Systematic approach to the development of purchasing from operations to strateg

Systematic approach to the development of purchasing from operations to strategy

Buying functions in the B2B space have undergone a tumultuous evolution over the past 30 years. Up until the 1990s, purchasing was considered an inferior function within a company. Its role was to ensure the operational supply of material goods and services to the company according to production requirements and specifications. Purchasing activities essentially consisted of studying printed catalogues, visiting suppliers' trade fairs and were carried out using pencil and paper, and later fax, email and Excel. The aim of the buyer was to 'pull' the supplier down to the lowest possible price. This was achieved through lengthy negotiations and dubious psychological tricks.

The first significant attempt to systematise purchasing is considered to be the model of Professor Kraljic, a partner of the consulting firm McKinsey. Professor Kraljic divided purchasing activity into four quadrants along the axes of "supply risk" and "purchasing value".

KRALJIC'S MODEL OF SHOPPING QUADRANTS

Kraljic's model is widely known in the buying world. We will therefore focus here on the correlation of the individual quadrants with typical purchasing processes and their digitalization over the last 20 years.

1. Purchase quadrant for standard items

It involves the purchase of mainly catalogued indirect consumption items with a relatively low unit price. Both purchasers and suppliers lack market power: a transparent market with strong competition weakens the bargaining position of the supplier and the low price of standard products weakens the market power of corporate purchasing. It is not worthwhile for purchasing to aim for the lowest prices because suppliers' price differences are marginal and the overall value of purchasing is low. Very often the process costs of purchasing are much higher than the price of the product. Therefore, the digitization of purchasing processes seeks the highest degree of automation to reduce process costs.

E-shops play a controversial role here. Their ease of use is tempting, but their disregard for approval and budgeting processes undermines 'spend under management'. However, there are alternative tools in the provider market suitable for B2B purchasing, including approval and budgeting, which reduce process costs by 50 to 80%.

These tools - "Digital Procurement" or "Procure-2-Pay (P2P)" - are a clear example of the difference between strategic and operational purchasing. They are purely operational and, despite their effectiveness, are not strategic. Here we come to the need to clarify which aspects of procurement are strategic and which are merely operational.

A purchase is strategic if it brings a "sustainable competitive advantage (SCA)". P2P in a company is certainly an advantage over the competition. This advantage is not sustainable in a transparent provider market where a competitor can achieve the same savings by introducing P2P. Which is not to say, of course, that a firm - if it does not already have P2P in place - should not implement it as soon as possible and achieve repeatable savings. Not to mention that implementing P2P will significantly lighten the purchasing load with menial activities.

2.Quadrant for purchasing key items

Leveraged items are less common and are at a higher price level than standard items. Specific examples: critical raw materials, expensive components up to modules, capital items, energy.

In theory, there is also transparency in the market for key items. However, it is far from being the same as for standard items. Minimum prices can be achieved through electronic negotiation techniques such as tenders or electronic auctions. Due to the higher prices and more significant price variations in the key product market, the achievable savings in material prices are much higher than for standard items. The total value of purchasing key items in a company ranges between 30 and 70 % of the total purchasing costs.

Again, these are operational processes, but with a high potential for savings, which is why their deployment in modern purchasing is an absolute "must". These methods can be used as a simple enquiry that is sent out to several suppliers and the whole process is handled by the appropriate tool in a matter of minutes on both the procurement and the supplier side. On the other hand, a complex electronic auction, for example, may require more than an hour of preparation at the contracting authority when game theory is deployed, and there is also a certain amount of time involved in preparing the bid at the supplier. Nevertheless, not only material but also process costs are always minimised.

The great advantage of tenders and electronic auctions is the almost zero cost of automatic evaluation of all bids, the absolute objectivity of the selection process and the highest degree of compliance with the company's rules (Compliance).

Note: due to the competition between suppliers in the standard and key items quadrant, there is minimal supply risk as a critical supplier can be replaced by a competitor in any situation. The recommended purchasing methods in both quadrants are highly efficient in terms of savings achievable. However, they are not strategically important in terms of the above definition of strategic purchasing. We will come to the strategic methods when purchasing in quadrants 3 and 4.

3. Quadrant for the purchase of narrow-profile items

In this quadrant, participants with different market power meet. On the one hand, there are monopolistic suppliers (e.g. of rare earths and other elements) or suppliers protecting their products with patents. They are at the mercy of buyers with usually low market power. They can defend themselves by means of special long-term contracts, often involving politics. More permanent are strategic methods, such as trying to break away from dependence on monopoly supplie

• "Invention on demand": customers develop a replacement for a narrow-profile part with their own design
• "Design for sourcing": buyers replace the old product with an overall new design that does not require a narrow-profile part

In both cases, collaboration between different departments from marketing, R&D, other technical departments and, of course, purchasing is required and the creativity and intuition of the team is needed. The result is gaining freedom in the choice of suppliers and gaining a sustainable edge over the competition.

There are other practices with the same focus, which are often very specific depending on the sector. These processes cannot be completely digitised, only teamwork supported by creative methods. We will see what the future holds.

4. Purchasing quadrant in strategic cooperation

The starting position is the comparatively large market power of buyers and suppliers. An example in the automotive industry: on the one hand, the OEM as a customer, on the other hand, strong suppliers such as Bosch, Continental or ZF Fridrichshafen. Here, strategic alliances between buyers and suppliers or even between buyers and suppliers are being promoted. The aim is to create new entities that come together to achieve breakthrough results while reducing the common financial risk.

Methodological examples:

At the boundary between operations and strategy: the "SRM (Supplier Relationship Management)" with permanent supplier evaluation and development. Close cooperation in new product development often results in single sourcing, including joint open book pricing, which replaces the operational price agreement with negotiation.

"Project based partnership" aims at limited joint projects in the development of new products. It is a teamwork of two or more companies with the participation of departments such as marketing, R&D, production and purchasing. It is also important to have the participation of the costing departments, which draw up the costing structure and the possibilities for optimising it.

Strategic alliances: mergers of multiple firms with combinable complementary advantages. The most strategic form of cooperation that requires several years of preparation and implementation.

Summary:

The digitalization of operational purchasing methods significantly increases purchasing productivity and frees up capacity to develop strategic alternatives from the savings achieved that financially secure the company's further strategic development. From the experience of the last 20 years, artificial intelligence (AI) and optimised process structures can be expected to gradually replace parts of operational purchasing with full automation in the form of robots. It is also to be expected that this development is unstoppable, but will not progress as quickly as automation proponents predict.

Procurement activities will gradually shift from operational activities to participation in strategic projects in teamwork with the above mentioned departments. It will elevate the importance of the purchasing department within the company.