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Strategic Purchasing: Strategic Purchasing and Supply Management Practices – Part 2

PART 1: Introducing New Research on Relational Rents
PART 2: Strategic Purchasing and Supply Management Practices
PART 3: The Nature of Strategic Purchasing
PART 4: Supplier Relationship Performance Outcomes
PART 5: Lessons for Purchasing Managers

Building a distinctive capability in strategic purchasing is important to the achievement of relational rents. Strategic purchasing is supported by associated supply management practices such as formal socialisation processes, supplier integration and supply base flexibility. We shall explore each in turn.

Strategic purchasing
Intense competitive pressures have forced companies to re-examine their approach to managing suppliers and their supply base. An increasing focus on core competencies, and the concomitant increase in outsourcing of components and services, has also placed greater emphasis on supplier management. In addition, much of the traditional in-house development activities have been pushed onto suppliers. Purchasing is thus increasingly regarded as a strategic weapon, centred on its ability to create collaborative relationships for firm advantage.Partnerships with suppliers can have a strong positive influence on firm performance through the development of joint resources and the exchange of valuable knowledge with these individual partners. In practice, many firms fail to realize these benefits when they implement sourcing agreements at a lower negotiated price. They fail to follow through with the relational processes that capture benefits over the course of the contract. The ability to extract benefits from supplier relationships is linked to the way these relationships are managed. For example, those relationships characterised by close interactions and successful process integration between buyer and supplier are better able to create, coordinate and protect joint resources for a sustained competitive advantage. Thus, it is not enough for a firm to possess a strategic purchasing orientation, they must also create conditions which allow the buyer and supplier to contribute and develop the relationship. Various supply management practices facilitate this process. Three will now be discussed.

Formal socialisation processes
Socialization may be defined as the level of interaction between, and communication of, various actors within and between firms, which leads to the building of personal familiarity, improved communication, and problem solving. Socialization may also be understood as the process by which an individual acquires the social knowledge and skills necessary to assume an organizational role (e.g. the process of “learning the ropes”). Supply chain socialization is the process by which individuals in a buyer-supplier engagement acquire knowledge of the other enterprise’s social values. Examples include; rules of thumb, special language, ideology that helps to edit a member’s every day experience, standard of relevance of work, prejudices, and models for social etiquette.

Supplier integration
Integration with suppliers is an effective strategy for improving business performance. Suppliers are often included in the product development process, but here we discuss integration with suppliers at the operational level. Integration of suppliers at the operational level makes the supplier an extension of the firm’s factory, emphasising continuity of supply and an end-to-end pipeline. Mechanisms for facilitating this integration include the participation of suppliers in design, procurement, and production stages, as well as the use of ordering systems and information technology to exchange information. These linkages permit increased coordination with suppliers at a tactical level, enabling the firm to deal more effectively with the complexity and uncertainty present in their environment. The development of a strategic partnership approach is fundamental to the success of supplier integration efforts. The approach must rest on a firm base of; supply market research, spend analysis, customer requirements knowledge, supplier selection criteria, and other formal processes. Ultimately, integrating suppliers into a well-managed supply chain is found to have a lasting effect on the competitiveness of the entire supply chain.

Supply base flexibility
Supplier characteristics can have a large impact on the performance of the buyer firm. The supply base flexibility reflects the degree to which a firm’s key suppliers are able to customize products, be responsive to delivery changes, and to accept late ‘mix’ and volume changes – that is, adapt to the needs of the buyer. This is similar to the concept of lean supply which advocates working collaboratively with fewer suppliers to reduce costs, improve design cycle times and foster innovation development.In the next article, we cover the relationships between these elements based on our study.