Purchasing and Supply Management
We need to recognize the differences between purchasing and supply management. Purchasing is a functional group (i.e., a formal entity on the organizational chart) as well as a functional activity (i.e., buying goods and services). The purchasing group performs many activities to ensure it delivers maximum value to the organization. Examples include supplier identification and selection, buying, negotiation and contracting, supply market research, supplier measurement and improvement, and purchasing systems development. Purchasing has been referred to as doing “the five rights”: getting the right quality, in the right quantity, at the right time, for the right price, from the right source. In this text we will interchange the terms “purchasing” and “procurement.”
Supply management is not just a new name for purchasing but a more inclusive concept. We feel supply management is a strategic approach to planning for and acquiring the organization’s current and future needs through effectively managing the supply base, utilizing a process orientation in conjunction with cross-functional teams (CFTs) to achieve the organizational mission. Similar to our definition, the Institute for Supply Management defines supply management as the identification, acquisition, access, positioning, and management of resources and related capabilities an organization needs or potentially needs in the attainment of its strategic objectives.6 Exhibit 1.1 depicts the key elements in our definition of supply management.
Supply management requires pursuing strategic responsibilities, which are those activities that have a major impact on longer-term performance of the organization. These longer-term responsibilities are not pursued in isolation, but should be aligned with the overall mission and strategies of the organization. These strategies exclude routine, simple, or day-to-day decisions that may be part of traditional purchasing responsibilities. The routine ordering and follow-up of basic operational supplies is not a strategic responsibility. The development of the systems that enable internal users to order routine supplies, however, is considerably more important.
Supply management is a broader concept than purchasing. Supply management is a progressive approach to managing the supply base that differs from a traditional arm’s length or adversarial approach with sellers. It requires purchasing professionals to work directly with those suppliers that are capable of providing world-class performance and advantages to the buyer. Think of supply management as a progressive and supercharged version of basic purchasing.
Supply management often takes a process approach to obtaining required goods and services. We can describe supply management as the process of identifying, evaluating, selecting, managing, and developing suppliers to realize supply chain performance that is better than that of competitors. We will interchange the terms “supply management” and “strategic sourcing” throughout this book.
Supply management is cross-functional, meaning it involves purchasing, engineering, supplier quality assurance, the supplier, and other related functions working together as one team, early on, to further mutual goals.7 Instead of adversarial relationships, which characterize traditional purchasing, supply management features a long-term, win-win relationship between a buying company and specially selected suppliers. Except for ownership, the supplier almost becomes an extension of the buying company. Supply management also recognizes the mutual benefits to both parties, through shared information, provisions for on-site resources, and frequent help to suppliers in exchange for dramatic and continuous performance improvements, including steady price reductions. In short, supply management is a new way of operating, involving internal operations and external suppliers to achieve advances in cost management, product development, cycle times, and total quality control.
Organizationally, leading and coordinating strategic supply management activities have largely become the responsibility of the functional group called purchasing. Practicing professionals often use the terms “supply management” and “purchasing” interchangeably. Through the above discussion we have sought to clarify some of the differences while recognizing that good purchasing and supply management practices can have significant impact on the organization’s overall performance.