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CIPS Level 6

SUGGESTED SOLUTIONS TO PRACTICE QUESTIONS

Strategic Supply Chain Management

Suggested Solutions to Practice Questions Developing strategies

CIPS examiners have shown in the past that a reasonable familiarity with major tools of strategic analysis is expected. In this question there is specific reference to the framework of Johnson and Scholes, but you are also expected to recognise a reference to the concept of emergent strategy developed by Mintzberg.

A good starting point is to look in more detail at the scheme of Johnson and Scholes, which breaks down each of the three main headings into subsidiary headings. This is the approach adotped in the suggested solution below.

Much research has been done into identifying and/or developing the rational models mentioned in the question. The analysis in Johnson and Scholes goes into great depth explaining the procedure, and in particular provides the following more detailed breakdown of the steps mentioned.

Strategic analysis examines:

• the environment;

• expectations, objectives and power

• resources

Strategic choice involves:

• generation of options

• evaluation of options

• selection of strategy

Strategy implementation involves:

• resource planning

• organisation structure

• people and systems.

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A strict application of this scheme within a purchasing and supply function might lead to a sequence of events somewhat like the following.

• Analysis of the environment. This would include the immediate internal environment of the purchasing function, including relationships with other departments. For example, the adoption of world class concepts such as just in time would dictate a need for a close working relationship with production. More crucially, this step would involve the external environment, including relationships and strategies along the supply chain.

• Analysis of expectations, objectives and power. In the case of a function (as opposed to the organisation as a whole) this might be relatively straightforward, in that the overall corporate framework would be a major factor. But purchasing, like any other function, would expect to be involved in agreeing these matters, rather than just having them imposed through an autocratic corporate planning process.

• Analysis of resources. Again, purchasing should have an input to the process of corporate planning as it relates to the functional budget and the manpower plan.

• Generation of options. The main strategic choices are relatively clear. Is purchasing to be mainly a clerical activity or is it to become actively involved in strategic issues? Is future supplier development to be through traditional methods or will more modern ideas of partnership sourcing and co-makership prevail?

• Evaluation of options and selection of strategy. The main criterion is the long-term profitability of the organisation. The emphasis here is on ‘long-term’: short-term adversarial approaches to suppliers, for example, may not satisfy the long-term objective.

• Resource planning. Once the strategy has been selected, implementation calls for detailed consideration of resources, in terms both of the financial budget and of the manpower plan.

• Organisation structure. This should be considered both in relation to the overall organisation structure, and purchasing’s place within it, and in relation to the internal organisation of the function itself.

• People and systems. Once again, the manpower plan is important, but systems of work (including crucially the extent of use of information technology) must also be determined.

As far as the implementation phase is concerned – the last three steps above – you might wish to refer to a structured framework, such as the McKinsey 7-S Framework.

This scheme is highly formalised, and it must be doubted how far it applies in detail to the actual process of strategic planning within organisations. Although some organisations (particularly very large ones) do have extremely formalised systems, it is likely that even here outcomes are determined at least partly by less formal means.

This situation is described by Mintzberg as ‘emergent strategy’. ‘One idea leads to another, until a new pattern forms. Action has driven thinking, and a new strategy has emerged… Out in the field a salesman visits a customer. The product isn’t right, and together they work out some modifications. The salesman returns to the company and puts the changes through; after two or three more rounds they finally get it right. A new product emerges, which eventually opens a new market. The company has changed strategic course.’

Suggested Solutions to Practice Questions

This description may well strike a chord with those who work in purchasing departments, and it is likely that to some extent strategy in real life is formulated like this. However, the danger is that too much of this can lead to a firm being deflected from its overall course; the presence of a formalised system is a useful check on this. In practice, most organisations probably get by with a mix of planned and emergent strategy.

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Strategy formulation

This question is part (a) of the case study question that appeared in the May 2001 paper for Strategy and Strategic Procurement. As you can see from the first part of the question, it is worthwhile to learn by heart definitions of core concepts in this syllabus. For the purposes of this question, a useful definition is that provided by K Andrews in The Concept of Corporate Strategy, which is used in the solution below. The second part of the question relates to the rational model of strategic planning and alternatives, such as emergent strategy. This is pure bookwork and can be answered directly from the text of Chapter 1.

There is no single accepted definition of corporate strategy. Different authorities provide definitions that emphasise different aspects of the concept. All are agreed that strategy is a matter for the highest level of authority within the organisation, because strategy is what shapes day-to-day planning and decision-making. However, various methods of strategy formulation have been observed in practice.

K Andrews defines corporate strategy as ‘the pattern of decisions in a company that determines and reveals its objectives, purposes and goals, and produces the principal policies and plans for achieving those goals’.

The definition provided by Andrews appears to be based on what is called the rational approach to strategy formulation. One version of this approach envisages firstly a period of analysis in which relevant factors are considered and possible strategies are considered. Next comes a stage of strategic choice, in which the candidate strategies are assessed and a choice is made. The final stage is one of implementation, when the chosen strategy is put into effect.

Not all authorities agree that this method of strategy formulation applies in practice. According to Mintzberg, strategies may emerge in opportunistic or entrepreneurial ways. An organisation may take advantage of changes in the environment or recognise new skills in an opportunistic manner, or a firm may be set up by an entrepreneur because of an opportunity in the market place. On this scenario, strategy development is dominated by the active search for new opportunities and is characterised by dramatic leaps forward in the face of uncertainty.

Another mode of strategy development is sometimes called adaptive because it fits the description that managers give of how strategies come about. They see their role as being involved in a continual proactive pursuit of a strategic goal, countering competitive moves and adapting to their environment while not rocking the boat too much.

Four major characteristics distinguish the adaptive mode of strategy development.

• Clear goals do not exist in the adaptive organisation. There is no single central source of power.

• Strategies evolve through reactive solutions to existing problems rather than a proactive search for new opportunities.

• Organisations make decisions in successive incremental steps. Strategy development is based on consideration of options that differ only slightly from the status quo.

• Decisions are made in a disjointed and piecemeal manner.

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A planned approach will not always happen in practice. Defined patterns of behaviour will already exist in any organisation, which means that superimposing a new strategy is not a simple matter. Existing patterns of behaviour will often help to shape the strategies adopted. If new strategies conflict with existing patterns, the strategies may well be modified in practice. This is the concept of emergent strategy.

Mintzberg describes this process. ‘One idea leads to another until a new pattern forms. Action has driven thinking and a new strategy has emerged.’

The actual outcome – the organisation’s realised strategy – can come about through a planned, deliberate formulation and implementation. It can also come about from a pattern in a stream of decisions (emergent strategy).

Some researchers have been sceptical about the very idea of the rational model in strategy development (the idea that organisations set objectives, identify all possible routes to those objectives, evaluate each possibility, and then make a choice). Charles Lindblom in particular has argued that this model simply does not reflect reality.

Lindblom’s criticisms of the rational model are as follows.

• It is meaningless to distinguish between objectives and the possible strategies to achieve them. In practice, managers confuse the two.

• It is unrealistic to imagine a strategic planner carefully sifting through every possible option to achieve predetermined goals. In practice, the range of options that will even present themselves as possibilities will be limited, and of those many will be filtered out without full evaluation.

• At best, formulation of strategy is a process of evaluating a few slight extensions to existing policies.

Lindblom therefore argued that strategic choice takes place by comparing possible options against each other and considering which would give the best outcome. He called this method of strategy development ‘building through successive limited comparisons’.

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Strategic analysis

When developing a strategic plan for any organisation the first step is to perform a strategic analysis of where the organisation is currently positioned in relation to its environment and, most importantly, in relation to its customers and its competitors.

The most common tools of strategic analysis that would be used are as follows.

• Position audit. This focuses attention on the question of ‘where are we now?’ – the current situation. All aspects of the organisation as it currently operates should be examined – objectives, resources, products, markets, operating systems, internal structure and results. Through systematic analysis and review it should be possible to isolate the organisation’s strengths and weaknesses, which can then be further analysed via a SWOT analysis. It should also be possible to extrapolate into the future, so the organisation has some idea of what its performance is likely to be if it continues on its current course. This can then act as a benchmark for measuring the projected results of other suggested courses of action.

• SWOT analysis. Strengths, weaknesses, opportunities and threats (SWOT) analysis delves deeper into the information thrown up by the position audit, and clearly identifies the organisation’s internal strengths and weaknesses in the face of external threats and opportunities. During this process ideas are frequently generated that can be further analysed and may be developed into alternative strategies at the later stage of strategic planning.

It is at this stage of strategic analysis that the strategic planner often realises that there is plenty of information available about the organisation’s internal operations, but less about the organisation’s external environment. Systematic environmental analysis is therefore often called for.

• Environmental analysis. Information about the environment can come from a wide variety of sources such as economic forecasts, industry projections, marketing research and technological reviews. The steps recommended by Johnson and Scholes in environmental analysis are:

– audit environmental influences; – assess nature of environment; – perform structural analysis to identify key environmental forces; – identify competitive position; – identify key opportunities and threats; – pinpoint strategic position.

Very often the result of environmental analysis is to identify the need to perform detailed competitive analysis.

• Competitive analysis – Porter’s Five Forces model. Porter states that any industry is shaped by five forces or threats, which have varying degrees of strength and which interact in different ways. These five threats arise from:

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– potential entrants, who may expand capacity without increasing demand, make market and product innovations, or increase everyone’s costs;

– substitutes; – the bargaining power of buyers; – the bargaining power of suppliers; – the competitive rivalry that ensues.

Once a picture of the overall competitive environment is developed, it is possible to concentrate on those parts of the competitive environment which most affect the organisation’s potential strategies.

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Environmental influences

This is a straightforward question on the PEST classification of environmental influences. Although it is probably simpler than you might expect in the actual examination it gives you the opportunity to practise a form of analysis which is repeatedly identified by the examiner as a key strategic tool.

Even in this relatively straightforward context you should note that you are asked for specific applications to the purchasing function. A purely general discussion without such applications would forfeit marks in the examination.

It is common to analyse environmental influences on firms using the PEST framework: political/legal, economic, social or socio-cultural, and technological influences. Although there is overlapping, in the sense that many influences will have aspects that straddle these boundaries, the framework is a useful one for analysis.

Political/legal influences

The political/legal environment includes the laws and regulations with which businesses must comply. Despite a stated commitment to deregulation by successive UK governments, the fact remains that business activities are hedged about by a multiplicity of regulations. These govern everything from company administration, through employment and health and safety issues, to product liability – with a million other applications in between.

Important recent examples of political influences on business include:

• the opening up of East European markets with the collapse of Communism in those countries

• the gradual erosion of the public sector in the UK, with the introduction of private sector commercial disciplines even in those public sector outposts which remain. This has far-reaching implications for the activities of purchasing professionals within former public sector organisations.

• the reduction or elimination of trade barriers within the European Union which has facilitated the work of buyers sourcing from abroad.

Economic influences

All organisations, even in the not-for-profit sector, must operate within economic constraints. This means that a wide range of economic influences acts on them.

• Availability of capital is an important factor in general financing of firms, and in particular in cases of investment in capital assets such as machinery.

• Availability of labour, and (related to this) the price of labour, has an important impact on a firm’s input costs, an area of direct relevance to purchasing departments.

• Fiscal and tax policy can also affect input costs, for example in cases where certain industries benefit from subsidies.

• The general level of economic prosperity is a key ingredient in determining demand for most firms’ products.

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Socio-cultural influences

The socio-cultural environment can be described as a mix of attitudes, desires, expectations, education, beliefs and customs. Examples of how such factors can impact on business are given below.

• Differences in national cultures can hamper international trade. This may be simply a matter of increased communication difficulties between members of different cultural backgrounds, but also includes cases where social differences lead to active boycotting of trade. An example of the latter is the case of South Africa in the days of apartheid.

• Increasing affluence in the Western world has created demand for a wider range of products, including expensive products. There are consequent opportunities for product differentiation and market segmentation. Purchasing professionals need to be aware of such trends in making their input to product planning.

• Changes in socio-cultural ideals have led to corresponding changes in employment patterns. Examples are the prohibition of discrimination on grounds of race or sex which are finally reducing barriers to career advancement for women and ethnic minorities.

Technological influences

Finally, the rapid pace of technological change has a profound impact on the business environment. The effects can be divided into two main categories.

• Changes in the types of products offered. Increasing technological capacity means that products hardly dreamt of 20 years ago are in most UK households today; microwave ovens, video recorders and personal computers are just a few examples. Clearly this has given an enormous boost to many existing industries, and has created many industries that did not exist before.

• Changes in the way that products are produced. Purchasing professionals will be instantly familiar with the importance of technological change in such areas as world class manufacturing, electronic data interchange, logistics and many more.

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Strategy and structure

The relationship between strategies and organisational structure is a topic that has been examined in the past.

The present question is essentially in two parts: the general assertion contained in the quotation, and the application to purchasing and supply functions in particular. This is a common feature in exam questions. One point that you may miss if you are misled by the wording of the question is that the relationship may be a two-way thing: structure can influence strategy as well as vice versa.

The assertion that strategy determines structure is an assertion that the following sequence of events is normal or invariable.

• First, the organisation (or a function within the organisation) determines its preferred strategic direction.

• Second, the implications of this choice automatically dictate the structure of the organisation (or of the function).

The first point to be made is that the implication of a one-way process is simplistic. Although textbooks on strategic planning often assume without question that determining the strategy is the first priority, it has to be recognised that in the real world this is not always so. Often, the existing organisational or functional structure is consciously or unconsciously taken as unalterable, and strategies are chosen to fit in with it.

This caveat aside, it is indeed true that researchers have identified important effects of strategic choices on organisational structure. This is by no means confined to the purchasing and supply function. For a very simple example, consider a book publisher that took the decision to move away from distribution through wholesalers and retail bookshops and into mail order sales. This would require very extensive structural changes involving warehousing, sales order processing, sales force management and much else besides.

In the specific context of purchasing and supply, the most common strategic changes in recent years have been in the direction of world class policies. This has been an important factor in shaping strategy both in organisations as a whole, and within purchasing and supply functions.

Some of the more important structural consequences have been as follows.

• The position of the function within the organisation has often been enhanced, with reporting lines now reaching right to the top echelons of management.

• Many activities previously carried out by separate functions have now been integrated. For example, it is now much more common to see an integrated materials management or logistics structure in operation. A key factor here is the need to streamline processes so as to achieve more rapid response to change and speedier satisfaction of customer needs. A frequent consequence is increased decentralisation.

• Purchasing systems have become more automated. This has applied not just within the boundaries of the organisation, but has been extended along the supply chain, often by means of technological links (electronic data interchange, or EDI).

• Partnership approaches have meant even greater need for liaison with suppliers – to achieve just in time ideals, to eliminate non-value-added activities, and to focus on the total cost of acquisition rather than merely the short-term price.

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Generic strategies

The ideas of Professor Michael Porter have had an important impact on strategic thinking. For the purpose of this question you are required to show understanding of his analysis of the generic strategies that businesses may choose to pursue. These are discussed in Chapter 4 of your Reference Text..

• A strategy of differntiation means that businesses aim to distinguish their offerings from those of competitors by means of different product features (broadly defined so as to include, for example, product availability).

• A strategy of cost leadership means that businesses aim to offer products comparable with those of competitors but at lower cost.

The main advantage to which purchasing can contribute in a strategy of differentiation concerns ‘product features’ such as quality, availability and delivery time.

Approaches to securing these advantages have changed markedly in recent decades. Proactive measures that can be taken by purchasing and supply functions are as follows.

• Focus on quality procedures so as to delight customers. This means an emphasis on designing quality into the product, to which purchasing can make a significant contribution, in preference to older techniques based on quality control through inspection.

• Streamline internal production procedures and supply chain procedures to minimise lead times and improve availability. Again, this implies modern just in time techniques in preference to the older ‘just in case’ method of holding buffer stocks.

• Streamline outwards movement through effective logistics management. Combine this with improved order entry and order processing systems making use of enhanced information technology.

The strategic benefits of these policies will be evident in lower costs, improved quality, reduced product variability and greater customer satisfaction.

If the chosen strategy is based on cost leadership, purchasing again has an important contribution to make.

• Focus on quality procedures so as to reduce costs arising from reworking and breakdowns. As above, this means an emphasis on designing quality into the product, to which purchasing can make a significant contribution, in preference to older techniques based on quality control through inspection.

• Reduce the costs of production through appropriate investment in automation. This contrasts dramatically with older approaches, in which reducing capital expenditure was often seen as a means of cost control. So it was – but usually in the very short term only.

• Reduce the costs associated with inventory by careful planning, perhaps using MRP or MRP II techniques, and reduced internal lead times. Once again, this contrasts with older views based on minimising unit costs of production by increasing batch sizes and therefore stock levels.

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• Analyse activities throughout the supply chain so as to minimise activities which do not add value. The use of value analysis and value engineering techniques may also be important.

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Options

This is Question 6 of the November 2002 exam for Strategy and Strategic Procurement. You should recognise that the four parts of the question are derived from Ansoff’s matrix. This will enable you to construct a solution simply by adapting the discussion on Ansoff in section 2 of Chapter 4 of your Reference Text..

In the published analysis of the question the examiner stated that candidates should have begun by explaining the three generic strategies identified by Michael Porter. However, since this is not specified or implied in the question, and since an answer to the question can be constructed perfectly well without it (as indeed the examiner’s own answer is), it is hard to know what to make of this advice. In the solution below we include an introductory paragraph on Porter’s work, and you should consider doing so if you face a future question on strategic options, even if the question does not ask for it.

Michael Porter identified three generic strategies for competitive advantage: cost leadership, differentiation, and focus. A business will aim to achieve competitive advantage through one or other of these strategies.

The business must then consider its strategic direction options. A useful tool in this context is Ansoff’s matrix, from which the four options specified in the question are derived.

Protect/build strategy

In this category, Johnson and Scholes discuss three possibilities: withdrawal, consolidation, and market penetration.

With regard to withdrawal, Johnson and Scholes give several possible reasons why this might be desirable.

• The organisation may be unable to achieve the resources and competencies to compete effectively.

• Although resources may be available, the organisation’s priorities may be such that they cannot any longer be devoted to a sector that has been pursued in the past.

• The owner(s) may always have had only a short-term commitment to the market, and retires from it when his short-term objectives are satisfied.

• In some cases, the organisation’s strategy may involve astute divestment of business units on a regular basis to fund investment elsewhere.

With regard to consolidation, it would be a mistake to regard this as merely standing still. A better perspective would be to say that consolidation means protecting and perhaps strengthening the organisation’s position in its existing markets. In some cases it may take much effort and investment to maintain the company’s products in such a way that they remain competitive.

A principal reason for wishing to maintain market share is that this may well be important for maintaining a company’s return on investment (ROI). To assess the impact on profit of a company’s strategic direction a useful tool is the PIMS (Profit Impact of Market Strategy) database. This is a database incorporating the experience of several thousand businesses.

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The PIMS database indicates several reasons why maintaining market share may contribute to maintaining ROI. For one thing, larger businesses (with larger market share) enjoy scale economies in the use of their fixed assets. Another reason is that companies with high market share can buy at more competitive prices.

And finally with regard to market penetration, this may be achieved by various means. One possibility would be to increase the amount of the product used on each occasion (for instance, a bottle of shampoo with instructions for use ending in the word ‘Repeat’). Another possibility would be to add product enhancements to gain market share from competitors. Or again, a company might set lower selling prices, or increase promotional activity, or adopt a more intensive distribution policy.

Product development

A strategy of product development involves introducing new products to existing markets. The advantage of this strategy is that the marketer can utilise his existing distribution channels. The marketer should understand his markets and therefore identification of new products may not pose too many problems, especially if these products are strongly related to his existing products. For instance, an organisation might sell conditioner if it already has a market for shampoo.

Again, there is an element of risk with this strategy and the marketer must make sure that his reputation is not at stake if current customers do not accept new product offerings. A good example of a company that utilises this strategy is the Body Shop which continually introduces new product ranges for its existing customers.

Product planning and the development of new products is essential if an organisation is to survive in the long term or if it is pursuing a product development or diversification strategy. The sales of any product will decline at some point in the future. The business must produce new products in order to sustain turnover and profit.

The marketing orientated company will realise that the macro environment is rapidly changing and that it must recognise and respond to these changes. Preferably, the organisation will be proactive and pre-empt these changes ahead of its competitors. These changes will influence customer behaviour and the products that they want to purchase. The danger is that if these new needs are not satisfied by the organisation, they will be satisfied by a competitor instead.

These macro environmental changes are also influencing the life of a product and so the rate of launching new products into a market must be increased.

It is for these reasons that product planning and innovation are essential to every organisation and so product development should not be left to chance. It should be a strategic process that is co-ordinated by the marketing department. Organisations should have strategic objects for new product development. These objectives might include the following.

• To increase market share. Although market share is not always an indication of profit, there is a strong relationship. Greater market share may lead to economies of scale in production and marketing.

• To develop and enter new markets or segments which may lead to competitive advantage.

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• To hold a lead position as an innovator. This might be essential in some industries; for example, in computers an organisation’s reputation as an innovator may sustain it.

• To diversify into new markets so that organisational risk is spread more widely.

• To exploit distribution strengths. If an organisation has strong distribution channels with good relationships with intermediaries, it can utilise these factors.

• To use production capacity and to avoid seasonal influences of demand in certain product areas.

Market development

A strategy of market development concentrates on finding new markets for existing products. This can be achieved by exporting goods but there are other methods, and a firm may use segmentation to help identify new markets. For example, a baby lotion might be suitable for women – in other words, a different market segment.

An organisation might consider this strategy at the mature stage of the PLC in order to sustain sales for as long as possible before decline. There is an element of risk involved in this strategy because, although the marketer understands and knows his own products, he must find methods of communicating effectively with potential customers.

Johnson and Scholes identify three common ways of achieving market development.

• Extension into market segments not currently served

• Development of new uses for existing products

• Extension into new geographical areas

Diversification

A strategy of diversification refers to the development of new products for new markets and so is generally considered to be a high-risk strategy as the marketer has little knowledge of his customers or his products. Some marketers concentrate on identification of new markets that complement existing markets, although this is not always the case. Many organisations concentrate on acquisition of other companies in order to pursue this strategy. But if they do pursue this strategy, some form of strategic new product development is essential.

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Resources

Robert M Grant emphasises the need to match the organisation’s resources to the opportunities arising. Certainly the external environment of the organisation is an important influence, but focus should also be placed on the internal capabilities. This is particularly important at times when the external environment is changing rapidly.

Grant believes that this (resource-based) approach to strategy implementation involves three main elements.

• Selecting a strategy that exploits the organisation’s principal resources and capabilities

• Ensuring that the organisation’s resources are fully employed, which in turn will ensure that its profit potential is fully exploited

• Building the organisation’s resource base

Apart from analysing the individual resources that are present, it is also necessary to consider how these can be exploited to create competitive advantage. The resources in question may be tangible (eg physical assets and cash) or intangible (eg goodwill, brands, patents). Human resources are also important (knowledge, competencies etc).

Grant also examines the potential of a given resource to earn profit. This depends on three factors.

• The extent of the competitive advantage afforded by the resource (which in turn depends on its scarcity and its relevance to the organisational strategy)

• The sustainability of the competitive advantage (which in turn depends on its durability, its mobility, and its replicability). If a resource is immobile (eg because of geographical distance or lack of information), or if it is difficult to replicate, then its value is reduced.

• The appropriateness of the resource

A resource audit is an assessment of the resources owned by an organisation (or at least accessible to the organisation – for example customers are not owned by the organisation but are a source of strength nevertheless).

It is usual to analyse resources under four headings: physical resources, human resources, financial resources and intangibles.

Physical resources include machines, buildings, materials etc. The resource audit should be concerned with the age, condition, capability and location of each of these.

Human resources should be analysed in terms of the skills base and the adaptability of the workforce (particularly important in fast-moving environments).

Financial resources include cash, debtors (net of creditors), and the systems and procedures for managing these assets. These items are often the subject of continuous audit by an internal audit department, and in most organisations are also examined by external auditors.

Intangible assets include ‘goodwill’ elements (eg the good name of the business, the prime locations it enjoys etc), as well as brands, patents etc.

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Management of change

In the solution below the question is tackled in the order of its requirements: firstly identifying barriers to change and focusing on a particular model (Lewin’s force-field model), and then relating the general considerations to the purchasing function.

The current era in business is one of rapid change in technology, work patterns, customer concerns and countless other areas. So pervasive are the effects of change that their management is now recognised as a subject of study in its own right.

From the perspective of purchasing staff perhaps the most significant areas of change are in product design, manufacturing processes and information technology. A key theme running through all this is an increasing dissatisfaction with traditional Western ‘scientific management’, with its emphasis on standardised production and specialisation of personnel. This approach is at odds with modern ideas of satisfying varied customer demands through empowered work teams.

But although there are good strategic reasons for these moves, they are not universally welcomed by the people they affect. For example, resistance to change may occur if people see it as threatening.

• Some may see change, particularly in the form of increased automation, as carrying a threat of redundancy.

• Some may see their position, status and power as being endangered.

• Some may worry that they will be unable to adjust – unable to learn the new techniques and skills that change often demands.

• In some cases, the resistance may have no clear logical basis. It is a fact that many people simply grow comfortable with known routines and experience vague fears when those routines are disturbed, especially if they are largely ignorant of what is to replace them.

One model for analysing and tackling these problems is that developed by Kurt Lewin: force-field analysis. This is based on the idea that in a given organisational situation there is an interplay of restraining and driving forces that keeps things as they are. The aim of Lewin’s analysis is to chart the forces that are pushing in the desired direction and those that push in other directions – usually in the direction of the status quo. Once this has been done, it is possible to focus on the resisting forces and either overcome or at least reduce them.

Lewin went on, in collaboration with Edgar Schein, to devise a three-stage model for changing human behaviour.

• Unfreeze existing behaviour.

• Introduce changes in behaviour and attitudes.

• Refreeze new behaviour.

It is the first of these steps that the present question is concerned with. Saunders, in Strategic Purchasing and Supply Chain Management, identifies the following processes as useful contributions at this stage.

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• Communication and education

• Involvement of the people who are affected

• Negotiation of preferred solutions so as to overcome fears

• Support through training and counselling

• The use of pilot programmes

For purchasing specialists the main area of change is the development of new models for buyer-supplier relationships. While the strategic importance of this trend is recognised, it is still necessary to overcome traditional behaviour and patterns of thought. Positive moves that can be taken include the following.

• Developing a coherent policy to introduce the new approach

• Encouraging the development of ‘partnership’ attitudes

• Increased training

• Structural change away from segregation of duties and towards multi-functional teams.

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Strategic planning

As specialists studying for a professional qualification, you are expected by the examiner to take a critical approach to the issues that confront purchasing and supply staff in the real world. This is illustrated in the present question.

While textbooks understandably focus on what modern thinking regards as best procedures, it would be unwise to assume that such accounts always reflect universal practice.The present question recognises that many purchasing functions remain caught within traditional methods of operation, and require analysis of how this problem can be overcome.

(a) Despite evidence that a strategic approach to purchasing and supply chain management can reduce costs, improve efficiency and above all secure competitive advantage and increase profitability, the message has not always led to adoption of modern purchasing practices.

The possible reasons for this include the following.

• Shortcomings within the purchasing function. Lack of proactive management, inadequate training, insufficient awareness of modern trends, or simply inertia can mean that the purchasing function does not give the lead required.

• Lack of awareness among senior management. This can be simple ignorance of the importance of a major item of expenditure – the cost of bought-out supplies – or it can be due to management focus on other areas such as production or marketing – without an understanding of the contribution that purchasing can make in these areas too.

• Inappropriate organisation structure. To make its fullest contribution, the role of purchasing must be recognised at an appropriate level in the organisation structure.

(b) Measures that can be taken to improve this situation should begin at the most senior level. Without gaining the support of top management it is unlikely that the purchasing function can achieve its full strategic potential. Much depends on the ability of the head of the purchasing function, whatever his title, to convince management up to and including chief executive level of the need for change.

Assuming that the appropriate management commitment can be obtained the next steps might include the following.

• Planning the structure of the function both within its own boundaries and as an element of the overall organisational structure

• Strategic analysis of strengths and weaknesses, again for both the function itself and for those areas in the corporate strategy to which purchasing can contribute

• Allocation of resources sufficient to strengthen the function by means of training and staff development

• Determination of strategic direction for the function and the whole supply chain, focusing on modern approaches to adding value, partnership sourcing etc.

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Centralisation and decentralisation

This is a straightforward bookwork question. Construct a solution by using the material in Chapter 9 of your Reference Text.

(a) The terms centralisation and decentralisation can be used to refer to:

(i) the extent to which decision-making authority is kept close to the centre (or top) of the firm – ie the level of the hierarchy at which decisions are taken – and the extent of delegation. Thus centralised purchasing decisions would be taken by senior purchasing managers – while decentralised purchasing decisions would be taken by purchasing staff at lower levels (eg unit buyers).

(ii) the extent to which related tasks and resources are gathered under a single functional authority or location – ie whether there is a separate purchasing function, or whether purchasing is carried out by relevant line departments. Centralised purchasing involves all purchasing activity being conducted at a head or central office, or on behalf of all units of the organisation. This is often the case where items required by different units and plants are similar. Decentralised purchasing involves buying activity carried out by line departments, plants or worksites, usually defined as cost centres.

(b) There certain advantages in centralising any function, or retaining managerial control and coordination:

• coordinated decisions (‘big picture’ thinking) and closer management control, therefore less sub-optimising behaviour

• conformity with overall objectives, rather than sub-unit goals and interests • standardisation of work processes and outputs, eg variety reduction and

rationalisation • balance between the competing interest of different functions or divisions • increased flexibility in use of resources, given ‘big picture’ thinking • economies of scale in the costs of management, finance, purchasing,

production, etc • better decisions (in theory) arising from the proven ability and experience

required to reach senior management positions • speedier decision-making, especially in a crisis – delegation can be time-

consuming • effective change management where quick action and strong leadership are

required.

In addition, there are particular advantages in centralising purchasing.

• The greater specialisation that is possible among purchasing staff. If purchasing staff are scattered between divisions, each of them must have general responsibility for a wide range of the division’s requirements, leading to the development of generalist knowledge and skills. If purchasing staff are based at a single centralised location, however, there is opportunity to divide tasks among them on the basis of specialised skills. Each buyer can focus on a particular area (particular skills, such as contract negotiation, or particular materials and

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markets, such as machinery or chemicals) and develop his knowledge to greater depth.

• A further advantage is that the requirements of different divisions can be consolidated. This reduces the frequency of small orders for a particular material, and enables buyers to obtain better prices (with economies of scale, bulk discounts, etc) and higher levels of service (as potentially significant clients). The number of suppliers is likely to be smaller, and order administration and processing may be more streamlined. This advantage is particularly evident where buying units are relatively small, because their individual requirements might be uneconomical.

• Greater coordination of purchasing activities may result from a centralised structure. For example, uniform purchasing policies and procedures can be introduced, facilitating standardisation. Staff training and development can be undertaken more systematically.

• Centralisation of purchasing can avoid price anomalies between purchasing divisions. More importantly, it can avoid actual competition and conflict between them, in times when supplies of a particular material, or purchasing resources, are scarce.

• Finally, the vital area of purchasing research is often neglected if individual divisions are expected to carry it out. It is a specialised area, and the necessary skills and contacts may not be available at divisional level. In addition, the need for divisional purchasing staff to perform a wide range of functions often means that purchasing research simply receives less attention than it deserves.

On the other hand, there are advantages in decentralising any function.

• Lower-level managers experience increased job satisfaction, which may promote commitment and loyalty.

• Senior management may not possess detailed knowledge of all the organisation’s activities, or of operational demands (especially customer demands). Higher-quality problem-solving and decision-making may be carried out by those with more technical expertise and immediate experience.

• Centralisation places stressful levels of responsibility onto senior management. • Subordinates experience enhanced opportunity for career development, which

may reduce difficulties in skill retention and management succession planning. • The referral of decisions upwards to senior management takes time and restricts

the responsiveness of the organisation to customer demands and environmental changes.

• Standardisation of processes and outputs may not capitalise on, or respond to, local variations in conditions or customer demands.

There are particular advantages in decentralising purchasing, including:

• One reason for doing so is to maximise communication and coordination between purchasing and operating departments. Buyers are close to users and develop a close understanding of their needs and problems. Face-to-face discussions are easy to organise and can help to diagnose problems and stimulate solutions. (This problem can to some extent be countered in centralised purchasing functions by the use of information and communications technology

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for regular contact and data-sharing, supplemented by regular site visits by purchasing staff.)

• Another benefit of decentralisation is that local buyers can respond more quickly to user needs. Centralised purchasing can run into difficulties if things do not go exactly according to plan. Reacting quickly to changes in schedules or unforeseen problems is easier if buyers are close to the scene of operations. Relying on long-distance communication inevitably means that response times are longer.

• Locally based buyers also have the advantage of knowing locally based suppliers. There are advantages – of cost, delivery time etc – in sourcing from short distances (although these should not be overstated, given the increasing globalisation of business and the support of ICT – particularly for the sourcing of services).

• Finally, there is an important management principle that supports a policy of decentralisation: a divisional manager can be held accountable for the performance of his division only if he has genuine control over its operations. This is not the case if the vitally important area of procurement is taken out of his hands and given instead to a centralised purchasing function.

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Inter-organisational structures

(a) The term ‘joint venture’ refers to a formal arrangement whereby two independent companies establish a new company which they jointly own (eg through shareholding, asset-holding and profit-distribution agreements) and manage. Their other businesses remain separate from this new, shared venture. Where more than two companies enter this arrangement, it is called a ‘consortium’.

The term ‘strategic alliance’ refers to a formally structured relationship, in which two companies legally contract to cooperate in specified ways (eg purchase, supply or distribution agreements; collaborative promotions or product cross-selling) to achieve specific commercial objectives that are of benefit to both parties. Companies pool competencies and resources which each firm, individually, may lack, to cope with changing technology, international markets or customer demands for integrated products/services markets.

The key differences between the two organisational forms are thus:

(i) The nature of the legal relationship between the two companies. Joint venture is a ‘hierarchical’ relationship involving integration within the organisational structure (in the form of a jointly owned company), while strategic alliance is further along the continuum towards a ‘market’ relationship, as a form of mutually beneficial transaction.

(ii) The extent of integration between companies. Joint venture involves joint ownership and management, while strategic alliance involves limited cooperative agreements.

(b) Inter-organisation relationships have become significant features of the business environment, because of the realisation that:

(i) market opportunities may not be effectively exploited by one firm alone, particularly in foreign markets and cultures. Western companies operating in Eastern Europe and China, for example, have formed joint ventures with indigenous partners. One provides technical and managerial expertise and investment, while the other supplies access to labour and local markets.

(ii) a single firm may have limited technical, product, management or marketing competencies and resources needed to compete in fast-changing, globalising markets. Huczynski and Buchanan suggest that in strategic alliances, for example, companies ‘attempt to achieve, with their existing respective value chains, the competitive advantage that might have … eluded them independently.’

(iii) a single firm may lack finance for development, and gain asset backing for development loans, or capital injection, from inter-organisational partners.

(iv) it may be more profitable to replace the market mechanism (transactions and exchanges) with more controllable longer-term networking relationships, enabling the integration of systems, data-sharing, economies of scale and other synergistic benefits.

(v) business cooperation may be required to aid economic recovery in a region (often supported by government policy and incentives).

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Strategic role

Many standard textbooks on purchasing and supply stress the extent of purchasing’s responsibility in terms of the proportion of total organisational expenditure that falls within the ambit of the department.

In the present question the first requirement is to discuss how purchasing can manage this responsibility so as to improve profitability. Your answer should cover direct costs of supply, costs of inventory, costs of logistics and materials management etc. The second requirement is to explain how this objective co-exists with more strategic objectives that have been assumed by purchasing departments in recent years. The question uses the term ‘superseded’, but it would be more accurate to talk of the new responsibilities being an addition to existing objectives.

(a) One of the most obvious facts about purchasing departments is that they spend an awful lot of money. We are not here concerned primarily with the costs of running the function itself – staff costs etc – though of course it is always worthwhile to ensure that efficiency and cost control measures are in place. The issue is the amount of expenditure that purchasing staff commit on behalf of their organisations to external suppliers.

The costs for which purchasing is responsible include acquisition costs, inventory costs and logistics and materials management costs. To reduce such costs purchasing specialists have traditionally taken the following measures.

• They minimise acquisition costs by appropriate selection of suppliers. Of course, a saving in acquisition costs which leads to an increase in quality-related costs is no saving, so purchasing staff have to be continually aware of the possible trade-offs in this area.

• They minimise inventory costs by close liaison with production over scheduling, perhaps instituting just in time principles. Of course, this has to be balanced against the cost of stockouts if things go wrong, and getting the balance right has traditionally been a core competence of purchasing staff.

• They minimise logistics and materials management costs typically by ordering in economic quantities.

These techniques still have an important part to play, but a proactive purchasing and supply function can improve on the basic model by extending the range of their involvement. For example, instead of taking the design specification as given, purchasing staff should seek to become involved earlier so as to contribute to the specification. Equally, instead of emphasising purchase price as the key factor for negotiation, attention should shift to minimising the total cost of acquisition.

(b) The question refers to purchasing’s role in reducing costs as being superseded. This is a misleading view of the processes that have taken place.

The key development has been a shift in perspective which affects not just purchasing but many other functions as well. This shift has led to less emphasis on the inputs consumed by departments, and more emphasis on their outputs – in other words, on the contribution they make to overall effectiveness, efficiency and profitability.

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Modern thinking now focuses on the purchasing function, and the organisation of which it is part, as just one element in a supply chain which is concerned ultimately with delivering value to customers. Controlling costs is an essential part of this process because it improves the organisation’s competitiveness – its ability to delight customers by providing features they value at a price they can afford.

But it is now recognised that price is only one in a multitude of factors that together make up the ‘package’ offered by an organisation. The challenge for purchasing is to increase their contribution to the other items in the package. Examples include ensuring consistent quality and reliable (short) lead times. The path to this objective lies through greater strategic involvement.

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Recent growth

A supply chain has been defined as ‘a network of autonomous or semi-autonomous business entities collectively responsible for procurement, manufacturing and distribution activities associated with one or more families of related products’.

Purchasing can thus be seen as a vital link in a chain extending from the extraction of raw materials to the delivery of product to eventual consumers.

The concept of the international supply chain is not essentially different from this familiar idea. It merely reminds us that the members of the supply chain are not necessarily confined to a single country. In international supply chain management, access to goods or services may mean crossing international boundaries.

The main reason for extending the supply chain to include an international dimension is to enhance the value added at each stage. An importer can benefit from the investment already undertaken by a supplier overseas, and can pass on similar benefits to his own customers. This is increasingly made possible by advances in transportation, communications, and information technology. Such advances provide an infrastructure to support the growth in international trade, which comes about for the following reasons.

• The overall economic prosperity of nations is promoted by international trade, according to the theory of comparative advantage.

• Individual buyers may experience difficulties with local suppliers: price, quality, delivery times, or simply availability (the goods may not exist locally).

• Costs of imports may be low, perhaps because of cheaper labour costs overseas, or better technology, or favourable exchange rates.

• Overseas suppliers may save the importer from having to invest heavily in local production.

• Technological advances in communications make it almost as easy to source from abroad as from the domestic market.

• A buyer who has the option of overseas suppliers gives himself more flexibility than one who is confined to local suppliers.

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Collymore

The views of Porter are extremely influential and in one form or another are likely topics for examination questions. You should be familiar in particular with his ‘five forces’ framework for analysing the competitive environment, his generic competitive strategies and his ideas on value chain analysis (the subject of the present question). These topics are covered in your Reference Text as well as in standard textbooks such as Strategic Purchasing and Supply Chain Management by Saunders (the chapter on approaches to strategic management).

Note that this question follows a common pattern of requiring general exposition of ideas in the first part, with detailed application in the second part. In the examination you will do badly if either aspect is skimped. Note also that, as is usual, you are required to analyse the implications of general ideas for the purchasing function in particular.

(a) Porter’s main theme in this area can be summarised by the idea that firms secure competitive advantage by the effectiveness with which they perform value activities. A firm creates value by carrying out activities better than its competitors, or by combining activities so as to differentiate its products or services. Customers consciously or unconsciously measure value by comparing the offerings of different producers and purchasing the offerings that most closely meet their desires.

From the perspective of the purchasing function an important aspect of Porter’s ideas is that value activities are not all performed within the firm’s own boundaries. A manufacturer’s success depends largely on the quality of its products, but this in turn will depend importantly on the parts and assemblies sourced from outside. In other words, part of the value in the manufacturer’s products is added by external suppliers, and this is very much the province of the purchasing specialist. Porter recognised the importance of procurement in his diagrammatic representation of the value chain.

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Porter’s analysis places emphasis on linkages between the different elements in the value chain, which occur when one element in the chain affects the cost or effectiveness of another. Clearly the purchasing function is an important source of such linkages. This viewpoint is reflected not just in the work of Porter, but in other researchers’ analysis of purchasing’s contribution to securing competitive advantage, for example by developing superior supply options.

The views of Monczka are particularly relevant in this context. He places emphasis on the ability of purchasing to add to customer satisfaction by involvement throughout the product life cycle – from initial conception to eventual marketing. A key contribution to

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securing competitive advantage is to drive out waste from the value chain right from the beginning. The increasing strategic role of purchasing is also reflected in moves to world class techniques such as just in time; an inevitable consequence is to broaden the activities of the purchasing function so as to include development and management of integrated supply chains.

(b) Porter’s views imply that a firm’s efforts to obtain competitive advantage are not restricted to activities within its own boundaries. Equally important is management of links with suppliers (and of course customers, but that takes us somewhat away from the role of purchasing). Once again, this is seen most clearly when world class techniques are adopted; the need for examining a supplier’s value chain is much clearer if a manufacturer is operating just in time purchasing and production.

In the case of Collymore, the character of the industry might at first sight suggest that the role of value chain analysis would be slight. Collymore is one of a small number of large firms exercising significant influence over the market as a whole. However, any tendency to complacency should be resisted and it is still vital to maintain a competitive edge. Value chain analysis can help in a number of ways.

• Firms pursuing a strategy of product differentiation can apply value chain analysis to assess customers’ perceptions of value. This can help to identify where additional value can be incorporated with least damage to product costs.

• Firms pursuing a strategy of cost leadership can apply value chain analysis to determine where their activities are efficient, and where they are not. This can lead to important savings, and may also influence strategic ‘make or buy’ decisions.

• Finally, value chain analysis can be used as one part of competitor analysis. This assumes that data can be obtained on competitors’ value chains enabling fruitful comparison.

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Lean supply

‘Lean supply’ is a term on many people’s lips, but there is surprisingly little on the subject in accessible literature.

The danger is of going into the examination with only a vague notion of what the concept entails. This question is designed to give guidance on some of the main features. You should begin by revising what your Reference Text has to say on the topic. If you wish to dig deeper, there are some useful comments in Strategic Purchasing and Supply Chain Management by Saunders, and more detailed coverage in the excellent Strategic Procurement Management in the 1990s: Concepts and Cases, edited by Richard Lamming and Andrew Cox, to which the solution below is much indebted. Finally, the real enthusiast should try Beyond Partnership: Strategies for Innovation and Lean Supply, also by Lamming.

(a) The meaning of ‘lean’ in the term ‘lean supply’ is that identical or superior outputs are achieved while consumption of resources is minimised. The resources in question are broadly defined, and include effort, time, space, materials – and, of course, money. The question highlights some of the main features involved.

Removal of duplications

The emphasis here is on reducing elements within the overall system which exist for historical reasons only and do not add value. They do add to costs. Lamming cites such examples as:

• invoices – these do not add value, but are produced for compliance reasons (to satisfy accountants, tax authorities etc)

• expediting – which would not exist in a perfect supply chain because it would be unnecessary

• inspection – like expediting, the existence of this activity is a tacit acceptance of inadequacy.

Recognising duplications is only the first step; removing them requires both cooperation along the supply chain and a readiness to accept that old procedures and patterns of thought are not written in stone.

Cost transparency

The basic idea is that a supplier should be ready to talk frankly to its customers about its own cost structures. Without this, true partnership is impeded and in particular it is impossible for the customer to help the supplier. Where the lean supply concept is embraced, the customer should equally be willing to discuss data on internal processes. At the same time, the customer should work to remove the supplier’s natural concern that the exchange of information will lead eventually to the customer taking the work in-house.

Such developments are not easy to introduce in the face of traditional adherence to secrecy and adversarial relationships. In particular, it may be difficult to extend discussion of cost structures to discussion of profit levels. Nevertheless, such should be a goal of lean supply enthusiasts.

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(b) The pressures facing businesses today, and requiring amongst other things a lean supply approach to meet them, are well summarised by Lamming as:

• customers who demand more sophisticated products and services • a need to optimise resource bases – to do more with less • a need to reduce time-to-market for new products • the emergence of new technological solutions.

Traditionally organised firms will find it difficult to cope with such pressures, and the implication is that far-reaching changes will be needed. In particular, there will be an increasing emphasis on relationships not within the firm, but between different firms along the supply chain. This of course is an area in which purchasing specialists have a great opportunity to contribute.

The danger is that traditionally trained and educated purchasing staff will have to make rapid adjustments to cope with the new demands placed on them. They will need to respond by showing both a willingness to adopt new patterns of strategic thinking and a determination to maintain levels of technical competence as new developments arise.

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Ethics

Ethical issues are increasingly a concern to major companies and this is reflected in the number of firms which now publish detailed procedural guides in this area. The subject lends itself both to straightforward ‘bookwork’ questions such as the present one, and to case studies.

(a) The question suggests a division between organisational and procedural safeguards. Although the dividing line is not a clear one, the following measures may be suggested under each heading.

Organisational safeguards

The primary safeguard is based on the knowledge and education of staff within the department. The organisational culture must be influenced from the top down so as to make it clear to all staff that ethical behaviour is just as important as securing a good deal from suppliers.

This must be supported by formal training if necessary. In most cases, staff will have come through a formalised education scheme such as that of the CIPS, and due prominence should be given to the ethical guidance published by the Institute. This should be supplemented by in-house training that emphasises ethical standards. Some firms follow this up by requiring staff to sign a statement that they have been trained in the firm’s ethical standards and will undertake to abide by them.

Finally, it is worth stating an obvious point: all of this presupposes that the organisation does indeed have a clear idea of the standards of behaviour required of their staff. A crucial element in achieving this is the development of written standards.

Procedural safeguards

A general commitment to standards, evidenced in writing and supported by appropriate training together with a management committed to ethical ideals, provides an organisational background in which ethical behaviour can flourish. But this should still be backed up by procedural measures to prevent or at least detect potential or actual breaches.

• Arrange that buyers work in ways that ensure mutual checking. For example, rotate the buyers that deal with particular areas or suppliers; look carefully at areas that may indicate problems (eg single sourcing deals, or arrangements where quality assurance procedures appear to be waived); limit signature authority.

• Ensure that suppliers are aware of a confidential hotline through which abuses can be reported without fear.

• Ensure that key personnel are employed on contracts which prevent them from working for the firm’s suppliers for a specified time after leaving the firm.

• Specify particular practices that will be regarded as breaches of standards: for example, the release of a supplier’s information to a competitor.

(b) All of these measures are necessary to protect against abuse of the position that purchasing professionals occupy. The scope for such abuse is wide, and includes the following common situations.

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• Volumes are uncertain, and a buyer may be ‘optimistic’ about the levels of future orders. If the ‘expected’ volumes fail to materialise, the supplier may cry foul.

• Competitive bids are obtained; disclosure of one firm’s bid to another could well lead to a lower overall price.

• A supply contract is under negotiation, but preliminary engineering work is needed before firm quotes can be made. Who pays for this work, and to whom does the ‘copyright’ belong?

• Gifts and hospitality. This is perhaps the most common problem area of all. Every buyer is the target of gifts and hospitality, large or small, innocent or with malice aforethought.

Doing the best for one’s firm, and maintaining the standards of the purchasing profession, are objectives which must be followed by everyone seeking the CIPS qualification. Organisational and procedural safeguards such as the above can help to avoid the pitfalls that are inevitably faced by buyers.

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