The Strategic Relevance of Procurement

Ramsey (2001) states that “It is possible for Purchasing to generate and protect competitive advantage, but it is extremely diffcult, and will tend to be the exception rather than the rule in all sectors of the economy. Consequently it may be stated, with confidence, that purchasing activities are intrinsically
operational rather than strategic in nature.”
In response to Ramsey (2001), Mol (2003) counter argues, that “the field of strategic management has enough positive things to say about the strategic potential of purchasing to conclude that purchasing is strategically relevant. In fact, purchasing can even be said to have become more relevant in recent years as firms have outsourced more activities and increasingly look towards suppliers to create added value. This indicates strategic advantage not only resides within the firm but also between the firm and its partners.”
In a 2000-word report, critically appraise Ramsey (2001) and Mol (2003) arguments, and discuss the strategic relevance of procurement based on:
–  the purpose of the procurement function and its role in the organisation
–  the processes involved in procurement and their wider relevance to the organisation’s
supply chain processes
–  strategic and tactical issues in the management of procurement
The report is expected to incorporate the relevant procurement theories, and the role of advanced tools, techniques, and technologies in procurement management. Background reading and research are essential for good marks. 

The 21st century has been characterized by increased globalization and development of markets, which has contributed to the need for firms to seek means of creating competitive advantage. Subsequently, there have been various strategic approaches that have been embraced by firms to increase their competitiveness and sustainability. The argument presented by Mol (2003, p. 1) and Ramsay (2001, p. 257) offers an opportunity to understand the relevance of purchasing and strategic management in the creation of competitive advantage. The sentiments expressed by Ramsay (2001, p. 257) are centered on the resource-based perspective (RBP), which is a strategic theory addressing the effects of resources and their management on a firm’s financial performance. According to Ramsay (2001, p. 260), the purchasing activities within an organization are considered as operational engagements rather than strategic approaches that contribute to competitive advantage. Mol (2003, p. 1) offers an opposing ideology which alludes that strategic management entails certain parameters that guarantee that purchasing activities are relevant to creating competitive advantage. Musau (2015, p. 12) reviews that purchasing alludes to an organization or a business acquiring goods or services that are instrumental in achieving its goals. Additionally, the author alludes that despite organizations attempts to set standards that facilitate the purchasing process, the activities vary significantly between organizations. In this light, procurement of goods or services includes not only the purchase, but also expediting on the quality of the items or services supplied and logistics. Various studies confirm that purchasing is an essential aspect of the managerial activities. Suggestively, procurement is a key consideration in the strategic management of organizations. The intent of this paper is to critically review the argument presented by Ramsay (2001) and Mol (2003), by addressing the significance of procurement in an organization.

Rimkuniene (2013, p. 14) suggests that procurement is a common business related operation that facilitates acquiring goods, services, equipment, and raw materials from different suppliers. The purchasing process has always been influenced by the demand and supply relationship that reflect the changes in an organization’s needs. Rimkuniene (2013, p. 14) suggestions are in line with those of Ramsay (2001, p. 260), stating that procurement is perceived to be an operational-administrative organizational function. Nevertheless, Rimkuniene (2013. P. 14) states that since the 1990s, there has been an emergence of different economic orientations that have redefined the role of procurement in the organizational life by offering a competitive environment with key drivers of organizational competitiveness and success behind it. From this context, reviews suggest that the implementation of a firm’s product market strategy is achieved through the investment of various inputs that can be acquired from the corresponding markets. However, the application of these assets does not guarantee sustainability in creating competitive advantage. Furthermore, Mol (2003, p. 3) informs that these assets procured for production are freely tradable, making them available to other stakeholders in the industry. From this perspective, all organizations in a particular industry have the opportunity to acquire similar assets in the market, making competitiveness difficult for the others. Musau (2015, p. 13) maintains that purchasing is obtaining goods and services from external suppliers that are required for running, maintaining, and managing the key support activities. A strategic approach to procurement entails engaging in purchasing during the most favorable conditions according to the production process, the capabilities of the organization in warehousing and effective transportation. According to Musau (2015, p. 13), there exist opportunities for organizations to gain competitiveness since these activities differ significantly.

Arguably, the functions and roles of procurement within the organization differ based on the strategic approach employed by the management. Ramsay (2001, p. 258) reviews that sustainable competitive advantage cannot be purchased in the open markets unless the resources sought are rare, imitable, and non-substitutable and are controlled by the firm. These show that there are means for a firm to achieve competitiveness through the procurement process. Mol (2003, p. 3) agrees with these sentiments by stating that they are logical observation because in open markets, all participants have access to the same goods and prices. Arguably, engaging in procurement as a strategic activity of business functions can influence the organizational profitability. Rimkuniene (2013, p. 15) states that since the 1990’s, the roles and functions of procurement have become imperative in coping with the global market due to their contribution to industrial competitiveness and value generation. Ramsay (2001, p. 261) and Rimkuniene (2013, p. 15) are in consensus based on the work of Michael Porter that competitive advantage is achieved when the firm can create value that exceeds the cost of creating it. In this light, the roles and functions of procurement within the organization are not only operational, but are required to add value that creates profitability. Procurement facilitates the management of internal transactions in ordering and receiving goods or services. The activities involved in handling procurement data and undertakings are often designed to ensure the firm benefits from efficiency in transactions and reporting. Through procurement, firms offer support to vendors and contracting processes that form the basis for price negotiations, the supply of raw materials, and sustainable production. Notably, the roles and functions of procurement are aligned to the overall corporate strategy to facilitate achievement of organizational goals. There is no doubt that these operational activities are instrumental in achieving competitiveness, but Ramsay (2001, p. 258) argues that these activities that include strategic outsourcing need to be categorized as core or non-core of the organization. Resultantly, the non-core activities are deemed as less critical and can be viewed as subcontracted, which makes them non-strategic.

Atanga et al. (2016, p. 86) reviews that Michael Porter perspective of strategic management entails creating sustainable competitive advantage. In the context of strategic activities, Ramsay (2001, p. 259) states that when organizations procure goods or services that rival companies can produce more competitively, those organizational needs cease to be core. The author adds that the core competence of a firm should be based on processes that other organizations find difficult to imitate. Based on this argument, the goods or services offered by suppliers lack strategic significance to the organization. According to Ramsay (2001, p. 259), companies should keep anything that is of strategic importance in-house. Nevertheless, Mol (2003, p. 5) states that managing supplier relations is of strategic significance for the company. Additionally, suppliers might have the capacity and knowledge that facilitate innovation and production of substitute products in a competitive market. The contradicting sentiments offered by these authors show that it is the procurement process that determines if is a strategic activity can lead to the creation of competitive advantage in the supply chain of the organization.  Also, the procurement process should support the corporate strategy, which is connected to the firm’s profitability and sustainability. The procurement process begins with reviewing the existence of a need for the materials or services to be procured. Fundamentally, identifying the right materials or services is important for the company to meet its objectives. Subsequently, the company must identify the most appropriate supplier to ensure value for money, which is addressed through the pricing and terms provided by contracts. The contracts are fulfilled through the purchasing process that entails delivery and making payments. The procurement process also includes ensuring that the products or services delivered suit what is discussed in the contracts, and keeping procurement records for management purposes.

The procurement performance is attributed to the efficiency and effectiveness of the purchasing process for the procurement function to be transformed from a reactive to a proactive activity. In this context, the procurement performance forms the basis for a firm to assess its progress towards meeting its goals and identifies the strengths and weaknesses that can be addressed to increase organizational performance and profitability. Ramsay (2001, p. 261) reviews Michael Porter’s sentiments on creating competitive advantage, which is imperative to the procurement process. According to the author, firms need to establish exclusive contracts after identifying the best suppliers in the market. Organizations can also achieve competitiveness by completely owning the suppliers and by identifying the key sources of materials. Also, Ramsay (2001, p.261) reviews that buyers can encourage suppliers to offer tailored services in their value chain to meet the organizational needs. Additionally, competitive advantage is achieved through the signing of long-term purchasing contracts with a particular supplier. From this context, long-term business undertakings with the supplier are key in getting discounts and developing trust, loyalty, and reliability. Notably, these elements are essential for firms to remain competitive in a dynamic market. Mol (2003, p. 4) also states that companies do not need to own resources for them to exploit them, and a long-term relationship with suppliers can be imperative in ensuring effective control of resources. Nevertheless, this is risky when there is no guaranteed mutual commitment between the buyer and the supplier. Based on these reviews, the procurement process and performance established through a sustainable supply chain can lead to competitive advantage. The underlying factors that promote this can be achieved by engaging in market research to identify the best suppliers, products, and factors that can influence how the process contributes to the success of the organization.

Musau (2015, p.15) reviews that purchasing coupled with other activities such as production and logistics is essential in the processes where designs and resources are transformed into finished products that meet the needs of the consumer. The concept raised by the author shows that procurement entails strategic activities that focus on meeting the end-user needs. For instance, effective procurement of raw materials ensures that production is achieved at a low cost, it is timely, and products meet the market needs. Subsequently, the customer can acquire goods at low prices and at the time of need, which leads to consumer loyalty and ultimate profitability for the firm. Nevertheless, Ramsay (2001, p. 261) reviews that achieving effectiveness in the supply chain can entail persuading suppliers to engage in deals that are contrary to their best interests. Such situations are associated with high rewards that include purchase of high volumes of materials. The circumstance shows that the buyer might have surplus power over the supplier. Legal provisions in various countries have been imperative in controlling the procurement process. For instance, contracts are governed by the law, preventing manipulations that buyers or suppliers might impose on each other. Musau (2015, p. 15) alludes that in countries such as the US, group purchasing organizations (GPO) have been imperative by leveraging the purchasing power of groups to ensure that organizations can get discounts from vendors. In such situations, it is difficult for the member organizations to achieve competitive advantage because their collective buying power eliminates the opportunity to acquire customized deals.

Mol (2003, p. 5) states that organizations that seek external knowledge sources to assemble a diverse pool of talents are well positioned in creating innovations. Additionally, the author reviews that outsourcing through the use of information technology and monitoring techniques also contribute to the innovativeness of the organization. The innovations are important in achieving competitiveness by developing unique products and services. The advancement of technology has influenced how firms create competitive advantage. Fundamentally, the type of technology used within an organization determines its capability in engaging in the market. Highly efficient technologies offer an opportunity for achieving competitiveness compared to firms with inadequate systems. Ramsay (2001, p. 260) states that development of new technologies, processes, or products with a supplier can be used to persuade them to engage in confidentiality contracts that prevent them from conducting business with other buyers, who might be key competitors in the target market. Resultantly, this leads to the creation of competitive advantage because the firm has exclusive access to materials or services as well as the benefits of an effective technological system. The use of E-procurement has increased efficiency, especially in e-commerce. It also facilitates effective market research and efficient use of procurement data for other organizations.

Despite some contrasting views by Ramsay (2001) and Mol (2003), it is evident that procurement functions can lead to competitive advantage. A strategic approach to procurement offers an opportunity for firms to gain competitiveness. The insights from literature review show that procurement should seek to attain the needs of the organization by obtaining the right materials or services and at the right time. Improving the procurement process can be done through the use of technology, market research, and making data-driven decisions. In this light, firms should undertake procurement as a strategic function that ensures value is transmitted to the end-user, which will impact other factors that promote organizational performance and profitability.

Reference List

Atanga, R. A. et al. (2016). Competitive Advantage through Sustainable Procurement in the Manufacturing Industry. Dama International Journal of Researchers, 1(8), pp. 85–92.

Mol, M. J. (2003). Purchasing’s strategic relevance. Journal of Purchasing and Supply Management, pp. 43–50

Musau, E. G. (2015). Determinants of Procurement Function and Its Role in Organizational Effectiveness. IOSR Journal of Business and ManagementVer. III, 17(2), pp. 2319–7668. Ramsay, J. (2001). Purchasing’s strategic irrelevance. European Journal of Purchasing and Supply Management, 7(4), pp. 257–263.

Rimkuniene, D. (2013). Modern Procurement: Strategic Role and Competitive Advantage. Innovative Infotechnologies for Science, Business, and Education, 2(15), pp. 14–18.

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