Linking Purchasing to Corporate Competitive Strategy

Charles A. Watts is an Assistant Professor of Management at Bowling Green State University. Dr. Watts received his D.B.A. degree from Indiana University. He has published articles in various professional journals, and is a previous Journal author. Kee Young Kim is Professor of Operations Management and Dean of the Graduate School of Business Administration at Yonsei University in Seoul, Korea. Dr. Kim received his Ph.D. degree from Washington University in St. Louis. He is the author of several books and numerous professional articles. Chan K. Hahn is Owens-Illinois Professor of Management at Bowling Green State University. He holds a Ph.D. degree from Ohio State University. Dr. Hahn is an active researcher in the field of purchasing/materials management, and is a previous Journal author. To compete effectively in the global marketplace, a firm must have a competent and strategically integrated purchasing organization. It is important that all functional area strategies and capabilities, including purchasing, be consistent with corporate competitive strategy. It is also critical that a company's suppliers have the capability to meet its strategic priorities. This article develops a conceptual framework to aid in linking purchasing to corporate competitive strategy and to other functional area strategies as well. The proposed model can be used to begin to integrate purchasing into overall corporate strategy. INTRODUCTION In a typical corporate setting, the purchasing function should play an important role in shaping the competitive capability of the firm in its marketplace. Recent surveys of manufacturing firms in the United States indicate that purchased materials account for an average of approximately 55 percent of the total production costs, compared with about 15 percent for direct labor costs. |1~ It is also well understood that the quality and delivery capabilities of any manufacturing firm are heavily influenced by the performance of its suppliers. Recognizing the importance of the purchasing function in overall corporate performance, most progressive firms pay close attention to their purchasing functions and attempt to improve the management of their supplier networks. For example, a recent study reported that almost half the companies surveyed had expanded the role of purchasing in the corporate strategic planning process. |2~ Yet a careful review of the purchasing management literature shows that the importance of the purchasing function in corporate performance has not fully been recognized in the United States. Traditionally, purchasing has been treated as a lower level operating function that has little to do with overall corporate competitive strategy. |3~ Much of the available literature on the subject treats purchasing strategy and policy from the perspective of narrowly defined operating level policies and strategies. For example, the most frequently discussed purchasing strategies in typical purchasing textbooks are related to the number of suppliers (single versus multiple), pricing strategies (cost or market-based), organization structure (centralized versus decentralized), and other operating level policies. Moreover, informal interviews and interactions with purchasing managers and top executives reveal that many of them still hold the archaic view that purchasing is an independent agency within the company. For example, some companies still use the position title "purchasing agent," and many managers still believe that they are simply an agent for the company and that they do not have any direct input into the firm's strategic management activities. Some purchasing scholars have tried to advance the notion that the purchasing department should be treated as a "profit center" rather than as a strategic organizational unit that contributes to overall corporate performance. The concept of purchasing as a "profit center" may be useful in demonstrating its potential contribution to overall corporate performance; however, this concept also can easily be misinterpreted as an endorsement of the view that purchasing is an independent agency. …