OVERVIEW & SCOPE OF P&SCM

PURCHASING SCOPE AND SUPPLY CHAIN MANAGEMENT

INTRODUCTION

Purchasing is the ‘process of buying’. Many people think that the purchasing department is
the only one responsible for this. However, the purchasing function is much broader and if
carried out effectively, it involves all departments in the company. The purchasing function
involves obtaining the right material, in the right quantity, with the right delivery (time and
place), from the right source, and at the right price.

Determining the right material requires input from marketing, engineering, and
manufacturing as well as the purchasing department. Quantities and deliveries of finished
goods are first determined by the needs of the market place. But manufacturing planning and
control must decide what raw materials to order and when so that the demands of the market
place are satisfied. It is then the responsibility of the purchasing department to place orders
and to be sure that goods arrive on time.

Determining suitable sources of supply is primarily the responsibility of the purchasing

department, as is the negotiation of price. Input from other departments is required in
determining and evaluating sources of supply and also to assist the purchasing department in
price negotiation. Purchasing, in its broad sense, is everyone’s business.

THE PERSPECTIVES ON PURCHASING

The study of purchasing can be approached from several perspectives. Such perspectives
include those of function, process, link in the supply or value chain, discipline and profession.

Purchasing as a function

In management studies, a ‘function’ is often defined as a unit or department in which people

use specialised knowledge skills and resources to perform specialised tasks. A function is
also what a resource is designed to do, e.g. the function of a pen is to make or mark.

A distinction can therefore be made between the purchasing function and the purchasing
department. The former in a business context involves acquiring raw materials, components,
goods and services for conversion, consumption or resale. The latter is the organisational unit
responsible for carrying out this function.

In many organisations, purchasing is still part of a segment, departmentalised structure in

which the procurement of supplies is a discrete activity in the sequence of activities from the
acquisition of supplies to the delivery of a finished product to the ultimate user.

Purchasing as a process

A process is a set of subprocess or stages directed at achieving an output. The various tasks or
stages can be depicted by a process chain. Thus, receive requisition, solicit quotations,
negotiate with suppliers, place orders, receive supplies, and make payments; purchasing can
be depicted as a sequential chain of events leading to the acquisition of supplies.

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The link in the purchasing process chain is information. Thus, each subprocess in the chain is
responsible for capturing or otherwise processing information that enables us to answer the
questions ‘ what are we required to purchase?’ and ‘where and how can the required supplies
be obtained?’

Purchasing as a supply or value chain

Purchasing, along with such activities as production, warehouse and transportation, is one of
the links in the supply chain or sequence of processes by which designs and resources are
converted into finished goods that satisfy the needs of customers.

Purchasing as a discipline

A discipline is a department of knowledge. The academic content of purchasing lacks the

clearly defined focus associated with other fields of study such as mathematics, economics
and law and draws heavily on other subjects to build its knowledge base. Such subjects
include accounting, economics, ethics, information technology, law, management accounting,
operational research, marketing, management and psychology. Purchasing as a sub – area of
study often included in wider ranging courses including logistics management, operations
management, and marketing.

Purchasing as a profession

Notwithstanding the enhanced status of purchasing in Britain by the granting in 1992 of a

Royal Charter to the Institute of Purchasing and Supply, the occupation has to surmount
difficulties in the quest for professional status.

Millerson has defined a ‘profession’ as:

A type of higher grade non manual occupation with both subjectively and objectively
recognized occupational status, possessing a well defined area of study or concern and
providing a definite service after advanced training and education.

Millerson lists the essential features of a profession as follows:

A skill based on theoretical knowledge.

A skill requiring training and education.
The denomination of competence by professional by passing a test.
Maintenance of integrity by adherence to a code of conduct.
Service provided for the public good.
The profession is organised.

The difficulties encountered by purchasing in meeting such criteria are:

No regulation of entry – it is not necessary to have a professional qualification in

purchasing to enter the occupation.

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Purchasing practitioners are at all levels of evolution. Persons with only an

operational or transactional knowledge of purchasing might experience difficulty in
moving to strategic purchasing.
Limited powers to enforce ethical standards.

Purchasing as procurement

Procurement is a wider term than purchasing which implies acquisition of goods or services
in return for a monetary or equivalent payment. Procurement, however, is the process of
obtaining goods or services in any way including borrowing, leasing and even force or
pillage. Since procurement is strictly a more accurate term it is unsurprising that the word
procurement is often supplanting ‘purchasing’ in job titles such as ‘procurement manager’,
‘procurement agents’ and ‘head of procurement’.

Purchasing as organisational buying

Organisational buying as defined by Marrian are:

Those buyers of goods and services for a specific purpose of industrial or agricultural
production or for use in the operation or conduct of a plant, business, institution, profession
or service.

Organisational buyers are, therefore, those who buy on behalf of an organisation rather than
for individual or family use or consumption. Organisational buyers can be considered as
belonging to one of the four buying groups each of which can be further subdivided, and may
overlap. Thus, in the National Health Service some supplies may be bought centrally by
government agencies, regionally by local health authorities and locally by hospitals
themselves.

Types of organisational buyers

1. Industrial/producer organisations

Characteristics – Purchase of goods and services for some

tangible production and commercially
significant purpose.

Examples – Manufacturers, primary (extractive) producers

– agriculture, Forestry, fishing, horticulture,
mining.

2. Intermediate organisations

Characteristics – Purchase of goods and services for resale or

for facilitating the resale of other goods in the
industrial or ultimate consumer market.

Examples – Distributors, dealers, wholesalers, retailers,

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banks, hotels and service traders.

3. Government and public sector organisations

Characteristics - Purchase of goods and services for resale or

use by organisations providing a service, often
tangible, and not always commercially
significant national, regional and local levels.

Examples – Central and local government, public utilities.

4. Institutions

Characteristics – Purchase of goods and services for

institutions that buy independently on their
own behalf.

Examples – Schools, college, hospitals, voluntary

organisations.

Purchasing as supplier management

Supplier management may be defined as:

That aspect of purchasing or procurement concerned with rationalising the supplier base and
selecting, coordinating, appraising the performance of and developing the potential of
suppliers.

Supplier management is a more strategic and cross – functional activity than purchasing,
which is transactionally biased.

Purchasing as external resource management

This is the view of Lamming:

The new strategic function will probably not be called purchasing – that is much too limited a
word. The connotations of purse strings and spending money have no relevance to the setting
up and management of strategic inter – firm relationships. This task is concerned with
ensuring the correct external resources are in place to complement the internal resources.
Perhaps ‘external resource managers’ is a term that future purchasing managers will adopt.

The perspective of external resource management is also adopted by Van Weele, who defines
purchasing as:

‘Obtaining from external sources all goods, services, capabilities and knowledge which are
necessary for running, maintaining and managing the company’s primary and support
activities at the most favourable conditions.’

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The purchasing function in this definition covers specifically activities aimed at:

 Determining the specification (in terms of required quality and quantities) of the goods
and services that need to be bought;

 Selecting the most suitable supplier;

 Preparing and conducting negotiations with the supplier in order to establish an

agreement;

 Placing the order with the selected supplier;

 Monitoring and control of the order (expediting);

 Follow up and evaluation (settling claims, keeping product and supplier files up-to-
date, supplier rating and supplier ranking).

Definition of organisational purchasing

Organisational purchasing may be defined as: that function responsible for obtaining by
purchase, lease or legal means, equipment, materials, supplies and services required by an
undertaking for use in production.

In this definition, the term production is used in the economic sense of creating utilities, i.e.
goods and services that satisfy wants. It is not, therefore, confined to manufacturing output
but also applies to servicing, distributing, etc. organisations.

Another school of taught define organisational purchasing; as the process by which

organizations define their needs for goods and services; identify and compare supplies and
suppliers available to them; negotiate with sources of supply or in some other way arrive, at
agreed terms of trading; make contracts and place orders; and finally receive, accept and pay
for the goods and services required.

This is closely associated with other organisational functions such as inventory management,
stores operation and transport. Production planning and control, manufacturing organisations
and merchandising, and distributive organisations, have to work closely with purchasing.
Often some or all these functions are combined with purchasing under a single head; “the
materials manager” or supply manager.

Purchasing and supply chain defined

In conducting its work on developing standards of competence for purchasing, the purchasing
and supply Lead Body developed a ‘functional map of the purchasing and supply chain’.

The key purpose suggested for the purchasing and supply chain is:

Provide the interface between customer and supplier in order to plan, obtain, store and
distribute as necessary, supplies of materials, goods and services to enable the organisation to
satisfy its external and internal customers.

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The definition continues by listing major functions, as follows:

Contribute to the formulation, communication and implementation of policies,

strategies and plans.

Contribute to the establishment and improvement of purchasing related systems.

Establish and maintain database of purchasing and stores information.

Establish and develop sources of supply.

Acquire supplies.

Provide goods and materials to internal and external customers through storage,
movement, distribution and transport.

Monitor and control the purchasing, supply, storage, distribution and transport chain.

Contribute to effective working.

Functions of purchasing

In looking at the objectives of purchasing, we have already covered many of the activities
that need to be included within the overall scope of purchasing if it is to perform its function
effectively and efficiently.

The purchasing function needs to have responsibility for and control of the following of
activity:

Determining purchasing policy and formulating the purchasing budget.

Advising management on the implication of the implementation of the purchasing

policy.

Advising other departments on all matters relating to supply of materials, sources of

supply, costing, lead – times and service.

Determining the most appropriate supplier base for the organisation in terms of
supplier approval, selection and performance monitoring.

Researching and developing new and alternative materials and sources of supply.

Controlling and disposal of surplus and scrap materials.

Undertaking all negotiations with suppliers in relation to all matters of a commercial

nature. This includes price, delivery, terms and conditions and duration of contracts.

Placing orders, scheduling deliveries and expediting materials.

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Developing procedures and practices that will enable full control to be maintained of
both ethical and commercial standards.

NB: These activities need to be the responsibility of the function across the whole range of
purchasing undertaken by the organisation, whether it is a capital equipment or construction
contracts, stock or non – purchasing.

Purchasing process model

Purchasing Function
Tactical purchasing Order function

Contractin Expediting Follow-up

Inter Determining Selecting g and
Specification Contracting
Ordering and Supplier
nal Supplier Evaluation
Evaluation
Cust
ome
Sourcing Supply * **
Buying
Procurement

Purchasing process model and some related concepts = USA;** = UK.

The diagram above schematically illustrates the main activities within the purchasing
function. It shows that these activities are closely interrelated.

The purchasing function does not include the responsibility for materials requirements
planning, materials scheduling, inventory management, incoming inspection and quality
control. However, in order to be effective, purchasing operations should be closely linked
and interrelated to these materials activities.
In the author’s opinion a purchasing manager should support each of the six activities
mentioned above. However, this does not necessarily imply that all these activities should be
conducted by the manager’s department, as illustrated in the following example.

A buyer who is responsible for maintenance, repair and operating supplies, is often
confronted with the ‘small-order problem.’ Many requisitions, which he receives from
internal departments, concern simple product of low expense.

Handling these requisitions, however, is often a laborious task if that buyer is to issue a
purchase order for every requisition. An alternative may be to arrange for a so-called
‘umbrella’ agreement with a specific supplier for the delivery of hand-tooling. In this
arrangement he may establish the product range, which will be
bought from that supplier including the prices per product. Furthermore, he may negotiate a
bonus from that supplier tied to the total purchasing turnover over 12 months.

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Next he may communicate terms and conditions of these contracts to the staff of Technical
Services. Through an agreed (computer-supported) order-routine, employees of this
department can order directly from the supplier, without involving the purchasing
department. In this example, it is the task of the buyer to develop an overall commercial
agreement with the supplier and to establish an (electronic) order routine with that supplier on
the one hand and the internal customer on the other hand. In fact, what happens is that the
ordering function is delegated, in a rather controlled way, to the internal customer. In this
manner it is possible to combine the purchasing power of the organisation with optimal
flexibility and efficiency for Technical Services.

Purchasing

From the definition of purchasing it may be derived that this covers all activities for which
the company receives an invoice from outside parties. Hence the playing ground of
purchasing includes intercompany business, countertrade arrangements, hiring of temporary
personnel from outside agencies, contracting for advertising. However, many of the activities
for which the company may receive invoices from suppliers may be arranged for without
interference from the purchasing department. Therefore the scope of the purchasing function
is usually much broader than that of the purchasing department.

Ordering

The term ordering refers to the placing of purchase orders at a supplier against previously
arranged conditions. Furthermore, this term will be used when purchase orders are placed
directly, without questioning the supplier’s conditions.

Call-off orders fall into this category as telephone orders for products bought from a supplier
catalogue. Ordering is considered to be a part of the purchasing process. In fact it relates to
the last three steps of the purchasing process. The use of the term ‘tactical purchasing’ refers
to the first three steps.

Procurement

As seen in the diagram, procurement is a somewhat broader term. It includes all activities
required in order to get the product from the supplier to its final destination. It encompasses
the purchasing function, stores, traffic and transportation, incoming inspection, and quality
control and assurance. Some firms also consider salvage and environmental issues (as they
are related to materials) as a part of procurement. This task is expected to become more
important in future years, with the increasing impact of environmental issues.

Buying

It is difficult to find a description of buying in management literature. It differs from

purchasing in the sense that it does not encompass the first step of the purchasing process.
This is in line with the practice of trading and retail companies (e.g. department stores),
where this term is most often referred to.

Here, discussions about the specifications of products to be purchased are more limited
compared to industrial companies, since in many cases these are decided by the supplier.

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Supply

Another term often used in the materials area is supply. This is somewhat more difficult to
grasp, because it appears that there are differences in connotation between North America
and Europe (Lenders et al. 1989, p. 3). In America ‘supply’ covers the stores function of
internally consumed items such as office supplies, cleaning materials, etc… However, in the
United Kingdom and Europe, the term supply seems to have a broader meaning which
includes at least purchasing, stores and receiving. The governmental sector also uses this
broader interpretation.

Sourcing

This is a term which has become increasingly popular in the materials area. Vollman et al.
(1984) include the following activities under this term: finding sources of supply, gathering
knowledge of procurable resources. Most of these activities relate, as the author sees it, to
second step of the purchasing process, i.e. finding and selecting adequate suppliers.

Purchasing management

This refers to all activities required to manage supplier relationships. It is focused on

structuring and continuously improving purchasing processes within the organisation and
between the organisation and its suppliers. Purchasing management, hence, has an internal
aspect and an external aspect. The idea behind purchasing management is that if suppliers
are not managed by their customers, customer relationships will be managed by the suppliers.

Given the widespread acceptance of marketing management and customer and account
management in business, suppliers usually are in a favourable position.

Given the cross-functional nature of purchasing management and its wider playing ground it
is also referred to in this text as business resource management.

Supply chain management

Purchasing management is part of supply chain management. The latter concept can be
described as the management of all activities, information, knowledge and financial resources
associated with the flow and transformation of goods and services up from the raw materials
suppliers, component suppliers and other suppliers in such a way that the expectations of the
end users of the company are being met or surpassed.

Supply chain management differs from purchasing in that it encompasses also all logistics
activities. Moreover it entails the management of relationships not only with first tier
suppliers but also with lower tier suppliers.

Supply chain management

Arjan J van Weele defines supply chain as:

The management of the activities, information, knowledge and financial resources associated
with the flow and transformation of goods and services up from the raw materials suppliers,

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component suppliers and other suppliers in such a way that the expectations of the end users
of the company are being met or surpassed.

Jayashanker et al define supply chain to be:

A network of autonomous or semi-autonomous business entities collectively responsible for

procurement, manufacturing, and distribution activities associated with one or more families
of related products.

Ganeshan and Harrison have yet another analogous definition:

A supply chain is a network of facilities and distribution options that performs the functions
of procurement of materials, transformation of these materials into intermediate and finished
products, and the distribution of these finished products to customers.

Classification of purchasing goods

The purchasing process may concern a large variety of goods and, of course services. In
general, purchased materials and services can be grouped into the following categories.

 Raw materials – Raw materials are materials which have undergone no

transformation or a minimal transformation, and they serve as the basis materials for a
production process. We may differentiate between physical raw materials, such as
iron ore, copper ore, coal, and natural raw materials, such as grains, soya and coffee.

 Supplementary materials – These are materials which are not absorbed physically in
the end product; they are used or consumed during the production process. Examples
of this type of products are lubricating oil, cooling water, polishing materials, welding
electrodes and industrial gases.

 Semi-manufactured products – These products have already been processed once or

more and they will be processed further at a later stage.

 Components – Components are manufactured goods which will not undergo

additional physical changes, but which will be incorporated in a system with which
there is a functional relationship by joining it with other components. They are built
into an end product. Examples are headlights units, lamps, batteries, engine parts,
electronic parts and transmissions. A distinction can be made between specific
components and standard components. Specific components are produced according
to design or specification of the customer, whereas standard components are produced
according to specification of the supplier.

 Finish product – These encompass all products which are purchased to be sold, after
negligible added value, either together with other finished products and/or
manufactured products. Examples of this product category are accessories which are
supplied by car manufacturers, such as stripings, car radios and ornamental wheel
rims. The manufacturer does not produce these products but obtains from specialised
suppliers. Commercial products and articles sold by department stores are also in this
category.

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 Investment goods or capital equipment – These are the products which are not
consumed immediately, but whose purchasing value is depreciated over a period of
time. In general the book value is stated on the balance – sheet annually. Investment
goods can be machines used in production, but they also include computers and
buildings. These examples illustrate the varied character of this category of goods.

 Maintenance, repair and operating materials (MRO items) – These products,

sometimes referred to as indirect materials or consumable items, represent materials,
which are necessary for keeping the organisation running in general, and for the
support activities in particular. These products are often supplied from stock;
examples are office supplies, cleaning materials and copy paper, but also maintenance
materials and spare parts.

 Services – Services are activities which are executed by third parties (suppliers,
contractors, engineering firms) on a contract basis. Services can range from providing
cleaning services and hiring temporary labour to having a new production facility for
a chemical company designed by a specialised engineering firm (a contractor).

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SUPPLY CHAIN MANAGEMENT

Supply Chains Defined –

There are many definitions and descriptions of what a supply chain is. Some focus on the
physical aspects of the process and have their roots in the transformation of traditional,
physical, logistical entities, through the definitions that describe supply chains in terms of
intellectual networks and visual organisations.

John Gattorna States:

‘The traditional view of logistics was very narrowly defined. It focused on the physical
movement of goods and, more recently, information, from suppliers to customers and their
consumers. This led to a pre – occupation with internal functions and processes within the
firm in the name of increased efficiency.’

In an article by Groom, Romano and Giannakis (2000) a review of supply literature produced
a sample of the definitions from well known authors in the field as follows:

Tan et al (1998)

‘Supply chain management encompasses materials/supply management from the supply of

basic raw materials to final produce (and possible recycling and re – use). Supply chain
management focuses on how firms utilize their suppliers’ processes, technology and
capability to enhance competitive advantage. It is a management philosophy that extends
traditional intra – enterprise activities by bringing trading partners together with the common
goal of optimisation and efficiency’.

Berry et al (1994)

‘Supply chain management aims at building trust, exchanging information on market needs,
developing new products and reducing the supplier base to a particular OEM (original
equipment manufacturer) so as to release management resources for developing meaningful,
long – term relationship’.

Jones and Riley (1985)

‘An integrative approach to dealing with the planning and control of the materials flow from
suppliers to end – users.’

Saunders (1985)

‘External Chain is the total chain of exchange from original source of raw material, through
the various firms involved in extracting and processing raw materials, manufacturing,
assembling, distributing and retailing to ultimate and customers’.

Ellram (1991)

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‘A network of firms interacting to deliver product or service to the end customer, linking
flows from raw material supply to final delivery.’

Christopher (1992)

‘Network of organisations that are involved, through upstream and downstream linkages, in
the different processes and activities that produce value in the form of products and services
in the hands of the ultimate consumer.’

Lee and Billington (1992)

‘Networks of manufacturing and distribution sites that procure raw materials, transform them
into intermediate and finished products and distribute the finished products to customers.’

Kopezak (1997)

‘The set of entities, including suppliers, logistics services providers, manufacturers,

distributors and resellers, through which materials, products and information flow.’

Lee and Ng (1997)

‘A network of entities that starts with the suppliers’ supplier and ends with the customers’
custom the production and delivery of goods and services.’
This spread and depth of study is a further indication of the growing importance of supply
chains as a field of credible research. G Capaldo et al confirm this view with ‘the weight
which externalization strategies and collaboration have assumed in the creation of value for
firms. Typically, the incidence of purchasing costs from suppliers is around 60% for an OEM
(Original Equipment Manufacturer). What is more, many products are made up of a system
of numerous components realized via a complex network of activities within which many
different firms interact.’

Classic Definitions

‘Supply Chain Management is the efficient and effective management of the flow of product,
service, materials, information and funds from their sources to their end customers. The goal
of Supply Chain Management is to create competitive advantage by satisfying the customer
while achieving optional cost levels and asset performance.’

The definition attributed to the CIPS is interesting in that it starts upstream (that is away from
the customer) and its goal is limited to only satisfying the customer, whereas the definition
provided by Frank Lalonde begins with much more downstream focus.

‘The delivery of enhanced customer and economic value through synchronised management
of the flow of physical goods and associated information from sourcing to consumption.’

Here we can see the focus is on customer value and synchronized management, however this
definition also relates closely to the traditional physical (logistical) process.

The Scope of Supply Chain Management

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There are many definitions of what a supply chain is:

Below is a definition of supply chain management.

The Chartered Institute of Purchasing and Supply

‘Supply Chain Management is the efficient and effective management of the flow of product,
services, materials, information and funds from their sources to their end customers. The goal
of supply chain management is to create competitive advantage by satisfying in customer
while achieving optimal operational costs levels and asset performance.’

This is shown systematically as below –

[Supplier] – Procurement orders – Manufacturing orders – Factory orders – Distribution

orders – Customers orders – [End users]

The scope of supply chain management. Supply chain management covers the flow of goods
from supplier through manufacturing and distribution chains to the end user.

Flows in the Supply Chain

There are three important flows in a supply chain, and it is management responsibility for
synchronisation, integration and optimisation of these throughout the supply chain. They are:

Information Flow

Information must flow both ways through the supply chain. The flow must be:

 Uniform
 Fast
 Quality information

Information which is essential for the above is:

Funds

 Payment terms
 Cash flow

Inventory

 How much to hold

 How long to hold
 Surplus disposal

Supplier needs for information

 Demand forecasts
 Delivery schedules
 Lead times

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Customer needs

 Order lead time

 % service level
 Parcel/shipment size

Physical flow

The main concern here is that there is effective order fulfilment at each stage of the supply
chain to eliminate the non – value added activity of stockholding.

Typical non – value added processes (NVAs) in procurement are:

 Stock piles
 Re – working/recalculating
 Stock returns
 Inspection
 Paperwork
 Double handling
 Delays
 Disputes
 Blame culture
 Counting

Funds flow

The effective management of the information flow which leads to effective physical flows
ultimately result in:

 Minimum capital tied up

 Timely cash flow

In this way, the time gap between paying our suppliers and receiving monies from our
customers is minimal, and therefore our organisation does not have to finance the holding of
stock unnecessarily.

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VALUE CHAIN MANAGEMENT

The term value chain is used to describe the various steps a good or service goes through
from raw material to final consumption. Michael Porter considers every firm basically as a
collection of primary and supporting value activities that are performed to design, produce,
market, deliver and support products that are valuable for customers. As he argues, a firm’s
value chain and the way in which it performs individual value-activities are a reflection of its
history, its strategy, its approach to implementing its strategy, and the underlying economics
of the activities themselves (Porter, 1985).

This explains why there can be explicit differences between organisations with regard to
structure, operations management, ways of planning, style of management, and sometimes
notable differences in strength of competition between organisations operating within the
same sector.

Seen from this perspective competitive advantage depends primarily on the art of positioning
a company in the right place on the value chain. According to Quinn (1992) each company
should focus on a just a few core activities, where it thinks it can achieve and maintain a
long-term competitive advantage. All other activities in which it cannot achieve world-class
status should be outsourced.

Contracting out non-core activities to specialised suppliers can contribute to cost reduction,
quality improvement, lead time reduction and innovation at the same time. This explains the
high and rising purchasing to sales ratio which can be perceived in many companies.

Quinn (1992) has suggested the following ideas for developing a sustainable competitive
advantage through core competencies:

 Companies need to focus their internal resources on those core sources of intellectual
or service capabilities, which presently create a meaningful distinctiveness in their
customers’ minds.

 The next step to competitive advantage is to consider the company’s remaining

capabilities as a group of service activities that could be either ‘made’ internally or
‘bought’ externally from a wide variety of suppliers specialising or functionally
competing in that activity.

 For continued success companies need to actively command, dominate, and build
barriers to entry around those selected activities critical to their particular strategic
concept. Concentrating more power than anyone else in the world on these core
competencies as they affect customers is crucial to strategic success.

 Managers need to plan and control their outsourced activities so that their company
never becomes overly dependent on, or later is dominated by, their partners. This
means consciously developing and monitoring multiple competitive sources and
strategically controlling certain critical steps in the process.

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Using this approach to core competencies, companies, according to Quinn, can develop a
much higher level of focus, and hence a higher leverage, for their business strategies than
through traditional product-focused strategies. Quinn’s ideas, which have been refined by
Hamel and Prahalad (1994), have been adopted by a score of companies worldwide. It is fair
to say that these ideas have set the stage for the emergence and widespread acceptance of
advance purchasing and supply strategies.

The role of purchasing in the value chain

In many business strategies the concept of value chain management plays a central role.
There will be an explanation of what value chain management is. When describing the role
and position of the purchasing and supply function in industrial companies, the value chain of
Porter (1985) is taken as a term of reference.

Diagram

Firm infrastructure
Support Human resource management
activities Technology development
Procurement

Inbound Operations Outbound Marketing Service

logistics logistics and sales

Primary activities
Purchasing and the value chain. (Redrawn from Porter, 1985)

The value chain in the diagram is composed of value activities and a margin which is
achieved by these activities. Value activities can be divided into physically and technically
different groups of activities. Porter differentiates between primary activities and support
activities.

Primary activities are those which are directed at the physical transformation and handling of
the final products, which the company delivers to its customers. As can be seen from the
diagram, distribution to the customer(s) and providing (product) services are part of these
primary activities.

Support activities enable and support the primary activities. They can be directed at
supporting one of the primary activities as well as supporting the whole primary process.

Porter differentiates between five generic categories of primary activities (1985, pp. 39 - 40).

 Inbound logistics - These activities are related to receiving, storing and disseminating
inputs to the product, such as materials handling, warehousing, inventory control,
vehicle scheduling and returns to suppliers.

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 Operations - Activities associated with transforming inputs into the final product
form, such as machining, packaging, assembly, equipment maintenance, testing,
printing and facility operations.

 Outbound logistics - These are activities associated with collecting, storing, and
physically distributing the products to buyers, such as finished goods, warehousing,
materials handling, delivery vehicle operations, order processing and scheduling.

 Marketing and sales - These activities relate to advertising, promotion, sales,

distribution channel selection, the management of channel relations and pricing.

 Service - Activities associated with providing services to enhance or maintain the

value of the product, such as installation, repair, training, parts supply and product
adjustment.

Supporting activities are grouped into four categories

 Procurement – Procurement relates to the function of purchasing inputs used in the

firm’s value chain. Theses may include raw materials, supplies, and other consumable
items as well as assets such as machinery, laboratory equipment, office equipment and
buildings. These examples illustrate that purchased inputs may be related to primary
activities as well as support activities. This is one reason why Porter classifies
procurement as a support activity and not as a primary activity.

 Technology development – ‘Technology’ has a very broad meaning in this context,

since in Porter’s view every activity embodies technology, be it know –how,
procedures or technology embodied in process or product design. Most value
activities use a technology that combines a number of different subtechnologies
involving different scientific disciplines.

 Human resources management – These are all the activities directed at recruiting,
hiring, training, developing, and compensation of all types of personnel, active in both
primary and support activities.

 Firm infrastructure – The whole company is customer of these activities. They

don’t support one or more activities – rather, they support whole company processes.
Examples of these activities are management, planning, finance accounting, legal,
government affairs, and quality management. In larger companies, which often
consist of different operating companies. This division is often the subject of
discussion which is why it changes so frequently.

All activities need to be performed in such a way that the total value generated by the
company is more than the sum of its costs. In Porter’s terms, the total value of the company is
determined by the whole of its sales value. The margin reflects the reward for the risks run by
the company. Porter regards procurement as a support activity. He uses the term procurement
rather than purchasing, since, as he argues, the usual connotations of purchasing is too narrow
among managers (1985, pg 41).

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