purchasing decisions and business strategy

1. PURCHASING DECISIONS
AND BUSINESS STRATEGY
Chapter 2
Prepared by:
Michael A. Alonzo
IGCF

2. 4 Decision Areas of Purchasing Strategy Framework
1. Supplier development
– New product/Substitute product development
2. Supply management
• Number
• Size
• Location
• Financial health
• Engineering
• Relationship
3. Scope of manufacturing Activities.
• Make product or buy product
4. Buying Criteria
• Purchasing scale
• Ordering policy

3. Components of Purchasing Strategy
• Purchasing actions are determined by the
firm's competitive priorities, its resource
capabilities and the environment.
• Purchasing strategy must consider:
1. competitive priorities
Two Generic Competitive advantage
Speed
Reliability
2. organization's strengths and weaknesses
3. competitive environment

4. The General Competitive Strategy Options
Cost - should drive all the costs down
Differentiation – enhance uniqueness in quality or
flexibility on customer service
• The competitive strategy must be articulated in
terms of competitive priorities
• priorities to dimensions such as the following:
• cost
• quality performance
• quality conformity
• product flexibility
• volume flexibility
• customer service

5. COST VS DIFFERENTIATION STRATEGIES
DECISION AREAS COST DIFFERENTIATION
Purchasing Criteria Low cost/unit
Consistent quality
High Quality
Bargaining Basis Economies of Scale Economies of Scope
Supplier Multiple One or Few
Supplier Size Moderate/large
capacities
Moderate/small
capacities

6. Purchasing/Buying Criteria
– Must reflect firms‘ competitive priorities
Example:
• Cost priority:
– high priority to purchasing costs
• Flexibility priority:
– high priority to lead time in buying material

7. Buyer’s Performance
The criteria on which the buyer's performance is
evaluated can influence the effectiveness of
purchasing actions
• Cost variance seems to be the dominant
criterion
• Reward criteria determines the firm's actual
priorities

8. Environmental Factors to consider
1. Inflation rate
2. Monetary policy
3. Fiscal policies
4. Technological development
5. Industry capacity
6. Market growth
7. Global Stability

9. Reasons for the emergence of supplier
partnerships as a competitive weapon
1. Increased competition
2. Deregulation
3. Increased use of electronic data interchange
(EDI)
4. Increased just-in-time
(JIT) manufacturing

10. Major Characteristics of Industrial
Buyer/Seller Relationships
1. Degree of risk/reward
2. Relationships
3. Information
4. Planning
5. Asset ownership

11. Supply Chain Relationship Quality (SRQ)
1. The entire supply chain must be
competitive in addition to individual firms.
2. Tool for achieving continuous improvement in the
industrial supply chain
3. The objective is to provide a valued product or service to
the ultimate stakeholder (customer)
4. Helps balance the needs of the buying organization and
the needs of the supply chain itself
5. Concerned with the extent to which cooperation, trust,
commitment, satisfaction, and performance expectations
influence the relationships in the same industry

12. The Strategic Sourcing Plan
The purchasing function must be integrated into the
firm's overall strategic plan
A strategic sourcing plan requires:
1. A complete understanding of corporate strategies and
marketing plans
2. An extensive evaluation/study of current suppliers, how
performance is measured, and the expectation of
suppliers relative to the industry
3. Study of the degree of global purchasing opportunities
4. Identification of total costs associated with current
purchasing department/function, budgets, staffing, and
so forth

13. The 4 Phases of Strategic Sourcing
1. Sourcing Audit
» A diagnostic process that identifies
opportunities for increased profitability
2. Organizational Development
» Developing sourcing strategies
3. Implementation and Evaluation
» Indoctrination of the company with sourcing
strategy
4. In-House Training Sessions
» Learn state-of-the art purchasing techniques,
negotiation strategies, and cost containment
methods

14. END