Assignment Title: Firms should seek to “get their own house in order” before seeking to manage suppliers Purchasing is a vital process of the company, 100% efficiency is required at all times. There must be proper organization and flexibility in this department. People working in this department should constantly evaluate the current purchasing scheme of the company and adapt to changes at all times. Purchasing department or team of a company basically seek to answer these two questions: what we buy and how we buy.
The answers to these two questions can change depending to companies size and sector. Indeed, by answering these two questions is the main goal of procurement team or department is to create best value for money and to maximize it. It is possible to maximize best value for money by obtaining surplus value. Surplus value is different from the value. Surplus value locates between cost of production for supplier and value of the product to the buyer.
This is called the area zone of agreement.
The surplus value which is retained by supplier is called producer surplus and the value which is retained by buyer is called consumer surplus, the procurement team/department aim to maximize consumer surplus. Purchasing process means that demand management. There are two ways to make purchase decision make-buy or outsourcing. Make-buy is required internal management it is related to the organizational buying behavior. Outsourcing is required external management consist of supplier management.
The fundamental issue in purchasing process is to provide efficiency in demand management.
Efficiency of purchasing process is related for instance a reduction in the number of suppliers used an automation of the purchasing process, the use of framework agreements, and the development of trusting relationship with suppliers. Providing efficiency contribute to get power. Business life means power games. The market is unforgiving for weakness so at first hand, while the firm seeks to establish its own house in order before seeking to manage the suppliers. It will provide efficiency.
In order to get successful purchasing process, firm should manage its demand efficiently and firstly firm should be sure to provide this efficiency by establishing “in its own house in order” in this case firm could get power above its suppliers. Demand management problems in an organization could appear in different ways (Londsdale, SP&SM, Lecturer notes, Week 3) Maverick buying, fragmentation of spend, early specification, over-specification, unnecessary change to specifications, poor demand information, lack of clarity, adverse selection, inappropriate contracting, poor monitoring leading to moral hazard, unnecessary purchase.
These problems occur alone or together. Organizational buying behavior involves a multi-person activity and it is true for 90% of organizational buying. This includes a very meticulous process which can even take more than a year to decide and conclude. Today’s organizations are aware of the costs involved in making timely, accurate and efficient decisions; create more value for money. If firms are to succeed in one facet of its global goal to be known in the market, a strong leadership should be in place; guide and make it move in a synchronized manner.
Most of whom started small in its own right to be able to manage its own people easily, efficiently and most of all, avoid unaccounted costs. For a firm to manage its buying behavior and create a benchmark, it needs to: recognize a problem, acknowledge a general need, create or come up with product specifications, make an efficient and able supplier search, make a buying step, select a supplier, make an order-routine specification and conduct a post-purchase performance review. Once this process is harnessed over time; the next step to go bigger; to expand.
(http://www. smartcompany. com. au/marketing/sales/22378-20111007-marketing-strategies-organisational-buyer-behaviour. html) To further elaborate: Recognize a problem- anticipate and plan for purchase on a routine basis Acknowledge a general need – extensive, objective cost-benefit analysis Create or come up with product specifications – using precise technical description using techniques such as value analysis Make an efficient and able buyer search- extensive search that extends to the search for a supplier Make a buying step – business to business
Select a supplier- made after extensive evaluation of objective information Make an order-routine specification-routine calculation of re-order points as well as time and place of delivery Conduct a post-purchase performance review – extensive comparison made and feedback given, concern with quality management at source. All of these elements could still fail with the existence of problems that should be recognized and avoided at first glance namely (Londsdale, SP&SM, Lecturer notes, Week 3) maverick buying,
fragmentation of spend, early specification, over-specification, unnecessary change to specifications, poor demand information, lack of clarity, adverse selection, inappropriate contracting, poor monitoring leading to moral hazard, and unnecessary purchase. When fragmentation exceeds its neutral level, means that parts or branches in this situation are unconnected and/or missing and still expected to come up with results the same as what the entire system once did (http://www. ourfurutre. com/real101. htm) the whole is always better in presence as everyone will have a better understanding of each function.
It is also good to note that when there is a “whole Picture” concept. There is a better understanding as to the fluid interaction and dependency of each part resulting to better result of each task at hand. To cope with organizational fragmentation it’s important to understand why fragmentation arise in organization what are conflicts between branches or parts. Fragmentation arises in an organization because of several reasons. First, each department of an organization performs different functions, it follows that these departments have different needs.
For instance, engineering department of a company would definitely use different computer from the HR department. These two departments have two different functions through both departments require computers for efficiency but both use special applications, features and specifications of computers to perform well. Legacy method is an old system that firms continue to practice these days. This is the second reason why fragmentation arises in organization. Maybe the system works satisfactory so organization sees no reason in changing it.
The cost for changing and redesigning system could be costly both time and money compared to the anticipated appreciable benefits of replacing it to a new one. And lastly, difficulties in consolidating efforts in the organization. Human as we are, we have different opinions and our way of thinking is always different to one another. There are organizational factors that make consolidation efforts difficult. Conflicting preferences within organization arise due to limited rationality. Bounded rationality can also contribute to conflicting preferences for decision makers make decision with limited and often unreliable information.
Limited time could and human mind’s limited capacity to evaluate and process information. Powers is exercised within organizations. People in higher position control over resources, rule-making, information and etc. lower ranks needed to comply to show obedience and respect thus result to conflicts. And lastly, each departments employees behave relating to their knowledge for example for manufacture department quality is important, for purchasing department price important. Each department has goals and priorities to fulfill,these can result to conflict as well.
Conflicting preferences can be solve through identifying the problem and build organizational alliance to change internal client. Setting a standard and centralize preference within the organization would definitely help resolve this problem. Building alliances would demand purchasing managers to sort out personnel according to their rank. This could help to solve conflicting references in the organization. Furthermore, when fragmentation exceeds its neutral level, two problems that will basically occur in an instant. Inflation of transaction costs which an organization can face to cope with unnecessary suppliers.
Organization could lose its leverage over its suppliers and suppliers tend to classify the customers. They tend to work with customers that work closely with their strategic objectives or make a good proportion of their turnover or help to spread their fixed cost but suppliers eliminate customers who don’t provide an attractive account or high volume of business. (Lonsdale and Watson, 2005) In a specific example, Rushmore University Hospital Trust (RUHT) (Lonsdale, SP;SM Lectures, Case Study) RUHT has fragmented throughout its 9 budget centres and each budget centre, clinicians could independently purchase.
Fragmentation happens most of the time; each clinician in each budget centre can purchase commodities with the same specifications but under very different terms. For example, x-ray films purchase price could be differentiated 45% between budget centres. Lack of coordination and supplier opportunism cause inefficiency in RUHT. By understanding the characteristics of each budget center’s procurement needs, it could succeed consolidation between budget services.
Another conspicuous example is Vodafone (Lonsdale, SP;SM Lectures, Case Study). In 2003, Vodafone Global Supply Chain Management Director, Detlef Schultz realized the internal procurement management problem. For instance, Vodafone has lack of information how it spend and it couldn’t translate its global size to the benefit. Schultz succeeds saving Money by putting together 17 disparate purchasing departments into one supply chain management. He introduced pre-agreed prices for frequently bought items. He provided the use e-auction system
creates category management and developed different strategy for each category and it standardized the judgment way of suppliers so all this efforts to establish efficient procurement management result a great savings in Vodafone. Novartis also achieved cost saving by transforming its procurement strategy. Novartis is operating in seven different divisions and each of operating separately with their own CEO and CPO and it realized that 60 per cent of the overall expenditure is homogenous so Novartis achieved its goal like previous examples by leveraging its scale and by implementing global category management.
In purchasing, demand management and procurement department capture power, decrease transaction costs, saving money and using companies scale and technology effectively, so by understanding companies own needs and improving information sources, providing coherence benevolently among brunches and departments and implementing appropriate strategies for each categories by this way company get efficiency in internal demand management and could reach its neutral level of fragmentation in purchasing.
So by this way, company could share its value with its suppliers and monitor them in terms of even them pursuing companies values so company get leverage over its suppliers. Finally, providing efficiency in order house provide efficiency in the same time in suppliers management.