“The Role Of Purchasing in the Supply Chain”
4.3.3. Supplier Selection
Value Chain
Every organization can be considered as a collection of activities that are performed to design, produce, market, deliver and support products or services that are of value to customers (Porter, 1985). Figure 1 illustrates this concept, which Porter called the value chain.
Inbound logistics: This refers to the activities involved in receiving, storing, and managing raw materials or products coming into a business. These activities include:
- Receiving shipments from suppliers.
- Managing inventory of raw materials or components.
- Warehousing and storing inputs.
- Scheduling and transporting inputs to the production process.
Inbound logistics is one of the five primary activities in Porter’s value chain. Efficient management of inbound logistics can reduce costs, improve production flow, and ensure timely availability of materials, contributing to higher operational efficiency.
Outbound logistics
This involves the activities related to distributing finished products or services to customers. It includes:
- Order processing and packaging.
- Transportation and distribution to wholesalers, retailers, or directly to customers.
- Managing delivery logistics, including fleet management or third party logistics providers.
Outbound logistics is also a primary activity. It ensures the delivery of products to the right place, at the right time, and in the right condition. Effective outbound logistics can enhance customer satisfaction and retention, directly influencing a company’s market position.
Inbound Logistics and Operations
Inbound logistics ensures the smooth flow of raw materials, components, or goods from suppliers to the organization. These inputs are critical for the production or service delivery process in operations. Key connections include:
- Material Availability: Inbound logistics ensures raw materials are available in the right quantity and at the right time for production processes.
- Inventory Management: Proper management of inbound logistics prevents overstocking or understocking, optimizing inventory for operations.
- Production Scheduling: The timing of inbound deliveries directly influences the production schedule, avoiding delays in manufacturing or service delivery.
For example:
• In manufacturing, delays in inbound logistics (e.g., late delivery of parts) can halt operations, impacting productivity.
• In a restaurant, inbound logistics ensures timely delivery of fresh ingredients for daily operations.
Outbound Logistics and Operations
Outbound logistics involves distributing the finished goods produced during operations to customers. The effectiveness of operations impacts the efficiency of outbound logistics in these ways:
- Production Quality: High-quality operations result in products that meet customer expectations, reducing returns and improving satisfaction.
- Timely Fulfillment: Efficient operations ensure that products are ready on time, allowing outbound logistics to meet delivery deadlines.
- Cost Efficiency: Streamlined operations reduce production costs, which can translate into more cost-effective outbound logistics.
For example:
• In e-commerce, outbound logistics ensures timely delivery of goods manufactured or assembled during operations.
• In retail, outbound logistics depends on the replenishment cycle maintained through the operations team.
According to Porter, a company’s value chain—comprising decisions about technology, processes, location, and whether to produce in-house or outsource each of these activities—forms the foundation of its competitive advantage. The value chain is also a segment of a broader value system, encompassing all value-adding activities, from sourcing raw materials to producing components and final assembly, and ultimately reaching buyers through distribution channels (Lawton and Michaels, 2001). This concept is clearly demonstrated in Figure 2.
Now that the structure of the value chain is clear, it becomes evident that most services or products we encounter are created through a sequence of interconnected business activities. To gain insight into how these services and products are generated, adopting a process perspective of the organization is beneficial. This approach also highlights the importance of cross-functional coordination in ensuring the effective delivery of these products and services.
Process view
McCormack and Johnson (2001) define a process as “a specific set of activities and subordinate tasks that deliver a valuable service.” In organizations, whether public or private, a process perspective often contrasts with the traditional view. Key differences are outlined in Table 1.
The value chain connects an organization’s processes, representing the cumulative work of these activities. Combining the concepts of process and value chain is essential, as processes consume resources and must be evaluated for both their value contribution and resource usage, including labor, equipment, and energy.
The value chain highlights the interdependence of processes and their impact on business performance (Krajewski and Ritzman, 2005). Weak links can jeopardize the entire chain. Core processes deliver value to external customers by interacting with them, developing products or services, and managing suppliers. Examples include reservation handling and web-based purchasing. Support processes, like budgeting and recruiting, provide essential resources for core activities, though distinctions between the two can vary by organization.
This focus on core versus support processes has led to greater interest in outsourcing non-core activities. Once considered peripheral, outsourcing is now a key business strategy, enabling organizations to rely on specialized suppliers who often perform tasks more efficiently and cost-effectively. This shift has elevated procurement to a strategic role within businesses.
Procurement
Van Weele defines procurement as a process involving functions such as purchasing, storage, transportation, inspection, and quality assurance, though its scope varies by organization. Figure 3 illustrates how procurement interacts with and overlaps supply chain management, highlighting their interconnected roles.
Purchasing Management involves managing supplier relationships and typically includes activities within supply chain management. Supply chain management, however, extends further, overseeing the efficient flow and storage of materials, inventory, finished goods, and information from origin to consumption to meet customer needs. Van Weele (2005) defines it as managing all activities, information, knowledge, and financial resources tied to the flow and transformation of goods and services. Unlike Purchasing Management, supply chain management also integrates logistics activities.
New Developments
Organizations face new challenges from rising competitive pressures and limited growth opportunities. In response, they have prioritized lowering sales prices and enhancing customer service. This has driven both private and public sector entities to continually seek ways to reduce costs—enabling private firms to maintain competitive pricing and public organizations to maximize value for money.
Building leveraged purchasing and supply strategies
• Global Sourcing
• Supplier Integration
• Early Supplier involvement in new product development
• Reciprocity agreements and compensation obligations
• Environmental issues and business integrity.