Overview

It has been 'wisely' observed that organizations make profits only when they meet the outside world. Internally, although adding value, costs are part of the product's progress. Evidence would suggest that companies are increasing efficiencies by means of technology utilization, scale and strategy, to increase purchasing content with less direct labour and, thereby, are reducing the value added internally as a proportion of direct labour costs. This trend can be viewed from the differences in the ratios between the degree of purchasing content compared with internal labour content. In the 1980s there was a 3:1 ratio respectively. In the 1990s it was a 4:1 ratio. The trend suggests that the ratio will increase further.

The importance of the purchasing function has traditionally depended both on the ratio mentioned above and the perspectives of management. The importance of the purchasing function can be viewed as a reflection in its hierarchical layout within the organization. Where management considers the purchasing function to be mainly an operational activity, the purchasing department is likely to be placed low down in the organizational hierarchy. Where management view the purchasing function with strategic importance, the reporting levels might include the board of directors.

Traditional definitions of the purchasing function encompasses the process of buying, selecting a supplier, arriving at a price, specifying terms and conditions, issuing a contract or order and expediting delivery. The traditional purchasing function has not typically incorporated supplier-partnering into its strategy. Figure 11.1 compares this traditional perspective with the partnership approach.