Magazine article International Trade Forum

Value Creation and Purchasing Strategy

Magazine article International Trade Forum

Value Creation and Purchasing Strategy

Article excerpt

Increasingly, as European manufacturers face fierce competition from new Asian sources, suppliers are looked to as sources of competitive advantage. This article discusses the strategic role that differentiated purchasing and supply management represents in support of companies' overall product/market and business strategies.

Purchasing and competitive strategy

Industry in Western Europe seems under-represented in new technologies and industries. Many industries seem to face market saturation or decline. Many companies now focus on 'selective growth'--enhancing core activities and starting up new activities. One consequence is the shedding of non-core activities.

In general, the following reasons may underlie this trend:

* Increased subcontracting, as a result of 'make-or-buy' studies. For example, a manufacturer of office equipment found internal manufacturing costs substantially higher than those of external suppliers prompting a make-or-buy programme. As a result the company moved to a higher level of assembly and now focuses on design, assembly, marketing and sales, with most component manufacturing terminated.

* Buying of finished products instead of components. For example, the Western European textile industry has responded to competition from 'low-wage countries' by shifting production to developing countries. Large retailers buy the raw materials, which are then sent, together with the design, to low-wage countries.

* Turnkey delivery. Manufacturers of industrial fences, for example, need to deliver their products turnkey (at the buyer's request), managing all installations, including safety and surveillance equipment (cameras, keyless entry systems) obtained from specialist suppliers resulting in an increase in the purchasing share of project costs.

* Technological development. The technology develops in some industries at such a pace that even large manufacturers cannot afford to keep up. Computer manufacturers obtaining their microprocessors from specialized suppliers is one example.

The agenda of purchasing and supply management has changed

The traditional agenda of purchasing and supply management has gradually changed.

The traditional cost orientation in purchasing has involved doing more with fewer suppliers, global sourcing, aggressive sourcing and electronic tendering and contract management. Purchasing managers need to reduce downside risk through single sourcing, early supplier involvement, outsourcing and partnership agreements. Purchasing managers must challenge suppliers to provide superior value informed by a shared knowledge of future investment plans to drive supply chain integration. Relationships with suppliers become strategic.

Integrating purchasing into company policy

Overall business strategy requires positioning vis-a-vis three major stakeholders. Employees or 'unions' may represent a fourth as knowledge and human capital are recognised as key success factors. The 'strategic triangle' covers these stakeholders (see Figure 1):

1. Primary customer or target groups. Products and services need to be tailored to differentiated customer target groups requiring specific product/market strategies.

2. Major competitors. Companies must respond to customer needs to achieve a distinctive, sustainable competitive advantage over competitors e.g. superior cost position, brand image, product quality, logistics performance and customer service. Continuous benchmarking of overall performance is required against best-in-class in specific activities,

3. Major suppliers. Production activities and support services must be under continuing review to assess competitiveness. If the conclusion is that current production activities cannot be carried out competitively in the long run, it will be necessary to investigate subcontracting options and/or possible partnerships with suppliers. …

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