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Possible kinds of values added by the purchasing department

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Value-based purchasing focuses the decisions of purchasing professionals on the creation of value, rather than on the traditional objectives of cost savings and efficiency. Most of the purchasing researchers see purchasing as a strategic contributor to the added value of the organizations. But only a few contributions discuss the possible kinds of values that the purchasing department could actually add to the organization. This paper tries to fill this gap and reviews the traditional and strategic concepts of values added by purchasing and the factors affecting value added. Furthermore the paper presents a conceptual model of factors affecting value added by the purchasing department. In order to discover the influence of these factors on the capacity of the purchasing department to add value to the organization, we conducted an empirical study. The preliminary findings of the empirical research are presented at the end of the paper.
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The 10th International Annual IPSERA Conference 2001 803
POSSIBLE KINDS OF VALUES ADDED BY THE
PURCHASING DEPARTMENT
Jan Telgen
Corina Pop Sitar
Abstract
Value–based purchasing focuses the decisions of purchasing professionals on the creation of
value, rather than on the traditional objectives of cost savings and efficiency. Most of the
purchasing researchers see purchasing as a strategic contributor to the added value of the
organizations. But only a few contributions discuss the possible kinds of values that the
purchasing department could actually add to the organization. This paper tries to fill this gap
and reviews the traditional and strategic concepts of values added by purchasing and the
factors affecting value added. Furthermore the paper presents a conceptual model of factors
affecting value added by the purchasing department. In order to discover the influence of
these factors on the capacity of the purchasing department to add value to the organization,
we conducted an empirical study. The preliminary findings of the empirical research are
presented at the end of the paper.
Value is becoming more important to the organization
Driven by the fearful competition on the marketplace, organizations are giving more attention
to the ‘value’ concept. They are attempting to increase the value of their products and services
and reduce non-value-added activities, both in terms of cost and in number. One function that
has a tremendous impact on these efforts is purchasing. The role purchasing plays in the
organization is crucial, and the outcome of the purchasing decisions made can have a
profound impact on the value of the organization.
In the value chain analysis developed by Porter (1985), procurement is viewed as a support
activity, that contributes to the competitive advantage of a business unit by adding value. The
purchasing function uses various inputs to perform value-adding processes (market and value
analyses, sourcing, negotiation, etc) and to provide output like quality, services, materials, etc.
If purchasing performs these activities effectively, this output provides the organization with a
competitive advantage (see figure1). The value-chain demonstrates that the purchasing
function has a major role in adding value to the organization.
Most of the purchasing researchers see purchasing as a strategic contributor to the added
value of the organizations. But only a few articles/researchers discuss the possible kinds of
values that the Purchasing Department could actually add to the organization.
The 10th International Annual IPSERA Conference 2001 804
Feedback
Figure 1: Identify the value-adding processes (Source: Dumond, 1994)
Literature review on value added
Many authors discuss the ‘value’ concept but there are many differences in the way they
define and treat the concept. When it first appeared, the use of ‘value added’ was put forward
as an alternative to profitability or return on investment supported by accountants who were
seeking an alternative measure of company performance (Wood, 1978). So, purchasing
performance on providing added value to the company was measured and evaluated on
changes in the purchasing price of materials and the cost of the departmental operation.
Farmer (1987) writes about the traditional concept of value of purchasing which was
obtaining the right materials in the right quantity, for delivery at the right time and right place,
from the right source, with the right service, and the right price. Later on the strategic concept
of the value of purchasing was explored by Ellram (1994). She sees purchasing as a strategic
business function integrated within the strategic planning process.
Nowadays, value-based purchasing focuses the decisions of purchasing professionals on the
creation of value, rather than on the traditional objectives of cost savings and efficiency.
The advent of E-commerce and other information technologies enlarges more and more the
kinds of values that purchasing department can add to the company, because:
the purchasing department transfers the operational activities to the users and concentrates
on strategic and value adding activities
they streamline the entire purchasing process (especially the operational part), eliminate
all non-value adding activities
they offer the possibility of a tighter control over the entire process
they offer powerful databases which hold all supplier details and end-users’ profiles, track
all activities and enable the provision of comprehensive and flexible management
reporting
etc.
INPUT OUTPUT OUTCOMES
Mkt Analysis
Value Analysis
Inv. Con trol
Negotiation
Personnel
Dollars
Energy
Supplies
Quality
Materials
Services
Equipment
Sourcing
Competitive
Advantage
The 10th International Annual IPSERA Conference 2001 805
We can observe that the purchasing role in providing added value has evolved and has been
modified along with the importance and the place taken by purchasing in organizations. In
figure 2 the main values added by purchasing are related to each of the evolution stages
towards purchasing maturity (van Weele, 1998).
Functional focus Cross functional focus
Time
Figure 2: Main value added by purchasing structured in purchasing
development model (adapted from van Weele et. al.,1998)
In the first stage the main value added by purchasing is assuring the continuity of the supply.
In the second stage the purchased items have increased in importance in a company’s cost
structure and purchasing is charged with minimizing materials costs and adding savings to the
bottom line. In stage three the emphasis lies on cross unit co-ordination and the main values
added by purchasing are greater compliance with pre-negotiated contracts, uniform buying
policies and systems and capturing the benefits from internal co-ordination. In the next stage
there is an extensive use of cross-functional teams and purchasing’ s main focus is on
Assure the
continuity of
the supply
Savings
Price reduction
Bales and
Fearon
(1993)
Savings
Cost reduction
Shorter lead time
Improved quality
Cross unit co-
ordination
Greater compliance
to pre-negotiated
contracts
Uniform buying
policies and
systems
Reduction of
internal
cost of operation
Extensive use of
cross-functional
teams
Improved
purchasing
efficiency
Customer
satisfaction
Improved lines of
communication
Reduced total
system costs
Butler
(1995)
Dobler and
Burt
(1996)
Closer and more
cooperative relation
with suppliers
Early involvement
in new product
development
Improved
information
system
Improved
competence
of the purchasing
staff, customers and
suppliers
Cousins and
Lamming
(1997)
Lysons
(1996)
Extensive use of
coss functional
supplier
development teams
Upgrading supplier
capabilities
Collaborate on
advance technology
with suppliers
Continuos
improvement
measures of supplier
performance
Satisfaction of the
end customer
Leenders and
Schiele
(1999)
Chemicals
Pharma
Financial
services
Public
utilities
Transaction Commercial Purchasing
orientation orientation orientation
Retail
Automotive
Computers
Telecom Electronics
Process Supply Chain Value Chain
orientation orientation orientation
Effectivenes
The 10th International Annual IPSERA Conference 2001 806
reducing total systems cost and satisfying the internal customer. In the supply chain
orientation stage purchasing is characterized by strategic supplier selection, long-term
relationships design, supplier network management and early involvement in the new product
development process. In the final stage the main goal is to design the most effective and
efficient value chain possible to serve the end customer. This last stage is characterized by an
extensive use of cross- functional supplier development teams and a close collaboration on
advance technology with suppliers.
The activities where purchasing is seen to add value have evolved over the ten last years
(contrast Bales and Fearon, 1993 and Leenders and Schiele, 1999). Many researchers (Bales
and Fearon, 1993; Dobler and Burt, 1996) focus their attention on tactical activities of
satisfying the customer by improving the efficiency and effectiveness of the purchasing
function. This approach it is only internally focused because they are taking into consideration
only the activities undertaken by the purchasing department of the company in question
Because purchasing makes the link between a company’s suppliers and its customers, it is not
only internally focused but also externally. In these circumstances, it would be more
appropriate to adopt a broader view and understanding of the possible values added by
purchasing to the company. In this purpose, the value chain developed by Porter in 1985
demonstrates the importance of external influences on providing value and how the customer
relationship determines this value. The value-chain analysis developed by Porter demonstrates
that the purchasing function, which interacts with both the firm’s internal and external
environment, has tremendous potential to provide value (not only internally but also
externally).
Leenders and Schiele (1999) take a broader view of the values added by the purchasing
department and classify them into four main categories:
values added to the organization (for e.g. improved performance, controlled costs, etc.)
values added to the purchasing process (for e.g. purchasing process facilitation, and fairer,
more defendable supplier evaluation, etc.)
values added to the specifier (for e.g. better understanding of their needs, having available
an extra resource to rely on, having access to information about the market place and the
service, etc.)
values added to the supplier (for e.g. helped them understand what was needed and how
they could improve themselves, etc.)
Based on the literature review we have selected five main categories of values added by the
purchasing department but the values added that should go into these categories depend on the
specific characteristics of each purchasing department, its position, importance and way in
which is organized.
We have selected the following categories of values added which we consider to be
representative and important for every organization:
better contracts
improved purchasing efficiency
customer satisfaction (improved quality and service)
closer and more cooperative relationships with suppliers
The 10th International Annual IPSERA Conference 2001 807
reduced costs, improved quality and increased time to market resulting from an early
involvement of the purchasing department in the new product development process
(NPD).
The first four categories of values added are based on Leenders and Schiele (1999). Basically
we took one aspect from each of their categories of values added. But we would miss
something if we didn’t take into consideration also the role of the purchasing department in
the new product development process, especially in today’s environment when everything is
evolving so fast. That is why the last category of values added that we have selected is the
contribution of the purchasing department in the areas of quality, cost and time to market
resulting from an early involvement of the purchasing department in the NPD process.
Factors affecting value added
The role of the purchasing function in increasing the value of the organization’s products and
services is discussed by Dumond (1994) in “Moving towards value-based purchasing”. The
author identifies three groups of organizational variables that she claims to have the largest
effect on a company’s ability to perform value-based purchasing:
the performance measurement system – which establishes the means and motivation for
effective value chain management;
functional interaction – allows purchasing managers to increase value by focusing on the
internal users that need to be linked to the external environment;
access to external information – allows purchasing professionals to increase the value of a
firm’s products and services by linking the internal user with the external environment.
Each of these three variables has been investigated in 21 manufacturing firms in a variety of
industries. Based on the results of her study, Dumond concludes that the current purchasing
environment does not support value-based purchasing. In order to develop an environment
that will support and encourage value-based purchasing, a series of changes have to be
considered by senior management:
focus individual purchasers on customers’ needs and identify value-adding processes;
develop a performance measurement system that emphasizes quality, process
improvement, and customer satisfaction;
integrate purchasing into the firms communication system;
educate not only individual purchasers but also their customers.
Cousins and Lamming (1997) consider that the activities of the purchasing department are
nowadays more strategic and diverse in nature and therefore a more extensive set of
competencies is required for the purchasing department in order to add value to the
organization. They also consider that the changes in the purchasing function (becoming a
strategic function of the organization which has tremendous potential to add value to the
organization) have been driven by improvements in information technology, globalization of
businesses and the need for organizations to become truly lean in order to remain competitive.
The 10th International Annual IPSERA Conference 2001 808
In Rozemeijer’ s view (2000) the main factors that have an impact on purchasing synergy and
on creating corporate advantage in purchasing are: corporate strategy, purchasing maturity,
corporate organization and business context.
Based on these findings from literature we have tried to group the factors affecting the values
added by purchasing department into the following conceptual model (see figure number 3).
Figure 3: Conceptual model of factors affecting value added by PD
Hypotheses
In order to discover how these factors influence the capacity of the purchasing department to
add value to the organization we operationalized the factors and the values added. In order to
do this we have formulated statements for each factor and each value added. The statements
are very simple and allow only a yes or no response. For example, the factor measurement
and information management is operationalized as: “in our company we frequently analyze
data on purchasing and suppliers and act on it”. The complete operationalization is given in
appendix A.
As a preliminary field test we surveyed 24 purchasing managers who are (regional) board
members of NEVI, the dutch purchasing association. We asked for a yes or no response for all
VA by PD
1.Company
strategy
3.Information
management
(feed-back, comparison)
2. Purchasing
maturity
4.Organizational
factors (structure,
policies, culture)
The 10th International Annual IPSERA Conference 2001 809
the statements formulated. Then we studied the dependence between the values added and the
factors affecting value added.
For the different combinations of factors affecting value added and values added we tested the
hypothesis (H0) that a particular factor is independent from a particular value added. In order
to test H0 we used Pearson’ s χ2 statistics (appendix B).
Figure 4: Factors affecting value added and the
values
added by the purchasing department
Preliminary findings
In figure number 5 the empirical results are presented. The gray areas pinpoint that there is a
relation of dependence between a particular factor and a particular value added (H0 is rejected
at the 95% confidence level). The white areas show that there is a relation of independence
between the factors and the values added.
These are only preliminary results because of the size of the sample we took (24 purchasing
managers) and because we tested the operationalization of factors and values added. In testing
the hypothesis (H0) that a particular factor is independent from a particular value added we
took a 5% confidence level.
Information
management
(F3)
20 Hypotheses
Factors affecting value added
Company
strategy
(F1)
Purchasing
maturity
(F2)
Organizational
factors
(F4)
Value
added
by
Purchasing
Department
Better contracts (V1)
Improved purchasing
efficiency (V2)
Customer satisfaction (V3)
Closer and more
cooperative relationships
with suppliers (V4)
Reduced costs, improved quality
and increased time to market
resulting from an early involvement
of PD in the NPD (V5)
The 10th International Annual IPSERA Conference 2001 810
Based on the obtained results it is interesting to see that purchasing maturity is a very
important factor which affects all five values added by the purchasing department that we
took into consideration. Furthermore, purchasing maturity positively affects all these five
values added. This means that the higher the stage of development of the purchasing function
is, the more values are added by the purchasing department to the organization.
Also, company strategy can affect the values added by the purchasing department (reduced
quality, improved costs and increased time to market) resulting from an early involvement of
the purchasing department in the new product development process. This applies especially
for organizations that have a differentiation strategy.
We have also obtained some unexplained relations of dependence, like for example between
the company culture (internally) and the relationships with suppliers (externally). We will
further investigate this.
Figure 5: The relations of dependence and independence
between the factors affecting value added and
the values added by the purchasing department
Factors affecting value added
Company
strategy
(F1)
Purchasing
maturity
(F2)
Organizational
factors
(F4)
Value
added
by
Purchasing
Department
Better contracts (V1)
Improved purchasing
efficiency (V2)
Customer satisfaction (V3)
Closer and more
cooperative relationships
with suppliers (V4)
Reduced costs, improved quality
and increased time to market
resulting from an early involvement
of PD in the NPD (V5)
Information
management
(F3)
+
+
+
+
+
The 10th International Annual IPSERA Conference 2001 811
References
Bales, W. A. and Fearon, H. E. , 1993. CEOs’ / Presidents’ perceptions and expectations of
the purchasing function. CAPS Report, NAPM.
Bickel, P. J. and Doksum, K. A. , 1997. Mathematical Statistics. Basic ideas and selected
topics. Holden-Day, Inc., 312-333.
Burt, D. and Dobler, D. W. , 1996. Purchasing and supply management. The McGraw-Hill
Companies, Inc.
Butler, R., 1995. What you measure is what you get: an investigation into measurement of the
value added by the purchasing function. Proceedings 4th IPSERA Conference, University of
Birmingham, England, 1-14.
Carter, P.; Monczka, R.M. et al., 1998. The future of purchasing and supply: a five and ten
year forecast . CAPS report, NAPM.
Dumond, E.J., 1994. Moving toward value-based purchasing. International Journal of
Purchasing and Materials Management, Spring, 3-8.
Ellram, L. M. , 1994. Strategic purchasing: a history and review of the literature. International
Journal of Purchasing and Materials Management, Spring, 10-18.
Farmer, D., 1987. Developing purchasing strategies. Journal of Purchasing and Materials
Management 14, 6-11.
Lamming, R.; Cousins, P; Frewer, R., 1997. Competency development for strategic
purchasing. Proceedings 7th IPSERA Conference, Italy, T6/1-1 T6/1-17.
Leenders, M.; Schiele, J.J., 1999. Meaningful involvement of a public sector purchasing
department: the case of consulting services. Proceedings 9th IPSERA Conference, London,
Ontario, Canada, 672-683.
Porter, M. A. , 1985. Competitive advantage. The Free Press, New York.
Rozemeijer, F. A. , 2000. Creating corporate advantage in purchasing. Proefschrift.
Eindhoven.
Van Weele, A. J. ; Rozemeijer, F. A. and Rietveld, G. , 1998. Professionalizing purchasing
organization: toward a purchasing development model. Proceedings 7th IPSERA Conference,
London, Great Britain, 515-523.
Wood, E. G. , 1978. Added value – the key to prosperity. The Anchor Press Ltd.
The 10th International Annual IPSERA Conference 2001 812
Appendix A
Operationalization of factors
Company strategy:
Our company strategy is cost leadership [ ]
differentiation [ ]
(Porter, 1985) focus strategy [ ]
P
urchasing maturity:
In our company purchasing is in the following stage of maturity:
transaction orientation [ ] process orientation [ ]
commercial orientation [ ] supply chain orientation [ ]
purchasing orientation [ ] value chain orientation [ ]
I
nformation management:
In our company we frequently analyze data on purchasing and
suppliers and act on it. Yes [ ]
No [ ]
Organizational factors:
Our company has a culture that encourages co-operation across
business units.
Yes [ ]
No [ ]
Operationalization of Values Added
etter contracts:
The involvement of the PD leads to better contracts.
(Farmer, 1987) Yes [ ]
No [ ]
I
mproved purchasing efficiency:
In our company we use efficient processes for contracting
and ordering. Yes [ ]
No [ ]
Customer satisfaction:
The PD is never to busy to respond to the internal customers’
requests and provides services at the time it promises to do so.
Yes [ ]
(Young and Varble, 1997) No [ ]
Closer and more cooperative relationships with suppliers:
Our long term relationships with the suppliers add real value to the
company. Yes [ ]
No [ ]
R
educed costs, improved quality and increased time to market
resulting from an early involvement of the PD in the NPD:
In our company purchasing becomes involved in the new product
development process at the concept stage.
(Wijnstra, 1997) Yes [ ]
No
[
]
The 10th International Annual IPSERA Conference 2001 813
Appendix B
In order to study the relation of dependence or independence between the factors affecting
value added (noted with F) and the values added (noted with V) we assembled the results in
what is called a 2*2 contingency table (Bickel and Doksum, 1997):
F=0 F=1
V=0 n00 n01
V=1 n10 n11
n+0 n+1 k
Where n00 is the number of companies with F=0 and V=0 (number of companies which gave
a NO response to the statements regarding the factor (F) and the value added (V).
We consider the following statistics:
cells
which is called Pearson’s χ2 statistics. Clearly χ2 is a measure of the departure of the
observed n00 from their expectation n0+ n+0 under hypothesis H (H0 : F and V are
independent).
k
In our case:
1 1 ( nij -
χ2 = χ12 ( chi-square with 1 degree of freedom)
i=0 j=0
This means that χ2 is approximately a χ12 distribution.
Suppose that we determine the value of χ2 . If χ2 > 3.84 (this value depends on the number
of observations) then the hypothesis H0 is not true, this means that F and V are dependent. In
the case that χ2 < 3.84 then the H0 is true and F and V are independent.
About the authors
Prof. dr. Jan Telgen and Corina Pop Sitar. University of Twente Initiative for Purchasing
Studies (UTIPS). P.O. Box 217 – 7500 AE , Enschede, The Netherlands. Tel: +31 53
4894532 Fax: +31 53 4892159. E-mail: jan.telgen@nl.pwcglobal.com; C.E.Pop-
Sitar@sms.utwente.nl
n0+
n1+
n0+ = n00 + n01
n1+ = n10 + n10
(observed – expected)2
expected
=
χ
2
ni+ n+j
)2
ni+ n+j
k
k
... 96-112) providing strategic direction with purchasing devolved. Equally, Telgen and Sitar (2001) have highlighted the switch of purchasing professionals focus from the objectives of cost savings and efficiency to that of the creation of value. Such repositioning creates a need to question how a twenty-first century purchasing unit should seek to contribute to the achievement of best value for money. ...
... g devolved. Equally, Telgen and Sitar (2001) have highlighted the switch of purchasing professionals focus from the objectives of cost savings and efficiency to that of the creation of value. Such repositioning creates a need to question how a twenty-first century purchasing unit should seek to contribute to the achievement of best value for money. Telgen and Sitar (2001), having reviewed extant literature, conclude that it is possible to generalise for every type of organisation that value can be added by the purchasing department through: . ...
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"The following report will investigate current literature supporting supply chain management and discuss application of this philosophy in the purchasing profession. Chapter One discuses the trend towards supply chain methodology, supply chain oriented empowerment concepts and analyze purchasing job postings for evidence of empowerment. Chapter Two looks at current literature analyzing various aspects of supply chain management. This includes how purchasers are equipped to support this model, the greatest opportunities for purchasers, and obstacles for implementation. Chapter Three discusses required leadership roles, cultural baggage in embracing change and change initiative for a traditional purchasing group to a supply chain model. Chapter Four evaluated the change initiative along with final recommendations and conclusions."--Leaves 6-7. Typescript. Project (M.A.)--Bethel College, 2004. Includes bibliographical references (leaves 60-63).
What you measure is what you get: an investigation into measurement of the value added by the purchasing function
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Competency development for strategic purchasing
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