Supply Chain Management
A supply chain involves the flow of goods in a company through the various stages of production. It includes movement of raw materials, inventory and finished goods from production to the point of consumption. Procurement is a crucial department in an organization since other stages of production heavily rely on it. Stadtler (2015) explains that proper planning and strategies in the supply chain management are essential to organizational success. This paper explores the role of purchasing in organizational SCM, through an analysis of relevant academic literature.
Importance of purchasing in a successful organization
Purchasing is an important element in the supply chain process of any successful company. Proper strategies during purchasing will improve the quality and offer value to the company’s final products. Other benefits include strengthening the company’s competitive edge and maintaining the flow of inputs and outputs in the organization. Karjalainen (2009) argues that the recent increase in specialization and the focus of core competencies in companies is a large motivator for firms to outsource their supplies. This question will focus on the importance of purchasing in a corporation with reference to Toyota automobiles as the case study.
Procurement not only involves getting the necessary materials for production but also includes other necessary activities. These activities include choosing the right supplier, approving orders and receiving the goods from the vendors (Slack et. al. 2010). Before choosing a provider, a company must consider whether production will be in-house or whether it is suitable to outsource it. Slack et. al. (2010) reveals that once a company chooses to outsource products then they must consider the price, delivery, and quality of the supplies.
The cost of the goods from the vendor makes a significant contribution to the final price of the product sold to the consumer. It becomes necessary for a company to reduce the cost from the supplier to increase their profit margin while also reducing the cost to the customer (Slack et. al. 2010). A firm should choose a low-priced product that does not compromise on quality. Suppliers need to prove that they can provide quality goods and services to a company before the selection process.
A firm should select a reliable supplier who will provide quality products continuously without prompting the business to check the quality. Monitoring the quality of goods will lengthen the production process while low-quality products lead to returns and loss of goodwill from clients (Slack et. al. 2010). The supplier should also have the ability to deliver goods on time, every time that the company makes an order. The reliability of a supplier to supply products every time they are required is an important aspect that businesses consider.
Purchasing is a fundamental element in an organization since it is necessary for the production process. Miemczyk et. al. (2012) assert that purchasing is the first process in the management of raw materials and production will not suffice in case of an imperfect process. Most firms procure semi-finished goods or spare parts that are useful in the final product of the firm. For example, a car assembling plant may purchase various parts from different suppliers and assemble them for sale to the ultimate consumers.
It is also significant as it helps define the relationship between a firm and a client. Since purchasing makes an essential contribution to the final product, bad quality supplies will often lead to an inferior product (Stadtler, 2015). Poor quality products portray a bad image to the public, affecting the client/supplier relationship. The making of a good product starts with the purchasing process, since quality products are necessary for efficient production. Purchasing is also significant as it is a major influence on the company’s revenues. Slack et. al. (2010) propounds that a small saving on the cost per unit of each product that a company procures may correspond to a significant rise in profits.
Tomino, Park, and Hong, (2012) argue that Toyota is an example of a business that has flourished partly due to the importance that they put in the procurement process. The use of lean thinking in its production processes has made it possible for the company to enhance production with little resources at its disposal. A lean organization seeks to maximize the value that it provides to the customer while minimizing any wastes in the business. The aim of a lean organization is to provide maximum value to the client with as little resources as possible. For a company to use lean thinking in its processes, it needs to distinguish the activities that are wasting resources to minimize such waste.
The use of lean thinking in the companies supply chain process reveals the importance of purchasing to a corporation. Toyota only buys what is enough for the enterprise and does not store any other surplus materials (Murray, 2013). It also prefers to use suppliers who embrace the lean principles since their prices are cheap, and they also strive to improve their products (Mehri, 2006). One way that the firm manages to do this is by encouraging their suppliers to embrace the lean production system (Tomino, Park and Hong, 2012). They also offer them support to reduce the amount of wastage in their businesses which corresponds to a reduction in the price they charge them. The emphasis of lean thinking in the purchasing system of a company reveals the importance of purchasing in a firm. Murray (2013) asserts that waste reduction in the purchasing process helps reduce the amount of wasted resources in the subsequent operations.
Factors impacting on the make or buy decisions
A make-or-buy decision is a choice to produce a product in-house rather or to purchase it from an external supplier. The vertical integration of a company presents as a certainty on the flow of goods. It will also not bear the risks that having vendors may bring. One factor that determines whether a business makes or buys its products is the cost of production and the available resources at the disposal of the firm (Sundquist, Hulthén, and Gadde, 2015). A company will have to consider whether it is cheaper to buy a particular product or to do in-house production. A quantitative analysis of the options would best determine whether the firm has enough resources to produce the good. It may be cheaper to carry out in-house production, but a lack of resources may make the company outsource its products. In the case of Toyota, it is cheaper for them to outsource the different parts from suppliers. Purchasing from external sources enables the company to focus on the production of quality goods.
Quality control in the firm will also determine the choice of selection that it chooses. An enterprise that seeks to control the level of quality of their products may decide to produce their supplies in-house. This type of production method will ensure that they can guarantee a reliability of quality in their goods. The firm may not always be able to authenticate the quality of products from suppliers making them susceptible to poor quality supplies. However, if a third party supplier is reliable in providing high-quality goods, then they may choose to outsource their products. Toyota manages to control the quality of their suppliers by using a small pool of reliable firms in their procurement process. The firm’s primary strategy in dealing with suppliers is to form long-term relationships with those who provide goods of the standards they require. Embracing suppliers who prove to be reliable is a way that the firm manages to offer reliability in their products.
The amount of labour that a company possesses will also determine if they can make or buy the supplies they need. Sundquist, Hulthén, and Gadde (2015) claim that when the sales in a company are small, some workers may help in the in-house production of the supplies required. Manufacturing the product will help maintain the productivity of the workforce. However, if a company does not have the proper number of workers required, then they will have to outsource such supplies.
A firm’s strategy will also be important in determining whether they choose to produce their needed supplies in the company or if they may buy them. Some companies require a particular design in their process and it may be hard to achieve the required products through buying. Enterprises that have trade secrets in their products such as Coca-Cola may prefer to produce their raw materials internally. Such companies may choose in-house production so as to protect the secrets of the trade. A business with a strategy to produce their goods domestically will benefit from vertical integration if it helps them achieve the desired result.
The quantity of goods needed for production and the convenience in the buying or making of products may also prompt a company to choose a certain purchasing method. Products that an enterprise needs in small quantities are likely to be made internally in the business. Firms that need bulk supplies are more likely to purchase their products from external suppliers (Sundquist, Hulthén, and Gadde, 2015). Convenience is also a greater consideration. For example, a company whose sole suppliers are overseas are more likely to start in-house production. If it is possible for a vendor to supply goods on short notice, then it is likely for the company to purchase it from them.
Purchasing can be seen to be a critical part of the production process in a corporation. Companies such as Toyota place great emphasis in purchasing since it affects the final products and the revenues of the companies. The firm’s collaboration with suppliers reveals the need for better strategies in the purchasing process. A lot of factors determine whether a company produces their supplies or purchases them from external suppliers. Cost, quantity, and convenience are some of the factors that companies consider before choosing between in-house production and external purchasing. An analysis of the costs and benefit of each of these options will be necessary for deciding the best strategy to employ.
Supplier Relationship Management (SRM) in the purchasing function
SRM involves strategically planning all the interactions between a company, and it’s third party suppliers to maximize these interactions. A company that has a good relationship with its suppliers can use these ties to accrue some benefits. They are likely to get preferential treatment if they are the customer of choice of a supplies company. Discounts, access to innovation and a reduction of risks are some of the benefits that a firm may accrue if it has a good relationship with its suppliers. The early involvement of a vendor in the product and process development is also likely to leverage their capabilities for better quality of products.
According to Rajagopal & Rajagopal (2009), a buyer-supplier relationship will work if both parties are co-dependent of each other. The relationships will last long if the results yielded by the cooperation are better than the company producing its supplies. Both the supplier and the customer compare the outcome of their interactions with any other alternatives that each may have. A satisfied supplier will be likely to continue the engagement even if they have better alternatives elsewhere. Businesses should have good relations with their suppliers if they intend to form long-lasting relationships with them.
One of the primary benefits that a firm is likely to incur from having good relationships with suppliers is preferential treatment. Schiele et. al. (2012) posits that being a customer of choice will lead to an access of innovation, technology, and reduced costs. A supplier is likely to give a discount to a client that they get along with well. Schiele et. al. (2012) argues that poor relationships between a business and a supplier may lead to a discontinuation of the transaction or less enthusiasm in the relation. A less enthusiastic supply will not grant any preferential treatment to a business (Schiele, 2012). The access to innovation and technology is also another benefit that a supplier may issue to a customer of choice.
Coca-Cola has a supplier relationship management programme that seeks to strengthen collaborations with its suppliers. An evaluation of each supplier is done to establish their performance while basing on cost, value, innovation and corporate responsibility and sustainability. One way that the company improves the relationship with their suppliers is through recognizing their outstanding performance in the ‘supplier of the year’ awards that they hold annually.
A good relationship with suppliers will also assist in the sharing of growth, risks, profits and investments (Davila, Epstein & Shelton, 2012). Having joint objectives with the suppliers is likely to improve the performance of a company since they know the needs of a firm. Common goals will also motivate the suppliers to provide quality goods since the success of the business will also mean their success. Coca-Cola has a supplier sustainability summit where it meets all its supplier to discuss ways of creating innovative projects. The meeting ensures that the vendors and the company have shared goals to achieve in their quest for success.
According to Davila, Epstein & Shelton (2012) the ability to harness the capabilities of a supplier is the largest benefit that companies may incur from a good supplier relationship management. Most firms today are unable to manage all the processes necessary for product development. Specialization of businesses in different lines of products makes it hard for the companies to produce their raw materials. For example, retail stores are unable to produce their goods since they only specialize in selling. Firms depend on the ability of their suppliers to provide them with the necessary goods for production. Gaining the suppliers talents and knowledge on certain products is essential for a company. The resources of a provider will also be useful in fulfilling the strategy of a corporation.
Coca-Cola uses the capabilities of their suppliers to get the best raw materials that are available to them. It does not have the means to finance all the production activities on their own and relies on the use of suppliers to get what they need. A good relationship between the company and its suppliers has ensured that they get the best resources, talent, and skill from the vendors.
Sustainable procurement practices among SME`s (Small to Medium Enterprises) and the Fortune 500 companies
Sustainable procurement is a form of purchasing that takes into account the social, environmental and economic impact of any purchases made. It enables the company to achieve its needs in a way that not only generates value to an organization but also to the society. These practices also make vital contributions to the economy of the country and should not negatively impact the environment (Oldroyd, Grosvold & Millington, 2011). Most small and medium enterprises are unable to achieve sustainable procurement practices as it requires a lot of human and capital resources.
Effective leadership and qualified staff are requirements for a company to be able to make sustainable procurement practices. Meehan & Bryde (2011) propose the needs for an explicit definition of the procurement’s staff role in using sustainable practices in supply. Training each staff on their responsibility will be significant for them to understand their role in the program. The company should also give the staff some performance goals that they need to achieve to use sustainable procurement practices. Training employees on the sustainable practices will cost the business a lot of resources and time. Most SME’s cannot afford to train their employees on these practices making it difficult for them to embrace it.
Hilton Worldwide has a Strategic Sourcing Sustainability Project that is meant to coordinate all its global purchasing strategies to incorporate sustainable purchasing practices. The company is rolling out environmental and social initiatives that intend to create benefits to the hotels and the society. They have been creating awareness to their employees, suppliers, and customers on the importance of sustainable procurement services.
A company should involve suppliers in embracing sustainable practices in the purchasing process. A company may find it hard to embrace sustainability if its suppliers do not share the same view on procurement. For example, firms that embrace sustainable practices tend to minimize the amount of waste in their production processes. A supplier that does not use sustainable practices may supply products that consume more energy or water. The company needs to relay its sustainable practices to its employees and suppliers (Meehan & Bryde, 2011). Hilton embraces sustainability in procurement and adopts practices that are likely to minimize waste while saving energy. SME’s are unlikely to take up these processes since one of their main criteria in looking for a supplier is the cost of goods. Vendors who offer cheap products may use unsustainable procurement practices, making it hard for the enterprises to look for other providers.
Oldroyd, Grosvold & Millington, (2011) argue that sustainable supplying also involves changing all the core processes of a company and replacing them with new ones that are not harmful to society and the economy. Hilton had to reinvent its packaging system to a different one that would be friendly to the environment. A change in such a system would require the use of a lot of resources that many SME’s may not afford. They also changed the mode of transportation that they use to ferry their products. An overhaul of such processes in an SME will not be possible due to the resources required and the level of training that the staff will need.
SME’s find it hard to adopt sustainable procurement practices due to a variety of factors. The funds necessary for an overhaul of the entire production and operating system are unreachable to most of these enterprises. Training employees will also take up a lot of time that a company may not be willing to spend. The change of suppliers and training of staff is also a large task for small businesses. However, most Fortune 500 companies may be able to effect easily such changes due to the amount of disposable resources that they have.
Suppliers play a critical role that is even visible when a corporation seeks to adopt sustainable business practices. Coca-Cola has managed to establish warm ties with its suppliers by creating evaluation programs, awarding the best suppliers and involving them in the business. The essay explores some challenges that SME’s face in their bid to embrace sustainable practices. Hilton is the case study for a company that successfully integrates sustainable procurement in its supply chain management.
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