International Purchasing and Procurement Issues - Essay Example

Contents Introduction Analysis 2 A Review of Conventional Procurement Practices 2 A Review of Newly Developed Technologies in Supply Chain 6 Case Study 9 Analysis of the Impact of New Technology on Procurement 12 Expected trend of Technology development and its impact on SCM 14 Conclusion 15 References 16 Introduction The business environment has changed a lot with the new technology advancements, as the emergence of technologies has affected the ways of doing business in all terms. Among these, especially the internet has much revolutionized the business environment. While such technologies has also altered the role of the business departments in an organization, such as marketing, human resource, finance, as well as the procurement department. While the procurement department functions have not been considered as managerial, where only simple purchasing of raw materials, or merchandises from the suppliers was thought to be held. But the new technology has changed it a lot. As Gebauer, et al., (1998) has suggested that “…Internet and related technologies will change the role of the purchasing department from a transaction-oriented function to a more managerial function focused on establishing and maintaining relationships with suppliers, third parties, and internal customers, and leveraging corporate buying power…” (Gebauer, et al., 1998, p. 167). The procurement can be defined as, “…Procurement is the business management function that ensures the identification, sourcing, access and management of the external resources that an organization needs or may need to fulfill its strategic objectives…” (Kidd, 2007, p. 3). It has been considered as a management function but now it is considered as a totally separate discipline, where it is known as procurement management or supply chain management. The Supply chain or procurement management can be defined as, “…Supply chain management is the continuous planning, developing, controlling, informing and monitoring of actions within and between supply chain links so that an integrated supply process results which meets overall strategic goals…” (CIPS Professional Practice Team, 2007, p. 8). Procurement is much more than a management function, while it is a discipline that has some strategic role in the organization. There are some the new roles of procurement management in the organization, where the procurement managers have to deal with the technological infrastructure essential to smooth the purchasing by fully automating this process or by allowing the main user to process transactions regardless of the participation of the procurement workforces directly. Such new trends and technologies have their main effects over the procurement rules, procedures, and tools, and also these are altering the management approaches of procurement (Gebauer, et al., 1998; Sheth & Sharma, 1999). The purpose of this essay is to analyze the impact of adopting cutting-edge technology on procurement management, where after reviewing the traditional procurement practices, the new technologies adopted by the procurement section are reviewed and their impact on procurement is evaluated in context of a real case. For more contextualized approach, the essay has focused mainly on the Retail Industry. Analysis A Review of Conventional Procurement Practices Traditionally, the role of procurement management was quite different and it only involved the relationship and information flow between the suppliers and the organization. The main purpose of this traditional perspective of procurement was to choose the supplier that is offering lowest possible “initial purchasing price”, and to ensure that supply of merchandise or raw material is made (Spekman, et al., 1998; Lummus & Vokurka, 1999). So, in this scenario, the procurement is made with two main objectives of the procurement, lowest quote and delivery, while later the concept of the supply chain emerges, where the whole chains are associated with this process (Swaminathan & Tayur, 2003). This section provides the review of conventional procurement practices used for the purpose of procurement, and the focal industry here is the retail industry. Spekman, et al. (1998) has argued that the traditional procurement typically has features like, “…multiple partners; partner evaluations based on purchase price; cost-based information bases; arm’s-length negotiations; formal short-term contracts; and centralized purchasing…” (Spekman, et al., 1998, p. 631). This environment of procurement, where there are a greater number of suppliers and only the lowest possible purchase price has to be achieved, motivates a head to head competition between these suppliers (Bernstein & Federgruen, 2003). While the main supposition of such surrounding is that the suppliers can be substituted easily and also that the greater rivalry with the assumption of a free market delivers more beneficial and vital supplier source, which can be founded on the concept of the sustenance of the most suitable supplier (Spekman, et al., 1998). The traditional supply chain or procurement structure of retail business was quite different from the contemporary structure, which is shown in the figure below; Figure 1. Traditional Retail Supply Chain Structure. Source: (Chiles & Dau, 2005) This traditional procurement was based on the information got from the retail outlets about the customer’s orders and needs, while in this structure only the vendors and retail outlets are involved. These vendors send the required products to the retail distribution centers and then the products are assembled and sent to the retail outlets for delivery to the customers. There can be a number of vendors of a retailer and many distribution centers where the inventory is kept and managed. The inventory management is another important issue in procurement management, as there is need to lower the inventory on hand to reduce the cost that can be achieved by having more on-hand and accurate information about the orders and sales data. In this traditional view, there is information flow from the customer to the vendors, and the physical flow is from the vendors to the customers. The information exchange between the retailers and suppliers is quite limited in this scenario. While this shows the limited cooperation and collaboration among the retailers and suppliers (Chiles & Dau, 2005). The main issues highlighted in this scenario are higher inventory costs, as the products are kept as inventory in the distribution centers and there is much costs involved in the upkeep and maintenance of the inventory. Another issue is the lack of better communication and collaboration between the suppliers and retailers, which is due to the one sided information flow between the supply chain partners. There are some other traditional practices adopted to accelerate the product delivery and information flow, which have been used by a number of retailers, such as Walmart. These traditional procurement practices include the Cross Docking as well as Distribution centers bypass. The cross docking is such a process, where the products are not kept in inventory as it flows from a number of facilities that are developed for the inbound as well as outbound transportations, rather than keeping them as inventories (Yu & Shen, 2013). While the distribution centers bypass is such an initiative where the products are directly sent to the customers and there is no need to keep the product as inventory. Furthermore, the Andersen & Rask, (2002) has argued that the procurement actions, in conventional manner, were not considered as a central strategic concern, where the scenario in which the top managers and their connections with other departments sit together to build the procurement strategy and its linkage with the whole corporate vision were not present. Traditionally, it was limited to the operations strategy, which includes making the procurement orders, receiving and managing the vendor’s deliveries, as well as managing the inventory as for retail companies (Andersen & Rask, 2002). Thus, the conventional practices for the procurement management included some issues, such as the only low-price supplier selection, weak information flows, less collaboration among retailers and suppliers, and high inventory management costs. The Chiles & Dau, (2005) have argued that these practices have posed many challenges to the retailers, as retailers in today’s market need to have on-shelf products always available for the product due to high demand for best customer services along with the minimum inventory cost. Such challenges of today’s business environment has entailed the “…paradigm shift from the silo management towards the integrated supply chain management…” (Chiles & Dau, 2005, p. 47). A Review of Newly Developed Technologies in Supply Chain There is an emergence of high technologies and infrastructure advancements that are affecting the supply chains and procurement management of an organization, in order to meet the challenges and threats posed by new highly competitive and dynamic environment. The academics and researchers have focused on the new supply chain practices and a sustainable procurement evolving from the emergence of technological developments (Walker & Wendy, 2006; Kalubanga, 2012). As Hochman (2007) has stated that “…By leveraging the capabilities of today’s technologies, supply management leaders can enhance the value they deliver to their organizations…” (Hochman, 2007, p. 61). This section elaborates a number of new technologies that are being implemented in the supply chain. From the 1980’s, the technology has impacted the supply chains, as with the development of some new technologies, such as EDI (electronic data interchange) as well as the employment of the barcodes scanning, the retail supply chains have enabled the managers to track the data records and sales forecasts. In addition to these the radio frequency identification, or RFID, tags are also applied in retail business, which help with more visibility in tracking the orders and also automatic recognition with more data space. It also minimizes the need of human workforce and resulted in cost reduction. These technologies have allowed the accurate data estimations and transfers, which in turn, has made the supply chain linkages more responsive as Information technology has boosted the speed of its activities (Chiles & Dau, 2005). Information technology has much reinforced the supply chain management practices, and apart from the electronic data interchange, there are two other technologies that are implemented for the supply chain, such as ERP (Enterprise Resource Planning), and MRP (Manufacturing Resource Planning) systems (Puschmann & Alt, 2005). Among these technologies, ERP system’s effects over the supply chain management are assessed by a number of studies, which have demonstrated that the most effective benefit of ERP in supply chain management is that it is wholly centralized as well as integrated (Nemati & Mangaladurai, 2013; Tarn, et al., 2002; Akkermans, et al., 2003). Tarn, et al. (2002) has defined the enterprise resource planning as, “ERP systems are the configurable information systems packages that integrate information and information-based processes within and across functional areas in an organization” (Tarn, et al., 2002, p. 26). This definition has provided the main benefit sought out of ERP is the supply chain integration and suppliers-retailers collaboration at all levels. Many of the studies have conducted research over the impact of the ERP on SCM, where most of them found a moderate impact on the supply chain management and integration. It is also found by (Nemati & Mangaladurai, 2013) that the ERP system delivers its benefits to the decision makers by providing them an accurate and pinpointed information about the procedures that allow them to take more unfailing decisions quite quickly, and also gathering the logics to upkeep their assessments. Though, the ERP has shown a moderate level of effect on SCM, but it was further considered as delivering a more positive influence on the supply chain concerns in the new environment. These main issues of the new information era are; the customization of the products and services, the necessity for a global information technology systems, high standardization of procedures and data, and more comprehensibility of the contemporary market (Akkermans, et al., 2003). Moreover, the ERP and MRP, both are suggested to provide a competitive advantage to the organization by delivering the enhanced internal and external supply chain planning and processing (Matičević, et al., 2007). Apart from these ERP and MRP, the invention of the internet has also benefited the supply chain management in much sense. The internet has revolutionized the supply chain management, as for retail business (Gebauer, et al., 1998), it has reduced the need for retail stores, rather such businesses just own a website and take orders on their websites and fulfil them. The internet provides a choice to the firms that either they can deliver the products directly from the supplier to the customer or from retail store to the customer, therefore, creating a tradeoff between the inventory’s carrying cost and the transportation cost. The internet has also developed another important emerging tool for the procurement management, known as “e-procurement”. The word e-procurement can be explained by the statement of (Alvarez-Rodrı´guez, et al., 2014), as “…the use of electronic communications to deal with business process between sellers and buyers. It can be considered as the linking and integration of inter-organization business process and systems with the automation of the requisitioning, the approved purchase order management and accounting processes through Internet-based protocols…” (Alvarez-Rodrı´guez, et al., 2014, p. 800). A number of studies have highlighted the benefits of e-procurement in the retail businesses, as it provides decentralization in terms of the procurement operational activities, while the centralization in the strategic procurement procedures resulting from the greater precision in the supply chain (Aberdeen Group, 2001; Arthur Andersen Business Consulting, 2001; Eyholzer & Hunziker, 2000). Thus, the internet and other IT and ICT technologies have altered the supply chain structure of a retail business, while it also provides benefits of low cost with more information sharing between suppliers and retailers. It has developed further new strategies for the supply chain management, such as CPFR (collaborative planning, forecasting and replenishment), VMI (vendor managed inventory), and ECR (efficient consumer response), which have affected the supply chain of retail business to much extent (Disney, et al., 2004). Following figure shows the internet retail supply chain structure. Figure 2. Internet Retail Supply Chain Structure. Source: (Chiles & Dau, 2005) The above figure has shown the internet retail supply structure, where the customers place order on websites and then the retailer can either directly ship the product to a customer if it has in stock, or it can ask any of supplier, third party, and other partners to deliver the product. It ensures the high responsiveness and efficiency with minimum costs. Case Study This section has discussed a case study of a retail company, which has adopted technology solution to counter the new business challenges in procurement management. The company is known as “Toys R Us” and is involved in a retail business, where it is functioning in a highly competitive market and to achieve an edge over rivals, it is important for the company to cut its costs that can increase its market share and revenues. To be the market leader, the company has to shorten the lead time of delivering the product and to lower the inventory and gain more working capital in hand. These objectives were quite tough to achieve due to its worldwide supply base, the lack of integration as there was a culture of working in silos, and extensive distribution of its retail outlets. The company has been using the conventional procurement practices and procedures, as well as the workforce is rigid towards any change due to its strong culture. As Aberdeen Group (2005) has stated about the company’s procurement processes, as “…Procurement processes and operations involved verbal requests, manual entry of purchase orders into a standalone system, heavy use of inefficient, paper-based processes, “snail mailing” of purchase orders and invoices from suppliers to Toys R Us purchasing, manual matching and codification of POs and invoices, snail mailing of coded invoices from purchasing to accounts payable, and manual re-keying and mailing of paper checks to suppliers…” (AberdeenGroup, 2005, p. 34). The issues being faced by the Toy R Us were, lack of visibility and transparency into desired products and suppliers, lack of accurate data about the supply availability, absence of a standardized authorization procedure, delayed and erratic delivery of products, and lack of control over the whole process. The issues from the divisions arises at the corporate level, where the supervision over the vendor relationship and supplier leverage were badly affected, as well as the managers were unable to develop a strategic method for the supply management. The effectiveness and efficiency were required in terms of the supply chain. Such ineffectiveness further boosted up the problems, as the suppliers face payment delays, greater fault rates, higher administration costs, and thus the suppliers were not able to deliver the strategic products to Toy R Us (AberdeenGroup, 2005). So, at Toy R Us, the conventional procurement practices were unable to provide main advantages or edges over the rivals in such greater price-conscious environment, which required to lower the cost, lead time and inventory, as well as capability to free up the working capital for the strategic initiatives’ purposes of the company. Then in order to cater all these issues and challenges, the Toys R Us adopted and executed the e-procurement solution provided by the Oracle Solutions Service Provider. These were selected to systematize or computerize all the processes rather than manual processing, as well as to integrate or collaborate the order process and management in all over the business segments, vendors, and other processes, such as payables, planning and budgeting procedures. In addition to these, the management of the company developed and implemented a link between the supply chain as well as the financial value chain in order to attain the company’s objectives with respect to the e-procurement in supply chain management (AberdeenGroup, 2005). The Toys R Us attained positive results after the implementation of the e-procurement solution. By executing the new system in the company, there were two important benefits of process enhancement as well as the cultural change, were achieved. The company’s managers could be able to attain transparency of the data and can forecast the demand over its segments and retail outlets, thus such achievements has altered the company’s culture. In addition, the budgeting process improved a lot in terms of predictability and efficiency, where the company was able to free its running capital to deploy it into more strategic initiatives, such as the re-modeling of the outlets, and launching of new stores. The benefits were not restricted to any level of the business, but every level achieved the advantages. The retail outlets got a direct link with the online directories that eased the order processes and management. It also delivers more variety and easiness in choosing the products with high quality but at lower rates. The cycle time was also cut short and the customers got transparency of their orders, where they were able to track their order status and its history (AberdeenGroup, 2005). Additionally, the suppliers were able to deliver quality products and concentrates more selling the toys. The managers were able to handle the business demands, customers’ needs and procurement terms better than before. The whole procurement department was upgraded and advanced affectedly, and was able to offer quality services to the internal and external customers, as well as vendors, rather than spending their time in performing tactical and administrative functions that had to perform. The expense was now centralized in all the segments that provides more leverage while discussing the terms with vendors. The company was able to manage the cash much better and lower the need for running capital. All the manual procedures through papers, verbal ordering and extra struggle needed to delight the internal customers were totally abolished. The company achieved high integration in its functions with regard to the accounting, by the employment of Accounting/General Ledger, Expense Payables, and Fixed Assets. Furthermore, the financial value chain was also improved to much extent, where the employment of e-procurement solution lowered the headcount, more accurate inventory, decreased paper accounts, and manual order processing and invoice entry. The suppliers were also having on-time payments with better payment terms that delight the suppliers. The pricing was able to reduce to achieve the competitive advantage (AberdeenGroup, 2005). Analysis of the Impact of New Technology on Procurement A pool of literature is reviewed in the first section, where the impact of the new technology on the procurement management is assessed, and it is also evaluated with the help of a case study of Retailer Toys R Us. The above analysis has suggested that there is positive impact on the procurement of deploying new technology. This section has further elaborated this effect by discussing some of the key benefits of this deployment. The new business environment demands from the retail companies that they should provide excellent customer services and quick deliveries to the right place in right time, and with high quality. This requires greater flexibility and responsiveness towards the customers’ needs and demands, which can provide the demanded competitiveness to the companies in order to get a competitive edge. According to Faranghari, et al. (2008), the companies can achieve the responsiveness and flexibility by employing the “supply chain management paradigm”, as also discussed by Chiles and Dau (2005). It is suggested that information technology can improve the “agility” in the supply chain management (Fasanghari, et al., 2008; Chiles & Dau, 2005). In addition, Mishra (2006) further explained the effects of technology on supply chain management, where it is argued that the information technology when deployed in the supply chain, it reorganizes the whole distribution channel net in order to realize excellent customer service levels as well as reduce the inventory, thus lowering the overall supply chain costs (Mishra, 2006). Moreover, Subramani (2004) has also conducted a research to assess the impact of information technology on the supply chain network, which includes the relationships between the suppliers and retailers. The study suggested that the information technology helps in streamlining all the processes by enhancing the information flow as well as collaboration between the suppliers, customers and retailers. And also, it argued that such enhanced connections between the buyers and suppliers resulted in more value creation, which is created throughout the supply network at each step (Subramani, 2004). On contrary to these, Wu, et al. (2006) has contended that it is not always the case that the deployment of the information technology would result in better performance of the companies, rather they highly depends on the particular organization and cannot be copied to another as it is. Though, it can also provide the firm benefits with more value creation, but depending on the type of the firm where it is applied (Wu, et al., 2006). Furthermore, the McLaren, et al., (2004) has suggested that in today’s business environment, where there are very complicated supply chains due to their presence at global level, there are many opportunities for the implementation of IT and other technologies in Supply chain management. This would result in better procurement management (McLaren, et al., 2004; McDonald, et al., 2004). Expected trend of Technology development and its impact on SCM After analyzing the impact of the new technology over the supply chain management, it can be suggested that there is a greater expectation of increasing technological development, as with every new day, new technologies are emerging that provides a number of solutions to the supply chain. New softwares development in information technology as well as increasing automation due to a number of technological developments would affect the supply chain management more positively. As (McLaren, et al., 2004) have suggested that this business environment is posing a number of new challenges, where the integration and information sharing between suppliers and buyers is of high significance to achieve the competitive advantages. In this scenario, the technology has brought all the suppliers and buyers at one platform from all over the world. The customers of today’s environment require quicker responses, order tracking and high quality products, which can be achieved by creating more responsiveness and agility in the whole supply chain. Conclusion It is concluded that the development of new technologies has much effect on the supply chain or procurement management. The roles of supply chain management have changed a lot due to the new technology implementation. With the emergence of internet and e-procurement, the supply chains have become more linked and integrated, which are important in the today’s business environment where there is need to have more responsiveness and agility in the supply chain to satisfy customers. The essay has analyzed the impact of adopting cutting-edge technology on procurement management, where after reviewing the traditional procurement practices, the new technologies adopted by the procurement section are reviewed and their impact on procurement is evaluated in context of a real case. For more contextualized approach, the essay has focused mainly on the Retail Industry. The case discussed above is of a retail business, named Toys R Us, which achieved supply chain benefits by adopting the E-Procurement, as it was facing a number of issues due to traditional supply chain practices. But after adopting a new technology that addresses all the issues in accordance with the new business environment, a number of benefits were realized, such as low cost, low inventory, and shorter lead time, as well as higher integration and streamlined operations. References Aberdeen Group, 2001. E-procurement: Don’t Believe the Anti-Hype, Boston: Aberdeen Group. AberdeenGroup, 2005. Best Practices in E-Procurement: Reducing Costs and Increasing Value through Online Buying, Online: Aberdeen Group. Akkermans, H. A., Bogerd, P., Y€ucesan, E. & Wassenhove, L. N. v., 2003. The impact of ERP on supply chain management: Exploratory findings from a European Delphi study. 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