Competitive Procurement Strategies: Building Strength and Reducing Vulnerability

7/29/2019 Competitive Procurement Strategies: Building Strength and Reducing Vulnerability

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94 Long Range Planning, Vol. 18, No. 1, pp. 94 to 99, 1985Printed in Great Britain 0024-6301/85 %3.00+ .OOPergamon Press Ltd.

Competitive ProcurementStrategies: Building Strength andReducing VulnerabilityRobert E. Spekman, Professor, Institute of Marketing, Norwegian School ofEconomics and Business Administration

Current economic conditions andresource constraints callintoquestion many of the implicit assumptions to which traditionalstrategic planning models subscribe. An attempt is made tobridge the gap between productlmarket decisions andconcerns for present and future resource availability. Theauthor develops the notion of strategic procurement planningas an approach to make more salient the potential competitiveramifications of procurement related decisions and for betterintegrating purchasing into the corporate planning process.

IntroductionOver the past decade we have witnessed the gradualrise of the purchasing function from a position ofcorporate obscurity to one of increasing impor-tance within the corporate hierarchv. Economicturbulence, particularly in the availability of energyand raw materials, has ser\,ed to increase the degreeof corporate status afforded to the procurementfunction. Nonetheless. empirical results suggestthat general management tends to view purchasingmerely as a cost saving centre and as a passiveparticipant in the planning process. While theargument* for purchasings profit generatingpotential has been made quite compellingly, there isa paucity of information that addresses specificallyprocurements role within the corporate planningprocess. In fact, with the exception of work byCorey,3 a review of texts4 in either managementand policy or strategic planning shows thatpurchasings contribution to the corporate plan-ning process is noticeable only by its absence. In thelight of current economic conditions and futureThe author is Visiting Professor at The Institute of Marketing,Norwegian School of Economics and Business AdmInIstration.Halleveien 30, N-5000, Bergen, Norway and Associate Professor atthe College of Business and Management, University of Maryland.

business trends such benign neglect does notwell for firms facing very competitive,growth markets and is expected to diminishability to sustain long-term profitability.

bodeslowtheir

The ,purpose of this paper is to draw attention toprocurements potential contribution to the cor-porate planning process. The primary objectivehere is to propose a framework for betterintegrating procurement related information withthe strategic plans of the firm. While purchasing at alow cost is indeed important, a central premise hereis that such concerns are a necessary but not asufficient condition for long-term corporatecompetitive viability. Rather than emphasize costsavings through efficient procurement practices,this paper advocates strategic resource planning andintroduces the notion of strategic procurementplanning. Strategic procurement planning growsfrom a concern for supplier dependence andinextricably links procurement practices to a firmsfuture competitive posture.

Past Assumption and PresentRealitiesWhile the practice of planning has evolved intostrategic management, many of the assumptionsupon which plannin, ~7models have been built havenot been re\Gsed to reflect current environmentalexigencies. The philosophy of planning has arguedthat the organization must extend its vision beyondits boundaries to these more distant factors that areless predictable and certainly less controllable. Oneproblem has been that managements cnviron-mental scanning behaviour has tended to be marketdriven. By stressing market related factors onlymanagers have been inattentive to important


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Competitive Procurement Strategies 95political, social and resource related factors thatimpact also on the firm. A second problem is thatplanning models have emphasized implicitlygrowth related strategies. It is only recently thatconcern has been expressed regarding the difficulttask of managing a business in zero or slow growthmarkets. It should come as no surprise, then, that athird problem has been that for many firms thestrategic planning process began with the marketplace and worked backwards. It would appearthat a strategic plan that focuses, almost exclusively,on market output factors may, at best, beanachronistic but it is certainly dangerous. At thevery least corporate managers must begin toconsider external resources availability as a majorcomponent of their product/market decisions. Tobe sure, resource scarcity and supply uncertaintymake it necessary for managers to plan environ-mental interfaces at both the supply input and themarket output side of the planning process.

Strategic Resource PlanningFrom the above, two important points emerge.First, environmental monitoring is a task crucial tothe corporate planning process and that theprocurement function can play a very importantrole in the monitoring, gathering and dissemi-nation of purchasing related environmental in-formation. There is no question that the capablemanager, regardless of functional responsibility,should be sensitive to the long-run implication ofhis decisions. However, environmental monitoringis only the first part of the strategic decision process.The second point, therefore, converges on theoutcome of the purchasing managers informationmonitoring behaviour. That is, the goal ofenvironmental analysis is twofold. First, it isimportant to ascertain the degree to which the firmis at risk because of changes and perturbations in itssupply environment. Next, this concern forstrategic resources must be wed to the firmsproduct/market decisions. Thus, a central role ofpurchasing managers is to develop a list of and tomonitor closely those resources that are tied to thefirms particular businesses (i.e. profit centres,SBUs). Presently, managers tend to describebusinesses by growth potential, market share orROI. There has been less of a concern to generate alist of commodities or strategic resources thatattempt to incorporate present materials needs andfuture availability with a firms business portfolio.It can be seen that the objective here is to articulatenotions of shared critical resources and futureresource requirements along with market growth,competitive exposure and market investmentdecisions. For instance, it is clear that DuPontsrecent purchase of Conoco was driven, in part, by acorporate decision to ensure long-term, captivesources of raw material for its petrochemicalbusiness. Given the wide range of internal pressures(e.g. new technologies, new processes, product linechanges) challenging the firm, one cannot ignore

procurements potential contribution to corporatestrategy through its access to and ability to monitortechnological, economic and resource relatedfactors in the supply environment.The process for generating strategic resources isclosely akin to strategic issue management or anumber of other systematic procedures of environ-mental assessment for early identification of and fastresponse to important trends/factors that canimpact on a firms ability to enact a strategicresponse.6 The process begins with the generationof environmental factors that impact on a firmsprocurement related activities. These factors canrange from macro considerations of inflation andrecession to the degree of capacity utilizationwithin a particular supplying industry to newprocess or materials innovations. Given the limitson managers ability to deal effectively withinformation, the list of factors must be pared to amanageable number. Central to the process are thecriteria by which important environmental factorsare isolated. While the exact number and kind ofcriteria are likely to vary depending on theparticular idiosyncrasies of the firm or the industry,it is suggested that the measure employed reflect thefollowing generic concerns:

The environmental factor has crucial long-termconsequences for the firm.The factor affects a wide range of strategicresources.A situation is created that is difficult to reverse.Significant corporate resources may be requiredto offset a potentially negative impact, or tocapitalize on an opportunity.

this fashion, environmental threats/oppor-tunities are highlighted, corporate strengths/weaknesses are assessed and an attempt ismade to not only determine the appropriatecorporate response but also the timing of thatresponse. Thus, a first pass is made to prioritizecorporate vigilence and managerial action. Such ananalysis assists the manager in bringing into sharpfocus strategic resource problems and opportu-nities. Managers are forced to question theirassumptions and ask themselves what wouldhappen to your business if. . .The strategic resource planning process is com-pleted only after the manager has bridged thegap between strategic resource factors andproduct/market considerations. Figure 1 illustrateshow one might attempt to link product/marketdecisions with resource constraints opportunities.As is implied by the figure, the manager is nowforced to consider and prioritize his strategicoptions based on factors other than traditionalmarket based criteria (i.e. market growth rate,market share). In this fashion a planning philosophythat focused solely on market based factors i\


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96 Long Range Planning Vol. 18 February 1985Strategic Business Units

SBU

SBU,SBU,SBU,SBU,SBU,SBU,SBU,;BU,

Levelof

Profit

MHMHHHLLLL

MarketGrowthRate

CashFlow

++++++---8 +-, +

Strategic Implications

Strategic Resources

SR, SR, SR,

Figure 1

supplanted by a perspective that considers strategicoptions from the supply-side as well. From thisintegration a comprehensive, touch-all-bases, cor-porate thrust emerges. It is apparent that themanager is compelled to focus attention to thesupply side of the planning process and develop astrategic procurement orientation that can hope-fully, impact favourably on the firms competitiveposture in the various markets it serves. In short,purchasings ultimate impact on corporate per-formance becomes a crucial consideration.

Strategic Procurement PlanningWithin the rather diverse strategic managementliterature there is convergence on the notion thatstrategic planning encompasses those competitivelybased decisions that relate the company to itsenvironment. Among the various factors that seemto drive competitive behaviour (e.g. rivalry amongfirms, threats of new entrants, barriers to entry,experience curve effects) little, if any, formalattention has been given to the relative bargainingpower of buyers and sellers. While it is true thatsellers have advocated systems selling and othermarketing based techniques for creating close,mutually beneficial working relationships betweenbuyers and sellers, these strategies are, nonetheless,seller controlled and often attempt to place thebuyer in a dependent posture. Dependency, asdepicted here, has both its benefits and costs. On the

one hand, the buyer has lessened the degree ofuncertainty associated with a particular procure-ment decision, but, on the other, he has increasedthe costs (either real or psychological) associatedwith the purchase. Costs translate into diminisheddegrees of freedom that constrain the buyersability to move freely among competing vendors.As a result, the buyers attempts at negotiating amore favourable purchasing agreement (e.g. priceconcessions, technical assistance, extended dating,warranties, inventory relief) are often thwarted. Inshort, the buyer is less able to leverage thepurchasing situation to his firms competitiveadvantage.The point here is that low cost purchasing (beyondthe costs of ones competitors) extended far beyondreaching efficiency in ones procurement/materialsmanagement operation. True competitive ad-vantage can be sustained by developing expertise inscanning the environment for those purchasingrelated factors that permit the buyer to firstunderstand the competitive ramifications of thosepurchasing related environmental factors and thento leverage the situation to the firms advantage (i.e.better control the buyer-seller relationship).Strategic procurement planning is seen as ahierarchy of effects process whereby there are threedistinct but highly interrelated levels of strategicaction. Each preceding level is a necessary but not asufficient condition for the following set ofdecisions to be enacted. In addition, each level ofstrategic decisions has a particular focus thatrequires a different type of environmental inform-ation and has a unique set of performance criteria.The three levels of strategic action are(1) Performance Related Strategies.(2) Procurement Systems Related Strategies.(3) Competitive Procurement Strategies.

Performance Related StrategiesThe lowest level of the hierarchy encompassesperformance related strategies that focus primarilyon managing purchasing resources, controllingexpenses and serving users needs within theorganization. The evaluative criteria employedtypically by management to discern whetherpurchasing had met its objectives is expressed interms of budget goals and internal performanceratios. For example, it is not uncommon to findperformance appraisal systems that seek to assess:* total dollars purchased;+ total dollars purchased/purchasing employee;+ total number of bids let;T7_/ total number of purchasing orders written;f7 total cost of operating the purchasingdepartment;


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Competitive Procurement Strategies 97out-of-stocks;percentage of late shipments;percentage defective/damaged shipments;planned vs actual costs;cancellation charges paid.should be apparent that the above stressespurchasing efficiency only and is concerned solely

with whether purchasing is being done right. Theseindicators are generated from internal, objectivesources of information and are used to makeinternal comparisons on a year-to-year basis. Whileit is important to know whether the purchasingdepartment has lowered the cost of purchasing, itwould be more useful strategically to knowwhether costs are indeed lower than onescompetition. This level of purchasing relateddecisions does not lend itself to assessing such acompetitive equivalent.

materials, labour and/or overheads. From the above,a number of different negotiation strategies canemerge. Multinational sourcing may result, forexample, if a high proportion of the cost associatedwith a particular purchase is a result of high labourcosts in a domestic market. One Norwegian hightech firm has recently shifted some of itssubassembly capability to Japan where it couldbenefit from less costly labour and more automatedproduction capability. The point is that whetherthe problem entails the cash flow needs and internalrates of return requirements inherent in anysophisticated inventory management system orsome aspect of the various issues alluded to above,purchasing is seen as a proactive decisionparticipant who can assist the firm better gather andintegrate relevant procurement related into thecorporate decision making process.Competitive Procurement Strategies

Procurement Systems Related StrategiesThese mid-level strategies encompass those issuesthat not only serve to co-ordinate variousorganizational subfunctions but also begin to buildinformation links between the organization and itsmore immediate external environment. Strategicissues focus on a range of concerns which include,but are not limited to, the following:ti supplier selection;+ contract duration;& centralization vs decentralization;* value analysis;~2 inventory management systems;* multinational sourcing.

Competitive procurement strategies focus on thebuyers intrinsic bargaining power which allowsbuyers to leverage purchasing and, as a result,improve the firms competitive market position.Building on previous strategic decisions, theprimary thrust here is to provide for the firm thelowest longrun costs that are in concert with thepresent and future sourcing requirements of thecorporation. Historically, purchasing has taken adefensive position when dealing with its supplyingmarket. The approach advocated here is to augmentthe past with a series of offensive strategies that arecontingent on the buyers ability to assessaccurately and understand perceptively all therelevant aspects of the supplying market. Keyissue? related to gaining market power are:

Understanding the Supplying MarketsStructure.

Flowing from a materials management perspective,these strategic decisions implicitly view purchasingas having a more integrative, if not a central, role inmany procurement related decisions that dependalso on input from other departments.

Balancing Stability and Competitiveness withinthe Supplier Pool.Achieving the Optimal Degree of VerticalIntegration.Minimizing Supplier Dependence.

While the vendor analysis component of thesupplier selection decision typically lies within the

Understanding the Supplying hfarkets Structure. Anpurview of the purchasing department, it would appreciation for the structure of the supplyingnot be uncommon for other functional areas to market permits the buyer to assess, at the outset offurnish crucial information. For example, certain the buying process, the potential power held byquestions regarding a vendors technical com-

suppliers. At the very least, this knowledge helps topetencies or financial strength should not be

shape the negotiation strategy utilized by the buyeraddressed without significant input from other

and effects, to a great extent, the firms competitivefunctional groups. A determination of the length of posture. The concentration of firms in the sellinga procurement contract is likely to be impacted by market, the ease of market entry/exit, the growthfactors ranging from estimates of requirements rate of the market (i.e. stage in the life cycle), and

(basedthe industrys cost structure, all contribute to an

on either market potential or pastproduction figures) to market/price volatility, to understanding of the firms relative bargainingthe stage of product development. Value analysis is power and suggest the amount of a priori leveragenot just a cost reduction programme and may available to the buyer. For instance, as a means ofcomprise an elaborate reverse engineering effort to supporting its present production scheduledetermine more accurately the true cost of McDonald Douglas is offering a fly-then-buyfinancial package to entice buyers. While this


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98 Long Range Planning Vol. 18 February 1985incentive may serve to tempt an airline to considerupgrading its fleet, it certainly increasesthe buyersbargaining position as he enters into negotiations.It should be apparent that highly concentratedmarkets with highly differentiated products do notbode well for buying firms which represent a smallpercentage of total industry purchases and whichcannot easily pass future cost increases forward toits customers. In addition, information germane tothe markets growth rate is quite useful since notonly do the number of competitors change overtime, the manner in which they compete changes aswell. For instance, scale and experience effects mayresult in changes in the value added generated andthe buyer may benefit since certain cost concessionsmay accrue. On the other hand, increases in valueadded (i.e. adding more service with a sale) mayaccrue. A significant issue relates to the degree ofunused capacity within the industry or theindustrys actual cost structure (ratio of fixed coststo variable costs). In cases where relative high fixedcost is the rule and/or a large percentage of new (orunused) capacity exists sellers tend to be veryvolume sensitive and often will strive to fillcapacity. There should be no question that such asituation places the buyer in a more favourablebuying situation. In fact, clever paperboard buyersin Scandinavia can, at present, take advantage of thefact that the paper industry in Finland, Sweden andNorway is suffering under conditions of under-capacity.Balancing Stability and Competitiveness. Whereas thebuyers primary objective is to achieve long-termstable relationships within its supplier pool, sourceloyalty has its strategic limitations. More precisely,the buyer must engage in a strategy of balancingnumbers whereby the supplier pool is smallenough to ensure that the firm is seen as a valuedcustomer but is, at the same time, large enough so asnot to diminish price and service competitionamong suppliers. In addition, there are otherconsiderations that extend beyond vendor com-petitiveness. Primary among these should be thebuyers interest in seeking and developing vendorswho can improve the buying firms marketposition either through advanced (or improved)products, services or processes. In addition to thepotential competitive advantage achieved throughjoint development work, the buyer can move hisfirm further along the learning curve by buying theexperience. Industry observers note that IBMsdecision to join forces with Intel permit it access to a64K RAM that operates faster than its own design.It should be noted that although source loyalty andsingle sourcing has great attraction, buyers mustlook beyond these notions and search for vendorswhose strengths can improve their firms competi-tive posture.Achieving the Optimal Degree of Vertical Zfztegration.For purchasing, the notion of vertical integration

encompasses typically the questions surroundingmake/buy decisions. In this case the buyer maycontribute to an analysis of whether a componentnow furnished outside should be made internallyusing existing facilities or whether new capacityshould be added to make something that couldotherwise be supplies. While the two decisionsrequire different kinds of information and analyses,the strategic benefits that accrue are similar. As aresult of backward integration the firm gainscertain economies, has raised entry barriers andtends to increase its ROI. At the same time there arestrategic costs to be considered not the least ofwhich is the reduced flexibility that can result fromsuch integration. New technological break-throughs, currency shifts and a host of factors caneasily render a decision to add new manufacturingcapacity useless.Yet, a question that is not asked is how can thebuyer use notions ofvertical integration to improvehis bargaining position and, therefore, his firmscompetitive stance. For instance, the buyer may beable to achieve many of the advantages of verticalintegration without incurring many of its costs. Forinstance, long-term contracts, co-operative R & Dventures, specialized logistical facilities, and so onmay guarantee uninterrupted sources of supply andlower unit costs without the capital investment. Inaddition, the buyer might engage in quasi ortapered integration as a way to partly reduce costsbut also to maintain a check on suppliers who maycome to perceive the buying firm as less dependenton them for particular sourcing requirements. Itwould not be unusual to expect that under suchconditions the buyer would gain certain priceand/or service concessions. In another vein, theU.S. auto industry and international oil companies,prior to the present glut, maintained a practice ofsupplementing their own production and fleetspartially as a way of shifting to the outside the riskof economic fluctuations.Minimizing Suppliers Dependence. Throughout thesediscussions the implicit driving force has been thedesire to minimize supplier dependence so as toimprove the buyers bargaining power. Whilepurchasing managers tend to agree that they shouldminimize supplier dependence, empirical evidencesuggests that they are not very sensitive to thefactors upon which a dependency relationship isbuilt. On a broad level, some of the issues can berelated to points raised previously. For instance,buyers should attempt to spread purchases andengage activity in helping to qualify other sources.Many manufacturers are turning to their suppliersand demanding quality improvements since theircompetitive edge is determined, in part, by theirsuppliers ability to furnish a reliable product. Inmany cases, manufacturers are working withsuppliers to help them meet the expected level ofquality. In addition, buyers should promotestandardization among purchases where perform-


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ante criteria are not affected. Although some of therationale here can be traced to earlier concerns forpurchasing efficiency (i.e. lower unit cost),standardization also removes some of the differ-ential advantages that occur to the supplier of tailor-made components. Thus, the supplying market canbe viewed more like a commodity and, as a result,the buyers bargaining position is greatly enhanced.Switching costs become an important consider-ation particularly when a buyer is faced with acompeting offer from a new vendor. Highswitching costs constrain the buyers ability to actin the market and, clearly, increase the sellersbargaining position. To say that buyers shouldavoid switching costs tends to simplify a rathercomplex issue. Rather, buyers should recognize thebenefits and costs which accrue through anysystems selling or integrated marketing strategy.While some switching costs are truly psycholog-ical, the buyer must be cognizant of the number ofissues that go beyond the training, retoolingengineering and ancillary equipment costs that areassociated typically with switching costs. Forinstance, buyers must consider also the rate ofchange associated with the changeover and whethersupport services will be available to ease thetransition. In addition, there are costs associatedwith the probability of product obsolescence andresource scarcity as well as with anticipated changesin technology that might occur after the productand/or system has been purchased. Clearly, thebuyer must help corporate managers gather andanalyse information such that the long-termadvantages and the long-term costs to the firm canbe assessed. The objective here is to expand theinformation base that is crucial to a fullunderstanding of a firms competitive posture.

Summary and ConclusionsThis paper has presented an approach for betterintegrating procurement, in general, and purchas-ing related information, in particular, into thecorporate planning process. The implicit themehere has warned that corporate managers can nolonger afford to develop strategic alternatives thatare based primarily on product/market consider-ations. The time has come for the strategic planningprocess to bridge the gap between supply input andmarket output factors. In addition, this paper

Competitive Procurement Strategies 99carries an important message for purchasingmanagers. Present economic conditions andresource constraints demand that procurement takea more proactive stance with respect to its rolein the planning process. Purchasing managersmust strive for more than efficientprocurement/materials management. Procurementrelated decisions must not only conform to thestrategic plans of the firm but should reflectconsiderations for the firms present and futurecompetitive posture. The time for an open dialoguebetween the purchasing function and the corporatestrategic planners has come. Neither can continue,nor can the firm ultimately afford, the sounds ofsilence that do not consider seriously thecompetitive implications of strategic procurementdecisions.

References(1)(2)

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Dean Ammer, Isyour purchasing department a good buy? HarvardBusiness Review, March-April (1974).Victor Pooler, Measuring the purchasrng man: TREN D,Journa/ ofPurchasing and Materials Management, Vol. 9, November (1973),Robert Spekman, The purchasing audit: a guide for management,J ournal of Purchasing and Materials Management, Vol. 15(1979).E. Raymond Corey, ProcurementStrategy:Strategy, Organizationand Decision Making, CBI Publishing Company (1978).For example, Charles Hofer and Dan Schendel, StrategyFormulation: Analytical Concepts, West Publishing Company(1978); John Pearce and Richard Robinson, StrategicManagement, Richard D. Irwin (1982); Will iam King and DavidCleland, Strategic Planning and Policy, Van Nostrand ReinholtCompany (1978); George Steiner and John Miner, ManagementPolicy and Strategy, Macmillan Publishing Company (1977).R. Hammermesch, M. J. Anderson and J. E. Harris, Strategies forlow market share business, Harvard Busmess Review, May-June(1978); R. G. Hammermesch and S. B. Sills, How to compete instagnant industries, Harvard Business Review,September-October (1979).See H. lgor Ansoff, Strategic issue management, StrategicManagement J ournal, Vol. 1 (1980); H. lgor Ansoff and JamesLeontiades, Strategic portfolio management, InternationalJ ournal of Management Studies (1977).Other critena can be found in F. Frredrich Neubauer and NormanSolomon, A managerial approach to environmental assessment,Long Range Planning, Vol. 10, April (1977).Michael Porter, Competitive Strategies, Free Press (1980).Robert E. Spekman and Ronald Hill, Strategic purchasing: anapproach for dealmg effectively with procurement in the 1980s.J ournal of Purchasing and Material Management, Vol. 16, Winter(1980).

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Competitive Procurement Strategies: Building Strength and Reducing Vulnerability