Purchasing and Supply Chain Management

A Sustainability Perspective

Thomas E. Johnsen, Mickey Howard, Joe Miemczyk, Thomas Johnsen

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138064744
• eBook ISBN: 9781351661911
• Topic: Business
• Subtopic: Business General
• Index: Business

For too long, business has focused on short-term cost advantages through low-cost country sourcing with little regard for the longer-term implications of global sustainability. Purchasing and Supply Chain Management, Second Edition, not only fully addresses the environmental, social and economic challenges of how companies manage purchasing and supply chains, but also delves deeper into emerging areas such as modern slavery, digital technologies and circular supply chains.

In addition to explaining the basic principles and processes of both purchasing and supply chain management, the book evaluates how to develop strategic and sustainable purchasing and supply chain management. Our key message is that purchasing and supply chain management needs to focus on value creation rather than cost cutting. This requires the development of new purchasing and supply chain models that involve circular supply structures, supply chain transparency and collaboration with new stakeholders in traditional sourcing and supply chain settings.

Aimed at students, educators and practitioners the book integrates sustainability into each chapter as a core element of purchasing and supply chain management. This second edition incorporates new examples and case studies from industry throughout, striking a balance between theoretical frameworks and guidelines for implementation in practice.

CHAPTER 1
Introduction

Learning Objectives

By the end of this chapter you should be able to:

• explain the reasons why purchasing is no longer an administrative, or clerical, responsibility, but a critical and strategic priority for companies;
• understand why purchasing is now seen as part of supply chain management and the implications of the purchasing–supply chain management relationship;
• define purchasing and supply chain management in relation to related concepts such as sourcing and procurement;
• evaluate the criticality of the sustainability challenge and how it affects purchasing and supply chain management;
• Argue the need for sustainability to become an integrated part of purchasing and supply chain management rather than a separate add-on consideration;
• explain the underlying theoretical perspective and structure of the book;
• Form an overview of the structure of the book.

1.0 Introduction

Purchasing has grown tremendously as a business discipline both in practice and in academia over the past 30 years or so. Many organizations across the private and public sectors worldwide have elevated purchasing to a strategic business responsibility; the emergence of the Chief Procurement Officer (CPO) is a symbol of the rising profile of purchasing. The trend towards outsourcing of non-core activities has clearly had a positive impact on the profession as a very high proportion of value adding now stems from suppliers, and many organizations have woken up to this fact and manage purchasing accordingly.

However, the elevation of purchasing to an important, even strategic, business function is a relatively new development and in many companies purchasing remains a low priority. Purchasing is still often highly driven by achieving low prices from suppliers, regardless of whether or not the company strategy is focused on low cost. So, although purchasing in many companies has become more sophisticated there is much scope for improvement of the profession.

An increasing number of people now choose to develop a career in purchasing, but only 20–25 years ago this was by no means a normal choice of career and was often seen as a dubious one. In some ways the emergence of supply chain management has played well into the hands of the purchasing profession because purchasing is seen as a critical link in the supply chain. But, in other ways the role of purchasing in relation to supply chain management is all but clear: some people regard purchasing as an integral part of supply chain management whereas others regard it as complementary yet separate.

The recent development of sustainability as a strategic challenge for business and society has boosted the importance of both purchasing and supply chain management. A company is no more sustainable than the suppliers it sources from so creating sustainable companies means creating and managing sustainable supply chains. Top management in many companies appear to have grasped this challenge but the often short-term driven, business functions of purchasing and supply chain management are not easy to integrate with the challenge of sustainability that by definition requires a long-term perspective. However, this is the challenge taken up by this book: to try to fill the gap of how sustainability affects, and can be incorporated into, purchasing and supply chain management decisions. The book is therefore not primarily a book about sustainable purchasing and supply chain management but a book that identifies and discusses how sustainability in its various guises is relevant to ‘normal’ purchasing and supply chain management. To paraphrase Kraljic’s (1983) message that ‘purchasing must become supply management’, the message of this book is: purchasing and supply chain management must become sustainable purchasing and supply chain management.

This chapter begins by tracing the development of purchasing from an administrative, tactical function within companies to a managerial, strategic function. The following section introduces the implications of supply chain management for purchasing, followed by a section outlining the sustainability challenge and what it means for both purchasing and supply chain management. Key concepts are defined and discussed along the way. The chapter concludes with an overview of the structure of the book.

1.1 The emergence of purchasing as an academic discipline

Compared with other business and management functions, such as marketing, finance or operations management, purchasing is relatively new and under-developed as an academic field of study. The first books and articles that considered purchasing in any detail date back to the 1960s, most notably Robinson et al. (1967), Webster and Wind (1972) and Sheth (1973). This early work focused on explaining organizational buying processes with a view to helping suppliers (sales and marketing people in other words) to better understand the buying process of their customers so were not really about purchasing management. In the 1970s the first proper textbooks on purchasing – or procurement – began to appear, including England (1970), Lee and Dobler (1971) and Baily and Farmer (1977). Academically, these can be seen as the foundation stones of purchasing.

However, it was not until the 1980s and early 1990s that books and articles were published that really sought to promote purchasing as an important business function and therefore as a worthwhile academic field of study. In particular, writers across Europe and North America argued that the position and status of the purchasing function within organizations should be elevated; various maturity models were developed, portraying purchasing as a reactive, passive and tactical function at one end of the spectrum to an integrative, strategic function at the other, advanced, end of the spectrum (Spekman, 1981; Reck and Long, 1988; Ellram and Carr, 1994; Gadde and Håkansson, 1993).

The lack of academic credibility of purchasing until quite recently reflected the fact that purchasing in practice used to be a clerical function focused predominantly on obtaining the lowest possible prices for goods, and administrative, mundane tasks such as record keeping. Around the same time as purchasing began to evolve as a field of study in the late 1980s and early 1990s companies had embarked on changes in industrial organization, ‘farming out’ or ‘outsourcing’ non-core competencies and activities that they used to perform in-house. This trend had major implications for purchasing because it meant that strategically important resources, or complementary competencies (Teece, 1986), had to be sourced – and purchased – from specialized suppliers.

The trend towards outsourcing continues to this day and has even accelerated; over the last decade 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; in addition to a search for low-cost sources, 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 themselves in-house. Even if, ideally, they would prefer to control at least the most important resources and activities by keeping these in-house, they have little choice but to source these from outside companies especially as the most critical resources these days are intangible and knowledge-based.

Consider, for example, the case of Airbus: despite its history as an aircraft manufacturer Airbus has chosen to outsource the design, development, and manufacture of major aircraft sub-systems to specialized suppliers. As part of the Airbus Power8 rationalization programme, Airbus seeks to focus on its core competencies and thereby outsource major aircraft work packages to suppliers, especially those that they term ‘risk sharing partners’. For example, approximately 50 per cent of aero-structure work on the Airbus A350 XWB has been outsourced. Also, production sites that were previously under Airbus ownership have been sold off, including the wing component facility at Filton near Bristol which is now operated by GKN, and other sites, including some in France, have followed. At the same time, Airbus seeks to reduce the size of its supply base so that it relies on fewer but more strategic suppliers. These include major industry players such as Rolls-Royce, General Electric and Pratt & Whitney, who assume responsibility for design and build of large aircraft sub-systems. Consequently, Airbus is not really a manufacturer anymore; Airbus relies on its network of suppliers for manufacturing and its role these days is as an aircraft systems integrator rather than a manufacturer.

Indeed, in many industries the proportion of value that stems from the supply chain is almost 80 per cent and in many companies the outsourcing ratio is over 90 per cent. Based on data from 738 UK corporations, Strassmann (2004) calculated the average outsourcing ration as 78 per cent (revenue/purchasing). For example, the outsourcing ratio at British Airways was 77 per cent, at Rolls-Royce (aerospace) it was 84 per cent and at Tesco (supermarket) and Centrica PLC (the energy provider) it was 89 per cent. Examples of relatively low levels of outsourcing include pharmaceutical giants GlaxoSmithKline and AstraZeneca where outsourcing accounts for ‘only’ 45 per cent, but this is still a very significant proportion and is likely to be even higher as the outsourcing trend continues.

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: an extended enterprise. As a central function dealing with suppliers, purchasing plays a key role in the management of supplier relationships. This role is not only a matter of cost reduction, although saving money remains a priority for any organization, but also about ensuring that the needs for a range of criteria, including, for example, quality, delivery, innovation and service, are being met by suppliers. The need to procure complex performance (Caldwell and Howard, 2011) requires not only deep collaborative relationships with suppliers, often spanning multiple decades, but also an understanding of how complex outcomes are articulated over time through a combination of contractual incentives and collaborative relationships, requiring new skills and competencies from purchasing staff.

It is against this backdrop that the elevation of purchasing from a passive low-level organizational function to a strategic function with corporate visibility and influence needs to be understood. The rise of the executive board position of the CPO is symptomatic of this trend. Companies increasingly realize the importance of improving their knowledge and competence in purchasing. They realize that they need to start filling this knowledge gap and to develop fundamentally new ways of thinking about purchasing and its potential contribution to ensure sustained competitive advantage in an increasingly competitive global business landscape.

1.2 Two developments in purchasing

Purchasing is in some ways a limited concept and rival terms have emerged, in particular, since the 1980s. In the opening chapter of this book it is important to develop an initial understanding of some of these alternative concepts and how they relate to and impact on purchasing.

The title of this book indicates that two important concepts are to be included alongside purchasing: supply chain management and sustainability. Both reflect major developments and challenges to purchasing theory as well as the purchasing profession and they affect the practice of purchasing in different ways. The following two sections explore how these are transforming purchasing.

1.2.1 Purchasing becomes supply (chain) management

Peter Kraljic’s publication in the Harvard Business Review in 1983, ‘Purchasing must become Supply Management’, was a cornerstone in the rise of purchasing from a tactical to a strategic business function. His most important message, as will be further explored in Chapter 4, was that purchasing should focus more on high value and high supply risk 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 the purchasing profession has embraced this fundamental message to the extent that in some parts of the world, most notably North America, purchasing is now simply referred to as supply management or simply ‘supply’. Indeed, the need to capture both ‘purchasing’ and ‘supply management’ is reflected in the use of the term ‘purchasing and supply management’ (PSM).

The rise of supply chain management since its early foundations in the 1980s is in many ways a natural extension of this development from purchasing to supply management. 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 multi-disciplinary genesis of supply chain management, most notably Porter’s (1985) value chain (strategic management) and channel management (marketing and distribution). Whereas the focus of purchasing 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 proc...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Acknowledgements
• Preface to the second edition
• Foreword
• 1 Introduction
• PART A Purchasing and sourcing
• PART B Supply chain and network management
• PART C Policy, tools and implementation
• Index