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Unformatted text preview: External determinants of the organisation of the purchasing function Dirk-Jan F. Kamann*, Éva H. Karásek** and Najat Aoulad El-Kadi*** * Prof. Dr. Dirk-Jan F. Kamann, University of Groningen, Faculty of Management and Organisation; Groningen Research Institute of Purchasing (GRIP), Lutkenieuwstraatje 4, 9712 AX Groningen, The Netherlands, tel +31.50.368.3899; fax +31.50.318 6900 E-mail: ** Éva H. Karásek, MBA, Groningen Research Institute of Purchasing (GRIP); E-mail: *** Drs. Najat Aoulad El-Kadi graduated at the University of Groningen, Faculty of Management and Organisation. Keywords: purchasing organisation theory industrial organisation Abstract Given their task environment, companies adopt a certain strategy. This strategy can be translated into appropriate features of the purchasing function: their purchasing policy, the organisation of purchasing and the purchasing processes. After discussing the model relating environment and company strategy to the purchasing function, a typology is given. This typology is based on literature study and expert interviews. It describes four archetype companies in terms of environmental setting, strategy and purchasing characteristics. The typology is tested on 10 companies. It is found that leading edge companies tend to support the typology, the majority of companies however, does not (yet). Introduction: strategy and the purchasing function: the POP-model The purpose of this contribution is to set out some lines for further thought on the broader context of the purchasing function and to start a debate about what this really means for the policy, the organisation and the processes of purchasing as we know it. Given their task environment (Wheelen & Hunger, 1992), companies adopt a certain strategy (Johnson & Scholes, 1989; Porter, 1980) on a particular technology-product-market combination. In doing so, companies act as part of an open system, which implies according to the contingency theory that the organisation has to be shaped in accordance with their environment (Lawrence and Lorsch; 1967). The strategy and technology is translated into the policies – including goals - of the organisation and is reflected in its processes and the way they are organised. To be an effective working system, congruence theory states that the elements have to fit each other as well as they have to be congruent with their external context (Nadler & Tushman; 1979). Therefore, policies and organisational goals (P), organisational structure (O) and processes (P) – with their corresponding activities - should be in congruence with each other (Kamann, 1988). At the same time, the triad of the POP-elements should be in congruence with the particular environment and the demands, requirements, challenges and threats of that environment. The way the three POP-elements are actually filled in for the total organisation is reflected in the corresponding POP-elements for the purchasing function. We could make a distinction between the purchasing department, which is a sub-system, and the purchasing function, which is an aspect system. Summarising: the purchasing Policies are derived from the general Policies of the organisation while the same applies for the purchasing Organisation and the purchasing Processes: the general POP is reflected in the Paper, presented at the 10th International Annual IPSERA Conference, 8-11 April 2001 in Jönköping, Sweden purchasing-POP (Kamann, 1999). In the model used, supplier management is determined by the strategy of the company on the market for its outputs. Following this line of thinking, different task environments and different strategies should lead to different ways the POPelements are filled in. It also implies that there is no such thing as the best solution for all companies. Because of this, the research question of this contribution is what is the outcome in terms of the purchasing POP-elements for companies in different environmental settings and strategies. We start with a discussion of the different relevant environmental elements. After that we will discuss the outcomes for the purchasing POP-elements. FIGURE 1: THE POP-MODEL cost leader or differentiator? customers competitors stakeholders Strategy/ Policies Processes Organisation suppliers partners Centralised or decentralised? Purchasing Processes Purchasing Policies Centralsed or decentralised? Purchasing Organisation squeeze or co-operate? Relevant external or environmental variables: dynamics and complexity From literature and expert interviews it expires that the degree of dynamics (Mintzberg, 1979) or turbulence (Emery & Trist, 1965) and complexity (cf. Gadde & Håkansson, 1993) are seen as the main external factors that differentiate in their impact on the company strategy and the POP-elements. The most important variables related to 'dynamics' are predictability of demand, intensity of competition, nature and speed of technological change, changes in legislation and government policies, takeover and merger behaviour of competitors, suppliers and/or buyers. The most important variables related to 'complexity' turned out to be the amount of differentiation among buyers with different demands, demands from different stakeholders, different types of inputs: materials, know-how, knowledge, different types of geographical markets. Impact on production technology and level of innovation Dynamics and complexity also play a role in determining the type of production technology and the required degree of innovativeness of the company (Porter, 1980; Johnson & Scholes, 1989). For production technology, we will only take two extremes. At one side of the scale we put process industry and discrete series production, while will put project wise production as the other extreme (Woodward, 1965). Process and discrete series production tends to be chosen in situations where (a) a standard product is purchased in a repetitive routinewise pattern (b) production is not buyer specific; (c) buyers are only concerned about the stock of end products 2 ('make-to-stock-environment'; cf. Hoekstra & Romme, 1992). Projectwise production typically takes place (a) for unique products, specified by the buyer; (b) with low repetition of demand (a lot of new task purchasing); (c) where buyer is involved from beginning of the chain ('engineer-to-order-environment'); (d) with aspects difficult to measure, such as high material complexity and powerful suppliers with few to choose from. Technology, innovativeness and strategy The choice of technology and the required innovativeness have a strong impact on the type of strategy the company selects and the triad of POP-elements (Kamann, 1988). Figure 2 illustrates the influence of all factors and their ultimate impact on the POP-elements. FIGURE 2: EXTERNAL, INTERNAL FACTORS, STRATEGY AND THE PURCHASING POP dynamics complexity production technology innovativeness strategy purchasing POP POP influence from external factors influence from internal factors Given the above situation, the company has to make some choices with regard to its strategy and organisation. Figure 3 gives the effects of the complexity of the production technology and the required need for innovation on the strategy and the type of organisation (Mintzberg, 1979). I. innovating differentiation III. low cost II. marketing differentiation IV. organic centralised I. organic decentralised III. mechanistic centralised II. mechanistic decentralised low need for innovations high IV. innovating differentiation/ low cost low need for innovations high FIGURE 3: THE IMPACT OF TECHNOLOGY AND INNOVATIVENESS ON STRATEGY AND ORGANISATION low high complexity of production technology low high complexity of production technology The result: a typology Combining the two matrices with the results of a literature study, interviews with consultants and companies results in a typology of environmental settings with archetype companies 3 operating in those settings. For each archetype, the impact on the purchasing function was worked out using standard textbooks (Dobler & Burt, 1996; Saunders, 1994; van Weele, 2000). The labels we attach to the archetypes characterise the attitude of the archetype companies towards suppliers. We are aware of the fact that every type is by definition based on ideal situations and companies. Few organisations will match an archetype completely and mixtures are possible. However, the typology is meant as conceptual model. More variables can be added, such as the degree of outsourcing, position on the product life cycle of products and technologies, presence of seasonal influences, maturity of the organisation, degree of digitalisation, and so forth. Adding variables however, makes it a rather complex model, taking away its simplicity and usefulness. FIGURE 4: THE TYPOLOGY type IV: "critical partners" high level of innovation standard leverage buyers with innovative partners process- & discrete production outsourcing innovative partners project oriented standard leverage buyers type III: "squeezers" type I: "teams" standard leverage buyers with preferred suppliers for project'unique' products low level of innovation type II: "calculating friends" Archetype I ('teams'); examples: high value components and equipment manufacturing. External environment Market is characterised by rapid and unpredictable changes. Products are unique and complex. Shows resemblance with 'engineer-to-order-environment' and 'design-and construct-environment'. Orders are unique and specialised. Strategy Companies differentiate through innovative skills to produce better, new products with new technologies: the innovation-differentiation strategy. The organisation is customer focused. Emphasise is not on price but on quality, customer friendliness, reliability, service, guarantee and exclusiveness of product. Short time-to-market and throughput time are important. Purchasing function Because of rapid changes in technology, increased complexity, reduced life cycles and innovativeness of product, integrated cooperation with buyers, suppliers and end-users is important. To meet flexible demand, Early Supplier Involvement is important. There is a high degree of outsourcing non-core activities to enable focus on core capabilities (Kay, 1993). Because of high volume of high value outsourced activities, the share of value purchased is high, leading to an added reason for increased importance of purchasing function. Archetype II ('calculating friends'); examples: building- and construction firms External environment 4 Stable market with relative low need to be innovative. Innovations usually originate from suppliers. Demand and technological change is stable and predictable. Products are produced as a result of buyer specifications. Strategy Marketing differentiation strategy supports the company profile on service, quality, reliability and attractive total package for buyers. Rarely a first mover in innovations. Purchasing function End products usually consist of standard components that are assembled/combined according to customer requirements and specifications. Because of the combination of standard components and specific customer specifications, the purchasing function is more ambiguous than with types I and III. Standard components come from several leverage suppliers. Specific customer demands for unique and/or complex components are fulfilled by preferred suppliers in the bottleneck and/or strategic quadrant. Turnkey projects tend to increase this share of suppliers. There is a trend to increase outsourcing, especially among large firms. Archetype III ('squeezers'); examples: packaging and glass industry External environment Stable market with low need for product innovations. Standard products with rather stable and predictable demand. Resembles 'make-to-stock-environment'. Stock of end products should prevent negative out-of-stock messages to customers and reduce lead times. Strategy A low cost strategy with standardised production technology leads to standardisation of inputs, outputs and processes. Emphasis on efficiency and cost minimisation. Purchasing function Standard non-complex inputs for the standard processes can be obtained form many leverage suppliers. Less outsourcing than Types I and II. Competitive position towards suppliers focuses on cost reduction, efficiency improvements, optimising order volume, vendor managed inventories and general reduction of stock of inputs. Archetype IV ('critical partners'); examples: PCs, cartridges and heating appliances. External environment Market with rapid, unpredictable changes. Very fast product and process innovations make dramatic changes unpredictable. In spite of high degree of innovation high pressure from competition which keeps sales prices under pressure. Strategy Combining the low cost strategy and innovation-differentiation strategy requires scale and efficiency effects in production. At the same time, R&D in new end products should improve the competitive position as well. Purchasing function The combination of two different strategies may well lead to an ambiguous organisation, including the purchasing function. Minimal throughput times, short timeto-market and specialised know-how among suppliers implies intensive co-operation with strategic and bottleneck suppliers. There is a tendency to ‘educate’ suppliers in low wage countries with good engineering backgrounds (e.g. Czech Republic), and a large degree of outsourcing, both in the low cost and high value components. 5 Empirical testing The typology was the result of literature study and interviews with a team of 12 consultants in purchasing. The next step was to test the model on 12 business units of 10 companies through interviews with managers in those companies. The companies were selected for their assumed classification in the typology, based on a pre-test analysis of their markets and characteristics. The test result of their classification is shown in figure 5. FIGURE 5: COMPANIES PARTICIPATING IN THE TEST AND PLACED IN THE TYPOLOGY high level of innovations - Lucent Technologies - Honeywell - Stork (1) - ASML - Fokker Space - Oce project oriented process- & discrete production - Atag Home Systems (Pelgrim) - PLM - Atag Home Systems (Atag) - HMA Power Systems - Stork (2) - Ballast Nedam low level of innovations Test results per Type The purchasing policy was operationalised using 10 aspects (Kraljic, 1983; Macbeth, 1994; Dobler & Burt, 1996); the purchasing organisation was operationalised using 4 aspects (Burns & Stalker, 1961, 1995; van Weele, 2000). In the next tables, we will give (1) the assumed fit between the company strategy of an archetype with the theoretical purchasing strategy, derived from the typology; (2) the assumed fit between the theoretical purchasing policy and the theoretical purchasing organisation, assuming a correct fit between the company strategy and purchasing policy. For each table and type, we give the theoretically assumed fit and an example of a misfit, found among the companies that participated in the test. We will discuss Types I and III first. Types II and IV are more hybrid types, because of their mixture of different strategies, creating a more ambiguous organisation. Archetype I ('teams') TABLE 1: TYPE 1 ('TEAMS'): FROM COMPANY STRATEGY TO PURCHASING POLICY TABLE 2: TYPE I ('TEAMS): FROM PURCHASING POLICY TO ORGANISATION OF PURCHASING One of the main differences we found between the misfit organisation and the theoretical organisation as it 'should' be, was the presence of features of a mechanistic organisation in stead of an organic organisation. For clarity, we incorporate an overview of the main features of these two types, based on Burns and Stalker (1961, 1995, p. 120-121). TABLE 3: ASPECTS OF A MECHANISTIC AND AN ORGANIC PURCHASING ORGANISATION Archetype III: 'Squeezers' In many respects, Archetype III is the opposite of Type I. 6 TABLE 4: TYPE III ('SQUEEZERS'): FROM COMPANY STRATEGY TO PURCHASING POLICY TABLE 5: TYPE III ('SQUEEZERS'): FROM PURCHASING POLICY TO ORGANISATION OF PURCHASING Archetypes II ('Calculating friends') and IV ('Critical partners') As we noted, these two archetypes have mixed strategies, resulting in more ambiguous organisations. This ambiguity requires additional management attention to prevent confusion and counterproductive acting. Both types use many standard components. Type IV has more outsourcing, particularly in the innovative part. Furthermore, the role of the standard components differs. Type II will have standard components used for all projects – a high degree of commonality over projects – and unique products, purchased for only a few or even one project. However, these 'unique' products usually are part of a standard catalogue of the supplier involved. It means that the products may be unique for the buying company, but that does not make the supplier a strategic or bottleneck supplier. The situation changes, when Type II companies develop concepts together with a fixed set of sub-contractors (co-designers or risk taking partners), resulting in a series of repeated products. In that case, the number of strategic partners increases. TABLE 6: CHARACTERISTICS OF TYPES II ('CALCULATING FRIENDS') AND IV ('CRITICAL PARTNERS') Relation with portfolio matrix The differences between the four archetypes are reflected in the respective portfolios. Therefore, we constructed an ideal type portfolio for each of the four archetypes. Again: as with all stereotypes, the ideal portfolios are meant as discussion to compare with the actual portfolio and are meant as policy guideline. The darker shaded surfaces are the goods and services present in the company; the light areas should have very few goods (and suppliers). type IV critical partners type I leverage teams routine bottleneck strategic strategic routine bottleneck type II type III squeezers leverage strategic calculating friends leverage strategic routine low bottleneck high complexity of supply market low routine bottleneck high share in total value inputs low leverage high share in total value inputs FIGURE 7: IDEAL PORTFOLIO MATRICES FOR THE 4 ARCHETYPES low high complexity of supply market The outcome of the test: the fit Table 7 gives the outcome of the test: how many companies scored TABLE 7: FIRST AND SECOND LEVEL 'FIT' AMONG 10 COMPANIES 7 All items taken, only 20% of all companies showed a matching answer. Another 20% failed on only one item related to the second level fit. We wonder whether this finding says something about the companies, or perhaps our archetypes? Conclusions Drawing on concepts from literature and expert interviews we assembled a typology relating the environment of companies through their strategy to the purchasing function. When tested on 10 companies, we found that two of the companies showed a perfect match between (1) environment, strategy and the purchasing function; (2) the policy and organisation aspects of the purchasing function as specified by the typology. Two other companies showed a 'close' match, failing only on one item in the second level fit. These four companies are all considered as 'leading edge' companies. As far as generalisation is possible, our tentative conclusion from the test is that leading edge companies tend to match the typology. Therefore, the model seems to be a potentially useful framework to structure thought about an ‘ideal’ organisation of the purchasing function. Further research will focus on the expansion of the model to companies other than the leading edge. References - - Burns, T. en G.M. Stalker (1961, 1995), The management of innovation, London: Tavistock and Oxford: Oxford University Press. Dobler, D.W. & D.N. Burt (1996), Purchasing and Supply Management, New York:McGraw-Hill. Emery, F.E. & E.L. Trist (1965), The causal texture of organizational environments, Human Relations, 18, pp. 21-32. Gadde, L.E. & H. Håkansson (1993), Professional purchasing, London: Routledge. Hoekstra, S. & J. Romme, eds. (1992), Integral logistic structures. Developing customer-oriented goods flow, London: McGraw-Hill. Johnson, G. & K. Scholes (1989), Exploring corporate strategy, New York: Prentice Hall. Kamann, D.J.F. (1988), Spatial differentiation in the social impact of technology, Aldershot: Avebury. Kamann, D.J.F. (1999), Inkoop vanuit een netwerkperspectief, (Purchasing from a network perspective), Inaugural address University of Groningen, Groningen: Charlotte Heymanns. Kay, J.(1993)`, Foundations of corporate success, Oxford: Oxford University Press. Kraljic, P. (1983).: Purchasing must become supply management, Harvard Business Review, September-October, pp. 109-117. Lawrence, P.R. & J.W. Lorsch (1967), J.W.: Organization and Environment. Cambridge (Mass.), Harvard Graduate School of Business Administration. Macbeth, D. (1994), The role of purchasing in a partnering relationship, European Journal of Purchasing & Supply Management, Vol. 1, No 1, pp. 19-25. Mintzberg, H. (1979), The Structuring of organizations, Englewood Cliffs (NJ): Prentice Hall. Nadler, D.A. & M.L. Tushman (1979), A congruence model for diagnosing organisational behavior, in D. Kolb, I. Rubin & J. McIntyre, Organizational Psychology: A Book of Readings, 3d ed., Englewood Cliffs (NJ): Prentice Hall. Porter, M.E. (1980), Competitive strategy; techniques for analysing indistries and competitors, New York: Free Press. Saunders, M. (1994), Strategic purchasing & supply chain management, London: Pitman. Weele, A. van (2000), Purchasing & Supply Chain Management, London: Thomson. Wheelen, T. & D. Hunger (1992), Strategic management and business policy, 4th ed., AddisonWesley Publishing. Woodward, J (1965), Industrial Organisation, Theory and Practice, London: University Press. 8 TABLE 1: TYPE I (TEAMS): FROM COMPANY STRATEGY TO PURCHASING POLICY Purchasing policy: “Partnership strategy” 1: role of purchasing 2: presence of purchasing goals and targets 3: type of supplier relations 4: importance of long-term contracts 5: supply base 6: suppliers selection criteria 7: criteria vendor rating 8: emphasis in job description and profile to select purchasing staff 9: co-operation with other functional areas Type I: innovation-differentiation strategy Fit Example misfit Ideal purchasing policy Actual policy strengthen the competitive position of company reduction of total costs; long term contracts and partnership relations; increasing efficiency of internal and external processes intensive and long term procurement function; limited to ordering and administrative handling none present in written form intensive co-operation between project leaders and suppliers mainly long-term contracts contracts expires when project is (>2 years) finished aim for reduction "few suppliers that can supply goods" total screening acquaintances of (or befriended with) project leaders; christmas gift culture total screening None next to administrative and techni- emphasis on skills in administration and cal skills, ability to work in teams; logistics good social and commercial skills takes part in multi-disciplinary does not participate in development (development) teams teams; sequential (product) development: compartmentalisation thinking 10: co-operation between intensive: aim for win-win situa- purchasing has reactive function; purchasing and suppliers tion project leaders control contacts with suppliers TABLE 2: TYPE I (TEAMS): FROM PURCHASING POLICY TO THE ORGANISATION OF PURCHASING type 1: innovation-differentiation strategy fit 'partnership strategy in purchasing' fit Organisation of the Purchasing function 1: degree of centralisation of purchasing function 2: degree of formalisation of purchasing function 3: training/education 4:specialisation staff purchasing department 'ideal' organisation of purchasing Example misfit actual present low: decentralised purchasing function; low: each project leader does his co-ordination of common inputs across own purchasing projects low: organic purchasing function high: mechanistic purchasing function high in terms of opportunities and budget Low low/average: flexible; forecasts materials High demand, long term risk-analyses, market analyses, suppliers selection, vendor rating, exchanging experiences members multi-disciplinairy teams 9 TABLE 3: ASPECTS OF A MECHANISTIC AND AN ORGANIC PURCHASING ORGANISATION Aspects of organising purchasing Mechanistic purchasing organization External environment stable conditions Functional task specialisation strong Required skills & know-how technical Nature of task inflexible, routine based Specification of tasks, obligations and precisely defined, narrow, technical methods used Relation between individual contribution not clearly recognisable; and organisational goals indirect Degree of hierarchical control strong Most important line of communication vertical Way of decision making Emphasis on obedience and loyalty authoritarian strong Organic purchasing Organisation changing conditions focused general open to redefinition broad, general clear and direct low (emphasis on self control) horizontal between colleagues democratic participative weak TABLE 4: TYPE III (SQUEEZERS): FROM COMPANY STRATEGY TO PURCHASING POLICY type III: low cost strategy fit Purchasing policy: Competitive position 1: role of purchasing 2: presence of purchasing goals and targets 3: type of supplier relations 4: importance of long-term contracts 5: supply base 6: suppliers selection criteria 7: criteria vendor rating 8: emphasis in job description and profile to select purchasing staff 9: co-operation with other functional areas 10: co-operation between purchasing and suppliers Example misfit Ideal purchasing policy Actual policy found obtaining products of the right quality, right supplier, right time, right price; focus on price, delivery time and technical specs. focus on price inputs, costs of purchasing department and minimisation production stops based on volumes and improvement of efficiency umbrella contracts of 1 to 2 year Procurement function: emphasis on ordering of products required because of efficiency targets, purchasing participates in development teams less intensive than with Type I Purchasing does not participate in development teams; reports to controller in subordinated role no co-operation Absent Hardly any relation at all with suppliers Both long term contracts and short term contracts; very few standard contracts present because of lower switching costs Proliferation of supply base more suppliers (both as dual sourcing and sequential) than with Type I focus on low prices, continuity and Unclear; in most cases based on reliability of supply previous experience as in (6): best quality/price ratio Unclear mostly skills in administration, Tasks at operational level logistics and negotiation 10 TABLE 5: TYPE III (SQUEEZERS): FROM PURCHASING POLICIES TO THE ORGANIZATION OF PURCHASING type III: low cost strategy fit 'competitive position strategy' fit Organisation of purchasing 1: degree of centralisation of purchasing function 2: degree of formalisation of purchasing function 3: training/education 4:specialisation staff purchasing department 'Ideal' organisation of purchasing high: centralised contracting of umbrella contracts; decentralised ordering high: mechanistic purchasing function average: acquiring administrative and negotiation skills; technical skills average to high: focus on order processing, securing purchasing demand, optimise order volume, maintaining daily contacts with suppliers, expediting, control of orders, fire brigade, control of payments, standardising inputs. Example misfit Actual organisation found high: almost no standard umbrella contracts high; purchasing is subordinated to finance (controller) low: hardly any training for purchasers high: purchasing mainly busy with operational activities TABLE 6: SOME CHARACTERISTICS OF TYPES II (CALCULATING FRIENDS) EN IV (CRITICAL PARTNERS) Type II: calculating friends Company strategy Type IV: critical partners marketing differentiation strategy low cost strategy and innovation differentiation strategy Purchasing policies competitive position plus relations Competitive positioning plus with preferred suppliers; with many partnering turn-key projects: part partnering Degree of outsourcing relatively low Relatively high Centralised/decentralised standard inputs: centralised Standard inputs: centralised 'unique' inputs: decentralised within Innovative inputs: decentralised central umbrella contracts led commodity teams Formalisation of purchasing predominantly high: mechanistic high: mechanistic purchasing function purchasing function for standard function standard inputs inputs low: organic purchasing function for innovative inputs; possible confusion Training/education average high; in availability and budget purchasing Specialisation purchasing average low/average: flexible and focus staff on employability Degree of standardisation high High purchasing process 11 TABLE 7: FIRST AND SECOND LEVEL 'FIT' AMONG 10 COMPANIES First level fit: Company strategy > Purchasing policy 1:importance purchasing in organisation 40% 2:presence purchasing goals 60% 3:type of supplier relationship 50% 4:number of long-term versus short-term contracts 60% 5:number of suppliers 50% 6:way of supplier selection 50% 7:way of supplier evaluation/rating 50% 8:emphasize on function description purchasing staff 40% 9:co-operation with other functional areas 40% 10: co-operation between purchasing department and suppliers 50% Second level fit: Purchasing Policy > Organisation of purchasing 1: degree of centralisation purchasing function 2:degree of formalisation purchasing function 3: training/education purchasing 4:specialisation purchasing staff 40% 90% 40% 40% 12 ...
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