Chap 2 purchasing decisions and business strategy

PURCHASING DECISIONS

AND BUSINESS STRATEGY

Chapter 2

Prepared by:

Michael A. Alonzo

IGCF

4 Decision Areas of Purchasing Strategy Framework

1. Supplier development – New product/Substitute product development

2. Supply management • Number • Size• Location• Financial health• Engineering• Relationship

3. Scope of manufacturing Activities.• Make product or buy product

4. Buying Criteria• Purchasing scale• Ordering policy

Components of Purchasing Strategy• Purchasing actions are determined by the

firm's competitive priorities, its resource capabilities and the environment.

• Purchasing strategy must consider:

1. competitive priorities

Two Generic Competitive advantageSpeed

Reliability

2. organization's strengths and weaknesses

3. competitive environment

The General Competitive Strategy Options

Cost - should drive all the costs downDifferentiation – enhance uniqueness in quality or

flexibility on customer service

• The competitive strategy must be articulated in terms of competitive priorities

• priorities to dimensions such as the following:• cost• quality performance• quality conformity• product flexibility• volume flexibility• customer service

COST VS DIFFERENTIATION STRATEGIES

DECISION AREAS COST DIFFERENTIATION

Purchasing Criteria Low cost/unitConsistent quality

High Quality

Bargaining Basis Economies of Scale Economies of Scope

Supplier Multiple One or Few

Supplier Size Moderate/large capacities

Moderate/small capacities

Purchasing/Buying Criteria

– Must reflect firms‘ competitive priorities

Example:

• Cost priority:

– high priority to purchasing costs

• Flexibility priority:

– high priority to lead time in buying material

Buyer’s Performance

The criteria on which the buyer's performance is evaluated can influence the effectiveness of purchasing actions

• Cost variance seems to be the dominant criterion

• Reward criteria determines the firm's actual priorities

Environmental Factors to consider

1. Inflation rate

2. Monetary policy

3. Fiscal policies

4. Technological development

5. Industry capacity

6. Market growth

7. Global Stability

Reasons for the emergence of supplier partnerships as a competitive weapon

1. Increased competition

2. Deregulation

3. Increased use of electronic data interchange (EDI)

4. Increased just-in-time

(JIT) manufacturing

Major Characteristics of Industrial Buyer/Seller Relationships

1. Degree of risk/reward

2. Relationships

3. Information

4. Planning

5. Asset ownership

Supply Chain Relationship Quality (SRQ)

1. The entire supply chain must be competitive in addition to individual firms.

2. Tool for achieving continuous improvement in the industrial supply chain

3. The objective is to provide a valued product or service to the ultimate stakeholder (customer)

4. Helps balance the needs of the buying organization and the needs of the supply chain itself

5. Concerned with the extent to which cooperation, trust, commitment, satisfaction, and performance expectations influence the relationships in the same industry

The Strategic Sourcing Plan

The purchasing function must be integrated into the firm's overall strategic planA strategic sourcing plan requires:

1. A complete understanding of corporate strategies and marketing plans

2. An extensive evaluation/study of current suppliers, how performance is measured, and the expectation of suppliers relative to the industry

3. Study of the degree of global purchasing opportunities4. Identification of total costs associated with current

purchasing department/function, budgets, staffing, and so forth

The 4 Phases of Strategic Sourcing

1. Sourcing Audit

» A diagnostic process that identifies opportunities for increased profitability

2. Organizational Development

» Developing sourcing strategies

3. Implementation and Evaluation

» Indoctrination of the company with sourcing strategy

4. In-House Training Sessions

» Learn state-of-the art purchasing techniques, negotiation strategies, and cost containment methods

END