Because of the need to curb the costs involved in this crucial supply chain channel, companies have began to consider purchasing as a strategic rather than a tactical function in the overall supply chain. “Strategic purchasing” aims to reduce the cost of materials that are consumed in production by a company by streamlining the purchase process with the embedment of IT resources and cultivating long term and effective relationships with suppliers. Like other strategic moves, the transition from tactical to strategic purchasing requires a structural change within the organization that places importance on the long term goal to be achieved. For purchasing to take on a strategic role in a company, its people, processes and structure need to be aligned accordingly that synergize the supplier relations and cost and quality of products to produce best practices and solutions for the company. The paper discusses the need for the shift from transactional role of purchasing to a strategic one and the relevant, process and people issues that have to be curtailed to achieve the desired objectives.
The importance of having strategic supplier relations has been stressed far and wide by academic literature. Porter identifies the bargaining power of suppliers as a crucial force affecting the competitive position of a company in a market. Companies have to purchase require raw materials to produce the final product to sell to the consumer market. The power of suppliers comes from the prices that they are able to charge to their customers. If, in an industry, fewer suppliers exist, the company has no option but to go to the same suppliers and settle on the prices that they charge (Dess, 2009). This gives the supplier all the power to exploit the customer with higher prices, allowing it to capture more value out of the prices charged for the supply of the product. When suppliers have power in an industry, its profitability reduces as it gets squeezed out through the prices charged by the suppliers. Suppliers with its services spread across various industries try to extract maximum profits from each one and holds power. Suppliers, with concentrated business in a key industry that produces a large volume of profit for them, will try to control their prices to sustain the customers tied to them (Scollish and Semanik, 2011).
The shift and transition from conventional tactical purchasing to strategic purchasing involves fully transforming the purchasing systems and relationships. It requires automation from top to bottom in the purchasing department and its operations. In the contemporary business environment, cost efficiency is tied with automation of operations. The online portals and software allow streamlining activities, processes, channel members and targets under cost parameters. Thus, the foremost requirement of the shift towards strategic purchasing is the automation of the purchase process (Dess, 2009).
The process has to cut down on paper work and move towards e-procurement using “point and click” ordering methods. The online system ensures keeping track of various orders of different sizes and multiple suppliers. Not only raw materials but such web-based ordering and purchase systems can be applied to office suppliers, IT supplies, etc. The automated and intranet enabled ordering and purchasing processes allow the mangers to identify which suppliers to move ahead with that allow cost advantages to be received and how to manage orders for Just-in-Time production (Scollish and Semanik, 2011).
Many companies that focus on Just-In-Time production and online selling of goods have transformed their procurement to be fully automated and tied with long term suppliers being used as strategic partners. The supplier relations are an important element of strategic purchasing. Companies have to identify the suppliers to move ahead with and tie mutual benefits together to pursue a long term relationship with them (Scollish and Semanik, 2011). Cost effective relationships can only be developed if there are benefits for both parties. In the face of economic turmoil, struggling Western companies have sought low-cost prodders in emerging markets such as India and China to obtain cost advantages, by offering their economy benefits of job opportunities and improved standard of living. Marks and Spencer, for example, has developed long term strategic partnerships with producers in India and China that continue to provide it with cheaper supplies of goods.
The biggest challenge involved in shifting the tactical role of an activity to a strategic role is converting the behavior and attitude of people. The transition can be implemented effectively and successfully without aligning the employees and managers under the strategic goals of the company (Ellram and Birou, 1995). For purchasing to become a strategic function, operational managers to have to educate employees and transform their task-centeredness to goal focus. Automation usually removes the need for a large number of staff and the ones that are used have to be fully trained with the IT resources being used in the processes and management (Scollish and Semanik, 2011). The desired cost and performance efficiency can only be added to the function by transforming the concerned people as well as the processes. Managers have to apply coaching, mentoring and leadership approaches with strategic focus to translate the performance requirements from employees to move the tactical nature of the function they perform to a strategic nature. Employees have to be motivated to change their focus and for this managers have to identity the appropriate change management and leadership techniques (Dess, 2009).
Apart from effective leadership techniques, the purchasing managers need to acquire negotiating and effective communication skills to negotiate with suppliers on prices and quality of suppliers. This is highly crucial for developing long term partnerships with suppliers. Purchasing managers can no longer be silent creators dwelling in the operations department of the company (Scollish and Semanik, 2011).
For purchasing to be a strategic function, managers have to transform themselves to become a source of competitive advantage for the function as well as the organisation. They have to realise and see themselves as an important element within the organization and not isolate themselves from the rest of the functions. Companies are now giving purchasing managers and other employees in the purchasing department cross functional training sessions and seminars regarding the strategic role of purchasing to enable them to equip themselves with complete knowledge and awareness regarding how their performance ultimately translates into effectiveness for the overall company’s performance (Ellram and Birou, 1995).
Apart from the human resource, other essential resources are also required for cultivating strategic relationships with suppliers and adding automation to the process. These include communicate channels and networks that facilitated inter-departmental and external communications with suppliers. IT resources are highly crucial that allow intranet networks to be built, online systems to be developed as well as allow managers to make strategic decisions with the help of decision support systems and enterprise resource systems. The purchasing managers need to have the resources that allow using information from Business Intelligence to gain industry know-how such as regarding the suppliers used by competitors and prices paid by them.
Companies have become bound under pressures to control costs and acquire competitive advantages to accept purchasing as a strategic function in the organisation. The transition from tactical to strategic purchasing requires structural, managerial and procedural transformation that comprises of automation, forward thinking, and long-term relationships with suppliers and performance centeredness of employees.