Peter Stannack, Director, Performance Sourcing, Ltd.
Buy the sky, and sell the sky, but ask the sky
Don't fall on me
- Michael Stipe, R.E.M
This paper supports a workshop to be held at the 85th NAPM International Conference on Purchasing to be held in San Diego from the 24th to 26th May 1999. It addresses issues with regard to the strategic use of new technology in managing relationships between purchasers and suppliers. It also outlines a new business model for purchasing and supply management.
Purchasing and Marketing Power. In 1620, Francis Bacon wrote in his Novum Organum that 'Knowledge and Human Power are synonymous, since the ignorance of the cause frustrates the effect'. Bacon's position was that unless you can understand why the effect arises from one's use of power, you can't optimise your use of power. The effect could, for instance, be the result of some other, potentially unrelated cause. Of course, these potential shortcomings seem to have had little effect on the way in which power is used in commercial relationships (Ramsay 1995).
In most classic economic models, employing purchasing power involves aggregating expenditure. This can be done internally by purchasing regulation, or externally by forming purchasing consortia. Most purchasing performance improvement is obtained in this way. Since in a static model, there is only a finite amount of business available this aggregate expenditure can be used to manage the choice framework of the seller i.e. the number of possible alternative buyers (Stannack 1995). The buyer can then 'leverage' the seller and obtain the 'best' deal.
The sellers role is also to manage the choice framework of the buyer and create, where possible, a monopoly position by some combination of forces (Porter 1980,1985) or competencies (Hamel and Prahalad 1994). The seller can then 'leverage' the buyer and obtain the 'best' deal. There is some evidence to suggest that achieving equilibrium in this relationship is achieved because of the imbalance of information held by the respective parties. Information is therefore critical in making the market 'work'
The Logic of New Technology. In a recent study, (Stannack and Osborn 1998) we compared the relative stance of marketing managers, purchasing managers and supply managers towards information. The study considered a number of issues (see table one)
This research provided a baseline for our paper. We can see that there are significant differences in the information 'positions' of the respective groups studied. Nonetheless, this is only a baseline. Information technology was changing these positions even as we carried out the research. The introduction of new technologies seems to be eroding the well-developed organisational niches of the purchasing and marketing manager, and the tentative, newly established organisational niche of the supply manager.
(Note: The information in this table is unavailable in graphic format; however the data is included below.)
Information Category: Type of information e.g.
RFPs, RFQs, Specs
Buyer pre-purchase behaviour
Buyer purchase behaviour
Buyer purchase behaviour over time
How buyers behave in interaction with product
How buyers behave in interaction with other products
How buyers behave in interaction with other buyers
Buyer risk i.e. credit scoring
Post purchase buyer behaviour
Potential buyer purchase capacity
Buyer process and outcome satisfaction
Product or service spec.
Supplier negotiation position
Supplier financial status
Alternative sources of supply
Supply Management Staff:
Supplier financial status
Supplier negotiation position
Alternative sources of supply
Information Category: Purpose of information e.g.
Marketing Staff: Manage buyer
Purchasing Staff: Manage negotiation and risk
Supply Management Staff: Manage supplier and risk
Information Category: Information gathering and analysis tools used e.g Marketing Staff: Market surveys, focus groups, POS information, purchase pattern Conjoint decision analysis, Mystery shoppers. Complaint trawling and analysis
Purchasing Staff: Tenders, RFPs RFQs, Inspection
Supply Management Staff: Vendor assessment surveys, site visits, joint problem solving teams, multidisciplinary teams(MDTs) Post purchase inspection
Information Category: Communication tools used e.g. Marketing Staff: Category management, advertising, 4'P's, leaflets, submissions relationship marketing Negotiation, customer training programmes PR programmes
Purchasing Staff: Tenders, RFPs, RFQs specifications, negotiation variation notices
Supply Management Staff: EDI, joint problems solving teams, MDTs, Supplier conferences and workshops, supplier development programmes
Information Category: Operational validity
Marketing Staff: Relatively high
Purchasing Staff: Relatively high
Supply Management Staff: Very low
Information Category: Predictive validity
Marketing Staff: Relatively high
Purchasing Staff: Relatively high
Supply Management Staff: Very low
Information Category: Time horizon
Marketing Staff: Immediate and subsequent contracts
Purchasing Staff: Immediate contract
Supply Management Staff: Immediate and subsequent contracts
Information Category: Focus
Marketing Staff: Customer
Purchasing Staff: Product
Supply Management Staff: Supplier
Information Category: Outcome satisfaction within the group
Marketing Staff: High
Purchasing Staff: High
Supply Management Staff: Low
Information Category: Outcome satisfaction outside the group
Marketing Staff: High /Variable/ Decreasing
Purchasing Staff: High/Variable/ Decreasing
Supply Management Staff: Low/Stable
We can identify two 'strategic' trajectories within information technology providers. The first has been to replace cumbersome and fragmented administrative or manufacturing processes that have grown up organically due to the effects the division of labour. This aims to remove costs by 'smoothing out and speeding up' business processes. Here information technology has driven (and been driven by) approaches such as business process re-engineering.
The second path seems to be to do the same thing to transactional processes. One of the key elements in this trajectory is the growth of so called 'e-commerce', and the growing use of the World Wide Web and the Internet. Broadly, it is possible to identify three main impacts for purchasing within this field.
The first of these is an impact on access. The use of information technology to change the way in which employees can access the product or service base has implications for the purchaser. The changing nature of access means that sellers bypass professional buyers, who have some of the information required, reaching the product or service user. This 'disintermediation' process drives and is driven by products such as Internet based catalogues and on -line auctions. Access strategies -what Bill Gates has called "friction free capitalism"- also include the ability to customise communication in an apparently 'interactive' way with many potential users or buyers through the use of techniques such as DHTML, XML, Java based languages, cookies, etc.
The second, related, impact is on choice. The so called 'death of distance' (Cairncross 1997) has increased the number of potential options as more and more companies with lower entry costs enter the marketplace. This provides the professional and non professional buyer with a sometimes vastly increased choice framework. Intelligent agents or 'shopbots' that can source and compare different products and services in a range of different criteria are in development. These shopbots only compare products and services, they do not assess risk. Increased choice can contribute to increased risk. This in turn relates to the third impact.
This is an impact on control. The use of information technology to manage the trade off between organisational flexibility and empowerment and organisational expenditure has implications for the purchaser. Here purchasing or even 'smart' cards can be linked to Enterprise Resource Planning (ERP) systems and reduce the need for regulation by the purchasing department.
These impacts also enhance the traditional effects of poor communication across internal functional boundaries. Although information systems and BPR can link task processes there is still considerable fragmentation of process responsibility and process ownership. This is reflected by accounts within the literature on both Strategy (Illinich et.al.1998) and HRM (Bridges 1996). Given these changes we can seen that there is a need for purchasing to respond by developing both a new business model, and a new role within that model.
Developing a New Purchasing Business Model. Traditionally, the purchasing professional has been the gatekeeper of the organisations external resource. They were, in effect "gambling" with these resources. To obtain optimum return on investment, they minimised exposure by managing down price and cost. They did this by, as noted above, employing purchasing 'power' to reduce supplier choice.
The information impact on - expansion of - choice frameworks means, however, that the gambling model has become much more intense, and requires a new way of operating. In order to 'gamble' effectively, the purchaser now needs to concern his or herself with three main issues. The next three sections of this paper will deal with these in turn.
Info- Merchants - Creating a Baseline. In order to gamble effectively, the first thing the purchaser needs is an internal baseline that provides a set of objectives. Without a stable set of objectives, the process of supply management is not tenable. The fragmentation of process ownership and responsibility noted above can mean that purchasing objectives vary widely over time and across departments. These shifting objectives mean that purchasing can often be in a no-win situation There are three broad (and overlapping) roles that can be used to stabilise and co-ordinate overall organisation purchasing objectives.
The first is a 'policing' role that reflects the 'control' element of IT. In the past, procedures, authorisation levels, etc. have allowed purchasing to ensure that purchasing activity was at least monitored, and preferably controlled. ERP systems and purchase or smart cards have in some organisations replaced these mechanisms. Both of these alternatives are, however, resource intensive in one way or another. There is also a problem with role conflict as increasing empowerment, and entrenched professional positions, lead to struggles over the 'right' to control expenditure. Here, however, the purchaser needs internal information with regard to spend patterns, commitment decisions and rule 'breaking'.
The second is to act as a service provider. This role involves the co-ordination of process through initiatives such as internal 'service quality' programmes (Bitner and Zeithaml 1998, Swartz, Brown and Bowen1995). This is a similar to the access strategy used by marketers. Here, the purchaser creates internal 'custom' by improving the level of service response to such a pitch that it is easier to use purchasing than to 'serve' themselves. The ultimate objective for such a strategy is to create dependence within the internal customer. The type of internal information required here is about purchasing needs, levels of competence and the way in which users evaluate purchasing.
The third choice is that of 'consultant'. This role involves two key elements. The first of these is to enhance the purchasing competence of staff within the organisation using a variety of 'consulting' or training strategies. The second is to develop and routinise organisational norms with regard to purchasing within the organisation. Part of this role may include evaluating and optimising the present (delivery, quality, service, innovation, or response failure) 'cost' and future (risk) cost trade-offs that take place across different functions. The type of information required here is specialist information. This may be regard to forms of contract, supplier selection models or negotiation.
Picking the 'right' combination of these roles is an essential step in creating a baseline from which purchasing can start to gamble.
High Rollers and Degenerate Gamblers- Optimising Information Quality. The next issue gamblers need to consider is how to improve return on their 'stake', In order to do this they need to optimise the quality of the information they collect and use in making their 'gamble'. Information is a commodity, like any other. Raw data goes through a number of processing stages, adding 'value' at each stage. It may be useful to consider these:
|Material||Description and Processing Activity|
|A. Raw Data||1. i.e. numbers, sensory impressions. Add context to create;|
|B. Information||2. Add comparators to create;|
|C. Measures||3. Add other information dimensions to create;|
|D. Descriptive information||4. That describes what happens. Add enquiry to this to create;|
|E. Explanatory information||5. That explains how things happen. Add rules to create;|
|F. Causal information||6. That reliably explains why things happen. We then add tools and relationships that create;|
|G. Operational information||7. That can be used to change what happens. To this we add generalisability to create;|
|H. Predictive information||8. That can be used to consistently predict what is going to happen.|
Many purchasing staff, however, fail to recognise this process. Instead they act like degenerate gamblers. They 'stop' their information gathering and processing at activity three or four, or limit this information gathering to personalities within the supplier rather than the supplier as a whole (Stannack and Osborn 1995). They replace information with power - control - strategies such as contracting. Unfortunately, they do not have the information to ensure that those strategies can and do work effectively anywhere other than the first 'tier'.
Improving information quality is a key step in managing within E-commerce environments. In gathering this information, there are, however a number of problems that information technology can overcome. These include problems of scale, geographical distribution, transparency, etc. Whereas the marketer might have a whole army of salespeople in the field, these resources are often unavailable to the purchaser.
Here the Internet gives purchasing an opportunity to employ its own access strategies. Wolff (1998) has noted how the Internet is changing from an information to a transaction-based network. Purchasing can take this one step further and use the Internet as a modelling tool. The capacity for both access and real time data collection across the 'Net allows supplier behaviour to be modelled. The capacity to model allows the user to predict the 'fall' of the purchasing 'dice'.
Info- Mercenaries - Using Information Power Externally. Both purchasing and supply management staff use purchasing power in very limited ways. In many cases, they have driven costs back into the supply chain, and either hide these costs, as in the case of inventory (Rainnie1982, Karlsson 1996) or cause the costs to 'break out' elsewhere in the organisation in a form of organisational cannibalism. This is due, to some degree, because of the difficulties in measuring costs in any useful way. The problems of using single performance measures within organisations have been touched on elsewhere (Johnson 1987, Kaplan and Norton 1996), but there are nonetheless problems with devising an alternate system.
Better information does lead to more effective management strategies. These fall into two types. Both of these strategies involve purchasers working outside the boundaries of their own organisation. In the first strategy, the purchaser works in the first tier. In the second, he or she will need to work in the network as a whole.
The first type are cost elimination strategies in which tools such as value analysis and value engineering, activity based costing, whole life costing, etc. are used to analyse costs. Subsequently mechanisms such as joint problem solving teams, kaizen teams, or supplier development programmes are set up to work with suppliers to eliminate those costs. The knowledge base of the purchaser here rests on industrial engineering methods as they take over the manufacturing or materials management function within the supplier. This can often be a cost intensive way of managing the supply base, but does lead to some impressive results at the first tier.
The second type of strategy involves cost redirection. Cost redirection relies on the traditional knowledge base of the purchaser. In some cases, organisations already buy on behalf of their suppliers. Boeing, for instance, have bought strategic metals on behalf of their suppliers. NCR often buy the raw materials for their suppliers in order to guarantee supply and manage risk. Cost redirection means pushing costs into areas where they produce better results for the purchaser. This involves improving the purchasing function of the supplier in a range of areas, some of which may be general management, and not manufacturing related.
There are a number of opportunities for cost redirection in purchasing. One such is training and development. Training and development is only rarely linked to improvements in outcomes that customers require or expect such as cost reduction, delivery improvement, innovation, quality improvement, and flexibility. Purchasers can use purchasing power to ensure that training and development is more effective by specifying that it should be linked to these outcome improvements. Another cost redirection strategy would involve redirecting marketing costs, shifting the role of the marketer from salesperson to trainer or problem solver. With improved -causal- information, there are clearly a number of opportunities of this nature.
Conclusion. This paper started with two short epigrams separated by three hundred and seventy years. The first suggested that we need to take cognisance of the environment in which we buy and sell. The second that it is critical to understand the way we use knowledge - information - as power. In order to meet the challenges of E-commerce, purchasing needs a new business model. Without a model that uses information and power effectively, the sky may well fall in on the professional purchaser.
Bitner and Zeithaml 1998, Services Marketing Prentice Hall Eaglewood Cliffs NJ
Bridges 1996 The Death of the Job Nicholas Brearley London
Cairncross 1997 The Death of Distance Business Books
Ilinitch, Lewin and D'Aveni 1998 Managing in Times of Disorder Sage Beverley Hills CA
Johnson 1987, Relevance Lost Free Press New York
Kaplan and Norton 1996 The Balanced Scorecard
Karlsson 1996 JIT Manufacturing -A Review International Journal of Production and Operations Management
Porter 1985 Competitive Advantage Free Press Macmillan New York
Hamel and Prahalad 1994 Competing for the Future HBS Press Boston Mass.
Rainnie 1993, The Reorganisation of Large Firm Subcontracting: Myth and Reality Capital and Class 53-75
Ramsay 1995 Purchasing Power European Journal of Purchasing and Supply Management vol3 p 14-31
Stannack 1995 Purchasing Power and Supply Chain Management Power -A Response to Ramsay's Purchasing Power European Journal of Purchasing and Supply Management vol 2 p11-17
Stannack and Osborn 1998 Segmenting Information Usage across Functions In press
Swartz, Brown and Bowen1995 Services Marketing and Management JAI Press Connecticut
Wolff (1998) Burn Rate: How I survived the Gold Rush years on the Internet Business Books