Schematic Overview of the Purchasing Process

2.1 Introduction:

Despite some authors (Constantino and Pellegrino, 2009; Ramsay and Wagner, 2009; Svahn and Westerlund, 2009), criticising that the purchasing function, as an issue, has received too little attention in the past and has yet to find a home in an existing academic discipline (Ramsay, 2001), Van Weele (2004), Collignon et al (2007), Zheng et al (2007) and Pressey et al (2009) argue that it is a too valuable unit that should not be disregarded.

Bailey et al, (2008) and Chen and Paulraj (2004) both highlight that not only should purchasing have strategic importance, but it can have a proactive long-term focus. Bailey et al continue to argue that as attention to the purchasing function increases, the emphasis centres more on activities around the formation of long-term buyer-suppler relations and total cost reduction as opposed to simple ordering and replenishment routines.

2.2 Schematic Overview of the Purchasing Process

To highlight, develop, and help implement purchasing processes, Collignon et al (2007) present an overview (adapted in figure 2) that analyses the function at three separate levels within the organisation: strategic, tactical and operational. The rationale behind the model is that it draws attention to what purchasing activities (processes) could be found at differing levels of a firm’s strategic direction.

Ramsay and Croom (2008) note that higher inter-organisational status is usually associated with more strategically inclined activities, and questions why companies fail to recognise the purchasing function’s contributions to strategic survival as some perceive purchasing to be largely tactical and operational. Despite this, Pressey et al (2009) declare that due to competitive pressures, many firms have in fact elevated the purchasing role into that of a strategic function.

Figure 2.1: Schematic overview of the typical purchasing processes. Adapted from:

Collignon et al (2007).

Strategic

Level

Tactical Level

Operational Level

Long range planning. Long term impacts on competitive

strategy. Purchasing research carried out.

Responsibility of top-management.

Cost reduction techniques. Direct supply policies for

Commodities/segments. Medium term impacts.

Expediting. Enquires/quotations/returns.

Supplier performance measurement.

Records and systems maintenance.

In their study, Ramsay and Croom (2008) claim existing purchasing and supply literature embraces a widespread belief that the function has not attained the status it deserves. Throughout their paper, multiple references are made to Reck and Long’s (1988) ‘strategic evolution stages of the purchasing function’, which is presented in appendix X. They use this model throughout to compare the influence of academic theory on practitioner behaviour.

In their pilot study, Ramsay and Croom (2008:201) concluded that the top three activities that provide differing amounts of strategic contribution (from practitioner responses) were cost control, negotiation, and supplier selection. Linking to Reck and Longs (1988) evolution stages, they note that it is considerably at odds with the academic consensus; cost control appears lowest in this model, negotiation fails to appear and supplier selection is made reference to at the lowest evolution stage of purchasing. Exactly why this divergence occurs is not answered by Ramsay and Croom, but is left open to further investigation, concluding that such purchasing development models are mostly unhelpful.

In a direct response to Ramsay and Croom (2008), Rozemeijer (2008) stresses the opinion of the relevance of purchasing development models emphasising the usefulness of them to classify organisations positions, and providing directions for possible strategic changes. In addition to this, Rozemeijer further rejects the observation that professionals and academics regard purchasing as solely a strategic activity and instead asserts that operational activities are in fact at the core of the function and that they can also play a crucial role in realising competitive advantage through closer relations.

Rozemeijer (2008) further questions the validity of Ramsay and Croom’s (2008)methodology, believing a sample size of twenty-one professionals personally known to the authors may present bias in participants trying to provide answers that match the researcher’s beliefs. Taking this into account Ramsay and Croom justify themselves by omitting any mention of the aim of the study.

Nevertheless, Rozemeijer (2008) does note that the simplicity of the purchasing development models may contradict the complexities in a change process, and that they are guides, rather than substitutes, for strategic thinking.

Consequently then, determining how to classify and select suppliers to examine the divergence mentioned previously (Ramsay and Croom, 2008), is likely to be a valid issue to investigate and through the use of Kraljic’s (1983) purchasing portfolio matrix, this can be analysed.

2.3 The Purchasing Portfolio Matrix

In 1983, the Harvard Business Review published Peter Kraljic’s ‘Purchasing Must Become Supply Management’ article. In this paper, Kraljic presents his ‘purchasing portfolio’ with an aim to allow purchasing functions to categorise products (and suppliers) to offer distinct purchasing strategies for each of these classifications.

The main premise of Kraljic’s model is to reduce supply risk, profit impact and use any potential buying power that a purchasing firm may have over suppliers (Kraljic, 1983; Dubois and Pedersen, 2002; Gelderman and Van Weele, 2003; CaniA«ls and Gelderman, 2007; Pagell et al 2010).

The model itself (fig 2.1) is based on the dimensions supply risk and profit impact, resulting in four separate quadrants: strategic items, leverage items, bottleneck items, and non-strategic items. Fundamental to this initiative, is the idea that as suppliers are characterised by different interests to the company (Van Weele, 2004), purchasing functions should implement a variation of strategies towards supply markets aiming for increases of efficiency within purchasing processes (Kraljic, 1983:112, Van Assen et al, 2009:145).

The adaptation of the Kraljic (1983) matrix in figure 2.1 contains each of the suggested strategies as well as brief descriptions of what allows products to be classified in to the quadrants. Table X in appendix X shows a more detailed criterion.

Leverage Items

Many alternative sources of supply

Product or service substitution possible

Largely buyer dominated

Strategy:

Competitive Bidding Exploit Purchasing Power

Non-Strategic Items

Large product variety

Many suppliers/buyers/alternatives

Logistically and labour intensive

Little dominance – high independence

Strategy:

Optimise inventory (reduce number of suppliers)

Bottleneck Items

Some alternatives exist

Few suppliers

High Switching costs

Largely supplier dominated

Strategy:

Secure supply and search for alternatives

Strategic Items

Large share of costs

Very few suppliers

Few (if any) substitutes

Strategy:

(If supplier has power)

- Seek long-term partnerships.

(If buyer has power)

– exploit power through cost reductions/ reduce inventory levels.

Supply Risk

Profit / financial impact

Low

High

High

Figure 2.2 The Purchasing Portfolio Matrix

Adapted from Kraljic (1983)

2.3.1 The Four Quadrants

Non-Strategic Quadrant

The ‘non-strategic’ quadrant of Kraljic’s (1983) matrix is largely represented as items having both low profit impacts and supply risks, with an abundance of potential suppliers and alternative products. Van Weele (2004) remarks that these items are routine in nature: providing few technical or commercial risks. Because of this, Van Weele (2004) further highlights that neither actor will dominate the relationship as switching between suppliers is likely to involve few costs and barriers. As such the buyer-supplier relationship is somewhat independent of each other.

Van Assen et al (2009) and Van Weele (2004) argue that because such products can represent high volumes of purchases, managing these is labour intensive – with around 80% of a purchasers time spent on these products (Van Weele, 2004:151). Therefore, Kraljic (1983), Van Assen et al (2009) and Pagell et al (2010) suggest that the purchasing strategy used in this case is to optimise inventory through increasing efficiency and reducing the number of suppliers into fewer transactions.

Leverage Quadrant

The ‘leverage’ quadrant has low supply risk, but high profit impact, and obtainable from multiple sources (Kraljic, 1983). Van Weele (2004) notes that because these represent sizeable amounts of final costing, the strategy of ‘exploit power’ could force competitive bidding where suppliers compete for custom with offers of quantity and quality discounts, which CaniA«ls and Gelderman (2007) state, is the exploitation of power, and assert that for such products, long-term contracts are not needed as buyers should search and ‘spot’ purchase.

Van Weele (2004) mentions however, that prolonged abuse of this power could lead to supplier cooperation, resulting in price fixing and even cartels (both illegal).

Bottleneck Quadrant

The ‘bottleneck’ quadrant is defined as consisting of items that have high supply risks, low profit impacts, and are characterised by few alternative suppliers and high potential switching costs (Kraljic, 1983).

In general, bottleneck items are vulnerable in terms of their supply and can cause significant problems and risks (Gelderman and Van Weele, 2003). As such, this quadrant is largely supplier dominated (Van Weele, 2004) and Kraljic’s (1983:112) strategy is to reduce dependence upon suppliers through securing supplies of these products and to search for alternatives.

Strategic Quadrant

The final quadrant is ‘strategic’ and has both high supply risks and profit impacts. Such products are likely to be highly customised with no alternatives, represent large specific investments, and incur high switching costs, making a change of supplier unattractive (Kraljic, 1983).

As a result, Kraljic (1983) suggests long-term partnerships should be sought and highlights that in this quadrant, there are three possible scenarios in terms of who dominates the purchase.

In buyer-dominated situations, Kraljic (1983) suggests the organisation exploits the situation through forcing price advantages, and inventory level reductions. Narayandas and Rangan (2004) however argue that firms will only engage in an exchange as long as the dominating firm is perceived as fair and as such may tolerate small measures of opportunism and exploitation.

Conversely, Van Weele (2004) suggests that in supplier-dominated situations, the buyer will be ‘locked-in’ a relationship and should accept conditions imposed – even if the firm seems to behave opportunistically by for example holding up resources after making specific investments. Kraljc (1983) suggests that organisations should always look for alternatives, reduce dependence on such products, or consider vertical integration.

The final scenario occurs when neither partner is in a dominating position. As such there exists a mutual interest - a balanced relationship, which may develop over time into more of a partnership (Van Weele, 2004).

2.3.2 Critique & Developments of the Matrix

Despite Kraljic’s (1983) matrix receiving much attention and largely being recognised as the most dominant and seminal approach in the area (Dubois and Pedersen, 2002; Gelderman and Van Weele, 2003; CaniA«ls and Gelderman, 2005; Svahn and Westerlund, 2009; Pagell et al, 2010), it has still encountered much criticism.

Dubois and Pedersen (2002) and Gelderman and Van Weele (2005) question how complex business decisions can be based on such simple classifications and recommendations, where the two dimensions of the matrix may not represent the best parameters for the many associated variables.

Gelderman and Van Weele (2005) continue to highlight that classification of products is largely subjective, and that mismatches with how buyers perceive its interactions with suppliers may prevent optimal strategies being implemented – the classifications are subjected to emotional and relational aspects of the purchaser (Van Assen et al, 2009). Gelderman and Van Weele’s study notes that experienced users of the portfolio respond to such critiques through acknowledging the application of the model follows no set blueprint. The process involves critical thinking and commitment of the purchasing function. Further to this, firms that find willingness to implement these changes are often blocked by the ability to because of lack of commitment or power of the supplier (Casciaro and Piskorski, 2005).

Purchasing portfolios have also been subject to adaptations. Based on their research, Pagell et al (2010) observed that some organisations used Kraljic’s (1983) portfolio in unexpected ways - purchasing functions were adopting strategic strategies for leverage items, such that firms were entering long-term agreements – contrary to the suggested strategy.

Pagell et al (2010), through induction, put forward an adapted purchasing model (figure X appendix X). This sees the leverage quadrant split into true, transitional and strategic commodities. Whereas true commodities retain the characteristics of leverage products, strategic commodities contain noneconomic features that can be leveraged long-term. Between these two, lay transitional commodities, where shifts in information symmetry cause some products to become more strategically inclined requiring temporary changes of strategy (Pagell et al, 2010).

However, it is crucial to note that the original study of Pagell et al (2010), was not intended to adapt the matrix, it was an unexpected conclusion, and that because the conclusions are fairly recent, it has yet to studied and scrutinised further. For this work and to fulfil the aims, it is likely that this adapted model should not be used until more research and critique is published.

A final point to be made is the relationship that the matrix seems to share with power and dependence. Despite not explicitly dealing with power issues, Kraljic’s (1983) fundamental assumption is that differences in power and dependence exist in supplier-buyer relationships (Dubois and Pedersen, 2002: 37; CaniA«ls and Gelderman, 2007:219). Some of Kraljic’s recommendations and strategies clearly refer to the power arrangement, for example, ‘exploit power’ in leverage strategies. Power and dependence may play a significant role in the approach and could be factors that affect the choices of purchasing strategy (CaniA«ls and Gelderman, 2007). As such, to further explore supplier-buyer relations, it could be necessary to understand power differences and how they may interact with the purchasing function’s decisions.

2.4 Power and Dependence

The best way to deal with suppliers, and what is appropriate for how buyers should behave power and leverage situations is surrounded by considerable debate (Cox, 2004).

Emerson’s (1963) theory on power-dependence relations is largely explored by the works of Pfeffer and Salancik (1977) and Pfeffer (1981). The basic consensus of these contributions is that “power resides implicitly in the other’s dependency”? (Emerson, 1963: 32). For example, Emerson highlights that the power (P) of actor A, is directly equal the dependence (D) that actor B has upon A and vice-versa, such that:

Pab = Dba

Pba = Dab

Emerson (1963) explains both above scenarios are unbalanced (one actor is power-advantaged over the other). However, when interdependence between the two is high, the relationship is balanced, such that:

Pab = Dba

Pba = Dab

It is important to note however, that this theory is anchored largely from researching into the exchanges of small groups (Emerson, 1963:32), so should be considered when as exchanges between organisations are likely to be more complex. Emerson (1963) tries to deal with this limitation through emphasising that the above formulations have been worded so that they could be applicable in many types of situations.

Discussing the links between power and dependence in relationships is likely to be an issue that may provide a more critical view. Through assessing power, it may be able to show how purchasing strategies are influenced by the potential power, or lack of power that a firm may hold.

2.4.1 Resource Dependency Theory

According to Pfeffer and Salancik (1977), power is simply the ability to get something done the way in which they are wanted to be done. In addition to this, they observe that power actually derives from activities and processes rather than individuals, further arguing that power revolves around scarce and critical resources; often resulting in power struggles to obtain them. Actors will try to use their ‘power’ to gain access to scarce resources, and enforce little power when resources are abundant – this is essentially what Pfeffer and Salancik (1978) call ‘Resource Dependency Theory’ (RDT).

Pfeffer (1982) explains that organisations are rarely self-sufficient, needing resources from the external environment, consequently, becoming interdependent on the external environment. This is important to consider in RDT as this interdependence can affect an organisations ability to get what it needs and even survive – this is basically the fundamental assumption of RDT (NienhA¼ser, 2008).

NienhA¼ser (2008) acknowledges that within RDT, resources which concern power can differ significantly between firms. Furthermore, Hillman et al (2009) believe that areas of political actions in RDT (power structures) are less frequently explained than they should be, to better understand how power affects the internals of an organisation. In addition to this, Hillman et al highlight their concerns over the lack of recent theoretical interest in RDT, arguing that there are more opportunities for further development and application.

Despite these issues, NienhA¼ser (2008) and Hillman et al (2009) agree that RDT is a well established topic significantly contributing towards explaining organisation behaviour and structure.

2.4.2 Power and Dependence in Kraljic’s Matrix

As highlighted, Kraljic’s (1983) matrix does not explicitly deal with power issues, it is clear they are taken as assumptions in the suggested purchasing strategies (Dubois and Pedersen, 2002: 37; CaniA«ls and Gelderman, 2007:219).

Through linking the issues of power and dependence, and RDT to the matrix, it may be able to illustrate more explicitly the role of power in the formation of purchasing strategies, thus, be useful in assessing what influences supplier-buyer relationships.

Firms, to varying extents, all depend on their trading partners (CaniA«ls and Gelderman 2005; 2007), and the partner that is most independent, is likely to dominate an exchange. CaniA«ls and Gelderman (2007) discuss that asymmetric relations are deficient as the power-advantaged actor (most independent), may be tempted to exploit. On the other hand, they also acknowledge that unbalanced relations do not always involve power misuse. Differences may promote effective coordination and integration, legitimising the balance of power over time.

In CaniA«ls and Gelderman’s (2007) study, they sampled 250 purchasing professionals testing their hypotheses (table X appendix X) based on Kraljic’s (1983) model to identify if the theoretical power issues are found in practice. They concluded that generally, the relative power they expected to see based on the quadrants in the matrix, were observed (table 2.1), albeit with one noticeable difference.

The expectation of CaniA«ls and Gelderman (2007) to find ‘balanced’ relative power in the strategic quadrant did not materialise. Instead they found that it was supplier dominated and emphasize that it is possible for buyers to feel dominated by suppliers in balanced and satisfactory relationships. They conclude by arguing that situations in which buyers feel dominated, but are satisfied, are desirable as the buyer will not search for alternative products / suppliers.

Source: CaniA«ls and Gelderman (2007:227)

Table 2.1: Comparison of relative power and total interdependence in the Kraljic matrix

Relative power

Total interdependence

Expected

Observed

Expected

Strategic

Balanced

Supplier Dominance

Highest

Bottleneck

Supplier Dominance

Supplier Dominance

Moderate

Leverage

Buyer Dominance

Buyer Dominance

Moderate

Non-Strategic

Balanced

Balanced

Lowest

It should be noted however, that CaniA«ls and Gelderman’s (2007) study was subject to limitations. The initial survey was confined to buyer perspectives, acknowledging that suppliers may have differing views on power and dependence.

As discussed, what is appropriate for a purchasing strategy depends on the power and leverage circumstance (Cox, 2004). To understand the basic elements of understanding power and leverage situations, Cox (2004) presents a ‘power-matrix’ (figure 2.3). Similar to Kraljic’s matrix, it provides four quadrants on two dimensions (attributes to supplier power, and attributes to buyer power). Cox’s model is useful in aiding to establish what basic features actually contribute towards making a resource or supplier dominant or power-(dis)advantaged.

LOW

BUYER DOMINANCE (>)

Few buyers/many suppliers

Buyers have high % share of total market for supplier

Supplier is highly dependent on buyer for revenue with few alternatives.

Supplier’s switching costs are high

Buyer’s switching costs are low

Buyer’s account is attractive to supplier

Supplier’s offering is a standardised commodity

Buyer’s search costs are low

Supplier has no information asymmetry advantages over buyer

INTERDEPENDENCE (=)

Few buyers/few suppliers

Buyer has relatively high % share of total market for supplier

Supplier is highly dependent on buyer for revenue with few alternatives

Supplier’s switching costs are high

Buyer’s switching costs are high

Buyer’s account is attractive to supplier

Supplier’s offering is relatively unique

Buyer’s search costs are high

Supplier has moderate information asymmetry advantages over buyer.

SUPPLIER DOMINANCE (<)

Many buyers/few suppliers

Buyer has low % share of total market for supplier

Supplier has no dependence on buyer for revenue and has many alternatives

Supplier’s switching costs are low

Buyer’s switching costs are high

Buyer’s account is not attractive to supplier

Supplier’s offering is a relatively unique

Buyer’s search costs are very high

Supplier has substantial information asymmetry advantages over buyer

INDEPENDENCE (0)

Many buyers/many suppliers

Buyers has low % share of total market for supplier

Supplier has little dependence on buyer for revenue with many alternatives.

Supplier’s switching costs are low

Buyer’s switching costs are low

Buyer’s account is not attractive to supplier

Supplier’s offering is a standardised commodity

Buyer’s search costs are low

Supplier has no information asymmetry advantages over buyer

ATTRIBUTES TO SUPPLIER POWER RELATIVE TO BUYER

LOW

HIGH

HIGH

ATTRIBUTES TO BUYER POWER RELATIVE TO SUPPLIER

Figure 2.3: The Power Matrix

Source: Cox (2004:352)

While not making any references to the Kraljic matrix, it is useful to observe the similarities between Cox’s (2004) model. Where each of the item quadrants are found in Kraljic’s matrix, it appears in Cox’s power matrix that they link directly, for example, non-strategic items are associated with balanced power and independent (see figure 2.1 and table 2.1). The same quadrant on the power matrix discusses the elements that could make relationships independent. Such links can be found across all quadrants.

2.5 Conclusion

The literature shows that the role of purchasing has developed and finding adequate purchasing strategies could be considered of strategic importance. The literature presented, including the Kraljic Matrix (1983), Resource Dependence Theory, and the Power Matrix (Cox, 2004), provide insights on what influences the formulation of these strategies.

The models and theories generally link well together, possibly allowing a more in-depth approach, taking into account multiple perspectives. In terms of the main objectives of this work, these linkages across frameworks should be able to help recognise the aspects of what affects buyer-supplier relationships.

Even though, as discussed, there may have been too little attention paid to the purchasing function, contributions and developments from authors such as discussed provided interest to practitioners and academics. As Ramsay and Croom (2008) highlighted in their study, there seems to be some divergence in what is expected from purchasing literature, and what happens in practice. Looking at this, through combing the models and theories could provide a genuine contribution to the field.

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