purchasing management book

PURCHASINGMANAGEMENT

AUTHORSAMONGOTHERSANDEDITORS: LARSBEDEYSOFIAEKLUNDNOJANNAJAFIWILLIAMWAHRNKARLWESTERLUND

CHALMERSDEPARTMENTOFTECHNOLOGYMANAGEMENTANDECONOMICS

Purchasing Management I

Preface

Purchasinghasgone through a lotof changesduring the lastdecades. Some even refer to it as arevolutioninpurchasing.Hence,theareahasreceivedanenormousinterestbothfromacademiaandpractice.

AtChalmersUniversityofTechnologypurchasingispartofresearchandeducationinthewiderareaofSupply Chain Management. Amasters programmewas started in 2004 and since then about 200studentshavetakentheirdegrees.AmajorityofthesestudentshavestartedacareerinSupplyChainManagement and quite a few are specialising in Purchasing.Owing to a generation shift inmanycompanies,accompaniedwithmajorstrategicchangessuchassupplierbasereduction,developmentofsupplierrelationshipsandoutsourcing,theircareershavebeenaccelerated.

This book is based on an advanced course in Purchasing Management as part of the mastersprogrammeinSupplyChainManagement.ThewholecoursefocusesonexploringthestateoftheartinPurchasing. Basedon literature reviewsandcasestudies thestudentshaveworkedondifferentthemeswiththejointambitiontodescribeanddiscusswhatishappeninginpurchasingtoday.

Asmuchasthebookmaygiveanideaofcurrentdevelopmentsinpurchasing,itmightalsoprovideapresentation of a coming generation of purchasing professionals. This new generation has beenthoroughlytrainedinprojectworkinamulticulturalsetting.Theyhavealso,inadditiontopurchasing,studiedsubjectssuchas logistics, industrialmarketingandproductionthatduringrecentyearshavebecome integrated intoSupplyChainManagement.Thismakes themwellprepared to takeon thechallengeofcreatingthenecessarylinksbetweencompanies,andbetweencompanyfunctions,thatisoftenclaimedtobe lackingtoenhancesupplychainperformance.Thisbookaddressessomeofthekeyissuesinthisendeavour.

Prof.AnnaDubois,examiner

Gothenburg,December2008

Purchasing Management II

Abouttheauthors

JohanAbrahamsson tookhisBachelordegree inMechanicalEngineering atChalmersUniversityofTechnology in 2007. After some additional courses in Logistics at Chalmers and in BusinessAdministrationattheSchoolofBusiness,EconomicsandLawinGothenburg,JohandecidedtojointheSupplyChainManagementmastersprogrammeatChalmers.Johanplanstofinishhismastersdegreein spring 2009with a thesis analyzing StoraEnsos inventory controlofnewspaper at theGermanmarket.Hethenhopesforacareerwithinaninternationalenvironment.

RickardBadenfors tookhisBachelordegree inMechanicalEngineeringatSchoolofEngineeringatJnkpingUniversity.HethenattendedamasterinSupplyChainManagementatChalmersUniversity.Rickardplanstobefinishedwithhismaster'sdegreeduringthespring2009.WhenbeingdonewiththestudiesRickardhopesforacareerabroadinaninternationalcompany.

Lars Bedey took his Bachelor degree in Industrial Engineering in combination with ElectricalEngineering at the Technical University of Brunswick in Germany. After coming to the ChalmersUniversity of Technology as an Erasmus student he decided to join the international mastersprogrammeofSupplyChainManagementatChalmers.Larsplanstofinishhismastersdegreewithathesisfocusingonbuyersupplierrelationshipsandpurchasingduringspring2009.Hethenaimsforacareerinaninternationalenvironment.

Lidia Bolotova took her Bachelor degree in International Economics at Ural State University ofTechnologyinRussia.Afterworkingforseveralmonthsinthetransportcompany,shetookaninterestinSupplyChainManagementanddecidedto jointhemasterprogrammeatChalmers.Lidiaplanstofinishhermastersdegreewitha thesis focusingon StrategicpurchasingatVolvo logisticsduringspring2009.Shethenhopesforacareerintheautomotiveindustry.

MartinDahl,abecominggraduatemechanicalengineeratChalmersUniversityofTechnology.AftertakinganadditionalcourseinlogisticsMartindecidedtojointheMastersprogrammeofSupplyChainManagementatChalmers.Martinplanstofinishhisdegreeduringthespringof2009.Hethenhopesforaninternationalcareerwithinpurchasingandlogistics.

About the authors III Sofia Eklund took her Bachelor degree in Mechanical Engineering with the focus on industrialmanagementandproductionatSchoolofEngineeringatJnkpingUniversity.ThisdegreeincludedasemesteratCurtinUniversityofTechnologyinPerth.TheinterestforSupplyChainManagementgrewduringtheeducationandshedecidedtojointheSCMmastersprogrammeatChalmers.Sofiaplanstofinish her masters degree with a thesis focusing on aftermarket strategies in different businessmarketsduringspring2009.Shethenhopesforacareerintheproductionindustry.

MartinEliassoniscurrentlystudyingthemastersprogrammeSupplyChainManagementatChalmers.HeholdsaBachelordegree inMechanicalEngineering, IndustrialManagementandProductionfromJnkpingUniversity.During theBachelordegreehe studiedone semesteratDeakinUniversityofTechnology in Australia. Martin plans to finish his masters degree with a thesis focusing onaftermarket strategiesduringspring2009.Finally,Martinparticularenjoyspurchasingmanagementandwishestoworkwithinthatfield.

Bettina Eriksson took her Bachelor degree in Industrial Economy and Management at ChalmersUniversity inGothenburgandcontinuedon to themastersprogrammeSupplyChainManagement.Duringspring2009Bettinawillwritehermasterthesison integratedtransportationsolutionatWSPGroupandaftergraduationshehopestostartacareerwithinlogisticsandtransportation.

IsmailGlgecitookhisBachelordegreeinIndustrialEngineeringatYildizTechnicalUniversityin2006.After 1yearof internships inPolandandUkrainehetook interest inSupplyChainManagementandadmittedtothemastersprogrammeatChalmersUniversityofTechnology. IsmailplanstofinishhismastersdegreewithathesisfocusingonDevelopingSourcingStrategiestoImproveAddedValuesatIndutradeFlowTechnologyduringspring2009.Hethenhopesforanacademicorbusinesscareerintheindustrialmarketingandpurchasingarea.

S.DavoodImentookhisbachelor'sdegreeinIndustrialEngineeringinIran.Tofollowhisinterest,hedecidedtostudyinSupplyChainManagementfieldabroadandchoseSweden.Heisnowworkingonhismasterthesis.Theaimistoproposeamodelforincreasetheefficiencyofpackagingsystemalongtheretailsupplychain,thereforetheefficiencyofsupplychaincanimprove.ThethesisissponsoredbytheSTFIPackforsk,a leadingR&Dcompany in the fieldofpackagingand logistics inStockholm.HethenhopestopursuehisstudyinaPhDprogram.

MasoudMostafavi took his Bachelor degree in Industrial Engineering at IslamicAzadUniversity Najafabadbranch.Pursuinghighereducation,he tookanentranceexamandwasadmitted for themastersprogramITandManagementatAmirkabirUniversityofTechnology (TehranPolytechnic)butafteronesemesterherealizedthatheismoreinterestinSupplyChainManagementanddecidedtojointhemastersprogrammeatChalmers.Forthenearfuture,MasoudisaimingforaPhDpositionrelatedtooneofhisareasofinterest,especiallyinthelogisticsandtransportationfield.

Purchasing Management IV NojanNajafigothisB.S. in IndustrialEngineeringatAzadUniversityofNajafabad.Being involved insome research studies on ERP implementation became his firstmotivations for pursuing logisticsissues in the Supply ChainManagementmasters programme at Chalmers. Nojan is performing aresearchprojectasthemastersthesisonmathematicalmodelingofsparepartswarehouses,whichisgoingtobefinishedinspring2009.Heplansforanacademiccareerafterhismastersdegree.

KaarelRandgraduatedhisBachelorprogramme inLogisticsatTallinnUniversityofTechnology. ThefollowingworkexperienceinDefenseForcelogisticsbroughthimintocontactwiththeSupplyChainManagementmasters programme at Chalmerswhich he joined in 2007.Kaarels ambitions are tograduatewiththethesislookingintosupplierrelationsinpurchasingandsupplychainintegrationandtocontinuehiscareerinasimilarline.

Niclas Schollin took his Bachelor degree in 2007, in the field of business development andentrepreneurship. During his studies he got interested in logistics and purchasing in differentorganizations. Inconsequence,hedecided tocontinuehisstudieswithamasterprogram inSupplyChainManagement.Hehopesforasuccessfulcareerinthefieldoflogisticsandpurchasing.

SiShenobtainedherBachelordegreeofTrafficandTransportationatShandongUniversity inChina.Afterthatshetookthe internationalmastersprogrammeofSupplyChainManagementatChalmersUniversityofTechnologyinSweden.ShehopestoworkwithinSupplyChainManagementareaaftergraduation,especiallywiththosecompanieswhichexpandbusinessinChina.

TomaszSzymelfejnikhas studiedLogisticsandTransportationTechnologyatWarsawUniversityofTechnology. After three years of education he has joined Supply Chain Management mastersprogrammeatChalmers.Tomaszisinterestedinnewapplicationswithintheautomotiveindustryandis planning towrite his thesis project on combining product development processeswith relatedcustomerrelationshipmanagement.

WilliamWahrn took his Bachelor degree in Industrial Engineering andManagement at ChalmersUniversity of Technology. After this he spent one semester at the University of Twente in theNetherlands studyingBusiness andAdministration.Thiswas followedby a fewmonthsworking asconsultantbefore joining themastersprogrammeSupplyChainManagement atChalmers.Williamcontinuedtoworkparttimeasaconsultantinparallelwiththestudies.Heenvisagesafuturecareerworkingwithproductivityenhancementandcontinuousimprovements.

PrLinusWestbergtookhisBachelordegree inBusinessdevelopmentandentrepreneurshipwithinconstruction atChalmers InstituteofTechnology.After theBachelordegreehe tookan interest inSupplyChainManagementanddecidedto jointhemastersprogrammeatChalmers.PrLinusplansto finishhismastersdegreewithathesis focusingon Optimizingproduction flowsatSAPA in theUSAduringspring2009.HethenhopesforacareerintheORKLAGroup.

About the authors V Karl Westerlund took his Bachelor degree in Industrial Engineering at Chalmers University ofTechnology.AftersummerstudiesatStanfordUniversityandUniversityofCaliforniaBerkeleyhetookinterestinSupplyChainManagementanddecidedtojointheSCMmastersprogrambackatChalmers.Karlalsohasexperiencesfromtheretailingbusinessandfromthevehicleproductionindustry,whichhe got from internships and weekend jobs. He has also worked as a logistic supervisor/teacherassistantatChalmersandhehasalsodevelopedalectureabouttheproductionimprovementmethod5S at the department of logistics and transportation at Chalmers.Karl plans towrite hismastersdegreewithathesisfocusingonsupplierdevelopmentandLEANandhopesforacareerinthefieldofpurchasingorproductionimprovement.

HenrikZander tookhisBachelordegree inMechanicalEngineeringatLund InstituteofTechnology.AfteraoneyearinternshipinaSwedishproductioncompanysituatedinShanghaiheisnowfinalizinghisstudieswithamasterdegree inSupplyChainManagementatChalmersUniversityofTechnology.Henrikwill finish his studies in Supply ChainManagementwith amaster thesis as Volvo Logisticsduringthespring2009.

JeserA. Zendejas obtained his Bachelor of Science degree in Industrial EngineeringwithMinor inSystemsEngineeringattheMonterrey InstituteofTechnologyandHigherEducation, ITESM.After2yearsworking for ITRTurborreactoresand 1yearatKuehne+NagelMexicohedecided to join themasters programme at Chalmers to specialize his knowledge and develop his career within hisexpertisefield.JeserwillfinishhismastersdegreeworkingforKuehne+NagelABduringspring2009,carrying out a thesis on Supply Chain operations in the Retailer sector. Afterwards, he plans tocontinuehiscareerintheSupplyChainSolutionsarea.

Purchasing Management VI

Tableofcontents

[1] DefinitionandtrendswithinPurchasingManagement........................................................................1

Introduction...............................................................................................................................................2

DefinitionofPurchasingManagement......................................................................................................2

TheimpactofPurchasingManagement...............................................................................................3

PurchasingManagementandcorporatestrategies..............................................................................4

HistoryandtrendswithinPurchasingManagement.................................................................................5

TrendswithinPurchasingManagementinthe1990s...........................................................................6

[2] PurchasingOrganization.......................................................................................................................9

Introduction.............................................................................................................................................10

Therequirementsforpurchasingorganization.......................................................................................10

Functions.............................................................................................................................................11

Trends..................................................................................................................................................11

Purchasingorganizationstructure...........................................................................................................12

Centralization......................................................................................................................................12

Formalization......................................................................................................................................14

Dynamics.............................................................................................................................................16

Otherorganizationalfactors....................................................................................................................17

Summary..................................................................................................................................................19

[3] InternalCollaboration.........................................................................................................................21

Introduction.............................................................................................................................................22

Importanceofinternalcollaboration..................................................................................................22

Table of contents VII

Purchasingcollaborationwithotherdepartmentswithintheinternalorganisation.........................24

Informationsharingstructures...........................................................................................................28

Conclusions..............................................................................................................................................30

[4] SourcingStrategies..............................................................................................................................31

Introduction.............................................................................................................................................32

GlobalSourcing........................................................................................................................................33

Lowcostcountrysourcing..................................................................................................................34

OutsourcingInsourcing.......................................................................................................................35

SinglesourcingMultiplesourcing.........................................................................................................36

Partnershipsourcing................................................................................................................................36

[5] Purchasingportfoliomodels...............................................................................................................39

Introduction.............................................................................................................................................40

TheoryandLiteratureReview..................................................................................................................41

TheKraljicMatrix................................................................................................................................41

Suppliersegmentations.......................................................................................................................43

Amutualdependencebasedpurchasingportfolio.............................................................................46

Addingevaluationofsuppliercooperation.........................................................................................47

Adaptingpurchasingstrategiesaftersupplysituations......................................................................49

Managingsuppliersegmentationportfoliomodelsandrelationships...............................................51

Relationshipscorrelationtoinvestments...........................................................................................54

Empiricalstudy.........................................................................................................................................56

Analysis....................................................................................................................................................60

VolvoLogistic.......................................................................................................................................61

SonyEricsson.......................................................................................................................................65

Conclusion................................................................................................................................................68

[6] CorporateSocialResponsibilityinPurchasingManagement..............................................................69

Purchasing Management VIII

Introduction.............................................................................................................................................70

EthicsinPurchasingManagement...........................................................................................................71

AtrendtowardsEthicalPurchasing....................................................................................................71

CodesofConduct................................................................................................................................73

BenefitswithanEthicalBehaviour......................................................................................................74

WhycompaniesfailinmakingEthicalPurchases................................................................................75

SocialResponsibility.................................................................................................................................77

Diversity..............................................................................................................................................77

Philanthropy........................................................................................................................................78

BenefitsandDriversofSocialResponsiblePurchasing.......................................................................79

ReachingasupplychaincomplyingwithCSRstandards.....................................................................80

EnvironmentallySustainablePurchasing.................................................................................................81

CancompaniesbecompetitivewhenactingaccordingtoCSRstandards?.............................................82

[7] EnvironmentallyPreferablePurchasing..............................................................................................87

Introduction.............................................................................................................................................88

EnvironmentallyPreferablePurchasing...................................................................................................88

ImpactofimplementingEnvironmentallyPreferablePurchasing......................................................89

TrendsthatleadtoimplementanEnvironmentallyPreferablePurchasing............................................89

Safetyandhealth................................................................................................................................90

Globalwarming...................................................................................................................................91

FindingandevaluatingGreenProductsandServices..............................................................................91

GreenProductsandServices...............................................................................................................92

Environmentalattributestolookfor..................................................................................................93

Casestudy................................................................................................................................................95

[8] InformationSystemsinPurchasingManagement..............................................................................97

Introduction.............................................................................................................................................98

Table of contents IX

Methods...................................................................................................................................................98

EDI.......................................................................................................................................................99

Internet.............................................................................................................................................100

Analysistools.........................................................................................................................................104

ITdrivenproblemsinpurchasing..........................................................................................................105

[9] SupplierSelectionwithfocusonchoiceofevaluationcriteria.........................................................107

Introduction:Whyissupplierselectionimportant?..............................................................................108

Whatcriteriashoulddecisionmakersfocuson?...................................................................................108

Supplierselectionmethods...................................................................................................................109

Servicesupplierselection.......................................................................................................................111

Summary................................................................................................................................................114

[10] Supplierselectionusingafuzzylinearprogrammingmodel........................................................115

Introduction...........................................................................................................................................116

Thescreeningprocess............................................................................................................................116

Supplierselectioncriteria..................................................................................................................117

Theanalytichierarchyprocess..........................................................................................................120

Thefuzzylinearmodel...........................................................................................................................120

Conclusion..............................................................................................................................................122

[11] SupplierselectionusingISOstandards.........................................................................................123

Standardsandcertifications..................................................................................................................124

ISO9000............................................................................................................................................124

ISO14000..........................................................................................................................................125

Certification.......................................................................................................................................125

Effectsofimplementation.....................................................................................................................125

ISO9000............................................................................................................................................126

ISO14000..........................................................................................................................................127

Purchasing Management X

Supplierselection...................................................................................................................................128

Keyfactorsforsupplierselection......................................................................................................128

Standardsforsupplierselection........................................................................................................130

[12] Tacitknowledgetransfer,acrucialpartofsupplierdevelopment...............................................133

Introduction...........................................................................................................................................134

DefinitionandImportanceofsupplierdevelopment............................................................................135

Suppliersperformancereview..............................................................................................................136

Genericsupplierdevelopmentactivities...............................................................................................137

Directfirminvolvement....................................................................................................................138

Incentives..........................................................................................................................................139

Enforcedcompetition........................................................................................................................139

Tacitknowledgetransfer.......................................................................................................................144

Thecharacteristicsandessentialfactorsoftacitknowledgetransfer..............................................145

Tacitknowledgetransferactivities...................................................................................................146

Conclusion..............................................................................................................................................149

[13] Supplierdevelopmentwithqualityfocus.....................................................................................151

Purpose..................................................................................................................................................152

Introduction...........................................................................................................................................152

Conceptofsupplierdevelopmentanditsqualityimplications.............................................................153

Supplierqualitydevelopmentphasesandactivities..............................................................................154

Supplierqualitydevelopmentindevelopingcountries.........................................................................157

Conclusion..............................................................................................................................................161

[14] Supplierbuyercollaboration,onewaytoreachsuccess.............................................................163

Introduction...........................................................................................................................................164

Thestudies:Review...............................................................................................................................165

CorstenandFelde.............................................................................................................................165

Table of contents XI

OhandRhee......................................................................................................................................165

GonzalezBenito................................................................................................................................166

VereeckeandMuylle.........................................................................................................................166

Thestudies:Resultsandfindings...........................................................................................................167

Conclusion..............................................................................................................................................169

[15] Informationsharing,thedriverofaproficientbuyersupplierrelationship................................171

Introduction...........................................................................................................................................172

Conceptualframework..........................................................................................................................172

Informationsharinginbuyersupplierrelationship..........................................................................173

Benefitsofinformationsharinginbuyersupplierrelationship........................................................174

Affectionsonbuyersupplierrelationship.........................................................................................174

Reflectionofthecase........................................................................................................................176

Conclusion..............................................................................................................................................178

[16] Appendices...................................................................................................................................179

Exampleofresultsfromthemodel...................................................................................................179

Performanceassessment..................................................................................................................179

Humanresources..............................................................................................................................180

Qualitysystemassessment...............................................................................................................180

Manufacturingcriteria......................................................................................................................181

Businesscriteria................................................................................................................................181

InformationTechnology....................................................................................................................182

[17] Bibliography..................................................................................................................................183

Purchasing Management XII

Listofcases

Casestudy:VolvoLogistic...........................................................................................................................56

Casestudy:ProcurementofplasticpartsatSonyEricsson.......................................................................59

CaseStudy:HowSwedishtoyretailersmisjudgedtheirChinesesuppliers..............................................76

CaseStudy:HowH&MintegratesCSRintotheirBusinessStrategy........................................................83

Casestudy:TheBodyShopSocialandEnvironmentalconcerns,theonlywaytodobusiness.........95

CaseStudy:BASACo.AnexperiencedERPimplementer........................................................................99

Casestudy:Indoorclimate..........................................................................................................................111

Casestudy:BEKO,anappliancecompanywhousedthefuzzylinearmodel...........................................121

Casestudy:Volvo3p(1)..............................................................................................................................139

Casestudy:Volvo3p(2).............................................................................................................................158

Casestudy:CumminsandToshiba.............................................................................................................174

Definition and trends within Purchasing Management 1

[1] DefinitionandtrendswithinPurchasingManagement

The aim of this chapter is to provide the reader with an introduction to Purchasing Management in order to fully appreciate the book. The chapter presents the books definition of Purchasing Management as well as briefly presenting the potential benefits with working at a strategic level with purchasing activit ies for a corporation. Furthermore trends and historical developments within the area of Purchasing Management will be presented.

Purchasing Management 2

Introduction

The aim of this book is to present current developments as well as the state of the art withinPurchasingManagement. To do this in ameaningful and structuredway the books definition ofPurchasingManagementmust firstbeestablished.Thisdefinitionwillbepresentedtothereader inthischapterandtherestofthebookwillonwardsbebasedonthisdefinition.Thischapterwillalsohighlight the importance of Purchasing Management within an organization. Furthermore, somereaderswillhavepreviousexperiencewiththetopicofPurchasingManagementandthereforealsobefamiliar with the historical developments within the area. Others, however, will not have thisknowledgeandforthisreasonthischapteralsopresentsandoutlinesthetrendsandeventsthatledtothecurrentstateoftheart.Thedevel0pments,whichthisbookwillfocuson,aretheonesofthesecondhalfofthe20thcentury.Theemphasiswillbeonthe1990s,sincethatperiodoftimeincludesthemostsignificantdevelopmentswithinthistopic.

DefinitionofPurchasingManagement

There does not existmany definitions of PurchasingManagement and the difference to thewellknown concept strategic purchasing is not very clear. Strategic Purchasing is often described anddefinedas:whenpurchasingactivitiesare linkedtothecorporatestrategicplanningprocess.Here isonemoreexplicitdefinitionofstrategicpurchasingwrittenbyCarrandSmeltzer(1997):

Strategicpurchasingistheprocessofplanning,implementing,evaluating,andcontrollingstrategicandoperatingpurchasingdecisionsfordirectingallactivitiesofthepurchasingfunctiontowardopportunitiesconsistentwiththefirm'scapabilitiestoachieveitslongtermgoals.

ThisbookwillbebasedonthisdefinitionanditwillinotherwordsworkasadefinitionforthebooksconceptPurchasingManagementaswell.This isdonesincePurchasingManagementcanbedefinedas the concept ofmanaging strategic purchasing. The structure of the book and the concept ofPurchasingManagementwillalsobedescribedwithhelpofaconceptualmodelwhich isdevelopedandmostlybasedonexistingliteraturewithinthetopicofpurchasingandsupplychainmanagement.Themainfocusofthismodel isthatPurchasingManagement is locatedattheboundarybetweenacorporateorganizationsexternalandinternalbusinessnetwork.Thebusinessnetworkisdefinedasanetworkofactivities, resourcesandactors (Ford,etal.,2003).On the internal sideof thebusinessnetwork the activities are often represented of internal processwithin the own organization andresourcesareoftenownedbythefocalfirm.Theactorshereareusuallyemployeesordepartmentswithin the corporate organization.On the external side of the industry network, the activities arerepresented by supplier activities or joint activities between different actors as competitors,customersandsuppliers.Theresourcesareownedbysuppliersor jointlyownedbydifferentactors

Definition and trends within Purchasing Management 3 suchascompetitors,customersandsuppliers.Theactorsontheexternalsideoftheindustrynetworkareprimarilythesuppliers,seeFigure1.

Figure1ConceptualmodelofPurchasingManagement.

Thepurposewiththisbook istocovertheconceptualmodel(seeFigure1)bydescribingthevariouselementsofthemodelintothebooksdifferentchapters.Furthermore,thepurposeofthebookistopresent a stateoftheartwayofoperating andmanagepurchasing activities. Thiswillbedonebypresentingsomesuccessfulguidelinesandmethodsbasedonboth literatureandrealbusinesscaseexamples.

TheimpactofPurchasingManagement

A large study based on 175 company surveyswith a respond rate of 22% performed by Carr andPearson (2002) shows that the factors strategic purchasing and Purchasing Management have apositive impacton the firms financialperformance inboth smalland large firms.CarrandPearson(2002)alsowritethatPurchasingManagementandsupplierinvolvementdoesaffectthesuccessofanewproductintroduction.ThisstudyalsoshowsthatalinkexistbetweenimplementationofstrategicPurchasingManagementandachievementsofa firmscomprehensivegoals. It isalso stated in thereportbyCarr andPearson (2002) that it isbelieved thatmost firms recognize the importanceofstrategicpurchasing,becausetheyspendalargepercentageoftheirsalesonpurchasedinputs.

Carr andPearson (2002) also finish their studywith thewords Basedon this study,managementshouldbetterunderstandtheimportanceofPurchasingManagement,supplierinvolvement,strategicpurchasinganditsrelationshipswithfirmsfinancialperformance.

Internal organizational tasks:

Collaboratewiththeinternalnetwork

Operatingpurchasingdecisions

Definepurchasingstrategies

Organizetheboundaryinteraction

External collaboration tasks:

Collaboratewiththeexternalnetwork

Mangesupplierrelations

Coordinatejointactivities

Monitor,evaluateanddevelopsuppliers

Purchasing Management

Internal network of activities, resources and actors

External network of activities, resources and actors


PurchasingManagementandcorporatestrategies

TocomplementthefindingsofCarrandPearson(2002)oneadditionalstudy,madebyEllramandCarr(1994)was selected. That study clearly indicates that purchasing strategy should be a part of theoverallcorporatestrategy.Themovementtowardglobalsourcing,rapidchanges intechnology,andincreased competition requires purchasing to assume more responsibility in the planning andimplementationofstrategies tosupport theoverallcorporatestrategy.Suppliersdoalsomoreandmorestattoplayacriticalroleregardingthesupportofafirmscompetitivestrategy(Ellram,etal.,1994).

Ellram and Carr (1994) also define four stages of purchasing organization related to the level ofstrategydevelopment.Thefourstagesare:

Stage I isapassivestage, inthisstagethepurchasingprocessnormallybeginsasareactorbasedonrequestsfromotherdepartments inacorporateorganization.Manyofthepurchasingactivitiesandprocessesarehandledbytotallyotherfunctionsthanpurepurchasingfunctionswithinthecorporateorganization(Ellram,etal.,1994).

Stage II is an independent stage where the purchasing departments spend considerable timeattempting to professionalize the own purchasing function by introducing such things ascomputerizedinformationsystems,formalizedsupplierprogramsandcommunicationlinks(Ellram,etal.,1994).

StageIIIisasupportivestagewherethepurchasingdepartmentsareviewedbytopmanagementasanessentialbusinessfunctions.Thepurchasingorganization isexpectedtosupportandstrengthenthefirmscompetitiveadvantagebyproviding timely information toallsurroundingdepartments in thefirmaboutforexamplepotentialchangesinthepriceandavailabilityofgoodsandserviceswhichmayimpactthefirmsstrategicgoals(Ellram,etal.,1994).

StageIVistheintegrativestage,inthisstagethefirmscompetitivesuccessrestssignificantlyonthecapabilitiesof thepurchasingdepartmentspersonnel.Thepurchasingdepartments rolewithin thefirmisalsochangedfromfacilitatortofunctionalandthisdevelopmentprocessmustbeimplemented,significant supported and guided by management. The longterm perspective is also of greatimportantregardingdevelopmenttothisstage(Ellram,etal.,1994).

Hopefully,itisnowclearthatPurchasingManagementshouldbetreatedatastrategiclevelwithinthecorporate organization and that the purchasing department should bemanaged and used as it isrepresentingan importantpartof the firm.The followingpartof thisbooks chapterwill focusonsomehistoricaltrendsandchangeswithintheareaofPurchasingManagement.


HistoryandtrendswithinPurchasingManagement

Procurementisregardedbyexecutivemanagementasanegativefunctionitcan hinder the company if not done well, but can make little positivecontribution.(Henderson,1975)

Thiswas stated in themid 1960s, by the purchasingprofessionalBruceD.Henderson,who spokeaboutthesituationandopinionsregardingpurchasingatthetime.Hearguedthatpurchasingwasaneglectedfunctioninmostfirmsbecauseoffexecutivemanagementsbeliefthatitwasnotimportantorrelevanttomainstreamproblems.(Trent,etal.,1998)

Since 1960s and since themiddle of the 1980s in particular, the strategic role of purchasing andPurchasingManagementhasreceivedconsiderableattention inacademicsandtrade journalsaswellas inpopularpress.Asfirmsstartedtoseethe importanceofpurchasing input intheirorganizationtheroleofpurchasingwaschangedfromanotconsideredimportantpartoftheorganizationversesamore important strategic role and resource of the firm (Carr, et al., 2002). Over the past threedecades,purchasinghasslowlystartedtogainvisibilityinfirmsallaroundtheworld.Thisevolutionaryprocesshasbeenslow inwordsoftimeduetothefactofcontinuousgeneralmanagementfailures.Managershave failed tounderstand the critical roleofpurchasing and therebynot focusedon itsissuesandstrategies.Ammer(1989)notedthatpriortothe197374oilcrises,topmanagementviewedpurchasingashavingapassiveroleinthebusinessorganization.Butamajorpoint intherecognitionofpurchasingstrategyoccurredwhenPorter (1980)emphasized the importanceof thebuyer inhismodelof the five forces that impact the competitivenatureof an industry.The 1980smarked thebeginningof a shift in attitude towards including thepurchasing role in corporate strategy. In the1970s and early 1980s, purchasing took a supportive role, ensuring that supplier quality met therequired standards for production. During the 1990s, the literature indicates amovement towardintegratingpurchasingintothefirm'sstrategicplanningprocess.Today,thepurchasingdepartment'sabilitytoimpactstrategicplanninghasincreasedinanumberoffirms.(Carter,etal.,1996b).

Purchasing Management 6 Figure2summarisesthedevelopmentofpurchasingfrom1970sto1990s.

Figure2Historicaldevelopmentofpurchasingmanagement

TrendswithinPurchasingManagementinthe1990s

As mentioned above, Purchasing Management has undergone a high degree of change since itsneglected stateback in the 1960s. This isparticularly true for the 1990s,where therewas agreatchange inopinion regardingpurchasing.According to a yearly survey conducted atMichiganStateUniversity the perceived importance of suppliers and purchasing/sourcing increased significantlyduring the 1990s andwaswidely acknowledgedby executivemanagers by the endof the decade(Trent,etal., 1998).By this timeseveralresearchesargued that theperformanceof thepurchasingfunctionsdid infactaffectoverallcompanyperformanceandthat itshouldbeconsideredaspartofthe corporate strategy (Johnson,etal., 1998).A studyperformedbyKemppainenandVepslinen(2003)alsoshowedthattheperceived importanceofpurchasing,comparedtootherfunctions,hadincreased significantly from then 1990s to the start of the naughtiest. This trendwasmost likelysupportedbytheincreasingstatusofSupplyChainManagement.

AccordingtoTrentandMonczka(1998)theincreaseinsupplierimportanceisaresultofatleastfivefactorsthataffectmostindustries:

1. Theneedtocontrolunitcosts2. Theneedtoreducethetotalcostofacquisition3. The increasing influence that suppliers have on the purchasers ability to respond to end

customers,particularlyasitaffectstimerelatedrequirements4. Anincreasedrelianceonfewersuppliers,and5. Awillingnessofpurchaserstorelyonsupplierstodesignandbuildentiresubassembliesand

subsystems.Thesefactorshaveheightenedthesuppliers.(Trent,etal.,1998)


Internalorganisationaltrends

Theshiftsince1990 inpurchasingresponsibilitiesrevealsa largescalemovementawayfromtacticalcommitmentsandmovement towardstrategicorvalueadding tasks (Trent,etal., 1998).The trendtowardsstrategicpurchasingwasalsoevidentintheresultsfromthe1994NorthAmericanExecutivePurchasingRoundtable(Carter,etal.,1996a).

The1990salsosawthestartofEDIandsystemdevelopment.Theuseofthesesystemsgrewyearlyinthe1990sbuttherateofgrowthwasnewermeetthepredictedrate(Trent,etal.,1998).Atthe1994NorthAmerican Executive Purchasing Roundtable itwas concluded that EDI and increased use ofinformation systemswas both ranked amongst the top fivemost significant trends (Carter, et al.,1996a).Otherstudies,however,showthattheoutsourcingof ITgrewdramaticallyduringthe1990ssinceitwasnotconsideredacorecompetence.(Kakabadse,etal.,2002)

During this period emphasis also grew on the use of crossfunctional teams to support sourcingdecisions,suchasevaluating,selecting,andmanagingsuppliers.Therewere,however,stillmanyfirmswho did not succeed in establishing such teams despite theirwillingness (Trent, et al., 1994). Theemphasisandsubsequentuseofcrossfunctionalteamsdoeshoweverseemtobeincreasing.In1990,lessthanhalfoffirms included intheMichigansurveystatedthattheyemphasisedtheuseofcrossfunctional teams.Thisnumberhad increased toover75percentby 1997.Thestudyalso found thatpurchasinggroupsorganizedaroundcommoditiesdecreasedwhilegroupsorganizedaroundenditemincreasedduringthe1990s.(Trent,etal.,1998)

The 1990s also witnessed an increased focus on the concept of corporate social responsibilities(EuropeanCommission,2001)(Carter,2000)aswellasthatofgreenorenvironmentalpurchasing.Bytheendofthedecadegreenpurchasingeffortswere,however,stilllargelyreactive.Therewerealsomanyobstacles,primarilyeconomical,whichpreventedgreenpurchasing frombecomingeffective.(Min,etal.,1997)

Externalcollaborationtrends

Thereisevidenceofanincreaseddependenceonsuppliersforproducttechnology.AccordingtothestudyconductedatMichiganStateUniversitytherelianceonexternalsourcesforproducttechnologyincreasedfrom37percentto44percentbetween1993and1997.Concentratingoncorecompetenciesand technologies and an increased emphasis on outsourcing noncore processes are factors thatcontributedtothegrowthinexternalreliance.Furthermore,pressuretoincludethelatesttechnologyin product designs makes supplier contribution increasingly important. According to the studyexecutivemanagementsawarenessof the importanceof the suppliers role in supportingproductdevelopment increasedsteadilyduringthe1990s,growingfrom4.5 in1990to5.9 in1997(where1=limitedimportanceand7=significantimportance).(Trent,etal.,1998)

Closeto75percentoffirmstakingpartintheMichigansurveydecreasedthenumberofsupplierstheymaintainedbetween1993and1998.Furthermore,over80percentofthefirmsexpectedacontinued

Purchasing Management 8 reduction inthesizeoftheirsupplybasethroughtheyear2000.Thereductions insuppliernumberswere however most aggressive as the late 1980s and early 1990s (Trent, et al., 1998). A surveyconductedbyCarterandNarasimhan(1996c)alsoshowedthatfirmswereexpectingtodecreasetheirsupplierbase.

During the 1990s the percentage of longterm contracts aswell as the percentage of dollar valuehandledbylongtermcontractsincreased.Thepercentageoflongertermcontractstototalcontractshasincreasedfrom24percentoftotalcontractsin1990to36percentin1997.Dollarvaluepercentageincreasedfrom34to50percentduringthesametimeperiod(Trent,etal.,1998).Simpsonetal.(2002)alsofoundtoagrowingfocuson longtermrelationswithsuppliers.Relatedtothis,KakabadseandKakabadse (2005)conclude that there isanexisting trendemphasisingmanagingrelationshipswithkeytrustedsuppliers.Also,theimportanceofstrategicallianceswithsupplierswasemphasisedatthe1994NorthAmericanExecutivePurchasingRoundtable(Carter,etal.,1996a).

Traditionally the approach to supplier evaluation, if one existedwithin a firm, in purchasing wasfocused on price, quality and delivery. These factors are still themost used but some firms havestarted to supplement them with other factors relevant to the industry. This can improve thepurchasing firmsability tochoose themostsuitablesupplier.Examplescanbeasuppliersprocesscapabilities,equipmentandqualitymanagement(Goffin,etal.,1997).Otherimportantfactorscanbecommunication and continuous improvement efforts (Simpson, et al., 2002). Companies alsoincreased their understanding of the benefits of having a formalway of evaluating and retainingsuppliers.Furthermore, it isreasonabletobelievethat the increasedemphasisongreenpurchasing(Min,etal.,1997)andcorporatesocialresponsibility(EuropeanCommission,2001)hasalsostartedtoinfluencethesupplierselectionprocesses.

Purchasing Organization 9

[2] PurchasingOrganizationThe structure of the purchasing department is especially important in external and internal networks. The organizational model must facil itate activities in different strategic levels as well as cope with changes in external environment. By adjusting formalization and centralization levels, the organization can be positioned to best support the organization. However, no universal solution exists, as the right structure is highly company specific and dynamic over t ime. Therefore, this is one of the major challenges that Purchasing Management confronts within business networks.


Introduction

Inthischapterthepurchasingorganizationissuesareaddressedwhataretheprerequisitesforsuchorganization and what should be considered beforehand, what are possible solutions and whichattributesaretheretodifferentiatebetweenvariousconfigurations.Inaddition,attentionisdrawntofewkeyelementsthatshouldbeconsideredwithinanycertainstructure.

Thechapter focusesmainlyonmanufacturing companies,which leaves serviceprovidersaswellaspublicsectororganizationsoutofscope.However,asstructuraldesignisanissueinanyorganization,theunderlyingprinciplesforthesupplydepartmentcanbeappliedoutsidethescopediscussedinthechapter.

Therequirementsforpurchasingorganization

Everycompanycanbe identifiedby itsgoalandthepolicyforachievingthisgoal.Thepolicydevisesorganisational setup to facilitate the activities stated in thepolicy (Quayle, 2006). Therefore everyfunctionthatperformsthoseactivitiesrunsunderaspecificorganizationalstructure.Thosestructuralarrangements influence the performance of the individuals in the organization as that is whatdeterminestheduties,responsibilities,andrelationsofthefunction(Quayle,2006).Thus,inbusinessnetworks, interactions and processes among the actors are conditioned by the way companies,businessunitsanddepartmentsareorganized.(Gadde,etal.,2001)

In order to maximize performance, a company needs to adjust its structure and managementprocessestothechangesintheoutsidecompetitiveenvironmentandalsotofacilitatethenecessarycooperationbetweenvariouspartswithin thecompany. (Johnson,etal.,2001)Therefore ithas tomeet both external aswell as internal communication requirements. As purchasing is a part of acompanythatliesinthemeetingpointofthoseenvironments,theissueofstructuraldesignbecomesespeciallyrelevanthere.

Thestartingpointfordecidinguponappropriateorganizationalsetup isto identifytherequirementssetforpurchasingfunctionbybusinessstrategy,externalenvironment,andotherfactors.Inaddition,according to contingency theory, it is crucial to recognize ongoing trends and changes in supplyprocessesinordertoincreasethecoherencewithcurrentbusinessenvironmentaswellaspreparetheorganizationforfuture.(Wood,2005),(Johnson,etal.,2008)

Purchasing Organization 11

Functions

Purchasing needs to facilitate activities of three different characters operational, tactical, andstrategic (Van Weele, 2005). According to Gadde, et al. (2001), the purchasing profession todayincludes four subfunctions over those different levels: ordering, negotiating, sourcing, and supplychainmanagementintermsofsynchronizingmaterialflows.

U Ordering includes mainly the administrative side of purchasing in the form of expeditingorders.Thisisapurelyoperationalactivity.

U Negotiatingdealswith selecting theeconomicallymost feasible supplier(s) from the listofapprovedvendors;while

U Sourcing involvesthepurchasing function inprocurementdecisionspriortothedecisionofapprovedlist.Purchasingisconsideredstrategicfromthatpoint.

U Supply chain management broadens the scope of purchasing by taking responsibility forsynchronizinginboundmaterialflowswiththerestofcompanysoperations.

Quayle(2006)arguesthatthosesubfunctionsshouldnotbeisolatedfromoneanother.Forexample,it might increase efficiency through specialization to allocate expediting and strategic issues toseparate persons but also, having to do the operationalwork can lead the buyer to selectmorereliable suppliers. For similar reason of better decisions, it is common that purchasing strategicmattersandsalesoperationsarecontrolledbythesameperson.Itallowsbetteralignmentofmaterialand information flows throughout theentireorganization.Furtherdiscussiononworkallocation inpurchasingstructurewillbeaddressedinlaterstagesofthischapter.

Trends

It isalso important to consider thedynamicsof supply functionwhendesigning the structure.Thetrends detected in purchasing characteristics today have been previously described in chapter [1]DefinitionandtrendswithinPurchasingManagement.Conclusivelytheywere:

U increasingstrategicroleofpurchasingincorporatepolicy;andthusU shifttowardsmorecentralizedcontrolU decreasingnumberofsuppliersU increasingnumberoflongtermcontractsU buyinggroupsorganizedaroundenditemsratherthancommodities

Therefore these are the ongoing changes and activities (the four subfunctions) that purchasingorganization has to facilitate in modern business environment. Around that core the rest of thestructurecanbebuilt.


Purchasingorganizationstructure

Having identifiedthegoalsandrequirementsfortheorganization,theappropriatestructurefortheorganization can be considered.Designing an organization refers to the process of assessing andselecting the structure and formal system of communication, division of labor, coordination, control,authorityandresponsibilityrequiredtoachieveanorganizationsgoals. (Trent,etal.,2005)Asgoalsaredifferent,theactualbalancebetweenthosefactors ishighlydependentonthespecificcompanyand its surroundingenvironment.However,despiteofnumerouspossible solutions,onlyadiscretesubsetofdifferentorganizationalconfigurationshasbeenfoundtobeadopted inpractice. (Wood,2005)

Themain attributes differentiating organization structures are considered to be centralization andformalization.(Wood,2005)Inourcaseofpurchasingorganization,thefirstoneimplieswhethertheprocurementactivitiesofdifferentbusinessunitsofacompanyarehandledbyonecentralfunction(centralized) or is every single location/site responsible for its own purchasing decisions(decentralized)(Gadde,etal.,2001).Formalizationoftheorganizationexpressestheextenttowhichtheprocedures, instructions,communicationpatterns,etcaredocumented inthecompanyandhowaretheyfollowed.Itistheexistenceandprevalenceofwrittendocumentation.(Wood,2005)Thosetwo attributes are commonly chosen for adjustment for reasons that they aremanagerially easilyapplicableaswellas they involveboth the formaland informal structureof the company. (Wood,2005)

Centralization

Centralizedpurchasingorganizationcanbefoundapplicable incaseofsimilaritiesbetweenmultiplecompany locationse.g. inused technology,market conditions,purchasingproblems, itemdemand,etc. It is more common to occur in companies offering the same product or service in multiplelocations. (Quayle,2006)Inaddition,centralizedcontrol isfoundtobeprevailingconfigurationalsofor single site and relatively small size companywhere thereareno feasible criteria fordivisionofcontrolandthusdecentralizationwouldprovidenobenefits.

However, decentralized purchasing solution is seen beneficial when substantial differences existbetweenvarioussitesofonecompany. Insuchcasecentralizedcontrolwouldbe inefficientaseachunit operates in its own area (Gadde, et al., 2001); (Quayle, 2006). Table 1 provides comparativeoverviewofbenefitsanddownsidesofbothdescribedsolutions.

Purchasing Organization 13 Centralized Decentralized

Adv

antage

s

U IncreasedprofessionalismofbuyersU MoreefficientallocationofpurchasingbudgetU HigherbargainingpowerU Lessordersandbiggerquantitiessavings

throughadministrativecostsandeconomiesofscale

U DirectandsinglepointcontactwithsuppliersU Avoidanceofcompetitivebuyingbyparallel

departmentsU Increasedefficiencythroughdevelopmentof

commonstandardsandproceduresU Higherroleofpurchasingincorporatehierarchy

U Purchasingdepartmentsbettercontactwithlocalorganization

U Integrationwithotherfunctions;buyersareoftenlocatedtogetherwithengineeringormanufacturingspecialists

U Abilitytofocusonlocalconditionsandadjustpurchasingactivitiesaccordingly

Disad

vantag

es

U Indirectcontactbetweensupplierandactualuserofthecomponent/product

U Increasedspecializationcanlimitpurchasingfunctionintegrationwithotherdepartment,losingtheoverallcoherencerequirement

U Highbuyingpowercanbeabusedbythechaseoflowerpricesresultinginbankruptcyofsupplierandchangersinmarketstructure

U Coordinationdifficultiesbetweendifferentsites

U Noclearoverviewofinboundmaterialflowleadingtoinefficiency

U Reducedspecializationandbargainingpowerduetosmallerscaleandscopeofthefunction

Table1Advantagesanddisadvantagesofdifferentcentralizationconfigurations.BasedonGadde,etal.(2001),Quayle(2006),VanWeele(2005)

It can be noted that total centralization and total decentralization are both extreme values ofcentralizationcontinuum.Themajorityofcompanies liesomewherebetweenthesetwoextremestoutilise advantages of both configurations (Johnson, et al., 2004). In such hybrid structuresresponsibilitiesandcontrolbetweenheadofficeandlocalorganizationaredividedwithaccordancetobusinessenvironment.Eventhoughtheexactdivisionishighlyindividualamongcompanies,thetasksoftenallocatedtoheadofficecaninclude:

U developmentofpurchasingstrategies,policiesandstandardsU negotiationsforcommon,widelyuseditemsU stockmanagementbetweensitesU purchaseofplantequipmentandotherstrategicitemsU trainingU legalmattersU researchandinformationservice

Gadde,etal.(2001),Quayle(2006)

Purchasing Management 14 Theresponsibilityforlocalpurchasingorganizationswouldthusbe:

U placingordersforcommonitemsU negotiatingandcontractinglocallyuseditems

Gadde,etal.(2001),Quayle(2006)

Formalization

The issueof formalization inpurchasingorganizations isnotmuchaddressed inprevailing literaturewhich implies its relatively small effect on supply performance of companies. However, itscombinationswithcentralizationdecisionhelptodescribefouressentiallydifferentorganizationtypeswhich are also suitable for defining different purchasing functions characteristics. Those includemachinebureaucracy,entrepreneurial,professional,andadhocracytypes(Wood,2005)(seeFigure3).

Figure3Differentorganizationalconfigurations.BasedonMintzberg(1989)

Machinebureaucracytypeorganizationscontainbothhighlevelsofformalityaswellascentralization.Thisresultsinanorganisationwithmanyformalrules,regulations,andcontrolswherealargepartofcommunication existing inwritten form. To be able to control that regulations are followed, thedecisionmaking iscentralizedwithveryclearandhierarchicaldivisionofpower(Wood,2005).Largemultisitemanufacturing firms that drive for efficiency canbe good representativesof such supplyorganizationtype.

Purchasing Organization 15 In theentrepreneurialorganization littleof itsactivitiesare formalized.Controlaswellasdecisionmaking is agglomerated to the manager which leaves little or no reasons why to formalize theoperationalcommunicationtoomuch(Wood,2005).Anexampleofpurchasingorganization likethiscanbesinglesitemanufacturingcompanywithcentralizedcontrolandrelativelysimpleprocedures.The configuration canalsobeappliedbymore complex companieswitha smallnumberof centralsupplierswhere localunitsare responsibleonly for calloffs from those contractswhich requirenoextensiveformalities.

Professional organization type contains high level of formalizationwith the purpose of facilitatingcomplexprocedures thatneed certain levelof formalized control.However,as the formalization isdesignedtoachievethedesiredoutcome from itsmembers,allprofessionalssharedecisionmakingauthority in this configuration. In general, it is considered to be suitable setting for hospitals anduniversities. (Wood,2005) Inour caseofpurchasingorganization, it fits toadevelopment intensemulti site MTO type of company with heterogeneous supply demand where contracts are doneautonomouslyatdifferentlocationsduetodifferentorchangingcharactersoftheproduct.Also,suchconfigurationissuitabletodescribetheheadofficelayerofcentralizedorhybridsupplyorganizationcorporatebuyerswithhighspecializationandautonomousdecisionmakingpower(VanWeele,2005).

Adhocracystructureislowinformalizationandwithdecentralizeddecisionmaking.(Wood,2005)Asall previous types, there are environments where such design can be considered an appropriatesolution.Itfacilitatesfastresponseandflexibilityintheprocesses.However,itisratherdifficultstatetocontrolduetotendency foranarchyandpoorcoordination. Itmightbesuitable forR&D intensedevelopmentorganizationswherepurchasingactivitiescanbecomplexandunconventional.

This clustering allows general positioning of the organization.As also hinted in the description ofprofessionalorganizationtype,differenttypescanbeexistindifferentlevelsofcentralizedorhybridpurchaseorganizations i.e.headoffice and localunits. Such classificationmightnotbeparticularlyusefultoknowforbuyingcompany itselfasmore important istheactualalignmentwiththerestoforganizationandnotwhichcluster itfalls in.Ontheotherhand, itmightprovetobegreatvalueforselling companieswhere such grouping can give useful insight how decisionmaking and power isdividedinpurchasingfunctionandthusallowstopushtherightbuttonsbyfocusingsalesefforttorightpositions(Wood,2005).

There is no checklist available concerning decisions for designing most appropriate purchasingorganizationi.e.inwhichsquaretobeonthatgraph.Thesolutionishighlycontextdependentandthecontextishighlyvolatilewhichleadstocontinuousneedtomonitorandconfiguretheorganizationalstructure(Gadde,etal.,2001);(Johnson,etal.,2004).


Dynamics

Anorganizationalstructuremustbeabletochangeinordertocopewithoutsidepressures.However,there are several views on the dynamics of organizational structure. It is suggested as beingprogressive with different organizational types evolving over time. Also cyclical and oscillatingpatternsbetweendiscretenumbersofconfigurationshavebeendescribed.Butthebottomlineofallof thoseviews is thatmanagers reform theorganization inorder toenhance theperformanceanddespite the fact whether such configuration has been used before. (Wood, 2005) According toJohnson, et al. (2001) and Wood (2005), it is not proven that CPOs restructure or design theorganizationdrivenbyandbasedonananalysisofavailablealternative.Suchreformsareinitiatedbypressurescreatedbychangesinexternalenvironmentwhichinfluencecorporatestrategy.Thatinturnnecessitates adjustments in corporate structure which inevitably brings along changes in supplyorganizationtomaintaincoherencethroughouttheentirecompany.

Such hierarchy of events leads to two important considerations regarding the design of purchaseorganization.First,asadjustments toorganizational issuesaredonewith thepurposeof improvingcost structure,evenwhen changingback to setting thathasbeenpreviouslyused.Thatmeansnoperfectorganizationaldesignexistsbuttheusefulnessisdeterminedbyexternalconditions.Second,as changes are not triggered by managers, but rather external pressures, internal problems, orcombinationof the two, there isacertain lifetime foroneorganizationalstructure (Johnson,etal.,2001).Itisjustamatteroftimebeforethecurrentconfigurationisoutdatedagain.

Comingbacktothemodeloffourorganizationtypes,thosetwoconclusionsimplythatcompaniesarenot determined to be in thematching square for eternity. The position changes over time. Ascompaniesgrow, they can, for example,move from entrepreneurial towardsmachinebureaucracyduetosimpleincrease inpeopleandvolumes.Bychangingstrategyordevelopingsupplierrelations,companies can become more development centred with professionaltype structure or evendowngradetoadhocracytype.Companiescanapplyseveralmodelsindifferentlayersoftheirsupplyorganizations enabling even more directions for a change. The movements in the graph dontnecessarilyhave tocrosscategorybordersbutalso shifts towardscertaindirectioncan indicateanimportantchangeforthecompany.

Expressingtheongoingtrendsofincreasingcentralizationandreducingthenumberofsuppliersinthelightofthismatrix,theshifttorightsideofthegraphtowardscentralizationcouldprobablybedetected in all clusters. The change in termsof formality isprobablymultifold,especially inhybridstructures,andshifts ingraphwouldexpressvariousdirectionsdependingonbusinessenvironmentmakingitdifficulttodetectanyclearpatternexceptforthefactofchangeitself.

However, it is important to differentiate between the essential drivers behind the shift towardsanother configuration. As described previously, it can be the result of already changed externalfactors. In that case, themanagementofpurchasingorganizationdealswith consequencesby just

Purchasing Organization 17 tryingtoavoidfurtherdamageswithfastreacting.Itresemblesdrivingacarthroughtherearwindowwhereupcomingcurvesontheroadarerecognizedwhentherideisalreadyverybumpy.

Inourviewitwouldbehighlywelcomedifthedynamicsoftheorganizationcouldbemorecontrolledintermstimingandplanningthechangeaccordingtofutureforecasts.Inthatwayminoradjustmentsinorganizationaldesigncankeeptheprocesseswellontrackandcanavoidcostlyrestructuringsoftheentireorganization.Despitetheseeminglackofresearchonthattopic,theissuesseemstocomeinfocusofpractitionersasstatedbythestudyofJohnson(2004)thatcopingandprosperingdespiteand,perhaps,becauseof change,maybe theCPOsultimate test.As changemanagement regardingexternalandinternalfactorsbecomesrecognizedpartofPurchasingManagement,theimprovementstowardscontrolleddynamicsmaybeunderway.

Otherorganizationalfactors

Once theorganizations structuralmodel hasbeen decided, the frame forworking conditions andformal communication has been set. It defines the shape and orientation of the function but notwhats inside.Therefore thenext step inorganizationaldesign isfilling the structure,whichalsoaddsfewcriticaldecisionstotheoveralldesignprocess.

Previouslyoutlined trends inpurchasingpractice indicate the increasing strategic role in corporatepolicy.Alongwith that comes the need for higher alignment in corporate hierarchywhich in turnresults inhigher reporting levelof theCPO.This trendneeds tobe taken into considerationwhendesigningastructure.StudiesbyJohnson,etal.(1998)andJohnson,etal.(2004)notethatinordertoachievethecapabilitiesofstrategicplanningandresponsibility,anorganizationmusthavesomekindof centralized control over its processes and prove that purchasing organizations classified ascentralized, and also hybrid, have higher rate of participation in major corporate activities thandecentralizedsupplydepartments.Thustheseeminglyexternalfactorofpurchasingpositioninginsidethecompanycorrelates tostructuraldesigndecisions inaverygoodway increasedcentralizationfacilitatesthehigherreportinglevelofaCPO.

The same study indicates another factorwhich, in terms of organizational structure,might seemirrelevant at first glance the background and characteristics of the CPO.Managerswith highercorporate positions and thosewith relevantwork experience demonstratedwider use of variouspurchasing techniques, e.g. crossfunctional teams, supplier and customer involvement teams, colocationofbuyerswithotherfunctions.Thosemethodscansignificantlydeterminetheactualformalaswell as informal communication structure in the purchasing organization alongwith division oflabourandcontrol.Thereforethequestionhowmanagingpositionsinpurchasingfunctionarestaffedmustalsobeconsideredinthedesignprocess.

Purchasing Management 18 Amongotherdecisionsaffectingthewayinwhichapurchasingorganizationworksisthequestionofdivisionofwork.Asoutlinedinthebeginningofthischapter,theongoingtrendisformalisingbuyinggroups around end items rather than commodities.However, the bottom line is that this divisionshouldbedoneonlogicalbases,whetheritisbasedoncommodities,geographicallocation,orotherfactors (Quayle, 2006). As specialization on one category alters the efficiency of the others, thedivisionshouldbemadewithconsiderationsto:

U practicalandtechnicalfeasibilityofdividingthelineofwork;andU subtasksshouldnotseriouslyimpactthevaluesofothersubtasks.

(deBoer,etal.,2003)

Inpurchasingorganizationthatcanbeinterpretedas,forexample,groupingaroundenditemsshouldbe easily supported by the organizational structure. The benefits of such a configuration shouldoverweightthenegativeimpactofchangesincommodityandgeographicallevel,i.e.itdoesnotalterfunctionalityofsupplying.

Forexample,(VanWeele,2005)suggestsadivisionoftasksbetweenthefollowingfunctions.

Function Responsibility

Corporateprocurementofficer(CPO)

Developingcorporatepurchasingstrategies,systems,reporting.

Corporatebuyer

Strategic commodities large volumes, high investment projects and services.Responsible for developing sourcing strategy for key commodities. Long planninghorizon.

Purchasingengineer

Newmaterialsandcomponents.Newsuppliers.Discussingspec.s,marketresearch,selection of suppliers, negotiations.Work on decentralized level. Liaisons betweenpurchasingandR&D.

Projectbuyer Similartopurchasingengineerbutfocusonequipmentandservices.

Materialplanners

Materialsplanningandordering,orderhandlingensuringmaterialsupply,callingoffmaterialsagainstannualagreements.Vendor rating monitorand control suppliersqualityanddeliveryperformance.

MRObuyerMROsuppliesmanagementoftheentireassortmentofMRO itemswithregardtooverallperformanceratherthanjustpricefocused.

Table2Buyerprofilesanddivisionofresponsibilities.BasedonVanWeele(2005)

As for the organizational structure, it is difficult to state the correct division. It can vary throughdifferent strategic levels of the organization (de Boer, et al., 2003)or be uniform for the entire

Purchasing Organization 19 department.Theoverallprinciple isthatthesolutionmustprovidesatisfactoryprofitandalignwithcorporatevaluesandpolicy.

Theliteraturehasalsoimpliedtheincreasinglevelofintegrationofpurchasingfunctiontoexternalaswellasinternalenvironment,i.e.tosuppliersandcustomers,andotherdepartmentsofthecompany,accordingly(Trent,2004).Commonmethodsoffacilitatingsuchinteractionarecrossfunctionalteamsincluding various counterparts related to end product, colocation of buyers and other specialists(engineering and manufacturing), supply councils, etc. The study by Johnson, et al. (1998) alsoindicatestheinfluenceofcentralizationdecisionsontheuseofthosetools.Theirconclusionisthatincentralized and hybrid structures the implementation of thosemethods ismore common than indecentralized organizations. However, the connection between organizational structure and thetacticsofcarryingoutthetasksexists.

Summary

The ideadescribed in thischapteraboutorganizationalconfigurationofsupply function is simplestructural design affects the performance of purchasing to substantial extent and should be paidconsiderationbydecisionmakersinthecompany.Itmusthaveagoodfittotherestofthecompanystructure and facilitate the activities necessary for competitive purchasing. More important, thechanging character of the best fit necessitates the understanding and consideration of ongoingtrendsinsupplyfunction.

However, the solution in thismatter is not simple.One can, and should, consider, among otherfactors,attributeslikecentralization,workdivision,orformalizationtoachievebetteralignmentwithsurrounding environment. Nevertheless, as repeatedly stated in the text, there is no uniformconfigurationor checklist available todownload and implement in all situations. Theorganizationmustbecontinuouslyadjustedinaccordancewithexternalforcesandcorporatepolicy.

Aspurchasinghasgained strategicvalue rather recently, themanagement still seems tobe seeingbusiness dynamics through sort of a back window, reacting only when the changes has alreadyoccurredandcopingwithconsequences.Intermsoforganizationaldesignthereseemstobea longwaytogotocontrolthesurroundingenvironmentasbeingabletopredictthedynamics,preparethe structure andprocesses in theorganization, and synchronize the changes inorganizationwithchanges inexternalenvironment.However, as the studieshave revealed theunderstandingof theimportanceofchangemanagementinbusinesspracticeandalongwithincreasinglystrategicroleandclosercollaborationwithsuppliers,wecanhopetoseeimprovementsinthatfrontinsoonerfuture.

Internal Collaboration 21

[3] InternalCollaboration Strategic purchasing is most often associated with external relations. However, purchasing integration and internal collaboration are the enablers of every corporate strategy. The aim of this chapter is to explain the connections between purchasing and the companys competitive priorit ies as well as emphasize the need for interdepartmental collaboration.


Introduction

Many literature sources across disciplines have described collaboration as interaction, wherecommunication in the formofmeetingsand information flowsareemployed tobonddepartments(Souder, 1977), (Trent,etal., 1994).Communicationbywayof task forceswasalwaysan importantintegrationmechanismduring the startupand final stagesofproductdevelopment.Souder (1977)definesthe interdepartmentalcollaborationasAstateofhighdegreesofsharedvalues,mutualgoalcommitments,andcollaborativebehaviours.Nowadayscompaniesmoreoftensend to themarketshighlycomplexproductsandrelatedservices.Itallrequiressolidexternalactionsbutalsonecessitatesclosecooperationbetweendepartmentswithinthecompanywhereeveryonehascommongoalsandunderstandstheimportanceofcommunicatingwithothers.

Importanceofinternalcollaboration

Interdepartmental interaction represents the communication aspects associated with activitiesperformed by different departments within a company. Such activities address verbal anddocumented information exchanges between specific sides; therefore they correspond to bothtangibleand intangibleassetsof the company (Trent,etal., 1994).All theactivities shouldbewellstructured, clarified and standardized whenever it is possible. If the work division is not clearemployeesmaybecomeconfusedovertheirroles inthecollaborationprocessesthatcancontributetofrustrationandseriouscorporateproblems.Also,ifinefficient,collaborationcanbetimeconsumingand can impactnegativeoutcomes i.e. lackof agreement andunderstandingbetween leaders andotherparticipants (Shani,et al., 2008), (Trent, et al., 1994). Therefore it isnecessary todefine themeaningofcollaborationineachcompanyandsetthestandardsforeffectiveinformationsharingandintegration.Asmentionedinchapter [2],purchasingorganizationshouldbetheenablerforeffectiveinternal cooperation aswell as collaborativewith other departments i.e. by using crossfunctionalteamsandleadership.Theconceptofcrossfunctionalteamshasbeenlatelybroughtupasanefficienttooltomanageexpectationsofthedepartmentsandthecompany.Whileitisfairlysimpleintheory,itspracticalimplementationisveryoftendifficult.Alotoffirmsmustchangetheirbusinessbehaviourand overcome previously established functional structures of reporting and sharing information.Powerfulcrossfunctionalintegrationrequiresacorporatecultureofparticipativeteamworkwithinallcompanyslevelsandacrossdefinedfunctionallimitations.(Trent,etal.,1994)

It is importanttodefineresponsibilitiesofpurchasingorganizationandotherorganization insidethecompany e.g. manufacturing, R&D, logistics, marketing. Therefore there should exist so calleddepartmentspecificactivitiesinordertoclearlydefineinternalcompetences.Someofthemwouldbe interrelated but the rest would reflect low interdepartmental interaction and lowinterdepartmentalcollaboration,sinceactivitieswouldbe internal to thedepartment.Nevertheless,

Internal Collaboration 23 introduction of new products and product changes very often requires collaboration of severaldepartments. In such cases the purchasers knowledge should be supported by engineers, adevelopmentteamandsalesrepresentatives.Itisthecommonviewthatprovidesthebestdecisionsandresults.(Kahn,etal.,1996)

Followingthediscussionitcanbestatedthatpurchasingintegrationinvolvestheactiveparticipationofpurchasing inthestrategicdebate inthecorporationand isaimedatpromotingthealignmentofpurchasing practices and goals with strategic business priorities. Purchasing integration relatespurchasingplansandpractices tobusinessvision,and shapes seniormanagementsperceptionsofprocurementsstrategicroleinthefirm.(Narasimhan,etal.,2001)

Someofthefieldresearchers,however,arguethatsometimes interdepartmentaldiscussionmeetsalotofproblems.Collaboration isunderstood as an involvedprocesswhere employeesmaynotbeproductivebecauseof timeand resourcespent to takepart incrossfunctional trainingand relatedactivities. Such actionswithout immediate resultsmightbeundesirable fromuppermanagementsperspective.Thinkingintermsoftransactions,departmentsareconsideredtobeindependententitiesthatmaycompete forcompanys resources,and thecollaborationbetweenspecificdepartments isconsidered tobeoccasional and costincurring.Due to competitionandperceived costs,managersview meetings and information flows with other departments as negotiations, where eachdepartment tries to get the best deal at the conclusion of themeeting or information exchange.(Kahn,etal.,1996)

It is important to point out that the level of purchasing success and the following success of thecompany depends on the fit between the companys functions. In case of purchasing initiative, astructure should be established to enable cooperationwith other departments. The departmentsshouldgiveeachotheramutualsupport inorderto improveoverallcompanysperformance.Whensettingupcollaborationprocesses,issueslikedivisionofresponsibilities,fieldsupportandinformationsharingshouldbedetermined.Byestablishthepurchasingdepartmentsfitintothecompanysotherfunctions it also creates a support for already established collaboration to improve and deliveroutcomesthatareinfavourforthebusinessperformance.Further,itcanbeobservethatthelevelofinvolvement of purchasing organization depends on a project and its complexity. Sometimes theinternalfocusofaprojectmaylieinotherdepartmentse.g.manufacturingandproductdevelopment.Despite the less important role of purchasing in some cases, it is still necessary to exchangeknowledgeandexperienceinordertosuccessfullycompletetheproject.


Purchasingcollaborationwithotherdepartmentswithinthe

internalorganisation

Itcanbestatedthatpurchasingworksasan intermediarybetweensuppliersandthefocalcompanyand takes a role of a relationshipmanager. It should have the ability to communicate effectivelyincluding thepotential contributions todesignand technologyexperts internally. It is important topoint out that the purchasing department does not have to coordinate all of the contacts withsuppliers.Other important departments like Research and Development (R&D),Manufacturing orSalesmay have themain and significant knowledge about a product and suppliermarket. In thiscontext,aclosecollaborationbetweenthedepartments iscrucial. Thepurchasingorganizationmaynotconstantlyplayamajorrolebutitshouldalwaysberesponsibleforsupplierselection,contractingandmonitoring aswell asmaintaining right relationships. The following sectionswill describe thepurchasing departments collaboration with other departments in the organisation. Thesedepartmentsare;R&D,manufacturingandlogistics.

PurchasingR&Dcollaboration

Purchasinginvolvementinresearchanddevelopmentactivitieshaslatelygrownintoamorestrategicissuethaneverbefore.Apartfromthe internalclosecollaborationbetweendepartments,firms lookfor supplier capabilities in engineering, design, testing, manufacturing, tooling, delivery andresponsiveness.ThisnewapproachhasbeendescribedbyNarasimhanetal. (2001),which indicatethat with the assurance of increased volume commitment and increased familiarity with a widerassortmentofparts,supplierscan focusondesignandprocess improvements.Taking intoaccountthisreality,theroleofpurchasinginvolvementinproductdevelopmenthasincreasedalot.Morethanever, the interdepartmental collaboration within research and innovation is essential for thecompanys longtermsuccessandprofitability.Leadershipand jointproblemsolving implemented inpurchasing organization are the tools to support developing critical products and processtechnologies.(Narasimhan,etal.,2001)

Purchasingpracticesmayinvolveextensiveinvestmentsanddevelopmentsuchasqualitytrainingforsuppliers, organizational change towards integration, developing strong internal ties throughmembership in strategy development teaming, information sharing, and joint decisionmakingactivities. The total costs tied up into these undertakingsmay be lowered by an efficient internalcollaboration and planning. Further, these benefits can contribute to longterm profits and solidbusiness establishment. For instance, the design for manufacturability can achieve leadtimereduction, better quality, less rework and cost reduction. An effective collaboration betweenpurchasingandproductdevelopmentcanleadtobetteroverallmaterialsmanagementindownstreamprocessesinsidethecompany.Bonaccorsi,etal.(1994)concludedintheirfieldresearchthatanearlyinvolvementofpurchasingorganization can enable efficient researchwithin relevant suppliers and

Internal Collaboration 25 improve a companys performance in the future. However, it can only be achieved when thepurchasinginvolvementandcollaborationismanagedcarefully.(Bonaccorsi,etal.,1994)

MostoftenthecollaborationprocesswiththeR&Ddepartmentinvolvescontactingcompanysengineersregarding specific components, materials and technological solutions. Typically, growing degrees ofprojectinnovationandcomplexityareexpectedtoleadtotheincreasinginvolvementofpurchasers.Thelevelofpurchasingcontribution inproductdevelopmentcanbediversee.g.onparttimebasis, fulltimebasisandprojectcoordinationrole.(Lakemond,etal.,2001)

According to the same author there must exist several factors that drive the need for purchasingcollaboration:

1. The presence of an internal organization that is able to support communication andcoordinationinproductdevelopment

2. Thecompetencesandsillsofthepurchasers intermsofpersonnelwiththerighteducation,skillsandexperience;understoodaswellestablishedpurchasingorganization

Figure4Configurationsofpurchasinginvolvementinproductdevelopmentprojects(Lakemond,etal.,2001)

Figure 4 presents different organizational mechanisms that have been suggested to coordinatefunctional interfaces between the departments of an organization. Purchasing can for instancebecomeinvolvedinaproductdevelopmentprojectbasedondirectcollaborationbetweenpurchasers

Purchasing Management 26 ordevelopersandengineers.Thepurchasingisnotreallyintegratedintheprojectteambutisinvolvedoccasionallywhenthesupportisneeded.Generallyspeaking,thecollaborationmayhaveadedicatedbasis (purchasers work full time in the development projects), a parttime basis (operationalpurchasing)oracoordinationrolewheretheprojectworkissupportedbythepurchasingteamfromthedepartment.(Lakemond,etal.,2001)

Figure5Theregionalpurchasingofficeforaregionalsupplybase(Lakemond,etal.,2001)

Figure5presentsanotherapproach that is common forglobal companies. Increasing competitionandmarketrequirementsputmoreconditionsinmanyindustries.Once,aDutchmanufacturerofcopierandprintingsystemsestablishedaregionalpurchasingofficeinAsia,inordertoreducetimetomarketofnewproducts, decrease costs and intensifymonitoring global development activities. Initially, the externalsupplier basewas aimed at investigating theAsian suppliermarket.However, later itmoved towardssetting up a purchasing specialist role with the responsibilities of an account buyer and regionalpurchasingmarketresearcher.(Lakemond,etal.,2001)

PurchasingandManufacturingcollaboration

Thereexistsastrategicandmeaningfulrelationbetweentheactivitiesperformedbypurchasingandmanufacturing departments. Thoroughly selected suppliers and close relationship with them cansupport production efficiency and reliability. Watts, et al. (1992) emphasized the importance ofachievingcongruencebetweenpurchasingobjectives,actionplans,manufacturingandbusinessgoals.To accomplish this, purchasing must be a full participant in business strategy formulation andimplementation.Integrationhasbecomeanewcorecompetenceforalotofcompanies.Inthispartofthebook,thecentralargument isthatawellalignedpurchasingstrategyhasacrucial impactontheachievementofmanufacturingandoverallbusinessgoals.

Internal Collaboration 27

Figure6PurchasingandmanufacturingintegrationHypothesisedmodel(Narasimhan,etal.,2001)

The simplemodelpresentedonFigure6 showspurchasing integrationandpurchasingpracticesashavingamaininfluenceonmanufacturingperformance.Forinstance,apositiveconnectionbetweenpurchasing practices and manufacturing activities may be maintained by supplier integration andsupply base management. Besides, purchasing integration can enhance the alignment betweenpurchasing practices, and manufacturing and business priorities, making it easier for purchasingdepartmenttocontrolmanagementattentionandsecureorganizationalresources.Itisreasonabletoarguethatbesidesaffectingmanufacturingperformance,purchasingintegrationcanactuallypromoteinvestments in purchasing practices that impact manufacturing performance (Narasimhan, et al.,2001).EfficientcollaborationbetweenthesetwodepartmentswithcooperationofR&Dcanpositivelyaffectcostreductionandqualityperformance.Joindecisionmakingprocessesenablebuildingavaluechainfromintroductionofnewproductstocustomizationandreliabledelivery.

It is important tounderstand thatsomeof thepurchasingstrategicdecisions i.e.supplierselection,contractingandsupplierevaluationarenotpossiblewithoutclosepartnershipofthemanufacturingdepartment. Very often it is the engineering knowledge that affects external collaboration withsuppliers and enhances searching for new product possibilities. In corporate reality, it is theproductioncompetences,capacitiesandeff

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