Topic: How to manage global purchasing during tough economic climate: model compared

Topic:How to manage global purchasing duringtough economic climate: model compared.

By

Olushola Adeborode Kolawole (Heriot Watt University,UK)

Abstract

Global purchasing has been view as process by which organization source their compmonet t

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INTRODUCTION

Global purchasing has move from the primary function of buyingand selling into a more dynamic function of business strategythat provides more competitive ground for industry (Geldermanand Arjan J. Van Weele, 2002).The activities of globalpurchasing involve global manufacturing of goods, sourcing ofraw-materials and distribution of finished product amongcountries of the world. This journal set out to criticallyevaluate, what should be the added contribution of globalpurchasing in an economy and in relation to businessenvironment in the likely difficult Economy in the yearsahead. In undertaking this discussion, we will start bydefining the word global purchasing and other concept and howit affects Economy, by looking at the role of globalpurchasing. To complete this discussion, we will be comparingtwo purchasing portfolios model and how company can managetheir risk that is associated with global purchasing.

DEFINING CONCEPT

In literature it was noted that the world global purchasinghas been use in different terms among which are internationalpurchasing, global sourcing and international sourcing, allmean the same in literature today and all this will be usedinterchangeably. (Mol, 2000) defines global purchasing as wayof finding and managing sources for production of finalproducts on a world- wide basis. However, (Spekman, 1991)argued that global purchasing should involve the efficient useof human and non-human resources from different part of theworld. (Johnson and Wood, 1996) gave a more detailed

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definition of global purchasing, they sees global purchasingas the buying component and inputs anywhere in the world insuch a way that the manufacturer puts a much broader netrather than relying only on local sources. Global Purchasing,can now being seen as the opportunity to interact with otherbusiness unit across the globe, this interaction may now beinform of buying and selling of raw materials, finishedproduct, labour sourcing in order to get competitiveadvantages over other organization .

Reason for global purchasing and its risks

Much literature has been written on the benefit or reason forglobal purchasing. We can see that going globally,organization want to enjoy competitive advantages overcompetitors (Frear et al., 1992). Every business on earthwishes to maximize profit and minimize cost of production.Some of the reason for global purchasing is that it will giveorganization opportunity to be exposed to different technologythat will make them to be more competent than theircompetitors. Past literature has shown a lot of reason whyorganization go globally, which may include, low price oflabour, raw-materials, new technology etc. (Min and Galle,1991). Meanwhile, (Monczka and Trent, 1991) gave a four stepmodel which an organization should take when making apurchase. The steps are; domestic sourcing (needs to considerif it can be sourcing in the country where it operate);Foreign sourcing (this should base on the decision to gainingcompetitive advantage over other organization); foreignsouring which base on the strategic method of the organizationand global sourcing which should base on strategic decision offind low cost of labour, supplies, raw-materials and newtechnology. There should be a cogent reason why anorganization should source globally.

No doubt global purchasing can help organization to enjoycompetitive advantage over other organization but, it has alot of destructive challenges among which are logistics

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problem which may be affected by long distance in case ofperishable product, communication could be another majorproblem in global purchasing, trade barrier and culturedifference etc (Nexhmi and Miyamoto, 2000)

Economy Crisis and Globalization

Economy crisis will definitely affect global purchase but thefact remain that organization should be able to know how tomanage their purchasing during this period. Review the recentglobal economic meltdown that befall the world which make someorganization to be out of business and some are yet torecover from the shock received during this period.nevertheless the impact of this economic meltdown could varyfrom one country to another depending on the region accordingto the report from (UNCTAD, 2008c) One of those things thathappen during economic crisis is that, the price of product/orraw materials will fall in the market, the demand for productwill also fall thereby decreasing the revenue of theorganization this may affect payment of supplier services,during this period bank may not want to lend out their moneyagain because they may not be able to recover it back but notin all cases that there would be a fall in the price somethingscarcity could occur which will make the price to rise andthereby more demand could also occur.

(Stern, 2006), argued in his review of the climate change thatthe world economy could reduce by 5 to 20% if no action istaken on the management of some environmental polluted factorswhich could affect purchasing globally. This means,environmental pollution can bring about an economic crisis, agood example of that is the recent earthquake that happens inJapan and currently the country is yet to recover from theshock which has really affected purchasing of raw-materialfrom the country and their supply chain is also affected. Therecent one is the flood that has taken over some Africanscountries. This has really affected the agriculture product ofsome of the area that was affected by the flood thereby

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bringing about a disruption in the supply chain of suchcountry. It can be concluded here that there is going to be afall or rise in the price of goods/raw-material that is beensource globally during an economic crisis.

Global purchasing and Risk

In face of tough economic, how can organization enjoycompetitive advantage? The answer lies on how an organizationcan manage their risks.

Changing in business climate is affected by a numbers offactors which include changes in the weather, changes indemand by the consumer, price, taste, government policy,reduction in the quality of the product competitors actionsmarket dynamics all these have increase the rate of risks inglobal purchasing (Christopher et al., 2007). A lot ofliterature has been written from different fields for exampleFinance filed, Economic and management, they have written tohelp organization to learn how to manage their risks. Risks isdefined by the (Group., 1992) as ‘a combination of theprobability or frequency of occurrences of a defined hazardand the magnitude of the consequence of the occurrence’ Risksis always associated with loss but (March and Shapira, 1987)argue that there could be some gain that an organization canderive from risks, it imply that risk has two outcome thepositive and negative outcome. Any organization that wish togo for global purchasing, must, first count the risk that maybe involve in their decision some of the risk was suggested by(James, 1990) he gave five factors that an organization mustconsider before going for global purchasing which includeconsidering the environmental risk of the country, politicalrisk what is the political situation in the country that mayaffect purchasing, economic risk, social risk and technologyrisk of the country. Organization should be equipped with theknowledge of what is happening in the country where they wantto source their component, so as to be able to adjust quicklyto any changes that may occur there in.

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Managing Global Purchasing Risks: model compared

Having understood the risks associated with global purchasingand despite all these risks, how can business enjoy addedadvantage? In answering this question we are going to considertwo models that try to provide solution on how organizationcan make wise purchasing during tough economic climate. It isobvious that many models have been written on a portfolioapproach in managing purchasing. In this literature we goingto discus two models that has been widely use both in Europeand American.

The two models are: Kraljic Models (1983) and Monczka Model

Krajic Model

The first model, to be discus is (Krajick, 1983) Model, heintroduce the first and the most dependable approach inmanaging product for the benefit of purchasing industry(Gelderman and Weele, 2005). Kraljic introduce 2 by 2 matrix,which categorise purchasing product into four, which areBottleneck, non-critical, leverage and strategic. Kraljic wentfurther to classified product on two dimension which areprofit impact and supply risks impact (for low and high).Thisfour categories has a different approach towards reducingsuppliers risks and as well as maximizing profit(Gelderman andArjan J. Van Weele, 2002).

The reason why this model was developed was to help purchasingorganization to minimize supply risks and reduce costs, bymaking best use of their purchasing power most especiallyduring tough economic climate.

Figure 1.shows the formulation of Kraljic model into 2 by 2matrixes.

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Source: (adopted fromwww.mindtools.com/pages/article/newSTR_49.htm)

How to use Kraljic Model in global purchasing

Kraljic Model is divided into four steps of productclassification which suggested that we need to classify ourproduct base on the following four stages.

1. Purchasing classification2. Market Analysis 3. Strategic Positioning 4. Action planning

This four steps is represented in figure 1

Now to apply Kraljic method 1: Classification of product to bepurchase

The first thing that an organization must do is to classifythe product they want to buy into two ways: (i) classified theproduct according to their supply risk and (ii) classified theproduct according to their profit impact. Using this method ofpurchasing classification, organization should differentiatetheir purchase product into the following category:

1. Strategic items: (High profit impact and High supplyrisks).here organization should be aiming at this point,

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because they will be able to develop long-termrelationship the instrument to use include diversifyingtheir activities, exploit and be at the balance position.

2. Leverage items: (High Profit impact and Low Supply risks)organization should not relax at this point but shouldaim at strategic items. The purchasing approach hereinclude exploit power, this will help organization to usetheir exploit power to place high volume orders. Thereshould be a competitive bidding in order to exploit theleverage position

3. Bottleneck items: (Low profit and high supply risks)organisation should order large quantity when the productis available, they should purchase in volume and alsokeep as safety stock. Insurance play a significant rolehere

4. Non-critical items: (Low profit impact and low supplyrisks) organization should use efficient processing atthis point by going for individual ordering and theyshould try to optimize their inventory level.

Kraljic method 2: Market Evaluation

Here the organization should compare her bargaining power as acustomer against that of the supplier. The organization shouldalso review the supply market and know whether the strategicpoint is available base on the quality and quantity of productas noted by (Krajick, 1983)

Kraljic method 3: Strategic Point

Here organization should identify items in the strategic box,in order to do this; we need to enter all products intoKraljic Matrix box.

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Sources (adopted fromwww.mindtools.com/pages/article/newSTR_49.htm )

Figure 2 show us the strategic items with their instrument

Kraljic method 4: Action plan

Kraljic gave three purchasing strategic points which includefrom figure 2:

1. EXPLOIT; - Here Kraljic advised that organization shoulduse high buying power to secure good price and to enjoylong term relationship from different supplier. This willhelp to reduce supply risks and help to make sportpurchase.

2. DIVERSIFY: - organization should try to reduce supplyrisks by sourcing for alternative suppliers oralternative product.

3. BALANCE: - this point, organization should balanceexploitation and diversifications together there shouldnot be a difference between the two.

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Kraljic approach gave us two ideas which are very important;ability to know and account for business risks and usingpurchasing power in a more competitive ways.(Gelderman andWeele, 2005)

Monczka Model

(Brigitte et al., 2011) in thier litrature compared the modelof Kraljic and Monczka in their litarture purchasing modelwill also be considered in this literature which was notconsidered by Brigitte et al. Monczka model was developed atMichigan State University (MSU) and it was named after theUniversity as Monczka Model. The model has been a good toolsfor purchasing strategy in the United State of America weremost organization make use of the model to make importantdecicsion in purhasing (Brigitte et al., 2011)

The model unlike Kraljic, identify eight important step inidentify strategic purchasing by organization. Figure 3 showsus the eight steps as presented by Brigite el at

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Figure 3- MSU model of Monczka

Sources:adoptedfrom(http://www.logistiek.femplaza.nl/documenten/wildau%20Models %20for%20decision%20making%20in%20purchasing%2021%2008%202007.pdf.)

Step 1: organization must decide wether to go for outsourcingor to opt for insourcing

Step 2: organization must group thier product to see if thereis any similarity between varuious product/items so that canbe treated in theasme way.

Step 3: this step will help organization to look for sound andgood suppliers and they can be find through there quoatation

Step 4: identify and manage the supplier potential

Step 5: use the supplier as soon as possible before the actualproduction

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Step 6: make use of your supplier in the actual production seethem as useful tools and let them know your sucess is theirsucesss and via versa

Step 7: recorgnize and develop the quality of the skill inyour supplier for your future orders

Step 8: try to reduce your cost and risks for you to becompetitive

Model compare

(Brigitte F et al., 2011) concluded that step 2 and 3 of Msumodel covers Kraljic models.Msu models covers all purchasingfunction,while kraljick help organiztion to tackle a veryimportant part of purchasing both model have thier positiveside and nagative side. (Brigitte et al., 2011) concluded bysaying Kraljic should be the best solution for a positivepurchasing methods for organization.(Brigitte et al., 2011)gave the folowing reason to jusitfy thier recommendation.

1. kraljic model involve creativity and needs thoughtfulnessit means Kraljic does not provide solution but ratherhelp you to deteremine the solution by yourself unlikeMsu model that serve as a checklist before you get to theend,with Msu,it means an organization can not be creativein determinin the best time to make purcahsing.

2. Kraljic Model is easy to understand and also easy tocommunicate,kraljic tools could be use to convince otherdepartment on what sholud be done. This was becauseKraljic explain all it the component of the model whileMsu model is more complicated.

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Conclusion

It can be concluded that the model proposed by Krajic canhelp organization to be creative as well as help them tomake best use of the tough economic climate. Organizationshould be aware that there could be a gain as well as a lostin going globallly depend on how they manage the the riskassociated with going globally. Some of the risk can areassociated with global purchaisng has been identify fromthis discussion as well as solution in managing such riskshas also been prosposed. Organization should endeavour toshow concern on how to reduce risk that may cause a greaterdisruption in business, this can be done by applying supplychain resilience, and this will allow organization to beaware of the risk that may associate with their business.Organization should be able to react and response tounforeseen circumstances that may want to be fall theirbusiness in doing this they should apply krajic method.Organization should know how to manage changes and how toadjust to situation caused as a result of risk. Kraljicmodel should also be a good tool in determining the rightproduct to purchase, Kraljic allow organization to determinewhat they want and how they should go about making selectionof supplier and when to buy a particular product. Kraljicstrategy will have a positive impact in making decision onpurchasing in global purchasing. Kraljic model helporganization to understand the power of negotiation.

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