Summary of the article “Purchasing Must Become Supply Management

Companies are drastically revaluating their supply schemes and broadening their scope of
potential suppliers. From 1990 the source of supply has drastically changed, and many
domestic companies sources their 30-40% supply from abroad. To ensure long term
availability of critical materials and components at competitive costs, a host of
manufacturers will have to come to grips with the risks and complexities of global sourcing
and one must learn to cope with the uncertainties and supply or price disruption on an
unprecedented scale

Whenever the manufacturer competitively procures a volume of essential products under

complex conditions it is important to control supply. The greater the ambiguity about the
supplier relationship, technical advances, and/or physical availability of certain products, the
greater the value of supply management

To determine the supply strategy of the company should perform these 4 assessments on its
purchasing practices 

Company need for supply strategy depends upon 2 factors:

1. The strategic importance of purchasing in terms of value, total cost, profitability
impact
2. The complexity of the supply material gauged by supply security

Assessment is based upon following 4 exploratory questions:

1. How sustainably company is making use of its opportunities for concerted actions
among different division and subsidiaries 
2. Does the company have the capacity and experience to avoid the bottleneck in the
future? 
3. Risk assessment, how much risk is acceptable in the company
4. Understanding between the make or buy a policy to give the best balance between
cost and flexibility
5. The extent of cooperation between suppliers or even with competitors to capitalize
on the shared resource

Shaping the supply strategy 

Companies use four-stage approach to devise strategies, the approach has given a simple
framework for collecting marketing and corporate data, forecasting, future supply scenario,
identifying available purchasing option as well as developing individual supply strategies for
critical items and materials 

Phase 1: Classification

The company should sort its purchasing items into three categories that are Strategic,
bottleneck, leverage and non-critical
Phase 2: Market analysis

The company should weight the bargaining power of its supplier against its strength as a
customer. Review the supply market, assess the availability of the strategic material in
terms of both quality and quantity and the relative strength of existing vendors. 

Phase 3: Strategic Positioning

Identify the areas of opportunity and vulnerability, assess supply risks, and derive basic
strategic thrusts for these items. If the company is in a position of strength it can bargain
and should press for preferential treatment. Bargaining from weakness, the company may
have to offer inducements, longer-term obligations for example higher price to ensure
adequate supply.

Phase 4: Action Plans

In this phase, the company should explore the range of supply scenarios in which it layouts
its option for securing long term supply and for exploiting short term opportunities, clearly
define respective risks, costs, returns and strategic implications

The end of completing all the 4 phases will be a set of systematically documented strategies
for critical purchasing materials that specify the timing of and criteria for future actions

Strengthening of the organization

In today's competing and information abundant environment purchasing cannot be done in

the isolation. It involves greater integration, stronger cross-functional relations, and more
necessary participation of the top-level management. In addition to these other following
important subject matters should also be present

1. Effective relations

2. System support

3. Staff and Skill requirements

Effective Relations

The top management of the company must decide how much they need to decentralize or
centralize their purchasing function. For example, a company while purchasing of the basic
materials is centralized but found that it could not do the same with the technical goods
because of heterogeneous production facilities and varying standards and differentiated
services and parts demands. The corporate philosophies also play a major role while
determining the extent of decentralization in the company.
System support

The purchasing department is extremely information-centric, and sometimes seeks

knowledge about the growth and activity of companies. The purchasing department needs
information about business strategies and priorities for the company, its major projects, and
expansions. If the information is not given at the right moment, the department would find
it difficult to handle demand fluctuations and unexpected bottlenecks. Following are the
support system which is often seen in companies with multiple product lines

1. Demand forecast system with 3 to 6 months’ time horizon.

2. EDP-supported purchasing planning, information, and disposition system

3. Use of KANBAN system for better integration

4. Framework for analysis of the nonstrategic items

Staff and skill requirement

The new supply strategy also demands the right skill and the company must upgrade the
skills and the experience of key purchasing people. 

Top management should foster a constructive atmosphere and attitude among purchasing
staff before undertaking any radical staff changes. 

Conclusion

A purchasing attitude, as usual, would make the company prone to competitive pressure but
improved strategic knowledge, increased flexibility and good creative thinking in the supply
region will improve the security of supply and lower the industrial company's costs.