Over the last decades many new management ideas were launched. Some of these turned into hypes but disappeared almost as quickly as they came. However, there is little doubt that Supply Chain Management (SCM) is here to stay. Although not everyone always realizes this, once implemented, SCM will a major impact on all functions within the organization. All too often SCM is seen as a logistics activity only. This however is dead wrong. In Figure 1 the supply chain from the perspective of a single company is given. As can be seen from this graph, the coordination ofactivities requires the efforts of basically anyone in the organization: Operations & logistics, Marketing & Sales, Administration, Finance and Purchasing.
Three levels of Supply Chain Management
The coordination of activities and goals between different entities in the supply chain with the goal of reducing waste and creating value. As can be seen from the definition, the tool that SCM is using to lower waste and increase value is the coordination between several entities. Dependent on whether the entities are departments in a company, business-units within a corporation or separate organizations, we can distinguish three levels of SCM.
The first level of SCM refers to the alignment of activities and goals of the different functions (or departments) within a company such as Research and development (R&D), Marketing and sales (M&S), Operations and logistics (O&L) and Purchasing. The basic idea of SCM on this level is that, in order to get the optimal result for the entire company, all functions need to be coordinated. For instance, in the product development process it is desired (or even required) that, next to the R&D department, also O&L, M&S and
Purchasing will be a part of the product development team. M&S is needed to make sure that the product is designed with the customer in mind, O&L can give details on what can and what can not be manufactured and Purchasing can be used to find out what type of
components and technologies are available on the market. It is important to realize that on this first (internal) level, coordination can be forced upon by making use of hierarchical structures. That is, the organizational structure of the company can be used to force specific behavior from different departments.
The second level of SCM refers to the coordination of different business-units (BU’s) within one corporation. Typical examples of companies that feel the need for SCM on this level are Philips and Hewlett-Packard. These companies have several operating units that produce and distribute components (such as computer chips and disk drives) for several products made by internal suppliers and shipped to internal customers. SCM on this level is aimed at
optimizing the flow of goods and information as well as the activities and goals between the different business units. SCM usually also aims to present one face to the suppliers, one face
to the customer (account management) and optimization of the activities between the different BU’s. Note that SCM on the second level is still about internal optimization only.
level implies that the several organizations work together to improve the results of all of
them. This feature is usually referred to as “win-win”. Note that, in contrast to the first two
levels of SCM, at this highest level hierarchical control is not possible, simply because a
supply chain does not have an owner. So, the companies are autonomous and working
together only because they choose to do so. It can be observed that, because of the necessary
condition that win-win is achieved and the lack of hierarchy, SCM on the third level is the
most difficult one to implement.
Note that the three levels of SCM discussed above are indeed to be considered as “levels”.
That is, usually companies consist of several BU’s and BU’s consist of several departments,
company has to implement SCM on the lower levels first. Generally, SCM on the third level
is considered as the only “real” SCM. However, frequently also the first two levels are
considered as SCM. With this in mind and since the three levels are in fact implementation
steps, in the remainder of this article we will also discuss the first two levels of SCM and
their impact on Purchasing.
The impact of SCM at the first level on purchasing
Traditionally, in many companies the perceived function of Purchasing is quite narrow. The
key responsibility for Purchasing usually is buying the parts that Operations is needing at
the lowest possible price. As a result, frequently Purchasing is concentrating on negotiation
and market price. As such, Purchasing is most often a sub-department of Manufacturing or
Operations. In an SCM-environment this will drastically change. In fact, when SCM on the
first level is implemented, it becomes necessary that Purchasing is a primary function next
to other primary functions such as O&L and M&S. Below, this statement and its
consequences will be discussed in some detail.
Recall that SCM is all about creating value for the final customer. It is to be realized that an
important source of value lies outside the company, namely with the suppliers. Take the
example of Dell who are in the business of assembling and selling computers. Needless to
say that the performance of a computer heavily depends on its key components such as the
hard disk, DVD drive, keyboard, CPU and memory. Rather than developing new
components by themselves, Dell is always scanning the market to see what the customer’s
whishes are and keeping in touch with all the hardware developers. This allows Dell to
always incorporate those technologies that are available and in demand, rather than being
enforced to sell the homemade technology to recoup their investments. Other classroom
examples of value-creation by Purchasing are department stores and similar retailers. Such
companies are basically only re-selling what is bought by Purchasing.
The impact of SCM at the second level on purchasing
In this section, SCM at the second level, i.e. coordination of Business units within an
organization, is considered. Here it is assumed that various BU’s purchase similar goods.
Usually, it is felt that SCM at the second level favors the centralized purchasing structure in
order to optimize the coordination, i.e. the emphasis is on “providing one face to the
supplier”. This means that in order to exploit the joint buying power, there will be one single
purchasing organization that usually is located in the head office. However, this will not
necessarily provide the company with an optimal situation. In fact there might be various
coordination mechanisms besides centralizing decisions. In other words, centralizing
Purchasing is only one way of capturing the benefits of SCM on the second level. In
practice there are various combinations of centralized and decentralized Purchasing
organizations. One alternative possibility is to centralize the strategic and tactic purchasing
activities and decentralize the operational purchasing activities. Also here the
aforementioned e-purchasing software is instrumental. IBM adopted a similar structure with
their so-called Cross-functional commodity teams. This structure provided a consolidation
of needs on components for the whole organizations with one single contact point for the
supplier. The needs of the different BU’s were bundled and managed by this team.
The impact of SCM at the third level on purchasing
In this section, the impact of SCM at the third level, i.e. coordination of independent
organizations within a supply chain, on Purchasing is considered. Compared to the previous
two sections, the scope will be widened across the company borders. The emphasis here will
be on how to coordination the activities of a company with its suppliers. More specifically,
the following three issues will be reviewed: “Which type of products will require which type
of coordination?”, “Which types of supply chain relations are relevant?” and “How should
SCM-relations be managed?”
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