Is Procurement Strategic or Operational?
Although the focus on the Procurement function has increased in the last years, it was not until the 1980’s that organizations in competitive markets began to put attention into this area. And still today, Procurement is considered a support and operational function in many organizations. This is not due to tendencies or fashions, it is mainly due to an evolution in the characteristics of the environment and context.
1) Offer vs demand shift
During the fifties, companies were working in stable and non-saturated markets whose demand was larger than the offer. Firms had market’s power and could decide what kind of products to produce.
However, during the sixties, the relationship between offer and demand began to change. Offer grew so much that it become larger than demand. Companies diversified their products in order to expand markets.
2) Companies’ structures and strategies
Most companies adopted a functional structure throughout the 20th century. Similar functions were gathered and departments such as marketing, purchasing, human resources, production, sales, etc., were created. Companies’ main focus was on production, whereas the rest of the functions were subordinated to that function. These secondary functions had no strategic objectives. Their main objective was to manage their resources efficiently.
Another important reason to explain why procurement didn’t play an important role in company’s strategy is the make or buy decision. Before 1970s companies operated in very stable markets, which encouraged producing in-house because large investments such as new plants would be recovered. Therefore, purchasing function’s objectives were mainly to support production and to buy products, components and services that were easily obtained in the market.
3) Procurement function
The procurement function was isolated from the other functions and other functions were purchasing by themselves, especially production. Purchasing policy was to ask large quantities of products to suppliers in order to get discounts. Besides, large orders reduced the risk of running out of some components because large stocks were available in warehouses. Additionally, more efficient purchasing transactions were obtained.
Buyers and suppliers used to have very competitive relationships. There used to be a kind of winner-loser relationship in which both sides considered the other side as a competitor rather than a partner. Companies tried to have access to a wide range of suppliers so that they didn’t depend on a single supplier. Therefore, close and helping relationships didn’t exist.
4) Changes in the environment
During the fifties and sixties companies had been growing up continuously and had been structured in a way that didn’t provide the purchasing function with responsibility. When the environment changed in the seventies, companies had to modify their strategies and structure.
There were a lot of companies willing to provide more products than customers willing to buy them. Companies began to realize that they had to satisfy customers’ growing expectations if they expected to keep their market share. Customers had obtained market’s power and they began to ask more complex, more personalized, cheaper and high-quality products as well as a better service from the company. Not only was important the technology evolution but also its speed. This situation was opposed to large investments in new plants because of the short time spam to recover the investment.
Improvements in information and communication technology
The development of a lot of software programs facilitated the management of any kind of institution. Besides, Internet, as well as mobile phones and computers, have made communication easier, cheaper and faster among people all over the world.
Thousands or roads, airports, railways and ports have been built all over the world, especially in developed countries. The movement of people and freights has become faster and cheaper. It has implied a globalization, with wide expansion of markets, suppliers and resources.
5) Changes in organizations
As markets became saturated, companies diversified their products to maintain their market share. In order to satisfy customers, companies couldn’t produce big quantities of the same product anymore because more personalized products were demanded. Manufacturing systems had to become more flexible and higher quality products were required by customers. Customers’ satisfaction became the prior objective relegating strategy focus on production. Firms had to break the internal barriers among departments in order to help information sharing.
Companies moved from a functional approach to a processes approach. One of the first authors who proposed a model in which activities were developed from the new perspective was Porter. He introduced the concept of value chain: “a system of value creation in which each organization adds its value to whatever it is that the system is creating”. The different value-adding activities of an organization are classified into two categories: primary activities and support activities. Primary activities are those which add value to the inputs. Support activities are those which hold primary activities.
Added value during each stage has to be higher than the cost of doing it so that there is a margin at the end of the chain which is the benefits for the company.
Also during the 1980’s, the concept of Supply Chain Management emerged. It was defined as “the integration of business processes from end user through original suppliers that provides products, services, and information that add value for customers”. Companies started to remove a perspective in which each department was just centered on their role and they began to establish a global perspective.
6) Adaptation of the Procurement function
The purchasing function was also forced to adapt to the new environment in which it had more importance within the firm. When companies decided to diversify their products, there was an increase in the variety of components and products purchased. It also implied life-spam reduction, which made it necessary to reduce the time that the purchasing function had to deal with suppliers, as well as to focus on different aspects than price such as quality and time delivery so that no delays in the final product were produced.
Transport, communications and information exchange improvements allowed companies to buy all over the world. The purchasing department had much more suppliers to consider as well as currency exchange rates to analyze. In other words, they had many more aspects to consider in order to do a good purchase.
An outsourcing strategy was followed by a lot of companies, which also increased the number of components that companies had to buy. Therefore, procurement needed more skilled people who knew several languages with higher knowledge of technology and better management skills. In addition, they took more responsibility due to the fact that outsourced products were of higher importance, as well as larger variety. The procurement function could provide a competitive advantage if companies were able to manage them properly.
Today, in 2020, we still find organizations which consider procurement an operational function. Buyers are not involved in strategic decisions and are skipped in the buying process. Other functions see procurement as a department that slows down the project and is not providing much value. But are they right? Should procurement only be responsible for sending Purchase Orders and negotiating price with a specific supplier selected by the end user?
Procurement, are you Strategic or Operational?