Strategic Role and Contribution of Purchasing in Singapore: A Survey of CEOs.
The purchasing function is receiving increased attention as a key contributor to the strategic success of the firm. This study seeks to identify the strategic role of the purchasing function and the contributions that purchasing can make in an organization. A mail survey was conducted among CEOs based in Singapore to examine the relationship between corporate competitive strategy and purchasing objectives, as well as how purchasing affects business performance through its integration with other functions, its partnership with suppliers, and its involvement in team decisions. The data collected were factor analysed and the results suggest that purchasing objectives are affected by the firm's corporate competitive strategy. More important, purchasing can yield better business performance through greater integration with other functions, closer partnership with suppliers, and greater involvement in team decisionmaking.
Purchasing is a very traditional activity. Despite its long history, however, it is only in the past three or four decades that there has been widespread recognition of the importance of efficient purchasing. Previously, purchasing was generally regarded as a routine clerical function or as a service function concerned with spending (Lysons 1981). Since the mid-1970s, there has been a growing, albeit sporadic, interest in strategic approaches to the procurement process, with an emphasis on the scope for pro-activity. However, there has been little consideration of the contribution that may be made to the overall competitive effort of the organization (Rajagopal and Bernard 1993). Farmer (1978) found that multinational manufacturing companies show a growing awareness of the importance of the supply function as an element in corporate activity.
When the deep recession of the early 1980s began to grip industries, purchasers found themselves on the ascendancy. They tended to work closely with suppliers to improve schedule and quality reliability, to seek mutual benefits from more effective liaisons, and to guarantee supplies into the future (Bailey and Farmer 1986).
Recognizing the importance of the purchasing function in overall corporate performance, most progressive firms today are paying close attention to their purchasing functions and have attempted to improve the management of their supplier networks. Also, recent writings have begun to recognize the importance of purchasing in formulating corporate-level strategies (Watts, Kim, and Hahn 1992).
In terms of direct contribution, for some organizations, purchasing is important. In others, it is critical. For example, the average firm in the United States spends about 60 percent of sales on materials and equipment (Killen and Kamauff 1995). In contrast, the expenditure on wages, salaries, and fringe benefits amounts to only about one-third of the materials cost or 20 percent of sales.
The logical question to ask is, "With the growing importance of purchasing, how has the CEO's perception of the purchasing function changed?" More important, how will this perception shape purchasing-supplier partnerships as well as affect purchasing's role in team decisionmaking in organizations today? According to Johnston and Lawrence (1991), many industry observers attribute Ford's gains over General Motors in the 1980s to Ford's proactive moves to forge strategic partnerships with suppliers.
Overall, the cost and economic impact of purchasing are often underestimated. Purchases continue to exceed 55 to 60 percent of sales in many industries (Ansari and Modaress 1987; Anderson, Griffiths, and Laseter 1993; Leenders and Fearon 1993). Thus, the fundamental questions is, "How can the CEO'S perception of purchasing affect business performance?" Most firms try to increase profit by reducing labor costs and increasing sales, while at the same time overlooking a significant opportunity in the form of total supply chain management (Killen and Kamauff 1995). Research has shown that without access to world-class suppliers, a firm will find it Increasingly difficult to meet the demands of its sophisticated customers (Monczka and Trent 1992).
With growing emphasis on the purchasing function, it is especially essential and interesting to have a better understanding of its role in and contributions to the organization. As such, this study is timely. Specifically, this article seeks to:
1. Understand the CEO's perceptions and expectations of the purchasing function in Singapore.
2. Examine the relationship between the corporate competitive strategy and the CEO's perceptions and expectations of the purchasing function.
3. Examine the effects of purchasing-supplier relationships on business performance.
4. Study the effects of the purchasing function's involvement in team participation on business performance.
5. Study the effects of the purchasing function's integration with other functions on business performance.
A mail survey was sent to 800 CEOs of firms randomly selected from the mailing list of the Singapore Institute of Purchasing and Materials Management (SIPMM). Recipients of the questionnaire were requested to respond to questions designed to measure their perceptions and expectations of the purchasing function, general competitive strategies of the firm, purchasing-supplier relationships, purchasing's participation in team decision making, the purchasing function's integration with other functions, and business performance of the firm.
Ammer (1974) has already noted that top management views purchasing as having a passive role in the business organization. The 1973-74 oil crisis and other related raw materials shortages drew attention to the importance of purchasing. In spite of the crisis, top management and purchasing professionals did not react to improve the role of purchasing in corporate strategy (Farmer 1978). Porter (1975), in his seminal work on the forces that shape the competitive nature of industry, identifies buyers and suppliers as two of the five critical forces. Thus, the strategic importance of the supplier and the firm as a buying entity began receiving recognition in the mainstream strategy literature.
The 1980s were a period of shifting attitude with regard to purchasing's role in corporate strategy. While many authors noted the benefits of greater strategic involvement by the purchasing function, there was limited significant research until late into the decade (see, for example, Spekman 1981; Browning, Zabriskie, and HuellMantel 1983; Spekman 1985; Burt and Soukup 1985; Caddick and Dale 1987). During the early 1990s, the research focus appears to have shifted toward the integration of purchasing with other functions, and the means by which the purchasing function can work to become recognized as a significant contributor to the firm's success (e.g., Freeman and Cavinato 1990; Pearson and Gritzmacher 1990; John and Young 1991; Monczka 1992).
Kaiser (1976) posits that purchasing strategy is influenced by the type of buy and the supplier market. Another study by Jain and Laric (1979) indicates that purchasing is important to the achievement of the marketing strategy of the firm. Hahn, Kim, and Kim (1986) also present a conceptual framework to examine the effects of a purchasing strategy that encourages competition among suppliers. Later, Watts, Kim, and Hahn (1992) develop a conceptual framework for connecting purchasing to the firm's competitive strategy and to the strategies of other functions. These studies are, however, only conceptual in nature and have not been tested empirically.
Previous studies have also focused on specific areas of purchasing such as supplier partnerships (Stuart 1993) and empowering of the purchasing function (Giunipero and Vogt 1997). These studies exclude corporate competitive strategy as a factor that can affect the way purchasing forms partnerships with suppliers. Further, others like Rajagopal and Bernard (1993) outlined a framework to map the development of a competitive purchasing strategy, which, however, remains untested empirically.
A study on team participation by Ellram and Pearson (1993) also suggests a transition from individual purchasing responsibility to a team-based approach. However, the research does not examine the consequences of the team-based approach. To date, there is no research that examines the possible affect of the CEO's perceptions and expectations of the purchasing function on supplier partnerships and team participation. Also, Stuart (1993) has established a model for supplier partnerships and tested it empirically using a questionnaire, which was distributed to a broad-based sample of industries. He confirmed the empirical test of his model exclusively to supplier partnerships. However, the model does not address how corporate competitive strategy can influence the purchasing philosophy and committed resources.
A review by Ellram and Carr (1994) revealed that much of the research completed in purchasing is either conceptual in nature or is based on a small number of case studies. While some studies have based their findings on data gathered from a large number of firms, most do not report the use of statistical analysis to support the findings of the research.
In another study, Tan (1990) Looked at how the electronics industry in Singapore organizes its purchasing function. In this study, respondents were questioned on the goals and objectives of purchasing, and organizational and management issues such as centralization, the existence of a central purchasing authority, the use of computers, and the freedom to formulate departmental policy and run the department. Most purchasing managers (89 percent) feel that their top management recognized the importance of purchasing. The study also reports that firm size does not seem important to top management's recognition of purchasing. However, it did not examine the possible effects of corporate competitive strategy on purchasing and how purchasing can affect business performance. Wang (1997) examined purchasing trends among manufacturing firms in Singapore and how using JIT can affect the changes that are taking place in purchasing departments. Her study, however, overlooks the effects that purchasing may have on business performance.
Thus far, there is no recorded empirical research on the effect of corporate competitive strategies on purchasing. To establish the purchasing function's role in strategy, a major study of purchasing's role and participation in corporate strategy is needed (Ellram and Carr 1994).
This study seeks to address some purchasing research gaps mentioned earlier. A framework that incorporates the CEO's perceptions of the importance of purchasing, purchasing's integration with other functions, the purchasing-supplier partnership, the role of purchasing in team decisions, and the contribution of purchasing to business performance is developed. The conceptual framework is shown in Figure 1.
Corporate Competitive Strategy
Porter (1980) proposed the first generic strategy to be cost leadership. This strategy requires aggressive construction of efficient-scale facilities, a vigorous pursuit of cost reduction from experience, tight cost and overhead control, and cost minimization. Its cost position gives the firm a defence against rivalry from competitors. Achieving a low overall cost position often requires a high relative market share.
The second generic strategy is to differentiate the product or service offering, creating something that is perceived industry-wide as unique. Approaches to differentiation can take the form of product design, brand image, product features, customer service, dealer network, or other dimensions. Product innovation is deemed extremely important. However, this strategy may not allow the firm to ignore costs, though it is not the primary strategic target. Differentiation provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price. Further, Porter argues that achieving differentiation may sometimes preclude gaining a high market share. It often requires a perception of exclusivity, which is incompatible with high market share (Porter 1980).
These two competitive strategies present the most important dimension of Porter's model, namely, the basis of competition for firms is either its uniqueness (differentiation strategy) or its low-cost leadership.
A commonly used definition of procurement objectives is to purchase the right quality of material, at the right time in the right quantity from the right source, at the right price (Lysons 1981; Bailey and Farmer 1986; Warts, Kim, and Hahn 1992; Killen and Kamauff 1995). But what is right? According to Killen and Kamauff (1995), some primary objectives of the purchasing function include buying at the lowest price ensuring the required quality and service, maintaining the specified material quality level, and maintaining good supplier relationships. Two contrasting purchasing strategies related to supplies appear to focus on cost and quality. In the former, the main concern would be price while in the latter, the main concern would be attributes of the product purchased, which would include the product's physical characteristics, features, functions, technology, and performance capabilities.
One would logically expect that the purchasing department and top management set the purchasing objectives. As such, purchasing objectives will dovetail with the corporate strategy of the organization. In short, purchasing objectives need to be congruent with organizational values and goals (Killen and Kamauff 1995). It then follows that the definition of right in a purchasing strategy must be consistent with the other functional area goals and objectives, and in turn be consistent with corporate competitive goals and objectives (Watts, Kim, and Hahn 1992). If purchasing objectives are not in line with corporate competitive strategy, this may result in a conflict in the goals of the firm and of the purchasing function. With an overall cost leadership strategy requiring tight cost control, one can also expect the purchasing function to emphasize cost minimization. Hence, the first hypothesis is as follows:
H1a: The more an organization emphasizes cost leadership in its competitive strategy, the more cost-focused are the purchasing objectives.
H1b: The more an organization emphasizes differentiation in its competitive strategy, the more quality-focused are the purchasing objectives.
Again, based on Porter's (1980) argument that differentiation and cost competitive strategies are not complementary additional hypotheses are as follows:
H1c: The more an organization emphasizes cost leadership in its competitive strategy, the less quality-focused are the purchasing objectives.
Hid: The more an organization emphasizes differentiation in its competitive strategy, the less cost-focused are the purchasing objectives.
CEO's Perception of Importance of Purchasing
Within a particular undertaking, purchasing may be accorded a relatively high or low status. The CEO regards the status of the purchasing function as important if there is equality of standing between purchasing and other departments. Purchasing will be consulted in areas other than the price, quality, and availability of materials, for instance, in strategy formulation and market planning. The purchasing function can also be involved in framing corporate policy (Lysons 1981). Any function will be deemed very important If it contributes to the overall success of the organization and is able to increase organizational profits effectively.
Many organizations claim that their purchasing function is equally important as other functions. However, the actual degree of importance as perceived by the CEO can be evaluated by examining the extent of the purchasing function's involvement in strategic planning. With an intense participation in strategic planning, purchasing can no longer be considered as just a "clerical function."
An organization's success depends somewhat on a successful relationship with its external suppliers. It is one of purchasing's main jobs to cultivate these relationships and to ensure they continue to be successful (Killen and Kamauff 1995). Traditionally, firms have used some form of bidding process for selecting suppliers. Under such a system, a supplier is selected through competitive bidding, often on the basis of the lowest bid price. Some authors have suggested that the philosophical underpinnings of the competitive bidding approach to supplier selection can lead to higher total cost in the long run (Hahn, Kim, and Kim 1986).
According to Stuart (1993), short-term contracts, evaluation by bid, and numerous suppliers characterize the traditional adversarial relationship between purchasers and suppliers, with an emphasis on price. Partnerships and strategic alliances between purchasers and suppliers are gradually replacing these adversarial relationships (Gentry 1993). Supplier partnering, or strategic alliancing, establishes and maintains an ongoing relationship between the two partners. For it to work, it requires information sharing, joint problem-solving activities, and mutual dependency (Womack, Jones, and Roos 1990). Stuart (1993) states that such a partnering arrangement involves a thorough review of potential suppliers by the buying team and is hence time-consuming and expensive. Longer-term contracts, multiple criteria in supplier selection, and fewer selected suppliers characterize the supplier partnership. Such partnerships require extensive time and effort and imply higher costs on the part of the purchasing unit. As such, only those firms which place significant importance on the purchasing function would be likely to foster the formation of such strategic alliances. Thus, it is hypothesized that:
H2: The more important purchasing is perceived to be by the CEO, the greater the extent of the purchasing-supplier partnership.
Role of Purchasing in Team Decisions
Purchasing is a critical link in the entire value-added process, having both internal and external customers (Giunipero and Vogt 1997). Today, the team concept is becoming increasingly important in managing a business (Scholtes 1988; Ellram 1990; Ellram 1991; Bartlett and Ghosal 1990). Multidisciplinary teams are essential to success in a volatile business environment (Murphy and Heberling 1996). A team includes the use of a committee, task force, or group of people from a variety of functional areas to achieve a common goal (Ellram and Pearson 1993). Issues, which have broad and strategic implications, are increasingly decided at team level. With the workings of a team, purchasing personnel may also have an opportunity to participate in decisions previously closed to them. Thus, the team approach represents an excellent opportunity to increase the purchasing function's influence in decisionmaking, as well as its strategic participation and visibility to others in the firm (Ellram and Pearson 1993). Murphy and Heberling (1996) state that the integrated product team must have the support of top management to achieve real success. They propose that teaming and empowerment can bring about both opportunity and risk. Teaming provides an opportunity for any functional discipline to show that it can add value to the process. However, the reaction of purchasing professionals to these new management philosophies is not clear. They can either watch teaming from the sidelines or support it enthusiastically and productively.
Since the team approach would involve the purchasing function in more strategic decisionmaking, the CEO must perceive the purchasing function to be of significant importance before involving it extensively in team projects. However, if purchasing were not perceived to have an important role, it would be excluded from most team projects and would not be asked to contribute to team decisions. As such, it is postulated that:
H3: The more important purchasing is perceived to be by the CEO, the greater the extent of the purchasing function's involvement in team decisionmaking.
Purchasing Function's Integration with Other Functions
According to Rajagopal and Bernard (1993), organizations exercise the best control over the cost of purchased goods and services only when synergy exists between departments. Integrating purchasing with other functions implies the contribution or the adding of value to other functions, such as engineering and marketing. To Lysons (1981), purchasing has a low status in the organization when purchasers tend to do what they are told. Thus, if the purchasing function is deemed unimportant, it would most likely be told to purchase whatever other departments need. It would not be asked to contribute to the other departments. Thus, it is logical to postulate that the more important the CEO perceives the purchasing function, the more likely it is to contribute to other functions. Thus, the next hypothesis is as follows:
H4: The more important purchasing is perceived to be by the CEO, the greater the extent of purchasing's integration with other functions.
Organizations are concerned with profitability in their business ventures. Issues like profitability, sales volume, customer retention, and competitiveness affect the bottomline. A detailed study of Japanese success in industrial competitiveness reveals that at least some portion of that success is due to the supplier relationship (Womack, Jones, and Roos 1990). An ongoing relationship encourages suppliers to develop a better understanding of customer needs and quality requirements. This typically results in reduced variability in output quality and rejected products and higher quality inputs into a purchasing firm's operations (Trevelen 1987). Good buyer-seller relationships facilitate the organization's efforts in managing superior performance (Rajagopal and Bernard 1993). As such, good purchasing-supplier partnerships can be posited to improve business performance. Thus, the next hypothesis is as follows:
H5a: The greater the extent of the purchasing-supplier partnership, the better the business performance of the organization.
Researchers have postulated that, given access to information on the firm's strategy and involvement in key decisionmaking issues within the firm, the purchasing function can be an important contributor to the overall strategic success of the firm (Landeros, Reck, and Plank 1995). The concept of supporting team involvement maintains that improved interfunctional cooperation and understanding can improve the commitment to and quality and speed of decisionmaking. Therefore, the next hypothesis is as follows:
H5b: The greater the extent of purchasing's involvement in team decisionmaking, the better the business performance of the organization.
Few firms today can allow purchasing or any other functional management area to operate in isolation. The increasing complexity of most business operations requires the expanded use of cross-functional teams of various specialists in a highly analytical decisionmaking process. As such, the integration of purchasing with all other functions is also key in determining business performance. Therefore, it is hypothesized that:
H5c: The greater the extent of purchasing's integration with other functions, the better the business performance of the organization.
The 10 hypotheses represent relationships highlighted in the conceptual framework found in Figure 1. They postulate the relationships between competitive strategy, purchasing objectives, and purchasing importance as viewed by the CEO. The relationships between the purchasing function's integration with other functions, its involvement in team decisions, purchasing-supplier partnership, and business performance are also discussed.
RESEARCH DESIGN AND FIELD PROCEDURE
Data were collected through a mail survey. The sampling frame used in this study consisted of 800 CEOs from the SIPMM mailing list. Those in the manufacturing industry include firms dealing with electronics, computers, plastics, semiconductors, printing, and construction materials. Firms from the service industry include hospitals, hotels, and restaurants. The CEO was chosen as the target respondent because the survey questions addressed the CEO's perceptions and expectations of the purchasing function, the overall performance of the organization, and the corporate competitive strategy. Using such broad-based questions meant that only the CEO or top management executives would be able to answer them accurately. Even though the CEO may not know the purchasing function in detail, he or she was the best person to direct the relevant individual in the organization to provide the information.
The multiple indicators of each construct in the study were gathered from a variety of sources. Some of the measures used were well established, some were modifications of existing measures, and others were developed from scratch using descriptive studies mentioned in the literature as a guide.
The operationalization of the "Corporate Competitive Strategy" construct involved the development of measures from descriptive studies in corporate competitive strategy. The main source is Porter's (1980) study. Purchasing objectives were measured based on cost or quality as the main focus of the objectives. These measures were adapted from Killen and Kamauff's (1995) study. Lysons' (1981) measures, "CEO's Perception of the Importance of Purchasing", were also adapted to operationalize the construct.
The measures for "Purchasing Function's Integration with Other Functions" were based on Rajagopal and Bernard's (1993) work. As the integration of purchasing with other functions generally means contributing or adding value to other functions, scales were developed to measure the extent to which the purchasing function adds value to the other functions.
The scales used to measure "Purchasing-Supplier Partnership" were developed after reviewing Stuart's (1993) research on supplier partnership, Gentry's (1993) study on strategic alliances in purchasing, and a study on maintaining buyer-supplier partnerships by Landeros, Reck, and Plank (1995).
Six-item scales for measuring "Purchasing Function's Involvement in Team Decisions" were developed based on the work of Giunipero and Vogt (1997) and research on the role of the purchasing function toward team participation by Ellram and Pearson (1993).
Subjective measures were used to measure "Business Performance." There are two reasons why subjective measures were chosen. First, subjective measures of performance are commonly used in research on private companies and on business units of large companies. Previous studies have found a strong correlation between subjective assessments and their objective counterparts (Narver and Slater 1990). Second, some respondents may not know or are unwilling to divulge certain information on the actual performance of their firms. They may, therefore, feel less threatened in answering questions that use subjective measures. Consequently, this may also increase the proportion of fully answered questionnaires among those returned. The subjective measures used here were adapted from Jaworski and Kohli (1992).
Questionnaire Design and Pre-Test
For consistency and easy completion, most of the scales used in this study are standardized 5-point and 7-point Likert scales. To reduce response bias, the measures for various constructs were mixed randomly and some of the questions were reversed scored.
The questionnaire was pre-tested on 10 key management personnel from 10 different organizations. The pre-test was used to assess issues such as face validity, statement clarity and precision, response format, sensitivity of questions, and questionnaire layout and length. The questionnaire was refined based on the respondents' comments. Certain commercially sensitive questions were rephrased to add clarity and certain questions (for example, sales volume) were taken out because they were deemed sensitive and would thus lower the response rate.
Field Procedure and Response
A letter explaining the nature and purpose of the research as well as a copy of the questionnaire was sent to the firms. To encourage quick and easy response, respondents were also allowed to fax their responses to the SIPMM, or return them via regular mail.
Of the 800 questionnaires sent, 65 were returned due to a change in address of the designated firms and other reasons. Thus, only 735 firms received the survey questionnaire, of which 89 companies replied. This yields a response rate of 12.1 percent. Discarding all incomplete and inconsistent responses, the final number of usable questionnaires was 71. A telephone check was made to determine the reasons for non-response. The lack of time, shortage of human resources, and sensitivity of certain questions were cited as reasons for nonparticipation.
The responding firms come from a wide range of industries, including electronic, computer parts, plastics, semiconductors, engineering, printing, restaurants, and the hospitality sector. This sample is appropriate for measuring the role and contributions of the purchasing function in Singapore firms in general. Also, the responding companies consisted of both small and large firms (66 percent were small and medium-sized firms with fixed assets of less than $15 million), as well as locally owned and foreign-owned firms (40.9 percent were locally owned firms). Table I presents the characteristics of the responding firms.
DATA ANALYSIS AND FINDINGS
The Statistical Package for the Social Sciences (SPSS-X) was employed for the data analysis. As most of the data were collected using Likert scales, and tabulation was straightforward, missing data were not a problem as all incomplete returns had been removed.
Exploratory Factor Analysis
A factor analysis was performed for all the scale items to explore the underlying factors of the measures used. The results revealed that the underlying factors for the measures were, in most instances, consistent with the proposed constructs (see Table II). A factor loading of at least 0.30 was used as a guideline to determine whether a variable was part of a factor (Nunnally 1978). For measures with loading less than 0.30, the items were examined carefully to assess if the questions or statements used really tapped the constructs. Where there were doubts regarding the face validity of the measures, the items were dropped from further analysis.
The Cronback alpha values for the constructs used in this study are also shown in Table II.
Means and Standard Deviations
The overall means and standard deviations of the constructs are shown in Tables III and IV. The two extreme means are 5.9190 for "Strategy -- Cost" and 6.2911 for "Strategy -- Differentiation". The smallest standard deviation in this study is 0.3605 for "Importance in Purchasing". This, however, is not small considering that four of the items in this construct are based on 3-point scales. Table III reveals that the degree of purchasing-supplier partnerships for Singapore-based firms is relatively high. Also, purchasing has an active role in team decisions. The purchasing function is, however, viewed as relatively unimportant and it has poor integration with other functions.
Table IV shows that purchasing participates actively in the buying of raw materials, vendor assessment and selection, contract negotiation and administration, and international sourcing. These are the traditional activities performed by the purchasing function. The purchasing function seems to be relatively uninvolved in the purchase of accounting systems, information systems, services, and rental of buildings.
Chi-square tests were also performed to determine if differences exist among some variables, such as the importance of purchasing as perceived by the CEOs, the purchasing function's integration with other functions, the purchasing-supplier partnership, and the purchasing function's involvement in team decisions, across Small and Medium Enterprises (SMEs) versus non-SMEs, and across locally owned firms versus foreign-owned firms.
The test results presented in Table V reveal that non-SMEs regard the purchasing function as more important than SMEs ([x.sup.2] = 4.78898, p = 0.05). This differs from Tan's (1990) study on the electronics industry where it was reported that top management commitment to the purchasing function was independent of firm size.
Pearson Correlation Analysis
The hypotheses were tested using the Pearson's Correlation test. The correlation coefficient matrix is shown in Table VI. The significant findings are reported below.
First, it was found that a firm that emphasizes cost leadership for its competitive strategy tends to have more cost-focused purchasing objectives, supporting H1a (r = 0.51, p [less than]0.01). Second, the more an organization emphasis differentiation in its competitive strategy, the more quality-focused are the purchasing objectives, supporting H1b (r = 0.28, p [less than]0.05). This supports Watts et al.'s (1992) proposal that functional goals must be congruent with corporate goals and objectives. Killen and Kamauff (1995) also maintain that purchasing objectives must be congruent with organizational goals and values.
There is a positive and significant (r = 0.32, p[less than]0.01) correlation between Strategy-Cost Leadership and Objectives-Quality, and as such, H1c is not supported. Thus, It appears that when firms use cost-leadership as a corporate strategy, they may have the purchasing function focus on quality as the purchasing objective as well. This may not prove to be productive as the purchasing function may not be synchronized with corporate strategy. There is also a positive and significant (r 0.46, p [less than]0.01) correlation between Strategy-Differentiation and Objectives-Cost. As such, H1d is not supported. It appears that when firms use differentiation as a corporate strategy, they may have the purchasing function focus on cost as the purchasing objective as well. Again, this may not be productive and may reflect differences between purchasing and top management.
Third, a significant relationship was found between the importance of purchasing and the extent of the purchasing-supplier partnership, supporting H2 (r = 0.33, p [less than]0.01). Fourth, there is no significant relationship between the importance of purchasing and purchasing's involvement in team decisionmaking; H3 is not supported. It, thus, appears that even when the purchasing function is considered important, it may not necessarily be included in team decisions. Fifth, there is no significant relationship between the importance of purchasing and purchasing's integration with other functions, thus H4 is not supported. This suggests that even when the purchasing function is considered important, it may not necessarily be properly integrated with the other functions.
Sixth, the extent of the purchasing-supplier partnership was found to improve business performance, thus supporting H5a (r = 0.28, p [less than] 0.05). This is consistent with Stuart's (1993) findings that supplier partnerships can affect the competitive advantage, growth, long-term profitability, customer retention, and sales of the firm, and with Rajagopal and Bernard's (1993) proposal that good buyer-seller relationships facilitate superior business performance.
Seventh, it was found that the extent of the purchasing function's involvement in team decisionmaking led positively to better business performance for the firm, supporting H5b (r = 0.28, p [less than] 0.05). Finally, the test results show that the extent of the purchasing function's integration with other functions is positively correlated with better business performance, supporting H5c (r = 0.28, p [less than] 0.05).
It is interesting to note that the three constructs -- purchasing's involvement in team decisions, purchasing's integration with other functions, and the purchasing-supplier partnership -- are highly correlated with one another (see Tables II and VI). This suggests that when a firm is able to integrate purchasing with other functions, it also involves purchasing in team decisions and engages in purchasing-supplier partnerships. The high correlation (r = 0.54, p [less than] 0.01) between team decisions and the purchasing-supplier partnership suggests that when a firm chooses to form partnerships with suppliers, purchasing then becomes a necessary participant in team decisions since it is in the best position to facilitate the partnership.
Practical Implications for General Managers
The results show that pursuing close knit supplier partnerships, involving purchasing extensively in team decisionmaking, and encouraging the purchasing function's integration with other corporate functions can lead to improved business performance.
As the extent of supplier partnership is affected by the CEO's perceptions of the importance of purchasing, general managers should discard the notion that purchasing is just another clerical function. With the trend toward global sourcing, coupled with rapid changes in technology and increased competition, it is vital that the purchasing function be viewed as a strategic function and as a contributor to the strategic planning process. It is, therefore, essential for top management to provide support and commitment to the purchasing function. This means viewing purchasing strategy as part of the corporate strategy.
Since supplier partnerships can improve business performance, it is important that the firm employ purchasing professionals whose attitudes match appropriately the form of supplier relationship it wishes to develop over the long term. Managing supplier partnerships requires a high level of analytical skills, problem-solving skills, creativity, and knowledge of the supplier's production and distribution processes. Suppliers play a critical role too. Firms should actively select only suppliers who are capable of, and willing to maintain mutually beneficial relationships.
The purchasing function's involvement in team decisions is shown to lead to improved business performance. The purchasing function should thus be asked to contribute to team projects whenever possible. The performance criteria should be team oriented, so that performance appraisal and compensation systems reward team results and not departmental results. Key supplier and customer representatives should also be included as full members of any team to which they can make significant productive contributions. This can further improve the team's performance.
The integration of purchasing with other functions is also essential. Top managers must constantly foster this integration by having more cross-functional meetings or, perhaps, job rotation to promote a better understanding of the conflicting objectives of different departments and of the potential contributions one department or function can make to the others.
This study has also revealed that smaller firms tend to regard the purchasing function as being relatively less important compared to larger firms. Since the purchasing function can contribute to business performance regardless of firm size, the relevant government agencies should educate top managers on the importance of the purchasing function to improved corporate performance.
Practical Implications for Purchasing Managers
Various aspects of the purchasing operation have been shown to lead to better corporate performance. Purchasing managers should derive greater confidence and assert their influence in the corporate strategic planning and implementation process. They should also seek to improve their abilities to participate in team decisionmaking and in integrating with other functions of the firm. They should strive to contribute to the success of corporate competitive strategy by pursuing internally consistent objectives, that is, focusing on cost in purchasing objectives when the firm is pursuing cost-leadership in the market and focusing on quality in purchasing objectives when the firm seeks to achieve differentiation in the market.
Purchasing managers should also view the role of suppliers in the right light. Suppliers should not be viewed as adversaries, but as pivotal partners in a demand value chain. Purchasing managers must, therefore, develop good negotiation skills to work closely with suppliers.
Purchasing needs to evolve and grow in strategic posture within the firm. This evolution requires the purchasing function to develop new skills and be recognized by top management as a key contributor to corporate strategy. As with almost all other business functions today, integrating purchasing with other corporate functions and integrating purchasing into strategic management is necessary for superior business performance into the next millennium. A prerequisite would be to change the attitude of purchasing managers and top management. It is imperative for firms to realize that purchasing must be proactive and operate at a strategic level to achieve and maintain sustainable competitive advantage into the next millennium. Changing the view of management in this regard, however, has been a slow process. It is hoped that this piece of empirical research can help to redefine and reinvent the various dimensions of purchasing needed to achieve corporate success.
Mark Goh is an Associate Professor in the Department of Decision Sciences at The National University of Singapore. Dr. Goh earned his Ph.D. degree from the University of Adelaide in Australia. His research interests include logistics strategy and supply chain management.
Geok Theng Lau is a Senior Lecturer in the Department of Marketing at The National University of Singapore. Dr. Lau earned his Ph.D. degree from the of Western Ontario. His research interests include purchasing management and buyer/seller relationships.
Lillian Neo is a Marketing Executive for Tianpo Jewelry of Singapore. Ms. Neo earned her BBA degree from The National University of Singapore.
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PROFILE OF RESPONDING COMPANIES Frequency Percentage Ownership Locally owned 29 40.85 Foreign owned 42 59.15 Firm Size SMEs 24 33.80 Non-SMEs 47 66.20 Number of Employees Less than 100 employees 21 29.58 100 to 600 employees 35 49.30 More than 600 employees 15 21.12 FACTOR ANALYSIS RESULTS Factor variable (Percentage of Factor Cronbach's variance explained) Score alpha Competitive strategy -- Cost (6.66%) 0.7813 Cost leadership 0.789 Customer savings 0.742 Large market share 0.710 Efficiency in production 0.572 Competitive strategy -- Differentiation (4.05%) 0.7180 Product innovation/uniqueness 0.773 Product/service quality 0.630 Purchasing objectives -- Cost (3.41%) 0.7078 Ensure available supply of materials 0.810 Contain material costs 0.794 Purchasing objectives -- Quality (8.37%) 0.8184 Important to internal customer satisfaction 0.748 Important to external customer satisfaction 0.743 Important to improve/maintain material quality 0.730 Develop good supplier partnership to maintain quality 0.696 Affects bottomline 0.544 CEO's perception of importance of purchasing (3.00%) 0.6748 Instrumental in competitive strategy formulation 0.792 Critical in reducing prices for firm 0.639 Affects operations of firm 0.609 Purchasing's integration with other functions (10.11%) 0.8483 Legal 0.870 Research and development 0.822 Advertising/Marketing 0.788 Engineering 0.727 Accounting/Finance 0.529 Purchasing-supplier partnership (6.16%) 0.7757 Evaluate supplier extensively before partnership 0.741 Work closely with supplier to increase profits 0.712 Has large influence on supplier's systems 0.679 Engages in joint problem solving with supplier 0.649 Involvement of purchasing in team decisions (26.44%) 0.8498 Develop procurement strategy in matrix teams 0.794 Integrate information well with other functions 0.719 Always asked to contribute to teams 0.692 Always included in cross-functional project teams 0.678 Usually helps to make important team decisions 0.565 Thoroughly involved in all organizational teams 0.536 Business performance (4.61%) 0.8757 Able to perform well relative to industry leader 0.912 Reports superior overall performance 0.878 Maintains good long-term profitability 0.820 MEANS AND STANDARD DEVIATIONS OF VARIABLES Variable Mean Standard Deviation Strategy - Differentiation 6.2911 0.8046 Stragey - Cost 5.9190 0.9541 Supplier Partnership 5.7254 0.8775 Business Performance 5.5049 0.7889 Involvement in Team Decisions 5.0094 1.1187 Objectives - Cost  4.3662 0.7744 Objectives - Quality  4.0563 0.7490 Importance of Purchasing  2.4356 0.3605 Integration with other Functions  2.4696 0.9886 Notes: (1.)Variables are measured on 5-point scale. Larger numbers indicate greater importance. (2.)Construct is measured by 14 items, 10 of which are based on 3-point scales while the other 4 are based on 5-point scales. Larger numbers indicate greater importance. (3.)Construct is measured on 5-point scale. Larger numbers signify greater integration of purchasing with other functions. MEANS AND STANDARD DEVIATIONS FOR PURCHASING'S PARTICIPATION IN DIFFERENT DECISION AREAS Standard Decision Area Mean Deviation Vendor Selection 4.0000 0.9168 Vendor Assessment 3.9714 1.0764 Purchase Raw Materials 3.8857 1.6020 Contract Negotiation 3.7429 1.1879 Contract Administration 3.5714 1.3030 International Sourcing 3.5429 1.6033 Purchase Maintenance, Repair, Supplies 3.3714 1.2646 Appointment of Contractors 3.3714 1.2415 Purchase Transport and Freight 3.3429 1.5500 Total Quality Management 3.2429 1.2903 Purchase Capital Equipment 3.0000 1.2626 Purchase of Resale Items 2.1714 1.7108 Purchase of Information Systems 2.0571 1.4435 Purchase of Services 1.9857 1.2683 Purchase Rental of Building 1.6571 1.4831 Purchase of Accounting Systems 1.6286 1.3744 Note: All items are based on 5-point scales. CHI-SQUARE ANALYSIS View Purchasing As Row Important Not Important Total SMEs 7 18 24 63.6 29.5 33.8 Non-SMEs 4 43 47 36.4 70.5 66.2 Column 10 61 71 Total 14.08 85.92 100% CORRELATION MATRIX Strategy- Strategy- Objectives- Objectives- Cost Differentiation Cost Quality Model I Strategy-Cost 1.00 Strategy- Differentiation 0.65  1.00 Objectives-Cost 0.51  0.46  1.00 Objectives-Quality 0.32  0.28 [+] 0.27 [+] 1.00 (1.)p [less than] 0.01, (+.)p [less than] 0.05 Importance of Integration of Partnership Team Purchasing Purchasing with Supplier Decisions Model II Importance of Purchasing 1.00 Integration of Purchasing 0.20 1.00 Partnership with Supplier 0.33  0.30 [+] 1.00 Team Decisions 0.16 0.41  0.54  1.00 Business Performance 0.23 0.28 [+] 0.28 [+] 0.28 [+] Business Performance Model II Importance of Purchasing Integration of Purchasing Partnership with Supplier Team Decisions Business Performance 1 .00 (1.)p [less than] 0.01, (+.)p [less than] 0.05
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|Author:||Goh, Mark; Lau, Goek Theng; Neo, Lillian|
|Publication:||Journal of Supply Chain Management|
|Date:||Sep 22, 1999|
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