Academic journal article International Journal of Purchasing and Materials Management

A Structured Method for Applying Purchasing Cost Management Tools

Academic journal article International Journal of Purchasing and Materials Management

A Structured Method for Applying Purchasing Cost Management Tools

Article excerpt

Managing cost continues to be one of the primary focal points of business today. Purchasing controls a high proportion of costs in most organizations. A recent study indicated that, as a percentage of an organization's revenues, purchasing expenditures averaged 63 percent in manufacturing, 86 percent in wholesale, 78 percent in retail, and 86 percent in utility industries. Even in the general service sector, purchases amount to approximately 25 percent of total costs.[2]

Purchasers know that it is important to manage costs. However, there are many cost management tools and techniques, and they continue to proliferate. Thus, it is difficult to determine which type of analysis should be used in a given situation, and time pressure may impede the purchaser in selecting the right tool for the job.

This article proposes a methodology to help purchasers determine what type of cost analysis technique should be applied to a particular purchase by exploring the following areas:

1. How should purchased items be classified into a framework, so that standard procedures can be developed for analysis of items that fit into certain classifications?

2. What cost analysis techniques best support each classification in the framework?

3. What cost analysis techniques are more strategic in nature, and can really help purchasing add value to the organization?

Each of these questions is discussed in some depth, following a brief review of the relevant literature.

LITERATURE REVIEW

The recent growth in articles related to purchasing cost analysis supports the notion that this is a growing area of interest. However, most previous research tends to focus on only one or a few techniques.[3] The research can be classified as primarily descriptive or prescriptive. It can further be broken down according to whether it is empirically or conceptually based. As shown in the classification summary in Table I, most of the work in this area has been conceptual in nature. All the empirical work identified in recent publications has been case oriented, with the exception of a limited survey performed by Ellram in 1992.[4]

TABLE I
SUMMARY OF RECENT PURCHASING COST ANALYSIS RESEARCH

             Descriptive        Both Descriptive    Prescriptive
                                and Prescriptive

Epirical     S. Rajagopal       L.M. Ellram, 1994
              and K. Bernard,   L. Carr and
              1993              C. Ittner, 1992
             L.M. Ellram,
             1992
             R. Monczka and
             S. Trencha, 1988

Conceptual                                          G. Tyndall, 1988
                                                    D.N. Burt, et
                                                     al., 1990
                                                    J. Cavinato,
                                                     1992
                                                    J. Shank and
                                                    V. Govindarajan,
                                                     1992
                                                    L.M. Ellram and
                                                     S.P. Siferd,
                                                     1993
                                                    R. Landeros,
                                                     et al., 1993

Descriptive Empirical Work

The descriptive work reviewed consists of three studies, two of which involved a single case study.[5] Two of these studies describe in some depth how one organization used cost analysis techniques in supplier selection[6] and supplier evaluation.[7] The third study was a survey that analyzed the prevalence of purchasing's use of cost savings techniques.[8]

Descriptive/Prescriptive Empirical Work

The studies done by Ellram and Carr and Ittner involve multiple case studies of organizations using total cost of ownership modeling in purchasing. …

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