Businesses are dependent on wise purchasing decisions. Luitzen de Boer, research associate for the faculty of Technology and Management at the University of Twente, gives an inside look into purchasing decisions, the trends and developments that affect them and the implications for purchasing management.
Within Purchasing and Supply, we may distinguish between several areas and levels of decision-making. Firstly, a number of decisions within actual purchasing processes must be made, such as decisions about the specification of need, selection and contracting of suppliers and operational purchasing decisions which involve ordering, receipt of goods and inspection of goods. However, there are also many decisions about purchasing processes that must be made. For example: is buying the best option in the first place? Who is going to buy what? How many suppliers should we invite to quote? These decisions about purchasing processes may be called purchasing management decisions. Purchasing (management) decisions are increasingly becoming more important and complex.
Implications for Purchasing Decisions
The purchase value of goods and services already contributes substantially to a company's turnover. Companies like Canon and Sony show figures of about 90%. The trend towards specialisation and focus on core activities will lead to a further increase of purchasing's share in total turnover. Secondly, the significance of the purchasing function can be related to the growing need for companies to simultaneously meet market demands, such as price, quality, flexibility and the level of innovation. Also, the insight emerges that the purchasing of non-production items and services is becoming a means for achieving drastic reduction of expenditures (De Boer and Telgen, 1995). Based on Van Weele and Rozemeijer (1996) and Carter et al (1999) there are several developments in the global business environment to be noted: Globalisation of trade and increased international competition holds important consequences. It not only implies an increase in potential customers, e.g. in Eastern Europe and China, but it also creates a bigger set of potential suppliers to evaluate and choose from. Hence, it directly affects purchasing decision-making. Internet Technology is already changing our society and business as a whole, and not in the least purchasing. In terms of decision-making, it again means that potentially there are more decision alternatives to choose from and/or more data available for evaluation. The new millennium will no doubt see a further growth of the use of Internet in relation to purchasing decisions.
Changing customer preferences require a broader and faster supplier evaluation. Customers become more sophisticated and demand improved benefits from the products offered to them. This in turn means that firms are under increasing pressure to develop products that are sufficiently innovative and consequently, transfer the increased demands upstream to their suppliers (Biemans, 1997). Choosing the right suppliers becomes more important and complex as an increasing number of factors have to be considered. As a result of the EC-directives on public procurement, purchasers often have to consider more bids than before, because invitation to tenders must be advertised in the official EU journal. Managing a much bigger number of tenders requires a more structured and efficient decision-making process. Purchasers must decide how they are going to choose tenders they will receive. Also, the requirement of selection according to objective, pre-stated criteria, forces purchasers to adopt an explicit, systematic and unambiguous approach to both the formulation of criteria and the process of ultimately ranking the tenders.
Trends and Developments
Finally, it is important to address important trends and developments in business strategy and structure, which will affect purchasing decision-making. The ongoing trend to outsource simply means that the total impact of purchasing decisions also grows. Hence, deciding on which activities should be considered for outsourcing and subsequently deciding on where to outsource are becoming increasingly important decisions. This will increase the need to justify such decisions. Secondly, an increase in outsourcing also implies a higher frequency of purchasing decision-making. Furthermore, the scope and level of outsourcing decisions is changing as well. As firms outsource more, the need for communication, coordination and planning and control of interaction between the firm and the supplier organisations increases (Carter and Narasimhan, 1996), hence these 'relational' factors must be taken into account when selecting suppliers The emergence of flatter and volatile organisational forms is likely to hold consequences for purchasing decision-making. First, as (purchasing) decision-making will increasingly be a matter of (project organised) teamwork, the number of people involved in the decision-making process will presumably grow while team members 'come and go'. Secondly, time-based competition implies high-speed exchange of information and faster decision-making as well.
Thirdly, the position and required skills of the purchasing professional will change as well (Telgen, 1994). Purchasing professionals must not only have in-depth knowledge of purchasing issues but must also have some knowledge about a wide range of disciplines. Similarly, other professionals will remain specialist in their respective field but will also develop general knowledge on other functions, such as purchasing. In addition, general management becomes more involved in purchasing decision-making while technological developments (e.g. catalogue systems) enable internal customers to take over ordering tasks. The spreading of the purchasing function leads to an increasing number of people being consciously involved in purchasing and purchasing management decisions.
The developments addressed here leave us with the question of how to deal with the increased complexity and importance of purchasing (management) decisions. In that respect, I identify two important points of concern.
First, it becomes more important to recognise decision-making skills as important requirements for those involved in and/or responsible for purchasing. Relevant purchasing decision-making skills include: o the ability to make useful distinctions between different levels and areas of decision-making in the purchasing environment;
o the ability to design proper control systems for the different decision-making phases, ranging from identifying decision opportunities, formulating criteria, developing decision alternatives and evaluating these alternatives;
o knowledge of adequate forms of decision support for purchasing decision-making, i.e. data management/support, decision model development, work flow management and output-support. If such skills are not sufficiently available, additional training and education is required. Contemporary Operations Research (OR) offers a range of methods and techniques that may effectively support the purchasing decision-maker in dealing with the increased complexity and importance of his/her decisions. Examples of such techniques are Multi-Criteria Decision Aid, Problem Structuring approaches, Mathematical Programming and Data Mining techniques. The results of the first practical applications, especially in the area of supplier selection, are indeed promising (see e.g. Labro et al 1999, De Boer 1998). OR models may enhance the effectiveness of purchasing decisions by:
o aiding the purchaser in solving the 'right problem', e.g. refraining from dropping a supplier when the delivery problems are actually caused by feeding the supplier with outdated information; o aiding the purchaser in taking more and relevant alternatives criteria into account when making purchasing (management) decisions, e.g. more long term considerations when deciding on make-or-buy;
o aiding the purchaser to more precisely model the decision situation, e.g. dealing specifically with intangible factors and group decision-making In addition, OR models may improve the efficiency of purchasing (management) decision-making by:
o enabling automated and faster computation and analysis of decision-making information, e.g. data on suppliers found on the Internet;
o enabling more efficient storage of purchasing decision-making processes and access to this information in future cases, e.g. saving files that contain criteria-structures for supplier evaluation;
o eliminating redundant criteria and alternatives from the decision or evaluation process, e.g. in extensive and expensive supplier audit programmes;
o facilitating more efficient communication about and justification of the outcome of decision-making processes, e.g. when reporting to management or suppliers.
All in all, the preliminary results provide a strong stimulus for both researchers and Purchasing
practitioners to further explore and exploit the potential of OR for Purchasing and Supply.
Biemans, W.G. (1997) Theory and practice of innovative networks, paper, University of Groningen.
Boer, L. de (1998) Operations Research in Support of Purchasing: design of a toolbox for supplier selection PhD Thesis, University of Twente, Enschede, The Netherlands.
Boer, L. de and Telgen, J. (1995) 'Developments in purchasing of non-production items' in Cox, A.(ed.) Power and efficiency in supply and value chain management, Proceedings of the 4th International Annual IPSERA Conference, Birmingham, UK, April 1995.
Carter, J.R. and Narasimhan, R. (1996) 'Purchasing and supply management: future directions and trends' International Journal of Purchasing and Materials Management, Vol. 32, 4, pp. 2-12.
Carter, P.L., Carter, J.R., Monczka, R.M., Slaight, T.H. and Swan, A.J. (1999) 'The future of purchasing and supply. A five- and ten-year forecast' CAPS, Tempe Arizona.
Labro, E., Degraeve, Z. and Roodhooft, F. (1999) 'Total cost of ownership purchasing of services: the case of airline selection at Alcatell Bell' in Erridge A. et al (eds) Perspectives on Purchasing and Supply for the Millennium, proceedings of the 8th IPSERA Conference, Belfast and Dublin, March 1999.
Telgen, J. (1994) Inzicht en overzicht: de uitdagingen van Besliskunde en Inkoopmanagement, Enschede, University of Twente.
Van Weele, A.J. and Rozemeijer, F. (1996) Revolution in purchasing, Eindhoven: Philips Electronics. About the author
Luitzen de Boer (MSc, PhD) is a Research Associate at the University of Twente. His research covers Purchasing Management in general and methods and techniques for supporting and organising purchasing decision making in particular. In addition to his research-activities he is also involved in teaching Purchasing Management. Luitzen de Boer is also an editor of several Dutch handbooks for purchasing professionals and a columnist on purchasing issues in a Dutch trade journal.