The Competitive Advantage in Strategic and Sustainable Procurement - Case Study Example

Abstract

Procurement in the organization as part of the supply chain has been linked to the overall strategic development of the organization. Organizations do understand the role that procurement plays in the organization, but aspects of outsourcing and globalization have given procurement a new outlook. One of the aspects associated with procurement is complexity as regards the involvement of different activities that include qualifying new suppliers, monitoring performance, and procuring different inputs. Such activities cut across organizational and functional boundaries thus impacting internal interactions and external involvement. The achievement of the effectiveness of procurement requires a strategic approach to procurement for the organization to achieve a competitive advantage and a favourable supply chain. From strategic procurement, sustainable procurement has come about from increased pressure from the government, clients, customers, as well as the public whose concern has been the adoption of sustainability in the procurement process. The paper that follows reviews the literature on strategic and sustainable procurement, with a focus on GlaxoSmithKline.

The Competitive Advantage in Strategic and Sustainable Procurement

Introduction

Procurement in the organization as part of the supply chain has been related to the overall strategic development of the organization (Chen, Paulraj, and Lado 2004). Organizations do understand the role that procurement plays in the organization, but aspects of outsourcing and globalization have given procurement a new outlook. The outlook is based on the fact that most organizations are now operating in the complex global arena where it is not just about serving customers globally but also sourcing and supplying the goods from the global market. The statement implies that as companies outsource their non-strategic and manufacturing activities, they increase the dependency of their supply bases for their input goods. Due to the increased dependency on outsourcing and supply, procurement has become a significant component in realizing the values of supply chain administration (Chen, Paulraj, and Lado 2004).

One of the aspects associated with procurement is complexity as regards the involvement of different activities that include qualifying new suppliers, monitoring performance, and procuring different inputs. Such activities cut across organizational and functional boundaries thus impacting internal interactions and external involvement. As such, the achievement of the effectiveness of procurement requires a strategic approach to procurement for the organization to achieve a competitive advantage and a favourable supply chain (Billington, and Jager 2008). More so, a strategic procurement approach in the organization minimizes the risks associated with supply chain management. A proactive strategic procurement operation is seen as an important element in giving a particular organization a competitive advantage through waste reduction in the value chain. The paper that follows analyses literature on strategic procurement, the influence of supply chain management, and the applicability of sustainable procurement. Further, the paper will consider procurement and its application by GlaxoSmithKline, a global pharmaceutical brand.

Strategic Procurement

The strategic aspect of procurement refers to the role that purchasing and supply have in the organization following their integration into the business’ core functions. The integration of procurement into the business’ core functions becomes strategic when it is instituted in a premeditated and proactive manner. The inclusion of strategic procurement in the business’ core functions is usually intended to give the business a competitive advantage. Organizations are moving from the view of procurement as a reactive and clerical aspect of the organization and incorporating it as a proactive and strategic part of the organization (Andreasan 2012, p. 7). As a strategic part of the organization’s functions, procurement is used to pursue the organization’s long-term objectives that include gaining a competitive edge, market penetration, driving shareholder value, and profit maximization (CIPS 2004). Organizations have realized this role that strategic procurement plays, and this has led to its increased utility in the global marketplace. Other factors that have aided its increased utility are such as its strategic value, cost efficiency, rapid product development, integrating material and information flow, and cost saving and supplier involvement. All aspects of strategic procurement that foster waste reduction in the supply chain management and influence the company’s competitive advantage are discussed individually below. It is important to note that these are the sources of competitive advantage from strategic procurement.

Strategic Value in the Organization

Proactive and strategic procurement drives organizations to develop visions and establish the quantity and quality of the products/inputs that they need in the realization of their business’ objectives (Handfield et al. 2005). In almost all instances, companies are looking towards increased shareholder value, having a competitive market position, and improving their profit margins. By having a vision on quality and quantity, the implication is that the organization has to decide in advance the specifications and supply standards of the material, technological, and human input. The set standards have to be adhered to during procurement as the aspects of quality, delivery time, and supply assurance helps the company add strategic value by avoiding defects. More so, the standards set in supply removes waste and save on cost by ensuring no costs are incurred in improving the quality of the supply materials prior to their usage in the organization. From the standardized quality and quantity enabled by strategic procurement, there is cost minimization that translates to increased organizational value emanating from increased profits, net stakeholder value, and competitiveness (Baily et al. 2008).

Enabling Cost Efficiency

The growth of strategic and proactive procurement strategies in the organization has also been as a result of the view of procurement as a cost reduction approach. One important goal of all organization is production optimization that is achievable through cutting the costs of inputs. Reduced costs of inputs can be achievable through the transformation of purchasing from a functional element to a process approach. Strategic proactive procurement has been successful in transforming purchasing into a process approach, and thus fostered cost cutting in the organization’s inputs. A process approach to procurement involves the view of procurement as a holistic aspect of the organization, while the functional approach involves the individual objectives of each department without concern for the objectives of other departments. As such, functional purchasing/procurement fosters sub-optimization and demarcation disputes. GlaxoSmithKline, which is a focus of this study, has been successful in fostering cost-efficiency through strategic proactive procurement in its post-merger period. The cost efficiency has given the organization a competitive advantage in the pharmaceutical industry. Pfizer was also successful in adopting this approach to cost efficiency following its merger with Warner-Lambert in 2000.

Rapid Product Development

The fact that strategic procurement fosters a process rather than a functional approach in the organization’s internal functions means that there is an acceleration of product innovation. Rather than work as a set of teams, the organizations adopt an integrated approach to teams that include representatives from the relevant departments. For procurement to be successful, it requires the involvement of and integration of knowledge from policy makers, designers, inventory managers, purchasing staff, quality assurance personnel, and marketing forecasters. Strategic procurement fosters this integration and brings about an acceleration in product innovation that leads to rapid product development. By having an integrated teamwork focusing on product innovation, there is consensus on the quantity and quality options as regards risk and the cost of inputs (CIPS 2009).Strategic proactive procurement also fosters rapid product development and its introduction to the market by calling for an earlier involvement of suppliers in the expansion process of the new merchandise. The early engrossment of suppliers means that the required quality and quantity of supply is available to enable product development in a time-efficient manner.

Integrating Information and Material Flows

The integration of information and material flows by procurement has been both internal and external. Integrating information and material flow have been under the process approach where there needs to be a continuous and holistic view of procurement as an important part of the organization’s strategic functions. The integration through strategic procurement has involved ensuring that the suppliers and organizational members in the procurement process work together in obtaining the require inputs. Strategic proactive procurement enables the amalgamation of information and related inputs flow in the organization (Burt and Pinkerton 2006). Through this amalgamation, there is integrated planning for the acquisition of inputs and their transformation into the needed products, as well as market distribution.

Active Supplier Involvement and Cost Cutting

The strategic role of procurement involves the need for supplier involvement in the procurement process, where organizations that involve suppliers in procurement have increased effectiveness and operational efficiency. By having an active supplier role, companies establish long-term and closer supplier relationships that are directed towards quality assurance, timely delivery, and reduced supply costs. Strategic procurement fosters the notion of supplier tiers, where organizations are able to reduce the number of suppliers to those with low-cost, high-quality products, and a fast response period. The key suppliers are placed within tier one of the supply network, and their other roles include dealing with sub-suppliers. Through the tiered and active involvement of suppliers, buyers and suppliers conduct business through formal communication structures that foster knowledge sharing. The buying/procuring organization is able to communicate its specification of supply thus ensuring quality, risk minimization, and cost reduction. Active supplier involvement is a part of strategic proactive procurement that enables quality assurances that are in turn associated to reduce costs and minimized risks.

The benefits and contribution of strategic proactive procurement are not limited to the five discussed benefits. Another benefit is that strategic procurement fosters the notion of a long-term relationship with suppliers rather than focusing on short-term prices as offered by suppliers. By focusing on long-term supplier relationships, there is value addition that eliminates unnecessary costs that would have otherwise been visible in the supply chain. As a factor that promotes a competitive edge and increases the company’s profit potential, strategic procurement factors in an improved time to market, decreased cycle time, and reduced cost of ownership. Strategic procurement becomes a tool that increases value while reducing costs and thus promoting the competitiveness of the organization.

As a tool that promotes an organization’s competitive advantage, the main aim of strategic procurement is the derivation of cost effectiveness. Different from the clerical and reactive approach that organizations initially used in procurement, the strategic approach involves aligning procurement to other organizational functions. Most importantly, achieving rapid product design helps the organization to rapidly respond to market demands and also position the product above the competitors. The benefits discussed above help position the organization at a better advantage than its competitors. Strategic procurement eases the supply chain management and minimizes associated risks throughout the process of product development. The supply chain risks and vulnerabilities are minimized through the holistic approach that associates the various stakeholders. In risk reduction and facilitating competitiveness, there is identification and analysis of failure points in the supply chain. Further, strategic procurement facilitates the achievement of profitability in the organization, where profitability becomes an indicator of the firm’s competitiveness in the industry.

Reluctance in Adopting Strategic Procurement

Despite the benefits associated with strategic proactive procurement, some organizations are yet to fully adopt strategic procurement. One of the reasons behind this reluctance and inability to experience the benefits of strategic procurement is that most organizations still use the traditional organizational structure. The traditional organizational structure allocates and executes work on a functional basis, where procurement is seen as a service function supporting production (Baily et al., 2008). The view and treatment of procurement as a function rather than process means that the organization cannot realize the value brought about by strategic procurement. For organizations to experience, the inherent benefits of strategic procurement there has to be a change in organization strategy, as well as the transformation of procurement from a functional to a process part of the organization.

Another factor affecting the realization of the benefits of strategic procurement is that organizations are still pursuing procurement from a clerical and reactive point of view. Like the functional approach to procurement, clerical and reactive procurement cannot maximize the benefits of procurement in the supply chain. Such approaches to procurement are redundant and the organizations need to realize the benefits of strategic and proactive procurement. As such, organizations wishing to experience the benefits of strategic procurement should deviate from the clerical and reactive approach to procurement and adopt the proactive and strategic approach to procurement.

Some organizations are also focused on the low prices offered on a short-term basis by suppliers rather than investing in a long-term and active relationship with suppliers. As opposed to the long-term supplier relationship, a focus on short-term prices only yields limited value that is non-aligned to the long-term strategic value that the organization is looking for. Long-term value addition from a procurement process is only achievable through long-term relationships with suppliers. Further, having a long-term relationship with supplier’s means that there is a valued association between the buyer and seller, where this association leads to value addition as derived from strategic proactive procurement.

Sustainable Procurement in Strategic Procurement

As much as strategic procurement is seen to add value to the procurement process and facilitate the company’s competitive advantage in the market, sustainable development has led to the need for sustainable procurement. Sustainable procurement is not only a concern for the organization concerning sustainable development but has also received concerned in international policy circles (Brammer and Walker 2011). Different from procurement, sustainable procurement is seen as a process where goods, services, and works are acquired from a trader who provides an amalgamation of benefits and whole life costs to meet the consumer’s necessities. From this definition, sustainable procurement helps administrations meet their necessities for utilities, works, goods, and amenities in approaches that depict value for money. The organization, consumers, and the economy, while also curtailing environmental impact do not only experience the generated value for money (Kalubanga 2012). As such, sustainable procurement is intended to achieve social, economic, and environmental benefits by taking into account the effects of procurement on the social, economic, and environmental aspects of society. Flyvbjerg refers to sustainable procurement as the need to optimize on quality, price, and availability of supplies while taking into consideration the ecological life cycle and social effects linked to the source of the product or service (2006).

The move towards sustainable procurement has come about from increased pressure from the government, clients, customers, as well as the public whose concern has been the adoption of sustainability in the procurement process. In the 2002 World Summit on sustainable development, there was a call for the promotion of public procurement policies that foster development and diffusion of environmentally relevant goods and services (Kalubanga 2012, p. 2). For organizations that have adopted the sustainable procurement approach, they meet their organizational needs not only based on an organizational cost-benefit breakdown but also with the aim of making the most of the benefits for the wider society. Such approaches are capable through extrinsic cost considerations while also applying the strategic proactive procurement. The extrinsic considerations are divided into the triple baseline that is the social, environmental, and economic considerations.

Benefits of Sustainable Procurement

Some of the paybacks related to maintainable procurement are cost reduction, revenue growth, and organizational risk profile. On cost reduction, sustainable procurement brings about reduced internal costs as well as the environmental compliance costs. Reduced internal costs may come about such as when the organization invests in efficient products and machinery that reduces costs associated with energy, and maintenance. Purchasing an environmentally friendly and fuel-efficient vehicle attains the tenets of sustainable procurement and leads to reduce costs in the organization and to the environment. According to Gonzalez, Hult, and Calantone argues that sustainable procurement reduces costs for the organization and society through the adoption of a wider approach to whole life costing (2008). The whole life costing methodology enables the reduction of use, recycling, reuse and hence reducing the waste likely to be disposed of in landfills (Gonzalez, Hult, and Calantone 2008).

Sustainable procurement also brings about revenue growth by the maintenance of current market positions while also opening up new markets. Consumers and clients are looking to be associated with businesses that have clear ethical and social practices and principles. Having a sustainable procurement policy means that the business has ethical standards as related to caring for the wider society and the environment, rather than only focusing on profit maximization. As such, such procurement is associated with building on the brand reputation that can have a bearing on service and product decisions. Having design specifications that adopt environmentally friendly designs bring about new market opportunities and the likelihood of revenue growth. The growth in organizational revenue is also achievable through government contracts that are obtainable by exhibiting sustainability business principles and practices. With such aspects of sustainable procurement, the organization has a competitive advantage over its competitors.

An organization’s risk profile is also reduced when the organization focuses on sustainable procurement. The reduced risk profile comes about when the organization is not vulnerable to changes likely to affecting its business practice. As an example, government policy may dictate that organizations need to move towards environmentally friendly procurement practices. For an organization that is yet to adopt sustainable procurement, the new legislation requires intense changes that include building new supplier relationships. On the other hand, an organization with sustainable procurement will have business continuity and reduced risk in terms of costs due to its adherence to sustainable business practices.

Consequences of Defensible Procurement on the Procurement Practice

The wider concern of sustainable procurement is on ‘greening’ the procurement process, where the implication is that sustainable procurement focuses more on the environmental goals of procurement. The implication of sustainable procurement is that organizations are exhibiting a more selective approach in choosing their suppliers, and this means an alignment with suppliers of environmentally friendly products. Product design, supplier selection, and evaluation are focusing more on the environmental aspects while cost and quality come in second. Even though sustainable procurement is leaning more towards environmental sustainability, the social and economic aspects of this procurement approach demand whole life costing (Cousins 2005). As such, the organization has had the increased need to evaluate their supply chain by developing supply sources that support social, economic, and environmental performance.

Another implication of sustainable procurement is that there is the necessity to foster conservational impact assessment of goods and services in the design phase. More so, contract evaluation by organizations should focus on the incorporation of sustainability issues. The new criteria for theselection of suppliers for an organization have deviated from the price consideration and moved to a multi-criteria approach that considers technical capabilities, quality, delivery, and sustainable development goals (Humphrey 2013).

Other implications are such as the emphasis on environmental procurement and development policies from all business partners. Such policies are envisaged in the aspect of corporate social responsibility that is a requirement for all businesses in developed economies. Also, through environmental regulation, the government has taken a more responsive role in safeguarding minimization of the business influence on the surroundings. Concerning sustainable procurement practices, there has been an increased need to create stakeholder awareness as regards the issue of sustainability in the procurement process. Although the environment has been given priority in sustainable procurement, social and economic issues also play a role in defining sustainable procurement.

Strategic and Sustainable Procurement at GlaxoSmithKline

GlaxoSmithKline (GSK) is a global pharmaceutical brand that has been referred to as a science-led healthcare company. The company is involved in different business areas around healthcare that are pharmaceuticals, consumer healthcare, and vaccines. The organization has a global reach in 115 countries with its major research centres based in China, Spain, UK, Belgium, and the USA. As of 2013, the company had annual sales of 26.5 billion Euros with a return on research and development investment of 13 percent (Reay 2014). On the state of its supply chain in 2013, the fragmentation of the company into different sites in different regions meant that the supply chain was highly fragmented. The company had over 2800 suppliers spread over 25 geographical sites where a range of over 1.2 million supplies was purchased in over 200, 000 transactions.

Prior to the current practices on the strategic procurement of its laboratory supplies, GSK had made progress by being one of the first pharmaceuticals to adopt e-procurement. E-procurement involves the sourcing of supplies and sharing of information through electronic data interchanges and was seen as a proactive step in making procurement a holistic part of the organization. Following the adoption of the e-procurement approach, the organization did not experience the expected savings as a result of the new procurement approach. Although there were cost reductions associated with e-procurement, there was an abundance of non-compliant purchases. The non-compliant purchases were those made outside the company’s contractual agreements and had an impact on quality and effectiveness. In line with making changes that would foster increased compliance, the organization changed its compliance and information systems that saw a 50 percent improvement in purchase compliance. The approach used by the organization to restructure compliance involved the gathering of data, identification of non-compliance causes, and designing conformance mechanisms (Kulp et al. 2006, p. 209).

The literature on strategic procurement points out that the strategic aspect of procurement has to involve the purchasing, supply aspect of procurement, and integrate it into the business’ core functions. The integration of procurement into the business’ core functions becomes strategic when it is instituted in a premeditated and proactive manner. The failure of GSK’s e-procurement was due to its failure to concentrate on information flows that would enhance integration of procurement into the business’ functions and thus fostered non-compliance. GSK realized this problem and began to change its processes and control mechanisms. Rather than view procurement as a clerical and reactive part of the business, the organization focused on integrating procurement into the business’ processes and fostering wider information flows was one of the approaches.

The Category Management Program at GSK

Following the integration of procurement into the business’ process, the organization adopted its own category management program. The adoption of the category management program was in line with achieving efficiencies in the organization’s strategic procurement and the need to increase competition in the industry. The application of category management in procurement was referred to as sourcing group management. The sourcing group management involved the engagement of cross-functional teams from the entire organization. The coming together of category teams began the process of the organization’s redesign with respect to the procurement processes. Suppliers had to fight to retain business with the company, and this led to the beginning of long-term supplier relationships and the provision of quality supplies for less. In two years after the introduction of the program, the organization had cost savings of 800 million Euros, which was 10 percent of the turnover (O’Brien 2009, p. 273).

Throughout the years, GSK has been building its strategic procurement from the basis of the category management program. The organization has been making improvements on its category management program and strategic procurement, where one of the approaches has been linking the procurement and supply chain to the firm’s corporate strategy. GSK’s corporate strategy has been based on three priorities that include increasing growth, improving the long-term financial performance, and reducing risks. The organization aligned its supply chain to the corporate strategy with the specific aims of meeting the needs of emerging markets such as in Latin America and China. More so, the alignment also focused on cost control and improving efficiencies in the US and European markets. Through cost control and improved efficiencies, the organization was able to develop a competitive advantage in the pharmaceutical and healthcare industry.

The process of adopting a global strategic procurement approach in its sourcing is described in the different stages of the process taken to achieve an integrated solution. In stage one, the company held a stakeholder and supplier workshop, where the focus was on establishing the baseline of workflows in the organization. Other focus areas in the workshop included dealing with bottlenecks, the company’s performance, expectations, and future strategies. The workshop is seen as an alignment to the need for the active participation of suppliers in the organization as a way of fostering efficiencies and cost reduction. In stage two of the integration process, there was brainstorming of the ideal state of the supplier relationship and the identification of priority areas that need change. Stage three of the process involved the establishment of the responsibility assignment (RACI) matrix that was based on core competencies. At this stage, the organization established the need for tiered rather than direct sourcing. Stage four included the systemization of the procurement process and the reallocation of resources to create a dedicated team. Further, there was the establishment of a governance framework.

The integration of procurement into the company’s corporate strategy has been successful since the integration in 2013. The integration process was designed to change performance through a transformation of the tactical and non-integrated supply chain into a fully aligned, innovative, high performing, and efficient model that can be continually improved. The efficiencies and outcomes of the new process have been increased compliance to 90 percent, a 90 percent reduction in the supply base, and a 15 percent in the supply tier’s stock level. The organization is also adopting sustainable procurement practices that are in line with environmentally friendly policies.

Conclusion

Strategic procurement refers to the role that purchasing and supply have in the organization following their integration into the business’ core functions. Organizations are moving towards integration of procurement into the business’ core functions as a strategic function in a premeditated and proactive approach. As a strategic part of the organization’s functions, strategic procurement has enabled organizations to pursue their long-term objectives that include gaining a competitive edge, market penetration, driving shareholder value and profit maximization. Other factors that have aided its increased utility are such as its strategic value, cost efficiency, rapid product development, integrating material and information flow, and cost saving and supplier involvement. GlaxoSmithKline has successfully integrated procurement functions into its corporate strategy, and the advantages of this integration have been increased competitiveness, increased efficiencies, and increased compliance.