Purchasing Function in Controlling Costs and Value Addition - Assignment Example

The Role of the Purchasing Function in Controlling Costs and Value Addition. The purchasing function of business procurement has over time evolved to become an integral part and continues to evolve in value addition to organisations. The last decade for instance has seen a lot of success in the purchase function in terms of creation of structured processes, saving on organisational costs and growing its visibility into the entire spend. The question now is what is the future of procurement and more specially in creating value to businesses? In response to the competitive market place, organisations are focussing a lot on the value concept (Clara and John, 2005). The goal is increasing the value of what they offer and eliminate any non-value adding activities. A function that is poised to deliver this value due its crucial role on organisations going forward is purchasing. Through inputs such as analysis of markets, contract sourcing and negotiations, the purchasing function plays a value adding role to organisations. The outputs of an effective purchasing function include good quality on products, services offered and materials procured. Through these outputs the purchasing function is better placed to deliver a competitive edge that is much needed in the business environment of today. Procurement and purchasing functions in the modern organisations go beyond the traditional buying role by paying attention to the bigger organisational objectives. Through the shift of focus, the purchase function can add value by placing emphasis on supplier quality and reliability. Extraction and automation of key processes in procumbent for example can release time for the workforce to attend other functions of sourcing which may be central to the needs of the business (KPMT, 2012). Balancing long-term visions with short term goals is another way through which organisations can harness value from the purchasing function. In driving value for the organisation purchasing function can no longer wait for the exit of a supplier or rush for speciality materials in the final hours of a product launch (Santala and Syrjanen, 2010). ATMI is one organization that has eye on the long terms objectives but with tools in place to respond to changes in the short term. It is able to give value by aggressively managing risks, analysing markets and feeding the entire system short term changes needed in the long term plans. Success in the purchasing function appreciates the need for sourcing strategically and purchasing tactically. Value can be unlocked out of the purchasing function by focussing on strategic sourcing and building of deeper relationships with suppliers. Organising practising best practices such as FMC have a dedicated team of employees closely managing their suppliers. Merck derives value from the procurement department by strategically organising the department into three expertise centres i.e., direct material, research and mew markets. Employees who are located in different regions execute the purchasing function tactically and closely manage their suppliers. Value can be derived through the purchasing function by segmentation of suppliers. Merck has segmented its suppliers into three distinct layers so as to partner with strategic suppliers in delivering results to the whole organisation (Taylor, 2003). The company uses three criterions to classify their suppliers. Firstly a supplier’s value to Merck is very important and in fact contributes to the company’s strategy. Secondly a supplier is tiered depending on the amount of money Merck spends with the particular suppliers. Supplier preferencing is another very important factor and on this end, Merck evaluates if the particular sees them as a strategic partner when deciding on how to segment. Segmentation of suppliers is also based on portfolio analysis where the company determines whether a supplier is a strategic one or a just a commodity (KPMG, 2012). The value aspect of supplier segmentation may not necessarily be perceived in terms of cost cutting; supplier value instead can be measured on the basis of amount of innovation they are providing to the business. At Merck for instance, suppliers placed in the top most tier, are accorded the most in terms of focus and value management. The company will regularly meet with these suppliers, set KPIs and constantly review them so as to harness as much value as possible. Most organisations are today using a pyramid structure to segment their suppliers and accord them the kind of relationship management that is commensurate with their value (Taylor, 2003). Those in the top tier are given the best in terms of attention and this is because their performance has a great impact on the firm’s business success. ATMI for examples has developed scorecards with its top suppliers that guide the relationships. There is no doubt therefore the value of a supplier is increasingly becoming influential to most organisations. So as to get the most value and cost savings out of their purchasing and procurement departments many corporation are investing procurement in the full value chain while focussing particularly on their customers. In the globally competitive environment with ever growing customer expectations, business are left with no other option but to streamline their procurement investments to focus on the creation of value for and responding to the needs & preferences of customers. By keeping a link between their suppliers, internal business environment and customers, and ensuring to have the link in mind, organisations see to it that procurement and sourcing are not taking place in some organisational vacuum. The customer is more important to any business and as such even procurement & purchasing practices have to be done with the intention of giving value to the customer. FMC Technologies inc. aims at achieving global standard quality, being reliable and persistently meeting customer expectations. As such one “pull though” requirement set by the company’s customers and passed on by the company to its suppliers is quality. Informed by the its complex ordering process, high technical requirements, extremely sensitive specifications and sector specific products & services, FMC stresses the need for a mutual relationship with suppliers in order to give the best service to customers and adequately meet their value expectations. The ultimate goal for most procurement & purchasing functions in organisation is to source the best, maintain fruitful relations with good suppliers and eventually give quality to their customers. From a strategic perspective, the procurement and purchase function is focussed on leveraging global expenditure frameworks so as to attain high quality of products, improve the integrity of products offered, achieve superb cycle times and most importantly reduce the entire costs of ownership. This calls for organisations to partner with world-class standard suppliers with high performance track records.FMC for instance recognises that partnering with suppliers who of international reach is very crucial in ensuring the company meets the expectations of customers in different countries. Culture is a very important in international business for instance and places a requirement on organisations to include local content in their products so as to appeal to the local customers. Companies such as FMC therefore encourage their suppliers to expand productions capacities and support localised projects that are key to the success of its business. Merck international also places significant strategy emphasis on aligning its initiative to focus on the trends in the market as well as customer preference demands. While building category strategies, the company’s global procurement function therefore considers a number of factors and how they might impact its future strategy goals. Firstly the company looks at the spend; what is spent with suppliers should be able to deliver cost savings for the company in the particular region. The organisations also wants to understand who its top regional suppliers are and whether they are placed into value focussed segments and managed accordingly. The company also takes into account the future of the suppliers and any other stakeholders in ensuring a very smooth business strategy that sees to it the company is meeting its global customer expectations in a manner that is consistent. The process of evaluating and determining supplier suitability most modern organisations through their procurement & purchase function look at the suppliers’ abilities to meet their product quality and eventually customer demands. In the initial stages therefore, the suppliers are scrutinised basing on available business information, their facilities, information technology infrastructures, financial information as well as environmental health and safety issues. Quality is given first class priority and therefore suppliers are assessed in terms of how quality their materials are likely to be. It is also important to consider information relating to particular products of target by the sourcing companies. This has the implication of sealing all loopholes in the agreements signed, avert of chances of product recalls, minimise incidents of quality issues between organisations and their facilities and ensure customers get consistently quality products. In the end the entire business is able to make great cost savings, control their operational costs and create value which is transferred to the customers through delivery of persistent quality. The procurement and purchasing function can therefore derive a lot of value if it is invested in the entire value chain with the customer being given emphasised. With focus being directed at the customer in the modern global business environment that continues to grow in terms of competitiveness, many organisations evaluate suppliers on six important areas of strategy before engaging into relationships with them. Product quality, planning requirements, assurance of suppliers, customer expectations and control of change are very important areas of concern. These demands are placed before potential suppliers who then asses their ability of meeting the demands and make decisions on whether to commit to the requirements. Selected suppliers on the other hand are managed closely, supported in meeting specific demands and updated on any change expectations to ensure business interests are safeguarded sufficiently. The result of such efforts is that suppliers are able to give best quality materials which enable the sourcing companies to effectively meet their product quality demands and satisfy their customers. With satisfied customers, sale will no doubt increase and so will the profits. With better managed supplier relationships on the hand, the procurement and purchasing function of the business is able derive cost savings for the company and create value through quality of materials purchased, time saved and customer expectations met. Given in the increasingly growing role of purchasing function and procurement in deriving cost savings and value for organisations, it is has become inevitably imperative to invest their time and money with strong suppliers. Organisations today have recognised the need for identifying suppliers with high potential and developing strong partnerships with these suppliers. Choosing to source from suppliers who are already good or who are able to meet current needs is a viable business option. But the procurement and purchasing function in most organisations are going beyond option available in the marketplace to select existing and fresh suppliers with the potential of growing, improving and becoming long term strategic business partners with minimal extra support. Companies are now proactively consolidating category costs and focussing on major partners who are poised to beneficially support their long term strategic business goals. At Merck for instance, supplier diversity is integrated in the purchasing function’s management and strategy plans as well as the factors used in evaluating the performance of its entire procurement division. The company’s procurement strategic plan also includes elements of supplier diversity highlighting possible challenges and risks associated with supplier diversity. Expenditure on suppliers is also highlighted and the cost savings for the past three years so as to guide the team in the attainment of future goals. Beyond integration of diversity in the supplier management strategy, companies also mentor their selected suppliers so as to improve the chances of creating successful partnerships. Merck’s global procurement makes sure all suppliers understand just how to carry out their businesses with Merck in an effective manner. This is specifically achieved by explaining to suppliers what Merck expects in the partnerships and assisting the suppliers build their capabilities of meeting the expectations (Monczka, Trent and Petersen, 2008). Further to selection of quality suppliers it is increasingly becoming common in the procurement and purchasing function for organisations to arm their suppliers the tools they need so as to create symbiotic relationships. By giving necessary tools, the organisations make it easy and possible for the suppliers to improve their performance. Organizations have recognised the need for improving and optimising supplier relations jointly with their suppliers. Focus is directed at what a particular supplier can do and support their business as instead of what the suppliers is currently doing. With such kind of supplier relationship management, suppliers are assisted to determine areas of improvement relative to the needs of their customers. Equipping of suppliers is very important as it enables them understand just what the organisation intends to give to its customers in terms of product quality, timeliness and solving all their preferential needs. The suppliers therefore work to support the organisations meet these expectations. In conclusion therefore the purchasing function is increasingly becoming vital to organisations due to its value addition potential. Aligning sourcing practices and categories with the needs of the business and not just costs is new trend. Success in purchasing functions also requires balancing the long term organisational goals with the need for short term agility and also separation of processes that are strategic from those that are tactical. Value comes from the segmentation of suppliers, category management and investing procurement processes in the entire organisational value chain keep in mind the customer’s needs. It is for these reasons that organisations are forging very close relationships with their suppliers so as to jointly manage the partnerships for a mutual benefit. Through such practices, the purchasing function and procurement are able to derive cost savings and create value for businesses. Works Cited. 1. Clara, C., & John, R. “Control and synergies in the outsourced supply chain.” Lund: Lund University. 2005. 2. Chung Jiang Yue Tian and Susanne Hertz Lianguang Cui. “Problems and Challenges of Global Sourcing: A Study og Chinese Manufacturing Enterprises.”JonKoping International Business School, 2009. Available at: http://hj.diva-portal.org/smash/get/diva2:318924/FULLTEXT01.pdf 3. Cook, T. A. “Global Sourcing Logistics: How to Manage Risk and Gain Competitive Advantage in a Worldwide Marketplace.” AMACOM, 2006. 4. Fan, X. “Purchasing in the Whole World under the Mode of Management of Supply Chain.” Journal of Hubei Correspondence University, 2007. 5. James M. Mose, James Njihia and Peterson Magutu. “The Critical Success Factors and Challenges of E-Procurement Adoption Among Large Scale Manufacturers in Nairobi Kenya.” European Scientific Journal, 2013. Available at: https://profiles.uonbi.ac.ke/njihia/files/the_critical_success_factors_and_challenges_in_e-procurement_adoption_among_large_scale_manufacturing_firms_in_nair 6. Jan Telgen and Corina Pop Sitar. “Possible Kinds of Values Added by the Purchasing Department.” (2001). Available at: http://doc.utwente.nl/42595/1/ValuesAddedByPD.pdf 7. KPMG. “Supplier Category Management: Driving Value Through the Procurement Organization.” KPMG, (2012). Available at: http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/supplier-category-management.pdf 8. Monczka, R. M., Trent, R. J., & Petersen, K. J. (2008, Mar). “Getting onTtract to Better Global Sourcing.” Supply Chain Management Review, 1-46. 9. Riku Santala and Samuli Syrjanen. “Spend Management: Key Elements for Realising Cost Savings In Procurement.” Bearing Point Management & Technology Consultants, 2010. Available at: http://www.bearingpoint.com/en-ie/download/Spend_Mgmt_WP_FI_8p.pdf 10. Taylor, T. K. “The Proper Use of Offsets in International Procurement.” Journal of Public Procurement, 2003: 3(3): 338-356. Read More