Question

What factors contribute to the increasing importance of purchasing within the organizational hierarchy?

Answer 1

Organising a Procurement department involves determining not only what we have discussed earlier:

1.  Where it should be located in the organisational structure (position); and

2.  How it should be organised internally (structure)

But, it also involves the considerations of:

1.  What it is responsible for doing (that is, its scope and involvement in the corporate processes (scope))

2.  Which resources it will require to carry out its responsibilities effectively (staffing)

Due to the varied nature of different firms’ products and operations, answers to the preceding questions differ among firms. A number of factors with significant impact on the above issues should be considered before final decisions are made on the organisation of the department. We shall discuss three of the key factors below and the fourth in the next sub-section.

1.  The importance of the Procurement function

In the competitive fast-paced business world today, the importance of Procurement in any specific firm is detailed largely by four factors:

a.  Availability of materials: Are the major materials used by the firm readily available in a competitive market? Or are some key materials bought in volatile markets subject to periodic shortages and price instability? If the latter condition prevails, creative performance by analytical procurement professionals is required; this typically is a top-level group.

b.  Absolute dollar volume of procurements: If a firm spends a large amount of money for materials, the sheer magnitude of the expenditure means that top-flight procurement can usually produce significant profit. Small savings add up quickly to big amount when thousands of units are procured.

c.  Percent of product cost represented by materials: When a firm’s materials costs make up a high percentage of its product cost (or its total operating budget), small reductions in material costs increase profit significantly. Top-level procurement usually pays off in such firms.

d.  Types of materials procured: Perhaps even more important than the preceding considerations is the amount of control procurement personnel actually have over materials availability, costs and services. Most large firms use a wide range of materials, many of whose price and service arrangements definitely can be influenced by creative procurement performance. Some firms, on the other hand, use a fairly small number of standard production and supply materials, from which even a high calibre, top-flight Procurement function can produce little profit as a result of creative management, pricing and supplier selection activities.

For progressive firms with a long-term view, there are also other important considerations on whether Procurement function is critical to a firm’s success, which will depend on whether the function contributes to:

a.  Improved product design and innovation through creative acquisition of state-of-the-art technology and materials.

b.  Attaining the firm’s competitive strategic quality goals by ensuring that only inputs with the required levels of quality are acquired.

c.  Flexibility of production and quick response to market changes by reducing supply lead-time through excellent supply chain management.

If many of these efforts at the corporate level rely on the Procurement function, it will be considered a strategically important function.

2.  Procurement function’s relations with other departments

In Unit 1, we have already discussed the continuing relationships of the function with other departments in an organisation. The Procurement
department needs to interact with various other parts of the organisation in order to effectively carry out the processes relevant to the function.

If the Procurement department is located at a high level within the organisation, it is expected to deal with more strategic issues. Thus, its relations with other departments will also be at a higher level, team working on matters that are critical to the survival of the organisation. This will require having people with the right calibre for this type of work.

If on the other hand, the Procurement function is located lower down in the organisation, its level of attention will become more operational rather than strategic, and the types of staff qualifications needed will be different.

In a nutshell, the criteria for Procurement function’s participation in an organisation’s various processes should focus entirely on whether or not the department is adding value to the process.

3.  Orientation of work and sub-cultures

These considerations concern how a Procurement department is organised internally with the alignment of the nature of work with the people in the department to achieve maximum benefits for the organisation as a whole.