Perspectives on procurement in business
What is the role of procurement in business management? Why is it important? To answer these questions, Procurement function will be studied from several perspectives.
1. Procurement as a function
In management studies, a ‘function’ is often defined as a unit or department in which people use specialised knowledge skills and resources to perform specialised tasks. In many organisations, procurement is still a part of a segmented, departmentalised structure in which the procurement of supplies is a discrete activity in the sequence of activities from the acquisition of supplier to the delivery of a finished product to the ultimate user. The challenge of global competition is, however, increasingly leading many organisations to replace segmented structures with integrated structures in which procurement is part of a larger grouping, such as managing international logistics or supply chain management. Such structures emphasise the importance of cross-functional decision-making. Procurement’s many interfaces within an organisation and the concept of working as a team will be discussed later in the unit.
2. Procurement as a process
The ISO 9000:2000 quality management standard defines process as ‘a set of interrelated or interacting activities, which transforms inputs into outputs”. Any activities or set of activities that uses resources to transform inputs to outputs can be considered as a process, as depicted in Figure 1.1.
Figure 1.1 The concept of process
The quality management principles advocate that a desired result is achieved more efficiently when related resources and activities are managed as a process.
Procurement as a process can be viewed as a sequential chain of events from recognition of needs leading to the acquisition of supplies to afterprocurement activities such as supplier evaluation and development. It is through the examination and identification of value-added and non-valueadded activities in this chain of events that cost reduction strategies can be formulated.
Value to the customer is good quality, a fair price and a fast and accurate delivery. Organisations should look for ways to create value internally in every one of their organisational processes where the outputs of each process is greater than the inputs plus resources consumed as illustrated in Figure 1.2.
Figure 1.2 The concept of value-added
3. Procurement as a link in the supply or value chain
Procurement, along with activities such as production, warehousing and transportation, is one of the links in the supply chain or sequences of processes by which supplies are converted into finished products and delivered to the customers. Supply chains and value chains are synonymous. A value chain is a linear map of the way in which value is added by means of a process from raw materials to finished, delivered product (including service after delivery). Porter’s value chain model as shown in Figure 1.3 regards procurement as one of the four support activities that contribute to the competitive advantage of a business.
Figure 1.3 M E Porter’s value chain model
4. Procurement as a relationship
Procurement relationships may be both, internal and external, short or long-term.
Internal relationships are with other links in the supply chain, such as initiator(s) of a procurement and the users of the goods/services procured. Increasingly, as mentioned earlier, internal relationships are cross-functional and based on teamwork.
Externally, relationships with suppliers, to be discussed later in the course, may represent a continuum from arm’s length to supplier alliances. Many organisations now rely on suppliers to design, develop and manufacturer items that they would previously have produced themselves. As cited by Lysons, K and Farrington, B (2006), Ford et al (2003) observe:
The main issue facing managers is no longer about ‘buying the right products at the right time at the right place’ but of handling and developing relationships with key suppliers over long period.
We have earlier on distinguished the term purchasing from procurement. Procurement encompasses supplier management. Supplier management is that aspect of procurement, which is concerned with rationalising the supplier base and selecting, coordinating, appraising the performance of and developing the potential of suppliers and, where appropriate, building long-term collaborative relationships. Supplier management is more a strategic and cross-functional activity than purchasing, which is transactional and commercially biased.
Figure 1.4 shows the relationship between procurement, purchasing and supplier management. Over here, we see procurement as a wider term, which relates to both purchasing and supplier management. In line with the developing trends in procurement management and the characteristics of Procurement function in the future, the design of this course provides more focus on the strategic activities of supplier management. We shall return to study some of these activities in more detail later in the other units of the course.
Figure 1.4 The relationship between procurement, supplier management and purchasing
5. Procurement as problem-solving
The following view of the IMP (Industrial Marketing and Purchasing Group) as cited by Lysons, K and Farrington, B (2006), sums it all:
Customers are not looking for a product from a manufacturer. Instead they seek a solution to a problem from a supplier. Business procurements are problem driven. A problem may relate to the customer’s need to carry out its basic activities efficiently and economically. Examples include the problems of wastage of material, poor utilization of staff or an unacceptable failure rate in components. We refer to these as problems of ‘rationalisation’. A problem can also arise for positive reasons such as when a company is trying to develop relationships with new customers or enhance the performance of a product. We refer to these as problems of ‘development’.
Procurement is no more relevant just as an arm’s length transactional functional activity. The procurement professionals are expected to be part of an integrated cross-functional problem-solving team that brings solutions to the discussion table to satisfy customers’ needs.
|Question to activity 1.1
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