CHAPTER 2 - PURCHASING

STRATEGY

I)Strategy Planning Process

II) Environmental Observation
III) Development of Strategy
IV) Implementation of Strategy
V) Assessment and Control
Strategies
VI) Procurement Strategy

BJMP3073
PURCHASING
MANAGEMENT AND
SUPPLY CHAIN

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 Why Business Strategy Vital?
1 – PLANNING
2 – STRENGTHS AND WEAKNESSES
3 – EFFICIENCY
4 – CONTROL
5 – COMPETITIVE ADVANTAGE

https://www.cascade.app/blog/the-5-best-business-strategies-
ive-ever-seen
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Best business strategies #1: Tesla Playing the long
game

Tesla created the most luxurious, expensive, fully-

featured EV sports car they could afford. That car was
the Tesla Roadster, and for context, the newest
generation of the Roadster will retail from upwards of
US$200,000 for the base model.

A 200 kWh of the large battery pack will

provide up to six hundred twenty miles of
range on a single charge,

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PURCHASING STRATEGY
• A purchasing strategy defines how
the organization purchases things
– material and service.
• Its main goal is to decrease the bottom
line [profit & loss] and maximize cost
savings.
• This can be achieved by reducing
inefficiencies, forming buying plans, and
establishing approval workflows to get
the result that the organization desires.
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 Purchasing Strategy Framework
• 4 Decision Areas
• Number
• Size
• Location
Degree of • Financial health
Supplier Supply
integration • Engineering
development management
• Relationship
• …

Decision
Areas

New product
Scope of • Criteria
or/substitute
manufacturing Buying • Purchasing scale
product Activities • Ordering policy
development

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 Purchasing actions are
determined by
Components • the firm’s competitive priorities
• its resource capabilities
of • the environment

Purchasing Purchasing strategy must consider

Strategy • competitive priorities
• organization’s strengths and weaknesses
• competitive environment

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 Competitive Strategy
• The General Competitive Strategy
Options:
1) Cost
2) Differentiation

• The competitive strategy must be

articulated in terms of competitive
priorities.
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Example

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Purchasing Strategy Linkages
Cost or
Competitive
Differentiation
Strategy
Cost, Quality level,
Quality consistency,
Competitive Delivery time,
Priorities Dependability,
Product flexibility,
Volume flexibility

Buyer reward Purchasing

Buying criteria Performance
criteria actions

External Company
environment resources

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 I) Strategy Planning
Process
• Strategic planning is a process in which
an organization’s top management define
their vision for the future and identify their
organization's goals and objectives.
• The process includes establishing the
sequence in which those goals should be
realized so that the organization can
reach its stated vision.
• E.g., IKEA offers lowest price for
12,000 types of products in 500
branches at 63 countries
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 Supply Strategy Interpreted in
Organizational Strategy
Supply
Objectives Organizational
Objectives Strategy is an outline of the actions and
decisions a company plans to take to
reach its goals and objectives.

A business strategy defines what the

company needs to do to reach its goals,
Supply which can help guide the decision-
Strategy Organizational making process for hiring as well as
Strategy resource allocation.
e.g., IKEA innovates 2000 new items
Why Organizational Strategy Important? each year
• Planning A business strategy helps different
• Strength and Weakness – analyze via SWOT departments work together, ensuring
departmental decisions support the
• Efficiency
overall direction of the company.
• Control
• Competitive Advantage 14
Supply Strategy Links Current and
Future Markets to Current and
Future Needs

Current Future
Needs Needs

Current Future
Markets Markets

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II) Environmental
Observation

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 • What Is
Environmental
Observation?
• Environmental
observation
involves collecting
and monitoring
information and
data regarding
changes and
trends in
industrial,
economic, and
global
environments.
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 Impact of
Covid19
- 81 millions
job loss in
Asia
- 225 millions
in whole
world

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 III)
DEVELOPMENT
OF STRATEGY

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https://www.slideshare.net/aliimran1011/pizza-hutcreative-
services-development-and-design
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 IV) IMPLEMENTATION OF STRATEGY
• 10 business strategy
examples

• 1. Cross-sell more products

• Some organizations focus on
selling additional products to
the same customer.
• Cross-selling works well for
office supply companies and
banks, as well as online
retailers.

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• 2. Most innovative product or service
• Many companies, particularly in the technology or automotive space,
are distinguishing themselves by creating the most cutting-edge
products.

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• 3. Grow sales from
new products
• Some companies like
to invest in research
and development in
order to constantly
innovate, even with
their most successful
products.
• This type of strategy
involves introducing
new products into
the market and
updated products
that can keep up
with trends.
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4. Improve customer service
This can be a good business strategy if
the business has had a problem
delivering quality customer service.
Some companies have even built a
strong reputation for having
exceptional customer service.
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 • 5. Cornering a young
market
• Some large companies are
buying out or merging
competitors to corner a
young market. This is a
common strategy used by
Fortune 500 companies to
gain an advantage in a new or
rapidly growing market.
• Acquiring a new company
allows a larger company to
compete in a market where it
didn't previously have a
strong presence while
retaining the users of the
product or service.
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 • 6. Product differentiation https://blog.hubspot.com/insiders/branding-differentiation

• Product differentiation is a common business strategy, especially

for business-to-consumer (B2C) businesses. They can differentiate
their products by highlighting the fact that they have superior
technology, features, pricing or styling.
5. Whole Foods
Top Competition: Trader Joe's, EarthFare, Fresh Market
Whole Foods goes beyond groceries -- the company is one of content generators and thought leaders.
Whole Foods mixes traditional consumer-packaged goods (CPGs) marketing with the content, storytelling, and digital
experience of inbound marketing by showing shoppers why they buy the food they buy: a healthy, diverse, and
"wholesome" selection.

How they're doing it:

•Shares ideas, generating meaningful content that isn't boastful or sales-driven. The business understands what its
customer is looking for
•Promotes a "greener" lifestyle. They got rid of plastic bags in 2008
•Focuses on local stores, taking away that feeling of the big chain
•Bright, unique and cheerful store design that's as easy to navigate as its website
•Partners with shows like Top Chef to promote their food
•Hosts events, runs multiple blogs and has an app -- showing the future of grocery shopping 34
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V) Assessment and Control Strategies

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Assessment and control strategies is the process of determining the
effectiveness of a given strategy in achieving the organizational objectives
and taking corrective actions whenever required.

An organization needs to integrate its

strategy and control systems to ensure
that strategy helps the organization in
achieving its goals.

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1. Financial Controls What are financial controls?
• Financial control • Financial controls are policies and guidelines
systems are that an organization sets to manage its financial
concerned with the resources and operate efficiently.
financial resources • It also includes a set of rules for documenting,
of an organization. analyzing, and reporting transactions.
• Financial resources • It enables a company to decide the direction,
are regularly
allocation, and use of financial resources and
flowing into the
organization and
ensure effective financial management,
are also flowing production efficiency, and profitability.
out of the • Budgeting, operations, and performance can all
organization. suffer as a result of its absence.
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What are financial controls?
Financial controls are policies and guidelines that an
organization sets to manage its financial resources and operate
efficiently. It also includes a set of rules for documenting,
analyzing, and reporting transactions. It enables a company to
decide the direction, allocation, and use of financial resources
and ensure effective financial management, production
efficiency, and profitability. Budgeting, operations, and
performance can all suffer as a result of its absence.

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• How to implement financial
controls?
• The steps for applying financial
controls framework in a business are as
follows:
Step 1: Assess the company’s current
performance
Step 2: Detect anomalies in budgets,
financial reports, and balance sheets
Step 3: Correct deviations in financial
accounts
Step 4: Regularly update financial
documents
Step 5: Examine the organization’s
operational policies
Step 6: Improve operating standards
and decision-making processes
Step 7: Make forecasts and set goals
for different scenarios
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 2. OUTPUT CONTROL
• In the case of the output control system,
managers forecast performance goals for
each unit and employee. They forecast the
actual performance of the units’ end
employees. Then, they compare the actual
performance against the goals already set for
them.
• When the performance of employees or
units is linked to the reward system, the
output control itself provides an incentive
structure for employee motivation in the
organization.
• Output control may take two forms;
screening control and position control.
• The first one concerns itself with meeting
standards for product or service quality
during the actual production
process/performance process. The latter
deals with the quality of products after
completion of the transformation process.
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• 3. Behavior Controls
• A behavior control system refers to a comprehensive system of rules
and procedures. These are prescribed to direct the behavior/actions
of employees at each level of the organization. Rules and procedures
standardize the way of reaching the goals.
• Two forms of behavior control are;
a) Operating budgets,
b) Standardization.
The operating budget includes the allocations of resources that need to be
used for achieving goals by managers.
Most commonly, managers at one level allocate to managers at a lower level a
specific number / amount of resources to use to produce goods and services.
Managers’ efficiency .depends on to what extent they can stay within the
allocated resources, i.e., the budget.
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Standardization denotes the degree to which a business-unit
specifies how decisions are to be made so that employees’ behavior
becomes predictable.’

i) Inputs (things that are used to produce goods or services such as raw
materials, parts, and labor), conversion activities (programming work
activities so that they are done the same way time and again), and
ii) outputs (performance characteristics of finished products or services)
can be standardized in a business unit.

All these are parts of behavioral control. Successful strategy

implementation requires, among others, a control system that matches
the organization’s strategy.

Strategic managers should ensure that financial and output controls are
supplemented with behavior controls for efficient achievement of goals.
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 VI) PROCUREMENT
STRATEGY

• The term procurement strategy refers

to a long-term plan to build strategic
relationships with competitive
suppliers to acquire the necessary
goods and services of the best quality
in a specific cost range and have them
delivered on time .
• A procurement strategy defines how
purchasing decisions are
made.
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 • TYPES OF
PROCUREMENT
STRATEGIES
• Irrespective of an organization’s
size, there are a few common
types of procurement strategies
that can be adopted by everyone.
• They are:
1. Cost reduction
2. Risk management
3. Supplier management and
optimization
4. Green purchasing
5. Global sourcing and
6. Total quality management
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 PROCUREMENT STRATEGY FRAMEWORK
The other ideal procurement strategy framework will include the
following:

A. Strategy statement: the basis and rationale

B. Desired results: deliverables
C. Timeframe: deadlines
D. Tactical plan: how a strategy will be implemented
E. Measures: metrics used to evaluate the process
F. Tools used: TCO, SWOT analysis, Porter’s Five Forces, Category
Positioning Matrix, SCOPE Analysis, Fishbone Analysis, etc.
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 SCOPE ANALYSIS
https://get2growth.com/scope-planning-model/

C (CORE COMPETENCIES) – O (OBSTACLES) – IDENTIFY

S (SITUATION) – ANALYSE
ANALYSE UNIQUE ASSESTS THE POTENTIAL ISSUES
THE CURRENT CONDITION
AND ABILITIES OF THE AND THREATS WHICH CAN
THAT HAVE IMPACT ON
BUSINESS THAT PROVIDE HARM THE BUSINESS
PLANNING DECISIONS
COMPATITIVE ADVANTAGE CORE COMPETENCIES

P (PROSPECTS) – IDENTIFY E (EXPECTATIONS) – LIST

BUSINESS OPPORTUNITIES THE FUTURE PREDICTION
THAT EXIST INTERNALLY FOR INTERNAL AND
AND EXTERNALLY IN THE EXTERNAL BUSINESS
ORGANIZATION CONDITION.

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