Purchasing and Supply Chain Management free essay sample

In no more than 2,500 words, using a structured essay format, explain how the need for firms to recognize supply chain management as a philosophy and a source of competitive advantage has led to significant changes in the purchasing role amongst public and private sector organisations. INTRODUCTION One of the fundamental questions facing modern organisations is how to achieve and sustain competitive advantage (Rumelt et al 1994) within an increasingly fast moving environment. Supply Chain Management (SCM) is critical element of model business strategy and globalisation trends where Organisations can create significant competitive advantage. SCM has many definitions but is essence is ‘the management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole’ (Christopher, 2005). Therefore the knowledge and understanding of the various processes involved in SCM are critical in the efficient controlling the supply chain (Davis, 2010). The purchasing process within SCM has thus become a central part with a role â€Å"to purchase the RIGHT QUALITY of material, at the RIGHT TIME, in the RIGHT QUANTITY, from the RIGHT SOURCE, at the RIGHT PRICE† (Baily, Farmer, Jessop and Jones, 2005) This paper discusses the evolution of SCM, why it had become central to competitive advantage and the developments it has forced on the role of purchasing. Quinn et al (1990 p79) state that organisations, â€Å"need to ask, activity by activity, are we really competitive with the world’s best here? † Quinn (1992) and Quinn and Hilmer (1994) continue the theory by arguing that activities in the organisations supply chain can be described as services. Each service can be examined from a customer’s perspective to ensure that the organisation knows how to perform better than anyone in the world. If it cannot perform to this high standard then it should be outsourced. Porter (1985) reinforces this view by stating that concentration by each organisation in the supply chain on its distinctive capabilities allows the development of better value added services and products. Key Principles within Supply Chain Management (SCM) Philosophies Supply Chain Management is defined by Lambert et al (1998, p. 1) as â€Å"the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders. . Although SCM is a widely accepted term, there is no definitively recognised description of SCM or its activities. Theoretically SCM can be seen as all the value adding activities through the supply chain, from the production of raw materials to the delivery of the product to the end consumer (Wisner and Tan, 2000). SCM philosophy can be further explained the internally focused concept, by incorporating multiple organisations among the SC in order to achieve ef ficiency and end customer satisfaction (Harwick, 1997). Figure 1 shows vertical integrated flow of a generic supply chain demonstrating the cross functional movement of a product towards the end consumer but also the upstream capabilities. [pic] (Lynch, 2012) Organizations in the 1950’s were very self orientated with the view of developing everything themselves in a mass production philosophy, of producing lots of products in order to ascertain low costs and then distributing to dealers and retailers. This meant that large inventories were needed in order to acquire their desired profit margins and maintain mass production (Origin of SCM). The 1970’s brought the ideal of reducing and managing inventories more effectively using systems such as material requirement planning and manufacturing resource planning, in order to deal with the financial crash and the increase in competition at the time (Origin of SCM). The 1980’s marked an exponential growth in SCM (Georgia Tech, 2012), giving way for new supply methodologies such as ‘just in time’ and ‘total quality management, with the focus of creating low cost, high quality products and customer satisfaction. The introduction of growth to IT was also prevalent, giving organizations an overview of the product cycle Origin of (SCM). Globalization has brought much more competition within the past decade, which has led organizations to create cooperative, mutually beneficial partnerships with suppliers, distributors, retailers and other firms within the SC (Wisner and Tan, 2000). This aided the flexibility of the JIT and TQM manufacturing systems, where there is little inventory to backup increased demand. (Lynch, 2012)[pic] Procurement and purchasing has therefore been required to develop as shown in above on an accelerated path from the 1980’s (cost and linear) to current trends (capability and strategic lean relationships). The main changes are shown in the table beside (Lysons and Farrington, 2006) PURCHASING MODELS Porter (1985) supports the SCM strategic direction where concentration by each organisation in the supply chain (on its distinctive capabilities) allows the development of better value added services and products. He continues that within such value chain there are primary and support activities which are carried out, with procurement being labelled as a support activity, eg it delivers a service which supports inputs within an organizations value chain. Davis (2010) conversely argues that Purchasing should be more considered as a proficient tool within the supply chain and key to an organisations realisation of the value chain. Despite evidence of purchasing existing in Egyptian times (Lysons and Gillingham, 2003, p. 9), it was only within the late 20th century that the significance of cost-effective purchasing became important (Giannakis and Croom, 2004) and even later as a strategic operational benefit. Figure 2 below helps chronologically walk through each forward step in the development of purchasing processes and models. Each of the models in figure 2 offers an explanation of how purchasing has developed (Davis, 2010) According to Davis, P (2010 p. 35). ‘These frameworks show that conceptually a theoretical base has been developed upon which research can be built for purchasing. Further he continues that frameworks offer a method for both assessing the stage of maturity of an organization’s purchasing function and how it could be further developed within such an organization’. Stage 1 across all of the models is predominantly seen as a simple transaction process which adds no value towards the organization. As figure 3 demonstrates this would be construed more as the linear purchasing approach. [pic] (Lynch, 2012) As you work down the development of procurement’s role it is only Reck and Long’s (1988) final stage that supports the initial view of Porter (1985) where fully developed purchasing is a supportive role. The other three models (Morris and Calantone, 1991; Stannack and Jones, 1996; Syson, 1992) emphasize purchasing as an ‘advanced, ‘proactive’ and ‘performance centered’ activity which is of strategic importance. Its function to mediate between external suppliers and internal organizational customers giving value to external customers (Novack and Simco, 1991, [cited in njazz J. Chen et al]) Ellram and Carr, (1994]) and Cooper and Ellram, (1993) takes this view of purchasing further stating that it has evolved from the notion of a supporting buying function to a much more ‘performance centered’ process and ascertaining a status of a ‘crucial strategic role’. Purchasing now performs strategic decision making during the corporate planning process (Cavinato, 1999) and thus has a significant cross-functional coalesce within Supply Chain processes. THE â€Å"MAKE OR BUY DECISION† Senior managers in the manufacturing industry have pushed the importance of the ‘make or buy decision’ within the business strategy (Probert, 1993. cited in Humphreys et al, 2002). Quinn et al (1990 p79) state that organisations, â€Å"need to ask, activity by activity, are we really competitive with the world’s best here? † Quinn (1992) and Quinn and Hilmer (1994) continue the theory by arguing that activities in the organisations supply chain can be described as services. Each service can be examined from a customer’s perspective to ensure that the organisation knows how to perform better than anyone in the world. If it cannot perform to this high standard then it should be outsourced. Often specialist suppliers can perform the outsourced activities at lower cost and will have higher value added than the buyer (Van Weele, 2004, p. 18 cited in Davis 2010). This view articulates the importance of procurement in effecting the supplier relationship. . Supplier Partnerships Milgrom and Roberts (1992) demonstrated how Japanese style systems introduced new implications for supply chain practice. Suppliers would offer their expertise to the organisation through extensive two-way flows of information and significant co-operation (Coulson 1998). These new concepts entailed, â€Å"close co-operation with suppliers to achieve the desired level of quality and delivery, and to implement design for manufacture† (Levy 1997 p95). It called into question traditional price based contracts and suggested a need for longer-term relationships based on trust, flexibility, innovation and quality. These changes in supplier relationships are emphasized in Table 4, which is adapted from the WebPages of iPower Distribution Group (a subsidiary of Parker Hannifin Corporation). The implications for procurement is that new suppliers need to listen, be proactive, and have knowledgeable sales, production, research and development teams that can work with organisations to strengthen the entire purchasing chain’s market position (Fitzgerald 1998). Chen et al (2004) shows these relationships in Figure 3 [pic] (Davis 2010) Supply Chain and the production process Strategic purchasing is implemented within the ‘Lean’ production system in order to eliminate waste with strong emphasis on supplier relationship. Manrodt (2008) defines lean as â€Å"a systematic approach to enhancing value to the customer by identifying and eliminating waste (of time, effort and materials) through continuous improvement, by flowing the product at the pull of the customer, in pursuit of perfection†. As such lean production philosophy was a further movement away from the traditional push supply chain process. The lean production method focuses on llowing there to be flexibility within the Supply Chain, with customers being allowed to pull from the Supply Chain. This means that organizations are focusing on the whole of the value stream, looking at the product from production to consumption (McIvor, 2001). Figure 4 (Erdogen and Sezen, 2009) shows the different Pull and Push Supply Chains. Amongst the lean production system sits other production protocols. Harrison (1992) and Flynn et al (1995) supported the combination of the ‘just in time protocol and the ‘total quality management’ protocol to produce efficient manufacturing. [pic] (Erdogen and Sezen 2009) Lean supply is thus reliant on purchasing/supplier partnerships as it is unable to exist unless a close, transparent and mutual relationship has been constructed (Lamming 1993, [cited in Humphreys, 2001) Tesco displayed the importance of this when lean production method was put in place with its cola supplier in 1996, where the level of service was at 98. 5% compared to its 99. 5% in 2005 after the changes had been made (Erdogen and Sezen 2009). There were 5 storage between bottler and customer in 1996, after lean production systems were employed this had changed to 2 in 2005 (Erdogen and Sezen 2009). This allowed Tesco to create the highest availability with the lowest stock. Case Study Toyota Toyota Motor Coporation is one of the leading car manufacturers in the USA with a market share of 13. 9% (shown in pie chart)(Cain, 2012) Toyota created the ‘Lean’ production system to counteract the traditional western ‘mass’ production strategy (Holweg, 2007). The obsession with lean production systems is key to their Supply chain success and has revolutionized industry (Kleiner). Toyota practices its supply chain management with a limited number of suppliers, with around 300 near its home base in Japan which they foster close communication with (Jones and Clarke, 2002). They function by using their just-in-time method as required by assembly, which are collected every 2 to 4 hours via a milk run. Toyota’s suppliers delivery a high level of quality, with 99. 9995 per cent of parts delivered without deficiencies and on time (Jones and Clarke, 2002). This makes a dramatic difference especially when Toyota are producing 13,000 cars per day (Toyota, 2010). Toyota looks to manage their entire value stream for each of their products, in contrast to segmenting these products to optimize their own activities and compete against others upstream and downstream (Jones and Clarke, 2002). Toyota aim to use their ‘pull’ supply chain to move parts through the value stream, in order to reach demand when required(Jones and Clarke, 2002). Compared with two other leading manufacturers (Ford and Chrysler) Toyota was found to be the most productive when measured for hours required for assembly (Toresco, 2006). Toyota measured at 27. hours against Ford 37 hours and Chrysler 35. 9. Conclusion Tidd et al (1997) note that in responding to rapidly developing markets and changing environments, organisations are forced to innovate. Current SCM across the value chain is about new agile organisations focused on gaining competitive advantage through better quality, lower costs and a quicker time from order to customer. This paper has explored how su ch innovation and new organizations are concentrating on supplier partnerships to extract the maximum return from their capabilities (Teece et al 1997). Abbott et al (2006) defines the modern lean Supply Chain as a set of organizations directly linked by upstream and downstream flows of products, services, finances and information that collaboratively work to reduce cost and waste by efficiently and effectively pulling what is needed to meet the needs of the individual customer. Thus SCM strategies are an integral part of the organizations architecture and planning process, where supplier partners are expected to make significant contributions in cost efficiencies, time and quality improvements, logistics, planning, development of new products, services and organizational knowledge. The role o purchasing and supplier partnerships (as part of such SCM strategy) in the ever-growing globally competitive market, are of increasing importance. For purchasing partnerships to add value and create competitive advantage they must be strategically managed with the required due diligence. Purchasing has needed to move from a monolithic linear supporting role to a critical strategic management role of supplier integration into the organisation, its structure and its future strategic plans. This can easily be summerised through the following quotes: FROM to purchase the RIGHT QUALITY of material, at the RIGHT TIME, in the RIGHT QUANTITY, from the RIGHT SOURCE, at the RIGHT PRICE† (Baily, Farmer, Jessop and Jones, 2005) THROUGH â€Å"The main issue facing managers is no longer about ‘buying the right products at the right time at the right price, but of handling and developing relationships with key suppliers over longer periods† (Lysons, 2006) and, is now concerned with â€Å"Key challenges for 2011 include developing system tools to release resources and increase efficiency, unleashing procurement’s innovative side and encouraging ateral thinking†.