Growth in the Strategic Role of Procurement - Assignment Example

Growth in the Strategic Role of Procurement al Affiliation Introduction The practice of managing the several aspects of a business separately is fast becoming a thing of the past. Today, business enterprises are being managed on a more global and holistic perspective. Procurement has now been integrated into the management strategies of the organizations in order to create a competitive advantage. Some of the enterprises such as Toyota Motors Corporation and Samsung that have done this continue to record a lot of success and profitability in the dynamic and more competitive global market. The procurement process is dynamic and thus allows the company to interact with several other businesses. In most instances, it is well structured to limit any case of mismanagement. Each of the participants plays a collaborative role for the benefit of the company. The discussion of the role of procurement tends to assume an understanding of the various elements inherent in the process. This ranges from the identification of the needs of the business to the various steps put in place to aid in managing contracts that have been signed with the various suppliers. The entire process needs constant reviewing in order to allow for the identification of the emerging needs. The procurement process can broadly be divided into the planning, sourcing and management phases. According to Bailey (2008), all the phases in procurement are very important. However, the successful companies are those who have laid more emphasis on the planning phase. The reasons for the growth in the strategic role of procurement in businesses are varied. In this treatise, two categories of factors will be looked into. They are the reason related to finances and those associated with production. Each category will be considered differently with the available practical examples being given. The difficulties experienced in achieving this particular strategic position will also be explored. It will also be backed by examples from different industries and sectors. Procurement Life Cycle Main Reasons for the Growth in the Strategic Role of Procurement Financing Related Reasons Cannon & Homburg (2001) attributes four major factors to the increased emphasis on the inclusion of procurement process in the management procedures in most organizations. The first reason is related to the amount of money used in buying materials and services for a company. A review of the profit as well as the loss accounts for a majority of global enterprise reveal that there is always continuous growth in terms of the amount of capital used in purchasing materials. These businesses cannot put so much money in buying commodities without putting in place the right kind of procedures meant to ensure that the best method of procuring the items is used. These organizations have realized that for the best returns to be obtained from the investments, emphasis needs to be placed on how procuring is done. The second factor is the realization that there is always a great potential for profitability and profit making in purchasing. The procurement process in place determines the level of cost saving that will take place in a company. Organizations with effective purchasing processes are able to realize major cost savings by buying the best materials as well as services at the best offered prices. There are two major ways that are used in ensuring that best prices are attained. They include buying in bulk and buying when the items being procured are overstocked. According to Syson (2005), the right procurement practice and process allows a business to know the suppliers who are capable of meeting its demands. This way, they will be able to reduce the cost and expenses associated with late delivery or total failure to deliver. Moreover, procurement is also being used today to increase profitability by helping reduce taxes significantly. This is done by skillfully using products and parts. In most instances, proper justification of a fall in the value of any part coming as a result of development of a product will lead to a reduction in the tax expenditure. Reduced taxes will translate to increased profitability. The third finance related reason for the growth in strategic role of procurement is the need to create value by using the procurement processes and procedures. By approaching procurement from an organizational standpoint, an enterprise will not only be able to save on cost but also increase its value. A prime illustration of such a firm that has been able to do this is LG Electronics. This Korean electronics giant made three changes to its procurement process and procedures were key in increasing its value and profitability. The business altered the way it bought items. Initially, it purchased commodities in accordance to product line. This was changed to an approach of buying based on the manufacturing stages in production. This allowed it to buy in bulk and save costs. In addition to this, LG restructured its procurement department to make all the members work as a team. The head of the department was also accorded an executive level position. It allowed him to voice his opinions on the overall operations of the business. By doing this, LG Electronics saved about $35 billion from 2009 to 2013. The fourth reason causing the said growth is the reduction in the emphasis placed on the price of commodities and services alone. Traditionally, most business centered their procurement procedures on getting the lowest price for the items and commodities. This has changed with a more comprehensive approach being used. Such approaches not only consider the cost of the items but also the supply cost and ownership costs. An example of an enterprise that has done this is Lafarge. This cement company has realized significant cost saving by using regional approach when identifying suppliers and vendors. The company takes the total cost of ownership approach that views the total expenditure in buying as an integral component of the entire cost of items. By doing this, it can minimize the cost while maximizing value at the same time. Such a proactive approach allows these companies expect increased savings at the end of each fiscal year. Bailey (2008) states that; “even though each business is unique in its own way and will require dissimilar management approaches, it is quite evident that the tactic used will impact directly on the financial position of the business”. If well managed, a business can be able to realize increased profits. Production Related Reasons In this second category, there are also four major reasons known to lead to increased emphasis on the integration of procurement in a company’s management process. The first reason is the availability of an integrated and holistic information flow in the organization and between the company and its suppliers. In the current competitive and dynamic global market, businesses and suppliers normally come together and jointly agree on the specifics of the items being requested. This is caused by the adoption of a more collaborative approach by most enterprises at the expense of the more divisive ones that had earlier been used. The procurement personnel are now active participants in the manufacturing process in various aspects. The second factor is the increased communication and participation of the relevant partners and heads in the entire procurement process (Heinrich, 2003). Such participations result in easy flow of vital information among the involved parties and department heads resulting in increased efficiency and effectiveness of the process. The positive outcomes of the integrated approaches seen in some companies have encouraged those that did not value the practice to adopt it holistically. The third factor is the movement towards the use of integrated management systems in development of products and items. According to Cannon & Homburg (2001), a company is able to get more value by having all the stakeholders working with or on that particular product. The stakeholders may include the employer, employees, shareholders and the consumers. Those companies that have adopted this approach have appreciated and benefitted from it through the effectives and efficiency that it brings in product development. The procurement teams are also involved and play a very integral part in the entire process. The final factor is the availability of support in all the stages and phases of the procurement process. Several institutions are being created to help in developing procurement professionals. An example is the Chartered Institute of Purchasing & Supply that has become a means through which the various procurement processes are studied and analyzed. This goes a long way in benefitting the global business community. Some governments have taken the support given to a completely new level. This is done through the various training programs that assist businesses, agencies, suppliers and other stakeholders in improving their procurement and supply chain processes. The main idea is that the days when the procurement department worked as an individualized and isolated group is now long gone. All the units of the organizations are currently involved in the process so as to ensure increased profits, reduce cost, increase production and boost efficiency and effectiveness. Difficulties Faced During Implementation Despite the benefits associated with integrating procurement processes into the company’s management processes, some businesses have not been able to do it. This is due to the inherent challenges faced in the implementation process. Such difficulties are either caused by the internal organization structures or from external factors. Internal Challenges There are several internal factors that may impede the implementation of the new integrated approach to procurement for competitive advantage. They range from the resistance to change to lack of qualified personnel. Limited access to the required capital, repugnance to risks and lack of understanding are some of the internally faced problems, as well. According to Baitler (2008), there are some employees who are always opposing change due to the fear of the unknown. Such workers view the new initiatives as a threat to their powers and duties and thus they do whatever they can to oppose and thwart them. Some workers are more comfortable with the normal routine used over the years. As such, initiatives that are meant to bring about any kind of change whether positive or negative will face rebellion. The rebellions can be witnessed in form of gossips, strikes, work go-slows and rumors. Rebellion is not always observable as it can also take the form of refusal to conform to the new standards and procedures that have been put in place. In order to avoid such situations, continuous training and learning should be made a norm in a company. The employees should be trained at all levels so that they are equipped with the right kind of knowledge that supports the new initiatives. The stated knowledge gaining process creates another internal challenge. When training is to be done to equip workers with new skills, it disrupts the regular operations causing delays and fall in productivity and output. This at times discourages executives and managers from embracing the new procurement initiatives. The problem is not specific to any kind of organization as it is faced by both small and big enterprise. The other major internal challenge is the lack of sufficient capital and funds. According to Hunter, Bunn & Perreault (2006) low cash flow generally impacts on both the quality and amount of merchandise that is purchased by a business. This is contrary to the core principle of a carefully rationalized and integrated purchasing process. Insufficient funds impact on the delivery time. When the funds are not available, timely delivery will be compromised and thus deterring a company from embracing the useful initiatives of procurement being suggested. According to Heinrich (2003), there are those companies that have focused on the price of the commodities being purchased more than the process itself. They, therefore, go out and look for items that are available at the lowest cost. Centering the entire procurement process on price has a very negative impact when it comes to growing the department as a strategic resource of the company. The risks associated with the implementation of the new procedures and idea is also another hindrance. Risks are present in almost every aspect of the process. It is inherent in the choosing of the strategic plan, employee hiring and selecting the suppliers. In addition, mitigating some of these risks process in itself gives rise to other risks (Cousins, Lamming, Lawson & Squire, 2008). It creates soring levels of uncertainty, which acts as an obstacle to the adoption and implementation of the new ideas. The existing organizational culture may also be an impediment to new ideas. For transitional change to take place, an understanding of the business, suppliers, and customer’s culture and environment is required. Employee engagement impacts on not only the financial performance of the company but also the operating cost and embracement of change. As such, the businesses that have employees who are not fully engaged faced a lot of difficulties in altering the modes of operation of the company which are related to the procurement process. The current popular procurement theories and strategies used by organizations suggest that a business must identify its key competencies and focus the management attention to them (Baily et al. 2008). This is done to develop a competitive edge in the global and local market. Any activity and resources termed to be non-core is normally left out or subcontracted. In some firms, the procurement department is still viewed as a non-core resource that comes from the external suppliers. Others have even gone ahead to subcontract their procurement services showing that they do not appreciate the strategic value it has. Such practices hinder the implementation of new ideas. External Challenges Unlike the internal problems, this second category of factors comes from outside the organization that is trying to embrace and implement a new strategic procurement procedure. The external environment makes the process difficult in several ways. The existing regulations and government policies in an area of operation can affect the entire process. Such policies are put in place to regulate and standardize operations (Green, Morton, New, 2006). All businesses are expected to abide by the regulations in all aspects of their operations. They control how a business transacts with its consumers and suppliers. Moreover, the policies determine the parameters of operations and when they are not followed, it may have some detrimental impact on the overall survival, profitability and sustainability of the business. Examples of such policies are those dealing with environmental matters. These greatly affect businesses that get their raw materials from the environment. They include timber factories, fishing enterprises and petroleum firms. Such regulations limit and challenge the implementation of new procurement processes and ideas. Competition is another actor that is classified as an external challenge. Organizations do not operate in a secluded market. As such they have to compete with other organizations for the market share (Wan, 2010). When a competitor is able to provide better quality items at a cheaper price to the buyers, a firm that had planned to implement new strategies may be discouraged about the initiatives. In some cases the plans are abandoned all together. The final external challenge comes from the side of the suppliers. Normally, a business gets into contractual agreement with a supplier to supply a given amount of products with a specific quality within a particular time frame. Even after ensuring that all requirements are in place and an agreement has been reached, the supplier may still fail to deliver. The suppliers at times lack the needed capability to deliver good quality at the right time and when this happens, the entire procurement procedures of the company will be negatively affected. The delays not only increase costs but also reduce productivity. Natural disasters and events may also prove to be a challenge to the integration of the ideas. Occurrences such as hurricanes and tsunamis greatly affect how a business operates. Several multinationals such as Toyota Motors Corporation have had their procurement procedures altered and affected by such natural occurrences. Despite the probability of the events taking place being very low, it is normally imperative to have them in mind. The internal and external factors have made the changing of procurement approaches very difficult. These factors may be experienced at the same time and are not limited to a given type of business. The ability of the company to mitigate and find solutions to these external and internal factors will dictate how it will benefit from the use of integrated procurement approaches. Conclusion Many companies have realized the importance of procurement to their overall profitability and success. This has resulted in a global shift in the approaches used towards it. The changes are all aimed at making it a strategic aspect of the operations of the company. The process is no longer a one man or single department affair. On the contrary, the department has a team comprising of people who carry out various tasks that had traditionally been reserved to other departments. These include; carrying out supplier and market analysis. The head of the team is today given executive powers and this makes them be able to air their opinions on the overall operations of the business. The various reasons that have been outlined in this paper have clearly demonstrated why various multinationals and small businesses are adjusting their approaches to commodity buying. This has led to increased profitability and efficiency. Those enterprises that have not embraced these trends continue to lag behind on the very competitive and dynamic global market. The transition has not, however, been a very smooth one. Several obstacles have hindered the process. The challenges come from within the organization and from outside. Those who are able to mitigate and tackle the problems have reaped significantly from the changes. In future, businesses will continue to put more and more emphasis on purchasing, planning and acquisition of various resources. This will go afar in giving them competitive advantage and increasing their profitability and sustainability. References Baily, P., Crocker, B., Farmer, D., Jessop, D., & Jones, D. (2008). Procurement Principles and Management. Harlow: Pearson Education Limited. Baitler, J., (2003). The power of effective procurement and strategic suppliers. Strategic Finance, 85(2), 36-40. Cannon, J, & Homburg, C. (2001). Buyer-supplier relationships and customer firm costs. Journal of Marketing, 65, 1, pp. 29-43. Chena, I., Paulraja, A. & Ladob, A. (2004). Strategic purchasing, supply management and firm performance. Journal of Operations Management. 22, 505-523. Cousins, P., Lamming, R., Lawson, B. & Squire, B. (2008). Strategic Supply Management: Principles, Theories and Practice. Harlow: Pearson Education. Green, K., Morton, B., New, S., (2006). Purchasing and environmental management: interactions, policies and opportunities. Business Strategy & the Environment, 5, 188- 197. Heinrich, C. (2003). Adapt or Die: Transforming your Supply Chain into an Adaptive Business Network. New Jersey: John Wiley & Sons. Hunter, G., Bunn, M. & Perreault, D. (2006). Interrelationships among key aspects of the organizational procurement process. International Journal of Research in Marketing, 23(2), 155-170. Syson, R. (2005). The road to purchasing excellence. Purchasing & Supply Management, 4 (6) 24-24. Wan, T. (2010). Organizing Purchasing In A Competitive Environment. Asia Pacific Journal of Management, 7(1), 85-102. Read More