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Michael Porter. Procurement is Vital for Businesses Research Paper


Introduction

In an article titled, Competitive Advantage, which was published in 1985, Porter dismissed the role of procurement/purchasing and articulated that it played a supportive role in an organization. While that was the case then, the role of procurement in contemporary business environment has changed.

Indeed, Porter agrees with the assertion by saying that procurement process is one of the areas where companies can create value for the shareholders and the society.

According to Porter & Kramer (2011, p. 62), companies have possessed a narrow perspective of increasing the profitability of their organizations at the expense of the society.

To rectify these imbalances, a myriad of companies have embarked on corporate social responsibility (CSR) as a way of taking care of the stakeholders in the periphery. Porter & Kramer (2011, p. 66) introduce the concept shared value within the value chain.

Particularly, they point out that companies could create value through the procurement process where all stakeholders stand to benefit. This paper seeks to agree with Porter’s assertion that procurement is vital for businesses and is one of the pillars for improved performance.

Procurement: Pillar in the Success of a Project

Previously, procurement served a diminutive function in an organization. Although it used to be a common aspect of many companies, it entailed simple buying of common goods and raw materials especially those that the production department recommended.

Chadwick & Rojogopal (1995, p. 234) explain that the procurement skills were still in their bookkeeping stages and were applicable in all operations of organizations.

For instance, after the manager received a list of requisitions, his or her main role entailed looking out whether the information presented was accurate and sufficient to allow the purchasing process to begin. Ideally, many companies had pre-established their respective suppliers and agreed on prices.

However, these terms would be renegotiable to allow for further bargains in prices and the dates of delivery. In large organizations, buyers were so much engrossed in making numerous purchasing orders and bargaining for supplies of virtually all organizational departments (Dobler 1994, p. 45).

To that end, purchasing department was perceived to belong to skilled and dexterous employees due to the high number of orders, complexities in delivery dates and resolving misunderstandings and queries.

However, these activities did not allow an organization the required time to strategize on the most efficient way to procure goods and supplies.

Porter & Kramer (2011, p. 71) say that different firms across the world have begun to perceive procurement as major driver of success. Despite previous failure to notice the importance of the process, many firms have begun to source for supplies in competitive areas.

Countless companies have become global organizations. As such, they have begun to shift and change their procurement processes to suit their new stature.

Companies have also recognized that locating their activities and operations in areas perceived to have low wages for workers is not enough for a company that seeks to create shared value.

To this end, companies have embarked on synergized procurement process where different units work together in the process of procurement. Synergy does not only apply to the internal environment of a company but also to the external environment (Farmer 1997, p. 87).

This implies that similar companies at the global market environment will synergize their procurement operations to derive value for all stakeholders. Companies are realizing that synergizing operations has costs that challenge the achievement of their objectives and plans.

Hence, organizations have appreciated ‘time to market’ and efficiency strategies that require procurement function of an organization to play a focal role. This was contrary to the initial strategies by organization that entailed expanding their operations with the hope of increasing their profits and revenues.

Synergy in procurement and dynamic nature of organizations have both worked together to increase the role of purchasing within an organization (Farmer 1997, p. 97).

Further, it is important to mention that procurement is an avenue for value creation in an organization. Porter & Kramer (2011, p. 72) argue that procurement should be a strategic tool that an organization uses to increase the well-being of all stakeholders.

This is contrary to the previously held notion that an organization can improve the wellness of a community in which it operates only through CSR. Shared value means that every member or stakeholder of a company should derive benefit from the company (Day 2002, p. 84).

For instance, construction companies aiming to increase their presence in a new market should seek to increase the efficiency of their suppliers to stand a chance of success.

Day (2002, p. 84) asserts that this may be possible through providing financial incentives for the suppliers to increase their productivity through acquisition of new technology to produce construction materials in demand.

Simultaneously, the suppliers’ capability increases in terms of volumes produced and efficiency in production.

In addition, strategic procurement process allows a company to create value by identifying areas for potential savings. This is possible by increasing the importance of innovation-driven models when purchasing and procuring supplies in order to review their structures of costs (Lamming 2002, p. 17).

For instance, companies have begun to adopt procurement models that turn conventional fixed costs into variable costs. Although procurement does not influence all costs that an organization incurs, Chadwick & Rojogopal (1995, p. 234) say that procurement influences over 75 percent of total costs incurred by a company.

To that end, it is apparent that when companies evaluate their disposable resources, procurement function of a company can support it in attaining critical efficiency improvement (Chadwick & Rojogopal 1995, p. 124).

To achieve this, it is important to look into the major purchase levers of price and volumes that the company intends to purchase.

Due to synergy in procurement process, the support of other companies is important to allow the procurement function to evaluate and bargain the prices with the suppliers across the market in search of the most competitive prices (Turner 2003, p. 108).

On the other hand, volumes that a company intends to purchase can influence the negotiating power of the procurement function of an organization.

To that end, it is noticeable that the role of procurement has changed immensely overtime. As such, strategic procurement is an important function of an organization as well as a driver of success.

Another factor that could have led Porter’s change of perception of procurement is the increase in appreciation of change in business environment. Today, procurement has taken many dimensions. Particularly, Porter was oblivious of the importance of strategic procurement.

It involves the application of the right sourcing strategies for all units involved in the process of procurement (Kraljic 1983, p. 112).

Contrary to the initial short-term focus of expanding and focusing on profit maximization, companies are adopting long-term strategies such as strategic procurement (Gardiner 2005, p. 27).

The rationale is that the process also involves buy-in from all the units of an organization and increased negotiating and analytical skills of the human resource. Strategic procurement addresses the question of the best and most feasible outsourcing strategy that could lead to increased efficiency for an organization.

Although there is no specific strategy that is right for all companies and organizations, strategic procurement promises to provide the purchaser a wide array of approaches when choosing the correct sourcing strategy.

Besides, the process considers the organization’s strategy and the financial importance of the goods to be sourced (Turner 2003, p. 123).

Strategic procurement facilitates the company to comprehend the market conditions faced by suppliers of the specific goods. Therefore, the process of purchasing has become an integral component of strategic plans that an organization and it contributes importantly to the success of the company.

Turner (2003, p. 45) asserts that companies have continued to integrate procurement internally with other functions. Although internal integration of units has been overlooked, companies are finding it important to integrate their units, as is the case with suppliers and customers.

Integration is a necessity in order for the organization to benefit from information sharing. In addition to gaining from decisions of procurement, an organization will also benefit from effectiveness from other units that attempt to meet their cost saving objectives.

At this level, Gardiner (2005, p. 37) says that procurement has begun to serve the role of increasing the commitment level of senior management team by demonstrating its importance in the organization and aligning its strategies to the organization’s objectives.

This continued appreciation of procurement as an important driver of success has led to the expansion of procurement department into analyzing other drivers of expenses within an organization.

This implies that procurement has become a critical function of an organization in examining costs of such functions as sales and administration (Kraljic 1983, p. 111).

To illustrate the changes that procurement has undergone to become a major factor in the success or failure of an organization, it is important to look into various aspects of an organization.

Kraljic (1983, p. 112) points out that procurement functions have expanded their remit into the management of risk and business propensity in the supply chain. This is particularly important due to the increase of companies operating in the global market.

Besides, procurement functions of different companies have comprehended the complexities that emanate from the volatility of supply chain (Arjan 2010, p. 93).

For instance, due to the constant fluctuations of exchange rates across the world, procurement departments have constantly been able to understand the financial market and maximize on them.

Instead of the potential costs that an organization would stand to incur when purchasing using a poorly performing currency, the procurement’s comprehension of the dynamics will facilitate the maximization of profits.

Porter & Kramer (2011, pp. 67-85) articulate that organizations have enabled their procurement functions to evolve and be able to manage risks such as disruptions in supply and shortages that may pose challenges to the suppliers.

Further, organizations have continued to forge strong and meaningful relationships with their suppliers. This implies that relationships between procurement and suppliers has changed and evolved overtime contrary to the perception held by Porter.

Organizations are working together with their respective suppliers implying that they have adopted collaborative approaches. This allows companies to share risk and returns in addition to increasing the level of innovation between them.

The collaborative approach between the procurement function of an organization and the suppliers is important in the sense that it allows the sustainability of the company (Lamming 2002, p. 19).

This is in the way the two actors initiate environmentally friendly solutions especially in packaging in addition to ensuring that the global supply chain is typical of favorable conditions for workers.

All these changes in the procurement function have contributed significantly to the adoption of high-end outsourcing and sourcing strategies in an organization.

To that end, it is imperative to assert that the changes that have taken place since Porter’s claim regarding procurement have made him to rethink his stand on procurement process.

In the contemporary world, procurement has changed its role and increased focus on devising ways that companies are able to manage their inputs (Gardiner 2005, p. 40). This is in the way an organization transforms the inputs into products.

As aforementioned, the role of procurement has changed over the last few decades. This implies that the department of procurement in every organization has continued to take in increased roles and responsibilities.

This leads to increased value of the organization as well as improved skills required to operate the procurement function (Arjan 2010, p. 102).

Indeed, trained and skilled employees within the department have shifted their focus to development and implementation of initiatives that lead to increased creation of value for all stakeholders.

This is in addition to ensuring that the company’s objectives and targets are met in terms of increasing sustainability of the organization and acquiring new technology.

Despite the increasing demands in the procurement function of an organization, Arjan (2010, p. 105) articulates that there exists apparent disparities in the demand and supply of such personnel.

To this end, companies have recognized the need to retain their employees within the procurement department for consistency and efficiency.

Besides, companies have invested heavily in ‘on job’ trainings that seek to develop the skills of newly acquired talent in order to augment their productivity and performance.

Essentially, companies have increased their ability to attract and retain talented and skilled professionals who are able to uptake many roles within the organization.

Considering the amount of resources that contemporary organizations are putting in procurement, it is obvious that the roles of procurement have increased. This is in the way they drive an organization into success.

Conclusion

In summary, Porter’s perception that procurement was until 1985 a supportive function of an organization has changed. The rationale is that organizations across the world have evolved overtime and continued to place emphasis on procurement.

At the outset, many companies have changed and evolved into global enterprises that require them to change their procurement processes to suit their stature. Companies have also understood some volatility aspects of the supply chain especially regarding the fluctuations in exchange rates.

Additionally, it is important to mention that integration of internal business units, establishment of strong relationships with suppliers and retention of procurement professionals have typified the modern business organizations. The companies have also appreciated the importance of value creation as opposed to CSRs.

The roles of procurement have increased due to the apparent evolution of companies. Indeed, it has become a driver of success according to Porter & Kramer (2011, p. 70).

References

Arjan,W 2010, Purchasing & Supply Chain Management, Analysis, Strategy, Planning and practice, Cengage Learning, Boston.

Chadwick, T & Rajagopal, S 1995, Strategic Supply Management, Butterworth Heinemann, Oxford, UK.

Day, M 2002, Handbook of Purchasing Management, Gower, Aldershot, UK.

Dobler, D 1994, ‘Letter from America: A new venture aptly timed’, European Journal of Purchasing and Supply Management, vol. 1 no. 1, pp. 82-123.

Farmer, D 1997, ‘Purchasing myopia – revisited’, European Journal of Purchasing and Supply Management, vol. 3 no. 1, pp. 35-231.

Gardiner, P 2005, Project Management – A Strategic Planning Approach, Palgrave Macmillan, Basingstoke, UK.

Kraljic, P 1983, ‘Purchasing must become supply management’, Harvard Business Review, vol. 61 no. 1, pp. 109-117.

Lamming, R 2002, Purchasing and organizational design, Gower Publishers, Aldershot, England.

Porter, E. & Kramer, R 2011, ‘Big Idea: Creating Share Value’, Harvard Business Review, vol. 1 no. 1, pp. 62-77.

Turner, J 2003, Contracting for Project Management, Gower, Aldershot UK.

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IvyPanda. "Michael Porter. Procurement is Vital for Businesses." December 26, 2019. https://ivypanda.com/essays/michael-porter-procurement-is-vital-for-businesses/.

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IvyPanda. 2019. "Michael Porter. Procurement is Vital for Businesses." December 26, 2019. https://ivypanda.com/essays/michael-porter-procurement-is-vital-for-businesses/.

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IvyPanda. (2019) 'Michael Porter. Procurement is Vital for Businesses'. 26 December.

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