Strategic Change, Vol.

6, 165±179 (1997)

R. McIvor,
P. Humphreys and
The evolution of
E. McAleer the purchasing
function

T he purpose of this paper is to identify

the major changes that have taken
place in the role of the purchasing
function in organizations over the last
two decades. These are as follows:
* The purchasing function is taking
on a more strategic role in many
organizations.
* An emerging view is that the
purchasing function should be on
an equal level of importance in the
organization with marketing,
human resource management,
®nance and the production/
operations functions.
* Purchasing is moving away from the
traditional adversarial approach
between the buyer and supplier to-
wards collaborative relationships.
* The make or buy decision is being
given more consideration because
of its strategic implications.
* Purchasing plays a key role in
corporate strategy through the se-
lection and development of suppli-
ers that support the organization's
competitive position.
* An understanding of the true cost
implications of the purchasing process
can make a signi®cant contribution to
the achievement of lower costs.
* The changing role of the purchasing
function has implications for the
training and development of the
purchasing professional.
166
Introduction
The purpose of this paper is to identify the
major changes that have taken place in the role
of the purchasing function in organizations
over the last two decades. It will be seen that
the purchasing function is taking on a more
strategic role in many organizations. In the
past, purchasing was regarded as a clerical
function with purchasing acting as the
`transaction accountant' between the buyer
and the supplier. However, the purchasing
manager has now become a manager of inter-
®rm information exchanges with responsibil-
ity for the selection and maintenance of the
entire supplier value chain (Spekman et al.,
1994).
The supplier network is now viewed as
playing an important role in the larger value-
adding network of the purchasing company
with the potential impact and value that the
supply network can add in the delivery of
products/services to the ®nal customer being
recognized (Macbeth, 1994; Ellram and Carr,
1994). With the changing competitive struc-
ture of many industries and the need to be
more ¯exible in a world of changing con-
sumer tastes, companies have realized the
importance of having an effective supply base.
For example, with some 75% of the core
components of its aero engine being out-
sourced, Rolls-Royce realizes that the perfor-
mance of its suppliers is crucial if it is to
compete with its rivals and that appropriately
focused performance measures are central to
its success (Synon, 1995). The purchasing
function affects directly the ability of a ®rm to
compete through its impact on quality, cost,
technology and supplier responsiveness.
Overview
Since the 1970s, the role of the purchasing
function has gone through considerable
change. In the past, it was regarded as a
clerical function with the objective of pur-
chasing a good/service at the lowest price. In
the early 1970s, Ammer (1974) found that top
management viewed purchasing as having a
R. McIvor, P. Humphreys and E. McAleer
passive role in the organization, with purchas-
ing being an administrative rather than a
strategic function. However, the 1973±74 oil
crisis and related raw material shortages drew
signi®cant attention to the importance of
purchasing (Farmer, 1978). Porter (1980), in
The role of the purchasing
function has gone through
considerable change
his seminal work on the forces that shape the
competitive nature of industry, identi®ed
buyers and suppliers as two of the critical
forces. Thus, the strategic importance of the
purchasing function to the organization was
beginning to receive recognition in the
literature. This trend continued with the
purchasing function being recognized as
making a signi®cant contribution to an
organization's success (Spekman, 1981; Burt
and Soukup, 1985). This has resulted in
purchasing assuming a more strategic role in
many organizations (Lamming, 1993; Gadde
and Hakansson, 1994). In many situations,
organizations are endeavouring to reduce the
number of suppliers and establish longer term
buyer supplier relationships to achieve com-
petitive advantage through more effective use
of the supply base (Monzcka and Trecha,
1988). The following ®ve core issues have
been identi®ed and will now be discussed to
illustrate the strategic nature of purchasing in
many organizations. The research carried out
focuses on manufacturing and assembly-type
industries.
1. Purchasing Ð a strategic issue
2. Trend towards more buyer/supplier col-
laboration
3. The growing importance of the make or
buy decision
4. The supplier selection process
5. Purchasing and its cost implications
Strategic Change, May 1997
The evolution of the purchasing function
Purchasing Ð a strategic issue
for organizations
Porter (1992) postulates that the `value
chain' is fundamental to the performance
of an organization. He emphasizes the
importance of logistics and management of
manufacturing operations in this chain.
Spekman et al. (1994) argue that the
purchasing professional has a critical role
to play and must understand the concept of
the value chain and appreciate the full range
of activities that go into the manufacturing
of a component or ®nished product. Lere
and Saraph (1995) also recognize this,
pointing to tasks such as protecting the cost
structure of the business, minimizing pur-
chasing costs, assuring long-term supply
sources and maintaining good relationships
with suppliers as having strategic implica-
tions for the business. Previously, the
purchasing professional had acted only as
an agent between the purchaser and suppli-
er, with responsibility for purchasing mat-
ters only.
As the 1980s progressed, companies were
under increasing pressure to continue to ®nd
methods of achieving competitive advantage.
Spends in excess of 60% of sales revenue on
bought-in goods and services were not
exceptional (Gadde and Hakansson, 1993).
In addition to the other functions, companies
started to pay particular attention to purchas-
ing as any savings in that area resulted in an
equivalent increase in pro®ts. Managing
suppliers and developing supplier relation-
ships became important factors with regard to
strategies for achieving competitive advantage
(Leenders, 1989; Burt, 1989). Indeed, an
emerging view was that the purchasing
function should be placed on an equal level
of importance in the organizational hierarchy
with marketing, human resource manage-
ment, ®nance and the production/operations
functions. Organizations are therefore
becoming more dependent on suppliers for
ef®ciencies in production and are depending
upon the purchasing function to implement
more effective supply-chain management
strategies.
Strategic Change, May 1997
167
Trend towards more buyer/
supplier collaboration
With higher standards of performance being
demanded in each business environment,
companies are of necessity looking to their
suppliers to help them achieve a stronger
Companies are looking to
their suppliers to help them
achieve a stronger
competitive position
competitive position. Ohmae (1989) advo-
cates that `in a world of converging consumer
tastes, rapidly spreading technology, escalat-
ing ®xed costs, and growing protectionism',
more collaborative relationships with suppli-
ers are critical instruments for serving custo-
mers in a global environment. Spekman et al.
(1994) believe that increased foreign competi-
tion, shorter product life-cycles, rapidly chan-
ging technologies have forced buyers to
search for a more cost-effective and ef®cient
supply base. For example, Chrysler buys in
almost 70% of the cost of a vehicle from
outside suppliers. In addition, greater colla-
boration with its suppliers has led to suppliers
putting forward proposals for cost savings
totalling $92 million in 1994 (Done, 1994).
In the past, the most prevalent type of
buyer supplier relationship has been the
traditional adversarial approach which does
not address the aforementioned issues. The
adversarial approach tends to be a win-lose
game for both the buyer and supplier with the
focus primarily being on price and the division
of pro®t margin. The purchasing company
strives to reduce the power of their suppliers
by maintaining multiple sources of supply and
avoiding any uniqueness in the relationship
that might make the cost of switching
suppliers high. By keeping suppliers in a
relatively weak position in the relationship,
the purchasing company is often able to
appropriate much of the value added from
technological developments in the supply
168 R. McIvor, P. Humphreys and E. McAleer

Table 1. Comparison of adversarial and collaborative purchasing relationships (Lamming, 1993).

Factor Adversarial Collaborative

1. Nature of competition in the
supply market
2. Basis for sourcing decision
3. Role of information transfer
and its management
4. Attitude to capacity planning
5. Delivery practice
6. Dealing with changes
7. Product quality
8. Role of R&D
9. Level of pressure
Price based and cut-throat
Competitive bids with price-based
supplier accreditation
One way and closed
Independent
Erratic
Secretive game playing, win/lose
Aggressive goods inward
inspection
Assembler designs and supplier
makes to speci®cation
Low Ð purchaser will go elsewhere
if dissatis®ed
Collaborative and technology based
Long-term performance history
Transparency of costs in each
direction
Shared problem which is strategically
planned
JIT, small quantities on an agreed basis
Collaborative, cost-reduction
programmes with shared bene®ts,
win/win
Shared joint efforts with aim of zero
defects
Shared Ð supplier involved early in
R&D process
High Ð continuous improvement to
identify better methods and materials
leading to lower costs

sector without incurring much of the
associated risks. The strategic advice to the
supplier, on the other hand, is to increase its
power in the relationship by creating
dependence through uniqueness (creating
switching costs in the form of product,
service, or quality features) and by possibly
posing a credible threat of forward integration
to keep the buyer in line (Leavy, 1994).
However, as companies increasingly look to
the purchasing function to help them meet
their cost and quality goals, they are becoming
interested in partnership sourcing (Spekman,
1988; Ellram, 1991; Macbeth, 1994; Stuart and
Mueller, 1994; Akacum and Dale, 1995; Land-
eros et al., 1995). Partnership sourcing is one
of the cornerstones of just-in-time (JIT) which
Partnership sourcing differs
from the traditional
adversarial model
has had enormous impact on international
competition in many industries from auto-
mobiles to computers. Partnership sourcing
differs from the traditional adversarial model
in that it involves trust, commitment and
information exchange (DTI, 1991). The part-
nership relationship protects the supplier
from the full rigours of competition in the
supply market, particularly if the supplier is
committed to one purchaser. The purchaser
can enjoy the bene®ts of greater security of
supply and more control over cost and quality
without the associated investment and risks
that would normally be involved. Companies
establish partnership-sourcing relationships
for materials and services that have strategic
importance for their businesses. The partners
must have shared goals and must work
together to improve the design, quality,
delivery and manufacturing aspects of their
respective products and operations in an
attempt to achieve competitive advantage
(Akacum and Dale, 1995). A comparison of
adversarial and partnership relationships is
shown in Table 1. This trend towards more
buyer/supplier cooperation has had a con-
siderable impact on the following areas:
(i) change in the supply base structure
(ii) buyer/supplier communication
(iii) supplier involvement in design
(iv) supplier development
(i) Change in supply base structure
The trend towards partnership sourcing has
led organizations to reduce the number of

Strategic Change, May 1997

The evolution of the purchasing function 169

suppliers while at the same time fundamen-

tally changing the way in which they do
business with their remaining suppliers.
Considerable reductions in the total number
of suppliers have been undertaken by, for
example, Chrysler, from 3,000 suppliers to
just over 1,000 (Raia, 1993), and Rank Xerox,
from 5,000 suppliers in 1981 to just over 300
in 1987 (Morgan, 1987). Many organizations
have reduced their immediate supply chain by
changing the structure of the chain and the Figure 1. Tiers in the supply chain.
number of tiers in it. These companies are
buying assembled systems or complete sub-
assemblies rather than individual components,
thus introducing another level into the supply
the supplier. This tends to be an arms length,
chain (Figure 1). The ®rst-tier supplier will
formal communication approach with a re-
supply the assembled system and is likely to
luctance on the part of both parties to share
be responsible for investment in product
information. However, in a partnership-type
design and process development. The ®rst-
relationship the two-way information ¯ows
tier supplier will then be responsible for
are normal with the buyer and supplier
coordinating the required supply of inputs
cooperating on a range of issues including
from the second-tier suppliers.
product design, technical capability and the
Toyota and Nissan have organized their
interchange of cost information.
suppliers into this type of structure. Only the
suppliers on the ®rst tier deliver directly to the
customer. These ®rst-tier suppliers are made
responsible for JIT deliveries. They have also (iii) Supplier Involvement in Design
become more `system' than `component'
suppliers over time, and in some cases are Increased buyer/supplier collaboration has led
responsible for product development. to increased supplier involvement in the
Furthermore, they are responsible for the design process with the purchaser. In Japan,
activities of the suppliers on the lower levels this has been the case for many years with
in the structure such as quality and delivery major suppliers offering the entire
times (Nishiguchi, 1993). Another interesting development process, including planning,
example in this area, is the case in which Ford design and manufacturing, and this early
informed all their suppliers of door compo- involvement comes with higher degrees of
nents that they were no longer interested in responsibility and extensive communication
purchasing individual components. The (Bonaccorsi and Lipparini, 1994). However,
suppliers were encouraged to do what they Western companies are beginning to realize
could to form alliances and then tender to the bene®ts that can be achieved from
supply complete door systems (Marler, 1989). supplier involvement. A survey carried out
by Birou and Fawcett (1994) has revealed that
organizations in the USA and Europe have
(ii) Buyer/Supplier Communication
strived to increase involvement in new
The communication patterns between the product development with suppliers. One
purchasing company and supplier are also strategy that has enabled the effective im-
changing. Under the traditional adversarial plementation of new product development is
relationship with the buyer exerting the concurrent engineering. The essence of con-
greater in¯uence, the information ¯ow is current engineering is the simultaneous de-
likely to be unidirectional from the buyer to sign of the product and the respective

Strategic Change, May 1997

170
manufacturing process. This will shorten lead
times in product development, which is a
major strategic issue in many industries. The
empirical evidence suggests that new inte-
grated product development concepts are
being implemented in both regions with the
USA having progressed further down the line.
In fact US ®rms reported a higher level of
supplier involvement, at an earlier stage and a
higher level of interaction.
(iv) Supplier Development
With the purchaser developing closer relation-
ships with its suppliers, companies have
become concerned with developing the
capabilities of their suppliers. Supplier devel-
opment refers to an organization's efforts to
maintain a network of competent suppliers
(Leenders, 1989). The purchasing company
adopts a long-term cooperative effort to
upgrade the technical, quality, delivery and
cost capabilities of its suppliers. Motorola's
Five Stage Model of Customer/Supplier Part-
nership Development provides a framework
to develop suppliers on a case-by-case basis
and attempts to understand where their
greatest needs, strengths and weaknesses
are. The model allows for situations where
supplier development may be necessary if
suppliers' performance is lacking in certain
areas (Moody, 1992).
Watts and Hahn (1993) carried out a
survey to determine the current level of
involvement in supplier development pro-
grammes and assess the success of current
programmes. The results of the study reveal
that supplier development programmes are
more prevalent than generally believed. An
interesting ®nding was that a range of
functional areas were involved in supplier
development and interaction was not limited
to the buyers and sales people of each
organization. This multiple contact point
relationship of supplier partnership in con-
trast to the single contact point relationship
of traditional market exchange is illustrated
in Figure 2.
R. McIvor, P. Humphreys and E. McAleer
The Growing Importance of the
Make or Buy Decision
Within organizations the make or buy decision
is being given more consideration because of
its strategic implications. The make or buy
decision can often be a major determinant of
pro®tability making a signi®cant contribution
to the ®nancial health of the company (Yoon
and Naddimuthu, 1994). Issues that the
purchasing company should be addressing in
the make or buy decision include:
* Will the customers/consumers recognize
a difference in the product if the company
outsources some of its core components?
* Should the company strive to maintain
and build its capability in a particular
technology or turn to the best-in-class
source?
* Does the necessary capacity exist within
the company to provide the item?
* Do the company internal design and
manufacturing capabilities lag behind
potential suppliers?
* How does the company compare in
product innovation and rate of investment
in product and process R&D in this
technology in relation to that of suppliers?
* Is the item part of an integrated produc-
tion route involving several stages of
manufacture? If so, can outside manufac-
ture be satisfactorily coordinated with
internal production schedules?
* If there is a disparity between purchaser
and supplier, how much investment is
required internally to match the capa-
bilities of the suppliers?
* What are the organizational implications?
For example, cultural ties to producing
internally.
In the past, buying by organizations has been
done largely on the basis of obtaining the best
price, exceptionally taking into account a few
other factors such as quality and delivery.
However, in many cases a lot of important
factors such as delivery reliability, technical
capability, cost capability and the ®nancial
Strategic Change, May 1997
The evolution of the purchasing function 171

stability of the supplier were not taken into

consideration (Dooley, 1995). Few companies Few companies have taken a
have taken a strategic view of make or buy
decisions. Many companies decide to buy
strategic view of make or
rather than make for short-term reasons of buy decisions
cost reduction (Ford et al., 1993). In addition,
some organizations may ®nd themselves with
an initial position which has been inherited chain is already established and the extent of
from the past. Their position in the supply vertical and horizontal integration already

Figure 2. Relationships between purchasers and suppliers.

Strategic Change, May 1997

172
mapped out. However, this is likely to have
occurred as the result of a series of short-term
decisions with no consideration for the long-
term strategic direction of the organization.
In a study of six engineering manufacturers
in the USA, Venkatesan (1992) found that
these companies in many cases had over-
invested in commodity parts and had ne-
glected developing proprietary components
that could create sources of competitive
advantage. Underlying this situation was the
fact that the same companies had no ®rm basis
for distinguishing core components from
commodity-type items. Venkatesan argues
there was no effort to place any of the
components in a hierarchy of strategic
importance Ð a critical input into the make
or buy decision. It is crucial to make this
categorization in order to match the purchas-
ing strategy with the relevant purchased item.
Without this categorization, when companies
are making sourcing decisions they may ®nd
themselves overinvesting in non-critical com-
ponents and disregarding the core activities of
their business. Synon (1995) believes that a
company must concentrate resources on
strategic buying rather than expending pur-
chasing's managerial resources on less im-
portant commodity and transactional-type
buying. A purchasing company needs to
develop a differentiated purchasing strategy
towards its various sourced items. This is
illustrated in the hierarchy of strategic im-
portance pyramid in Figure 3. This pyramid
categorizes the type of items sourced by a
typical manufacturing company and the
purchasing implications for each category.
For each item category, the sourcing company
should adopt the type of supply strategy that
allows it to exploit its purchasing power with
suppliers and minimize risks. It provides a
framework to place items in a hierarchy of
strategic importance. A brief description of
each category is presented here.
(i) Strategic items
These are generally obtained from one
supplier, and/or they concern products
of which the short- and long-term
supply is not guaranteed. Furthermore,
R. McIvor, P. Humphreys and E. McAleer
they represent a considerable value in
the cost price of the end product.
Examples are engines and gearboxes
for automobile manufacturers.
(ii) Leverage items
These are items that can be obtained
from various suppliers and represent a
relatively large share of the end pro-
duct's cost price. A small change in
price has a relatively strong effect on
the cost price of the end product.
Examples are bulk chemicals and steel.
(iii) Non-critical items
These items produce few technical or
commercial problems. They usually
have a small value per unit and there
are many alternative suppliers. Exam-
ples are cleaning materials and of®ce
supplies.
There is little doubt now that organizations
are assigning more strategic attention to the
make or buy decision. For example, at the
heart of IBM's approach to the make or buy
decision, it has strived to de®ne the absolute
minimum resources and critical `value-added'
skills that are the very core of their business.
Distinguishing between core and non-core
activities in the make or buy decision involved
assessing the long-term strategic implications
of each activity for the overall business. In this
analysis, IBM was careful not to lose the core
competences of the business Ð the features
that actually provide the business with its
competitive edge (Gillett, 1994).
A further example is BP Exploration Oper-
ating Company which made the sourcing of its
information technology (IT) services a strate-
gic issue. It had previously developed all its IT
services in-house. Under this arrangement, IT
staff found themselves being drawn into the
day-to-day decisions of running the computer
systems rather than being able to focus on
activities that directly improved the business
such as working directly with senior man-
agers. However, in 1993, it decided to out-
source all its IT operations in an effort to cut
costs, gain more ¯exible and higher quality IT
resources. IT staff can now work directly with
business managers at a strategic level to
Strategic Change, May 1997
Strategic Change, May 1997

The evolution of the purchasing function

Figure 3. Hierarchy of strategic importance. Adapted from Kraljic (1983).

173
174
suggest technologies that will improve busi-
ness processes, cut costs, or create business
opportunities. By doing this, they believed
their IT staff could then be engaged in
activities that would create value for the
organization (Cross, 1995).
The Supplier Selection Process
One of the most important objectives in the
purchasing process is that of the selection and
maintenance of an effective supply base
(Weber et al., 1991). Companies must have a
supplier selection strategy that enables them
Vendor selection is becoming
increasingly critical
to have a supply base that achieves this
objective. Vendor selection is becoming
increasingly critical as companies continue
to develop more collaborative and long-term
relationships with their suppliers. With the
purchasing function playing a more strategic
role, vendor selection has now become a
strategic decision, particularly in relation to
strategic purchased items.
A study carried out by Dickson (1966)
surveyed buyers to identify the factors that
they considered in awarding contracts to
suppliers. Although some supplier selection
criteria were found to vary in different
situations, in addition to price three common
criteria emerged as important regardless of the
type of purchased product. These were
quality, on-time delivery and supplier perfor-
mance history along these criteria. Another
study carried out by Lehmann and O'Shaugh-
nessy in 1982, found that, the key factors
generally thought to affect supplier selection
decisions were price, quality, delivery and
service.
In 1993, Wilson's ®ndings appear to
con®rm the earlier ®ndings of Lehmann and
O'Shaughnessy. This study paid particular
attention to the purchasing situation in order
to facilitate comparisons with earlier studies.
R. McIvor, P. Humphreys and E. McAleer
Crucially however, this study found a shift
from price as being the primary attribute in
the selection process. This decline in the
importance of price was associated with an
increase in the relative importance of quality
and service. The overall increase in the
importance of quality and service and the
decline in importance of price may be
indicative of the changes occurring in the
relationship between buyers and their suppli-
ers. Whereas, in the past buyer/supplier
relations have been adversarial in nature,
collaborative relationships are becoming more
prevalent, particularly in the purchase of
strategic items. For example, computer man-
ufacturers such as NCR, require vendor
support with the buyer and supplier operating
closely in order to install in an optimal manner
sourced components in the ®nished products
(Bertrand, 1986).
The criteria discussed so far on supplier
selection have focused on quanti®able mea-
sures such as cost, quality, delivery and other
related factors. These are important factors
that should be considered in almost any
supplier selection decision. However, under
partnership sourcing, it becomes not a task of
supplier selection but rather a question of
identifying the best partner for a long-term
relationship. In this situation, a new set of
supplier selection criteria come into consid-
eration, equally as important as some of the
criteria already mentioned. Ellram (1990) uses
the term `soft' factors to describe this new set
of criteria. These soft factors can include
issues such as top management compatibility,
design capabilities, company culture and the
strategic direction of the supplier ®rm. These
factors are unique due to the partnership
nature of the buyer supplier relationship. A
fuller listing of these factors identi®ed by
Ellram is shown in Table 2. Each of these
factors may have varying levels of importance
depending upon the characteristics of the
purchased item, the technology involved and
the nature of the purchasing organization. In
the strategic supplier selection decision, there
is a long-term focus. This focus suggests that
while a supplier's performance and capabil-
ities are important, the supplier's potential
Strategic Change, May 1997
The evolution of the purchasing function
Table 2. Supplier partnership selection criteria (Ellram,
1990).
Financial issues
1. Economic performance
2. Financial stability
Organizational culture and strategy issues
1. Feeling of trust
2. Management attitude/outlook for future
3. Strategic ®t
4. Top management compatibility
5. Compatibility across levels and functions of buyer
and supplier ®rms
6. Supplier's organizational structure and personnel
Technology issues
1. Assessment of current manufacturing facilities/
capabilities
2. Assessment of future manufacturing capabilities
3. Supplier's design capabilities
4. Supplier's speed in development
Other factors
1. Safety record of the supplier
2. Business references
3. Supplier's customer base
and future direction must also be taken into
consideration. This long-term orientation as-
sociated with partnership sourcing creates the
need for these more qualitative factors to be
included in the analysis. It must be stressed
that these qualitative factors should not re-
place but should supplement the quanti®able
measures used in the supplier selection
process. With partnership sourcing, the buyer
recognizes the supplier as an integral member
of the organization, thus requiring the im-
plementation of a supplier selection strategy
that provides a measure of overall supplier
performance along with supplier account-
ability.
Purchasing and its Cost
Implications
Successful businesses develop accurate cost
pro®les for all their operations. Freedman
(1993) argues that knowing the true cost of
an operation allows better strategic as well as
operational decision making. Questions as to
which products and services should be
offered, to which customers, what inventory
should be held, and whether or not to make
Strategic Change, May 1997
175
or buy a product can be determined more
effectively. As outlined earlier, the supplier
network is now recognized as an integral part
of many organizations, requiring the same
level of effective cost measurement that
would be applied in the costing of the
internal operations of the purchasing organi-
zation. Under the traditional adversarial
purchasing relationship, the focus has tended
to be on purchase price alone. However, the
purchase price is only one element in a
model that incorporates a broader set of costs
in the supply process. With more collabora-
tive purchaser/supplier relationships, it is
more important to set the goal of reducing
total supply costs, rather than focusing on
one variable Ð price. This has led companies
to consider total acquisition cost (TAC). TAC
sums up all the actual and potential costs
involved in the purchasing process (DTI,
1995). It encompasses all direct and indirect
costs associated with the acquisition of a
good/service throughout the entire supply
chain and not just the purchase price. An
understanding of the true cost implications of
the purchasing process can make a signi®cant
contribution to the achievement of lower
costs. The purchasing function is playing a
more important role in analysing the cost
performance of suppliers (Cohn and Tayi,
1990). This involves determining and under-
standing the supplier's ability to maintain
effective cost performance. The purchasing
company should be utilizing more effectively
the available information on a supplier's cost
dynamics Ð that is, the factors that are likely
to increase or decrease the supplier's cost
(Lere and Saraph, 1995). The information
produced by this type of analysis is
particularly vital under partnership-sourcing
relationships.
Smytka and Clemens (1993) argue that
de®ning the total cost involved in the
procurement process has become important
as consumer expectations for product quality
and price competitiveness change at increas-
ing rates. There is considerable scope to
produce direct cost savings and hence main-
tain pro®ts in the purchasing and supply area.
For example, a saving in raw material costs
176
will lead to an increase in pro®ts and may cost
nothing to introduce, whereas an increase in
price, may lead to a loss of sales and require an
increase in investment and promotional
activity. Hence, in order to remain competi-
tive, an organization needs to manage its
supply chain cost effectively. Measuring costs
in the supply chain becomes necessary in the
supplier selection decision by providing
complete cost data on the important cost
issues involved.
Polaroid has developed a comprehensive
programme entitled Zero Based Pricing,
which focuses on reducing Polaroid's costs
for purchased materials, equipment and
services. It encompasses all costs associated
with the acquisition of a material or compo-
nent for the ®nished product. It considers
costs right from idea conception, as in
collaborating with a supplier in the design
phase of the component, through to any costs
(for example, warranty claims) associated
with the component once the ®nished
product is being used by the ®nal customer.
The company has enjoyed considerable sav-
ings with this programme, including reduced
scrap, rework and ®eld failure. It has also
demonstrated that a mutual understanding of
costs between the purchasing company and
supplier can help build trust and foster
communication for longer term supply rela-
tionships (Burt, 1989).
A mutual understanding of
costs can help build the trust
required for better, longer
term relationships with
suppliers
With organizations having to measure total
costs more effectively, they are now recog-
nizing the bene®ts of purchaser/supplier
co-operation in this process. In the supplier
selection process, the ideal situation for the
buyer is to have each potential supplier
submit the costings involved in supplying
the item. Polaroid has demonstrated that a
mutual understanding of costs can help
R. McIvor, P. Humphreys and E. McAleer
build the trust required for better, longer
term relationships with its suppliers. Total
cost measurement complements movement
towards more purchaser/supplier coopera-
tion, as costs extend over each organization's
functional areas. Cost analysis not only
bene®ts the buyer, but bene®ts the
supplier as well. Traditionally, buyers have
been insensitive to the needs of
their suppliers to make money, especially in
high-risk projects (Burt, 1989). In some cases,
suppliers may have been reluctant to do
business with a particular purchaser if in the
past unreasonable demands mave been made
by the buyer to reduce costs. Part of the
reason for this has been a lack of cost
information. However, if the buyer and
supplier have a clear outline of the costs
involved in the acquisition at the outset then
margins can be determined more precisely.
Conclusion
This article has attempted to describe the
major changes that have taken place in the
role of the purchasing function over the last
two decades and the implications that these
changes have had for organizations. The
challenge for purchasing is to view its
function from a more strategic and proactive
perspective. The movement towards more
outsourcing, rapid changes in technology,
supplier involvement in new product devel-
opment, partnership sourcing and the mea-
surement of TAC require the purchasing
function to assume more responsibility in
the planning and implementation process of
the corporate strategy of the organization. The
purchasing function plays a key role in these
issues which can determine the long-term
strategic direction of the orgnization. The
contribution of the supplier as part of the
larger value-adding network of the purchasing
organization cannot be realized unless pur-
chasing plays a stategic role in the formulation
of corporate strategy.
Purchasing plays a key role in corporate
strategy through the selection and deve-
lopment of suppliers that support the
Strategic Change, May 1997
The evolution of the purchasing function
organization's competitive position. In fact,
the purchasing function manages external
manufacturing with responsibility through-
out the supplier value chain. It plays an
important role in protecting the organiza-
tion's competitive advantage. In the make or
buy decision, the core competences and
capabilities of the organization must not be
jeopardized by outsourcing key processes or
product elements, thereby losing that skill.
Purchasing will impact pro®tability by allow-
ing suppliers to become involved in new
product development, and by supporting the
manufacturing process, monitoring the sup-
ply environment, and forecasting the avail-
ability and cost of materials for future
production needs.
This changing role of the purchasing
function clearly has implications for the
purchasing professional. If purchasing is to
be a strategic function, then the role and
attitudes of the purchasing professional must
change to ensure that purchasing is included
as a key participant in the organization's
strategic planning process. The purchasing
professional must have the ability to take an
integrated view of the business. Developing
supplier relationships means ®nding ef®cient
solutions, considering the trade-offs between
direct costs, indirect costs (such as produc-
tion, administration, material ¯ow, etc.) and
the other strategic bene®ts from the relation-
ship. The role of purchasing personnel within
the company should therefore be one of
adding value to the total purchased package,
as a member of a cross-functional team,
collaborating with, and coordinating specia-
lists from these functions. In terms of training
and development, the purchasing professional
therefore needs to develop a number of
important skills. These include an under-
standing of: ®nancial management, supplier
development, operations management, strat-
egy, marketing and negotiation skills. In
effect, the position requires a person who
can not only work as part of a team, but has
also got the entrepreneurial skills to identify
potential opportunities for the organization in
minimizing the total cost of the purchased
package from a supplier.
Strategic Change, May 1997
177
Biographical note
Ronan McIvor is a research of®cer in operations
management, Paul Humphreys is a lecturer in
operations management, and Eddie McAleer is a
professor of management at the School of
Management, University of Ulster, Newtownabbey,
County Antrim, Northern Ireland.
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