The Procurement Value Proposition

The Rise of Supply Management

Gerard Chick, Robert Handfield

• Publisher: Kogan Page
• Year: 2014
• Print ISBN: 9780749471194
• eBook ISBN: 9780749471200
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

WINNER: ACA-Bruel 2015 - Grand PrixBusinesses are going through rapid change due to an increased focus on sustainability and corporate responsibility, technological advances, geo-political and macro-economic change, and demographic shifts. If purchasing and supply chain managers are to embrace these challenges they must develop new ways of thinking about supply structures and processes as well as new skills and competencies. The Procurement Value Proposition examines these important changes that will have a profound effect on the way future procurement is carried out. It considers the implications of global economic transformation for procurement set against: changes in business contexts, purchasing strategies, organisational structure, roles and responsibilities, system development and skills required to work in the profession. This book discusses the value proposition offered by contemporary procurement to the sustainability and development of business. They examine how organizations that position procurement as a core business function will be able to drive a more competitive lever for change, and more readily adapt to the forces driving rapid change in the current global environment. The Procurement Value Proposition features case studies of companies that are moving through procurement transformation in a continual phase of movement and adaption to the multitude of shifts that are occurring. It features input, observations and case studies from CPO's, Commercial Directors and other Procurement and business leaders. The book considers a variety of geographical contexts and highlights differences between the US, the UK and China. Awarded the Grand Prix ACA-Bruel for its important contributions to the research and practice in procurement and supply chain management, it has been recognized for its ambitious vision of procurement.

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PART A

Foundations and establishment of contemporary procurement

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01

What is contemporary procurement?

Procurement began with various dubious roots. In the late 1980s, one of the co-authors regularly attended purchasing conferences at an organization known as the National Association of Purchasing Management.¹ The meetings served largely as a social function for a lot of buyers to get together, sit at the bar and tell war stories. Someone listening in on these conversations was likely to hear people discuss how they had ‘got a great price’ from a supplier, after they ‘threatened to go with someone else’, followed by guffaws and other discussions. Many of the buyers who attended these conferences had been promoted as a result of working in a warehouse, in an administrative assistant role, or even as an assembly-line worker. If one were to attend a supply management conference today, one would meet a very different type of individual, and engage in a very different set of conversations.

This chapter traces the development of purchasing from a principally administrative, tactical service within companies to a managerial, strategic, value-adding function and introduces the implications of supply chain management for purchasing.

The emergence of procurement as a profession

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Modern societies have for some time articulated the division of expert labour into various ‘professions’. These professions – of which medicine, accountancy and law are obvious examples – are found, on analysis, to meet certain common criteria. It is generally accepted that there are seven criteria that need to be satisfied in order to describe an activity as a profession. The first six of these are:

• The members of the profession are engaged in the performance of a service, which is vital to society.

• Their performance is based on a specialized and codified body of knowledge.

• Those who enter the profession must first undergo a programme of broad general education as well as further education and training for a career in the speciality.

• Candidates for the profession undergo an examination to test their qualifications to enter the practice.

• The profession promulgates a code of ethical conduct for members and makes arrangements to enforce compliance to this code.

• The profession offers a secure career to its members.

The seventh relates to a licence to practise. Whilst the first six criteria can be satisfied by the existence of organizations such as the Chartered Institute of Purchasing and Supply (CIPS) – who provide for all six points through their charter and via their standards, qualifications and certifications – it is the seventh criterion that remains to be achieved. In the United States, the Institute for Supply Management (ISM) has a similar focus on engaging in all of the first six elements, but not the seventh.

That said, at no time in its 80 years has CIPS or its members seen so many opportunities for creativity and leadership via professional procurement. Doubtless this will apply to ISM in the United States and NEVI and others in Europe. Some of these opportunities can be seized and realized by individuals, but more usually they require a team effort under some professional sponsorship.

For a body of specialists to be accepted as professional requires that they meet their obligations to society at large with respect to that specialty. No one wants to become a professional through self-appointment. The deep-down satisfaction comes when others regard one as having earned the status of professional through one’s deeds.

Within the terms of the criteria outlined above, one can decide whether a case can be made for professionalism in procurement. However, while procurement has undoubtedly come a long way – and paraprofessional it may be – it still has far to go if it wishes to be seen in the same light as medicine or the law.

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The emergence of procurement as an academic discipline

When compared with other business and management professions such as marketing, finance or human resource management, procurement is relatively new. Whilst the origin of supply management is closely linked with the birth of the company itself, it was viewed by academe as being of little interest as it appeared to require little or no skill.

Supply chain management (SCM) as a concept was born at the beginning of the 1980s. At that time research and teaching in the field was almost non-existent. Some of the early academic programmes in supply management were created by Hal Fearon at Michigan State University and Arizona State University, where these early programmes were called ‘Materials Management’. Both of these universities also created executive programmes in this area.

In the period 1992–99, a group of like-minded academics at Michigan State University created an initiative called the Global Procurement Benchmarking Initiative, and created a series of studies that focused on leading procurement practices.² These technical reports were largely focused on documenting what organizations were doing, and classifying these strategies into basic, moderately advanced and most advanced. Out of these early studies were derived many of the maturity models that formed the basis for procurement consultancies at Accenture, AT Kearney, IBM, McKinsey, Booz & Co and others.

Since the mid-1990s, the growth of both teaching and research has been exponential. In 2014 SCM is making the change from being an emerging research field to becoming a consolidated one. The importance of an academic perspective on SCM and, more to the point, the role of procurement within it, is that it ensures that any possible gaps between research and practice can be minimized.

The 1970s saw the publication of the first real textbooks on procurement, the most notable being England (1970), Lee and Dobler (1971) and Baily and Farmer (1977). From a pedagogic perspective, these can be seen as the foundation stones of procurement as an academic subject, which in itself affords the subject the gravitas required for a ‘profession’ to be taken seriously.

By the 1980s and early 1990s books and articles were published that really sought to promote procurement as an important business function and therefore as a worthwhile academic field of study. In particular, writers across Europe and North America argued for the position and status of procurement as a function, rather than a service, within organizations and that it should be elevated in status accordingly.

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It is in no small part that this lack of academic credibility of procurement and supply management until relatively recently reaffirms that its practise for some considerable time had been little more than a clerical service, focused predominantly on obtaining the lowest possible prices for goods and carrying out low-level, mundane tasks such as record keeping. Today, more than 50 universities in the United States and more than a dozen in the UK have supply management curriculums.

Early developments towards modern procurement

Around the same time as procurement began to evolve as a field of academic study in the late 1980s and early 1990s companies had embarked on changes in industrial organization, in particular the advent of ‘outsourcing’. Businesses began moving non-core competencies and other activities that they previously performed in-house to third-party service providers in an effort to reduce cost. This trend had major implications for procurement because it meant that strategically important resources or complementary competencies had to be sourced – and purchased – from specialized suppliers.

As the business landscape began to change so did inter-company relationships, principally due to globalization and rapid developments in new information technologies; and with this change came the need for the proper management of the supply side. Consequently, the position and status of the procurement function within organizations was elevated again. People developed various maturity models, with some portraying procurement as a reactive, passive and tactical service, whilst others portrayed it as an advanced, integrative, strategic function.

Procurement becomes supply (chain) management

Peter Kraljic’s publication in the Harvard Business Review in 1983, ‘Purchasing must become supply management’, was pivotal in the rise of procurement from a tactical service to a strategic business function. His key message was that procurement should focus more on high-value and high-risk supply items and that these called for ‘supply management’ rather than ‘purchasing management’. This is a theme that has since been the subject of much debate and, in some parts of the world, most notably North America, procurement is now frequently referred to as supply management or simply ‘supply’.

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The rise of supply chain management is in many ways a natural extension of this development. Adding the word ‘chain’ to ‘supply management’ may seem trivial but is, in fact, significant. The inclusion of the concept of chain hints at the multidisciplinary genesis of supply chain management, most notably the inclusion of concepts such as Porter’s value chain (strategic management) and channel management (marketing and distribution).³

As procurement metamorphosed into a professional function, it became more deeply involved with changes in industrial organization. The introduction of ‘outsourcing’ of non-core competencies and other activities formerly performed in-house is possibly the most prominent. This trend towards outsourcing has accelerated; since the mid-2000s or so outsourcing has been an integral part of globalization as companies have looked to low-cost countries for cheaper sourcing. Outsourcing reflects a deep trend; moreover, outsourcing is part of a wider change process of industrial reorganization in which companies focus on what they do best and connect to the rest through a network of business relationships.

Technological innovation is now happening at such a rapid pace that companies can no longer do everything in-house. Today businesses have little choice but to outsource, principally because the most critical resources are intangible and knowledge-based.

The dawn of the modern era: procurement as an enabler and value adder

What is without question is the fact that today many organizations see their supply function as a key driver of competitive advantage. Procurement is at the heart of supply chain management, but SCM shifts the focus from direct relationships between buyers and suppliers towards entire end-to-end supply chains. In many organizations procurement is now an integral part of the supply (chain) management function, focused on the management of the part of the upstream, supplier-focused supply chain (sourcing).

Whereas the focus of procurement is clearly on supplier relationships, the focus of supply chain management is on the wider business system that includes several layers, or tiers, of suppliers, sub-suppliers, customers, distributors and so on. In some ways supply chain management has absorbed a number of business functions involved in the process of supply, including procurement, operations, logistics and distribution management.

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In 2014 the proportion of value across many industrial sectors that stems from the supply chain is almost 80 per cent and in many companies the outsourcing ratio can be greater than 90 per cent. The consequence of the outsourcing trend is that companies become heavily dependent on the performance of their suppliers and therefore need to make sure that suppliers are effectively managed, as if they were an extended part of their own company.

As a central function to working with suppliers, procurement plays a key role in the management of supplier relationships. This role is no...

Table of contents

• The Procurement Value Proposition
• The Procurement Value Proposition
• Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgements
• Introduction
• PART A Foundations and establishment of contemporary procurement
• 01 What is contemporary procurement?
• 02 Procurement maturity
• 03 From global trends to corporate strategy
• 04 Five game changers
• 05 Taking a practical approach to improvement
• 06 It’s all about people
• 07 Cometh the hour cometh the man
• 08 The dawn of procurement’s new value proposition
• 09 The future
• 10 Reflections and conclusions
• PART B Innovation debates
• 11 Introduction to innovation debates
• References
• Further Reading
• Index
• Copyright Page