Many companies are now confronted with diminishing growth opportunities, which results in a situation where an increase in turnover can only be realized at the expense of the competition and only with a great deal of effort. This leads to increased pressure on sales prices and consequently on cost prices and margins, which causes two developments.
- On the one hand it has resulted in shifts of power between purchasing and selling parties in many markets. Due to the fact that in many cases the market has changed from seller’s market to buyer’s market, the role of the buyer is now more dominant than a number of years ago.
- On the other hand the increasing pressure on sales prices and margins has resulted in an increased pressure on direct materials-related costs. Because the purchasing prices determine the sales prices in the industrial sector to a large extent, the company will be constantly on the look-out for opportunities to keep these prices as low as possible.
As a result of both developments, the purchasing and supply strategies of industrial companies have undergone major changes.
Several examples of these changes are presented below:-
- Co-ordination of purchasing requirements: In companies with several manufacturing plants, important purchasing advantages can be realized by combining policy is seen to emerge in many European companies of this type, even across national borders. Traditionally this was already common for raw materials; at present however, a similar approach is used for the purchase of computer hardware and software, capital goods and components. Good examples of companies with an active policy concerning purchasing co-ordination are, apart from the automotive and computer industry, Shell, Philips electronics and Alcatel.
- Integration of purchasing in logistics: Automation enables companies to improve materials planning and supply systems. It furthermore may significantly improve the productivity within the materials area. An integrated approach of materials management requires close cooperation between the production planning, inventory control, quality inspection and purchasing. To achieve successful automation, system standardization is a prerequisite. Purchasing cannot be allowed to follow its own course. To ensure effective integration of the different materials related areas. Purchasing increasingly is integrated into supply chain management.
- Integration of purchasing in engineering and production planning: In practice, supplier selection is determined to a large degree by the technical specifications. Once established, this specification is often very difficult to change. From a commercial point of view it is undesirable that specifications are defined towards a particular supplier; in that case purchasing often ends up with a monopolist, which seriously hampers negotiating. To prevent this it is desirable to include purchasing in the development process at an early stage. The goal is to make optimal use of purchasing knowledge of products and markets for the benefit of the product design.
- Make or Buy: Practice shows that several production activities can be done cheaper and faster by specialized suppliers. Moreover, companies may take greater demands in terms of quality on external suppliers than on their own. This is why in some industrial branches, the purchasing to sales ratio has been steadily rising. For some companies these have resulted in detailed make or buy studies. Purchasing should always be closely involved in this type of study, because they are the logical source of market information.
- Reciprocity agreements and compensation obligations: Companies operation on international markets is often obliges to compensate their sales turnover by counter purchase obligations. The recent opening up of the eastern European block has counter trade an actual issue. Buying from these countries may even open up interesting sales opportunities. Purchasing become involved in fulfilling such obligations
- Total quality control and just-in-time production: In several companies a growing interest in quality improvement and increased productivity can be observed. The activities of the European foundation for Quality Management, initiated by the presidents of 14 European industries on 5 September 1988, illustrate the first; several EEC programmes, aimed at logistics, the second. There is a growing awareness in the international business scene that, if Europe wishes to remain competitive on a world scale in several sectors, Improvements must be made in both the level of costs and the level of quality of the end products.
E-Purchasing and E-Procurement
The Internet and e-commerce is drastically changing the way purchasing is done. Internet use in buying has led to the terms “e-purchasing” or “e-procurement.” Certainly, communication needed in competitive bidding, purchase order placement, order tracking, and follow-up are enhanced by the speed and ease afforded by establishing online systems. In addition, negotiation may be enhanced and reverse auctions facilitated. Reverse auctions allow buying firms to specify a requirement and receive bids from suppliers, with the lowest bid winning.
E-procurement is considered one of the characteristics of a world-class purchasing organization. The use of e-procurement technologies in some firms has resulted in reduced prices for goods and services, shortened order-processing and fulfillment cycles, reduced administrative burdens and costs, improved control over off-contract spending, and better inventory control. It allows firms to expand into trading networks and virtual corporations.
Criteria for e-purchasing include:
- Supporting complete requirements of production (direct) and non-production (indirect) purchasing through a single, internet-based, self-service system.
- Delivering a flexible catalog strategy.
- Providing tools for extensive reporting and analysis.
- Supporting strategic sourcing.
- Enhancing supply-chain collaboration and coordination with partners.