Value-Based Purchasing - Case Study Example

Value-based or occasionally referred to as activity-based, purchasing concentrates the decisions of the purchasing department on the production of value apart from the traditional goals of cost savings and efficiency; majority of researchers on the area of purchasing view purchasing as strategic and a main contributor to the added value of a company. However, hardly any of the contributions elaborate on the potential types of values that purchasing professional could in fact add to the company (Brimson & Antos 1999). Therefore, this paper will attempt to review the strategic frameworks of values added by purchasing in order to somehow provide a conceptual paradigm of factors influencing value added by the purchasing professionals. I. Value-Based Purchasing Management When companies spot out the considerable percentage of their budget affected by the outcomes of purchasing, the significant prospective benefits from putting into effect purchasing management, and the reality that purchasing management processes and outcomes utilize and affect the entire company, they frequently start to change their perspective of the purchasing role from that of a strategic support group to a tactical potential. The initial step companies frequently adopt toward a value-added approach to purchasing management activities is to set up quantifiable, corporate-wide purchasing management objectives that head straightforwardly to high-level corporate objectives. These objectives may emerge from benchmarking practices, internal audit, or evaluations carried out by an external consultant (Leftwich 2004). The metrics applied to monitor progress toward achieving these value-added purchasing management objectives are outcome-based, such as “total cost reduction, supplier quality improvements, or number of preferred suppliers rather than function-, process-, or tool-based metrics” (Leftwich 2004, 112) that are entirely inherent to the purchasing responsibility, such as the quantity of agreements and/or purchase orders processed annually or quantity of electronic orders. Nevertheless, only setting up objectives and determining parallel metrics alone is insufficient to jumpstart the shift to a strategic or value-based paradigm to purchasing management. The companies that have been most effective and successful in putting into effect paramount purchasing management practices also allocate tasks and liabilities for achieving the purchasing management goals, starting with high-level corporate purchasing management stakeholders (Lewis 1993). As a final step toward implementing a more value-based approach to purchasing management, companies are incorporating the purchasing management organization and deliberations into the topmost echelons of internal decision making. For instance, Intel’s top management currently acknowledges purchasing as strategically comparable with design and manufacturing (Leftwich 2004, 114). The transition toward more value based or strategic purchasing management demands that purchasing be broadened beyond the conventional transactional paradigm to integrate more advanced and more value-based purchasing activities. An initial step in this transition is to relocate from processing purchase orders and challenging present agreement ‘as is’ to the advancement and bargaining of more flexible, higher-profit agreements that embrace bigger groups of products and services (Belkaoui 1996, 108). Bethlehem Steel discovered that more that 80 percent of its expert purchasing personnel time was spent in strategic activities with no more than 20 percent of their time concentrated on value-based activities. A second step is to integrate market research into the purchasing task to gain knowledge which products and services excellently address internal customer demands, the inventive suppliers of those goods and services, the finest means to purchase them, providers’ primary cost drivers, supply market status, effective means to evaluate performance and give out rewards and incentives, what novel technologies are anticipate in the future, and others (Belkaoui 1996, 108-109). The more-advance purchasing management organizations persevere to better manage and incorporate the company supply base as well as the supply chain. They evaluate corporate expenditure trends and examine the comparative significance of purchased products and services to the company’s main processes to identify the best acquisition tactics (Brimson & Antos 1999). As companies initiate to put into effect these new, developed purchasing management practices, they are realizing that the profundity and expanse of the expertise of their present purchasing staff is frequently unsatisfactory. While several traditional purchasing groups comprised mainly of clerical personnel trained to process undemanding and uncomplicated transactions, implementations of value-based purchasing management practices demands interdisciplinary collaborations and teams made up of experts and professionals with sophisticated interpersonal, systematic and technological skills. For instance, purchasing management experts are expected to be skilled in communicating, building consensus, collaborating efficiently in a team setting, and negotiating. Economic analysts further claim that the capability to gain knowledge, adjust and change is as well crucial to the success of new purchasing management professionals (Leftwich 2004). When carrying out market research and business intelligence, purchasing management personnel identify supplier cost structures, approximate supply market situations, and evaluate financial reports. Moreover, internal outlays analyses demand that purchasing management experts calculate the overall ownership costs related to purchasing products and services and the cost of poor quality. Most value-based purchasing groups integrate supplier development programs, which demand specialization in process restructuring, just-in-time production strategies, the theory of constraints, and quantitative process control. Possibly the utmost fresh challenges for purchasing management professionals are related with the current and abrupt implementation of e-business or e-commerce on the Internet (Leftwich 2004, 122). As discussed, several of the new optimal value-based practices demand contribution from staff with an expansive variety of capabilities and skills and the purchase-in of various stakeholder groups in a company. This is specifically the actual occurrence for the process of establishing strategic alliances with suppliers and formulating and managing intricate contractual dealings with them. To make these activities workable, several companies have transferred purchasing management decisions in the turf of cross-functional teams. Depending on the nature of the responsibilities, these teams can be permanent or temporary (Lewis 1993). When confronting a dilemma that may take advantage from close dealings with present supplier firms such inventory reduction attempts, delegates of supplier firms must be counted as official constituents of the purchasing management teams. When they are counted, purchasing management teams are inclined to function more successfully, with greater attempt given by the members of the team, higher gratification, and fewer management difficulties, and hence attained greater enhancements in performance (Lewis 1993, 73). In addition to possessing substantive know-how on their fields of expertise, members of the team must have the firm interpersonal and team-building capabilities, such as collaborative problem solving, that are important for productive teamwork. This is particularly essential for teams that unite personnel because they come from different departments of the company or from different geographical locations. Members of the team should as well be capable to appropriate the task to be accomplished to the wider interests and goals of the company, rather that adopting a restricted, well-designed paradigm (Leftwich 2004). II. Factors Affecting Value-Based Purchasing The contribution of the purchasing function in enhancing the value of the company’s goods and services is discussed by several economic researchers. According to Dumond (1994) there are three types of organizational factors that she asserts to exert the greatest influence on a company’s capacity to carry out value-based purchasing: the performance measurement system which creates the methods and establishes motivation for successful value chain management; functional interaction facilitates purchasing managers in increasing company value through providing more attention on the internal users that have to be connected to the outside environment; access to outside information permits purchasing experts to enhance the value of a company’s goods and services through connecting the internal user to the outside environment (pp. 3-5). Based on the findings of her research, Dumond (1994) assumes that the present purchasing context does not sustain value-based purchasing. In order to formulate a context that will sustain and prompt value-based purchasing, a sequence of changes have to be taken into account by the top management: concentrate individual purchasers on the requirements and demands of customer and determine processes that produce value-added purchasing; design a performance measurement scheme that put emphasis on quality, process enhancement, and customer satisfaction; incorporate purchasing into the company’s communication lines; foster awareness not merely among individual purchasers but as well their customers (pp. 5-6). Cousins and Lamming (1997) believe that the purchasing department’s activities are at present more value-based, strategic and varied in character and hence a more comprehensive set of abilities and skills are sought for the purchasing division so as to add value to the company. They as well assume that the shifts in the purchasing task have been triggered by developments in information technology, internationalization of businesses and the requirement for companies to become genuinely lean so as to remain competitive. In the perspective of Rozemeijer (2000) the primary variables that have an influence on purchasing collaboration on establishing competitive advantage in purchasing are “corporate strategy, purchasing maturity, corporate organization and business context” (p. 91). III. Core and Non-Core Activities of Purchasing The key to successful value-based purchasing management is to domesticate core activities and outsource non-core activities. Companies that have value-based purchasing do one thing, they radically outsource. Many companies discuss outsourcing, but in fact do it merely in departments such as office supplies and administration, which will by no means impact significantly on performance. The most effective and successful companies are more revolutionary. They aggressively outsource in order that they can dedicate their energies into the tasks they accomplish best, in the process bringing in benefits such as lower expenditures and costs, reduced production time, improved customer satisfaction, and entry to advanced technologies, talents or market information. A case in point of core and non-core activities in purchasing is one leading airline in Europe which decided to keep hold of merely the core activities that generate most value such as supervising routes and load variables. Non-core activities, which the airline referred to as ‘everything else’, include ground personnel and reservation representatives which have to be outsourced (Lewis 1993, 82). Another, a large heath care organization outsource non-core activities such as materials management and nutrition services in order for them to focus entirely on their core activity, patient care (Lewis 1993). Last example is a high-growth fast-food chain that cooks and prepares less food at its store, because of the findings that suppliers, with their sizeable quantities and more detailed concentration, can lessen logistics expenditures and enhance product reliability. It, for the meantime, focuses in product customization and marketing (Belkaoui 1996). IV. Conclusions Motivated by the aggressive competition on the marketplace, companies are paying a lot more attention nowadays to the value notion. They are trying to enhance the value of their goods and services and remove non-value-added activities, both with regard to cost and quantity. One operation that has a significant influence on these attempts is purchasing. The function purchasing fulfils in the company is very important, and the result of the purchasing decisions can wield profound effect on the value of the company. Currently, value-based purchasing concentrates the decisions of the purchasing department on the generation of value, rather than on the conventional goals of cost savings and efficiency. The invention of e-business and various information technologies enriches progressively more the types of values that purchasing professionals can supplement to the company, because of several reasons: the purchasing professionals shifts the functional activities to the users and focuses on tactical and value-adding activities; they reorganize and restructure the whole purchasing process, specifically the functional portion, remove all non-value adding activities; they present the likelihood of a firmer regulation over the whole process; they present commanding databases which contain all information and details about the supplier and users; and others. Furthermore, since purchasing establishes the connection between the suppliers of the company and its customers, it is not just internally concentrated but as well as externally, in these situations, it would be more relevant to take in a wider perspective and understanding of the potential value-based purchasing in a company. In connection to this, a number of economic analysts show the fundamentality of outside influences on giving out value and how the relationship to the customer establishes this value. The value-chain analysis shows that the purchasing operation, which intersects both the company’s internal and external settings, has enormous possibility to give value, not merely internally but as well externally. Lastly, with the right level of dedication and the right personnel in charge, it will be probable to begin revolutionizing the function of purchasing within a company setting. A number of companies have by now taken hold of purchasing management as a way of obtaining and maintaining competitive advantage. Several others are starting to rethink the input that purchasing can provide to overall corporate performance. The rest has to be rocked and roused. If not they will discover themselves trailing behind and not even aware of the reason. References Belkaoui, A. (1996) Performance Results in Value Added Reporting, Westport, CT: Quorum Books. Brimson, J. A. & Antos, J. (1999) Driving Value Using Activity-Based Budgeting, New York: John Wiley & Sons. Dumond, E.J., (1994) Moving toward value-based purchasing. International Journal of Purchasing and Materials Management, Spring, 3-8. Lamming, R.; Cousins, P; Frewer, R., (1997) Competency development for strategic purchasing. Proceedings 7th IPSERA Conference, Italy, T6/1-1 T6/1-17. Leftwich, L. M. at el. (2004) Organizational Concepts for Purchasing and Supply Management Implementation, Santa Monica, CA: Rand. Lewis, R. (1993) Activity-Based Costing for Marketing and Manufacturing, Westport, CT: Quorum Books. Newman, R. G. (1992) Supplier Price Analysis: A Guide for Purchasing, Accounting, and Financial Analysts, New York: Quorum Books. Rozemeijer, F. A. , (2000) Creating corporate advantage in purchasing. Proefschrift. Eindhoven. Read More