purchase criteria.
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6. Strategic Purchasing
• Purchasing decisions or actions that constitute purchasing
strategy are determined by the firm’s competitive priorities,
its resource capabilities, and the environment.
• In the formulation of purchasing strategy, the organization’s
competitive priorities, the organization’s strengths and
weaknesses, and the competitive environment must be
considered.
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7. Competitive Strategy
• A firm can compete in two broad alternate ways. It can either
seek competitive advantages on cost or choose to
differentiate itself from its competitors on some attributes of
the product or in the way it markets its product.
– Cost and differentiation—is important but too broad to be useful for
management faced with day-to-day decision making.
– The competitive strategy must be articulated in terms of competitive
priorities. Key environmental factors also must be considered.
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8. Competitive Priorities
• The competitive priorities operationalize the firm’s
competitive strategy.
• The two generic competitive advantages—delivery speed and
reliability—are operationalized in terms of cost, quality
performance, quality conformity, product flexibility, volume
flexibility, and customer service.
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9. Purchasing Criteria
• The criteria in buying material must reflect firms’ competitive
priorities.
• A firm competing on cost must give high priority to purchasing
costs. A firm competing on flexibility must give high priority to
lead time in buying material.
• With short lead times, the company can be more flexible; and
develop the ability to respond to changing situations quickly.
Lead times are also important in achieving superior customer
service.
• Suppliers with short lead times and who are reliable in meeting
their due dates minimize the problem of material shortages for
the manufacturer; as a result, the company’s production can be
more dependable in meeting the customers’ due dates.
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10. Purchasing Criteria
• The criterion on which the buyer’s performance is
evaluated can influence the effectiveness of
purchasing actions and effectiveness in making the
firm competitive.
• Cost variance seems to be the dominant criterion in
evaluating performance of purchasing decision
makers.
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11. Supply Chain Strategy
• As competitive forces increase, customers demand better
products, faster delivery, increased service, and decreased
costs.
• As firms become more competitive, a rippling effect is
experienced by the suppliers.
• As inventory levels are reduced throughout the supply chain,
each member becomes less insulated from demand variation.
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12. Supply Chain Strategy
• Companies participate in a variety of supplier relationships
and take on a variety of roles.
• Each company can be a supplier, customer, or end-user of
products.
• Supplier partnerships can be categorized using five factors:
(1) degree of risk/reward, (2) type of relationship,
(3) information, (4) planning, and (5) asset ownership.
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13. Supply Chain Strategy
The characteristics of buyer-seller relationships exist on a
continuum beginning with the traditional approach of open-
market, with a single short-term contract that presents minimal
risk to both parties. The opposite extreme is vertical integration,
where the parties are fully integrated as one unit.
• Partnerships are a hybrid of these extremes with each party
retaining an individual identity.
• A long-term relationship provides the ability to share assets and
integrate planning, technology, and processes.
• In theory, partnership members equally share risk and rewards.
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14. The Supply Chain Relationship Environment
• In dynamic business environments, maintaining a competitive
advantage is a major survival factor.
• The advent of supply chain management has led to a more
complicated operating environment.
• Not only does the individual firm have to maintain its competitive
edge, the entire supply chain must be competitive.
• Competitive and industrial ranking can be used as a tool for
achieving continuous improvement in the industrial supply chain.
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15. Supply Chain Relationship Pegging
• The supply chain relationship pegging system consists of four
phases.
• Phase I is an assessment of the current performance gaps in the
process. In this phase, the performance gaps should be
prioritized based on the firm’s strategic direction and the
relative cost of taking action versus not taking action.
• Phase II consists of questionnaire development, interviews, or
other data collection methods.
• Phase III is the classification and analysis phase.
• The final phase (Phase IV) is the interpretation stage.
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16. The Integrated Buying Model
• The decision maker faces multiple goals in making
the buying decision.
• The cost per unit, quality, and lead time are some of
the issues that a decision maker faces in making the
buying decision.
– Cost
– Quality Level
– Lead Time
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17. Materials Cost
• The cost per unit of material depends on the volume
or amount purchased, the quality level desired, and
the desired lead time.
• Material procured in larger volume enables the firm
to buy at discounts.
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18. • QUALITY LEVEL • LEAD TIME
1. Supplier lead time affects a firm’s
1. The quality level of material flexibility and service to its own
purchased must meet the customers. Firms that compete in
desired objective as defined volatile markets and face rapidly
by the firm’s competitive changing product or technology
priorities. require greater flexibility than
– The lower the acceptable firms competing in stable
defect rate, the higher the markets.
quality level of the material – With short lead times, the
purchased. company can be responsive to
external changes.
2. Six sigma suppliers focus on 2. The more uncertainty there is in a
(1) defects per million units as vendor’s lead times, the more
a standard metric, difficult it is to manage the
(2) provision of extensive production process.
employee training, and (3) the
reduction of non-value-added
activities.
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19. Constraints
• A buyer must not only satisfy cost, quality, and lead-time
goals, but also stay within quantity and budgetary constraints.
• The buyer must ensure that the right quantity of material is
purchased to satisfy the demand; otherwise, shortages may
occur, resulting in poor customer service.
• The budget limitations may constrain the amount of material
that can be purchased at any instant. The buyer may have to
give up quantity discounts, if the storage or budget resource
is not available.
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20. The Purchasing Strategic Plan
• There are a number of important challenges facing materials
managers and executives in the future.
• The opportunities, if pursued, will be unlimited; if not
pursued, devastating to the firm’s survival.
• In order to take full advantage of the challenges, the
purchasing function must be integrated into the firm’s overall
strategic plan.
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21. Developing a Strategic Sourcing Plan
• The development of a strategic purchasing plan requires the
following:
– 1) A complete understanding of corporate strategies and marketing
plans
– 2) An extensive evaluation/study of current suppliers, how
performance is measured, and the expectation of suppliers relative to
the industry.
– 3) Study of the degree of global purchasing opportunities.
– 4) Identification of total costs associated with current purchasing
department/function, budgets, staffing, and so forth.
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22. The Strategic Sourcing Plan
• Phase 1. Sourcing Audit
– The sourcing audit is used as a diagnostic process that
identifies opportunities for increased profitability.
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23. The Strategic Sourcing Plan
• Phase 2. Organizational Development
– This phase involves development of sourcing strategies;
setting of clearly outlined areas to cut costs and improve
profitability; establishment of a sourcing control system
based on frequent analysis and systematic approach;
formulation of incentive programs; and provisions for
training by taking advantage of local ISM seminars and in-
house sessions on how to establish purchasing monitoring
systems.
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24. The Strategic Sourcing Plan
• Phase 3. Implementation and Evaluation
– In this phase, a thorough indoctrination of the company with
sourcing strategy, implementation of new procedures,
monitoring of sourcing activities, feedback mechanism for
evaluation, and refinement of sourcing processes is
conducted.
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25. The Strategic Sourcing Plan
• Phase 4. In-House Training Sessions
Classes should be conducted in groups of no more than 15
individuals.
– Appropriate purchasing and other management
personnel from the company will attend these
sessions to learn state-of-the-art purchasing
techniques, negotiation strategies, and cost-
containment methods.
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26. Purchasing and Strategy Trends
• The NAPM and Center for Advanced Purchasing Studies
produced a study entitled “The Future of Purchasing and Supply:
A Five- and Ten-Year Forecast.”
• The 1998 study reported the results of a comprehensive survey
on the evolving responsibilities of the purchasing function during
the periods between 1998 and 2008.
1. Linking to organizational objectives.
2. Linking to supply chain objectives.
3. Competitive advantage and purchasing strategies.
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