My research indicates that procurement and acquisition have a strong strategic dimension in most companies. My interviews show that, in the opinion of representatives of manufacturing industry, the business sector where procurement is most strongly integrated into the company structure is retailing. This is followed by those manufacturing industry sectors with complex products, such as the aerospace and automotive industries. Purchasing for production needs seems to get most attention and acceptance in manufacturing companies, although the purchase of investment or capital goods also stimulates the development of strategic purchasing. These areas are the main tasks for the purchasing department.
Those employed in the purchasing function are frequently involved in product development projects and in companywide schemes, either as a part of a team, or in a more traditional manner. Their main tasks are to find the right suppliers, and to ensure that goods are delivered on time after the developmental phase has been concluded.
The integration between the production function and the purchasing function is invariably strong, and certainly stronger than the relationship between purchasing and other functions in the company. But, according to my findings, the purchasing department rarely takes the lead in initiating and developing these relationships.
Purchasing activities are becoming more and more decentralised, but strategic procurement and common areas for the whole group are held coordinated by means of a centralised organisational role in the company. Most clearly visible is the purchasing department's professional involvement at the functional level, and in those areas linked to purchase for production needs. Here we can see both a distinct behaviour and a defined procurement strategy. A large percentage of the annual purchase value is however often accounted for by staff working outside the formal purchasing organisation, which means that purchasing management does not always have the full picture, particularly in larger companies and groups. One distinct dividing line is between what is supplied through the purchasing department and what is supplied in other ways. Another dividing line is between different purchasing areas, with some being much more knowledgeable and efficient than others.
The recent trend for companies to concentrate on their core competencies is resulting in more of the remaining activities being contracted out. Such a process can be operational or strategic in character. Accordingly, different types of alliances are created and, depending on the content of the contracted out business, these could be either operational alliances or more profound alliances involving strategic co-operation. The process could also be essentially internal, whereby contracting out activities take place within the group as an aspect of vertical ownership.
The classical method of controlling by means of ownership has often been described as vertical integration. But according to my research, vertical integration can take two main forms. The first, or "classical" one, is designed to secure traditional influence through ownership. Total vertical ownership has nowadays been "loosened up", which is why other forms of integration involving only partial ownership are relevant. The other and newer form we often find today is "vertical co-operation", involving either full or partial integration. Control by power-dependence, relational contracts and through organisational structure creates different types of alliances, similar in some ways to control by ownership, but without some of its disadvantages. An enterprise may choose a backward type of integration related to different needs and specific conditions within strategic supply management, depending on circumstances.
As a result of my research I have identified four categories of Buyer-Supplier Relationships, from traditional "arms-length" to vertical integration, each category with different characteristics, determined by different purchasing situations and different company requirements. These categories offer alternatives for purchasing management to develop sound solutions for different purchasing needs, and they represent one of the cornerstones of a professional supplier base.
Transactions between buyers and sellers can take place in several different forms, which from the buyer's viewpoint are seen as supplier relationships. The most fundamental are simple competition-based transactional exchanges. There are also traditional collaborative types of transaction varying in their complexity. These may be arranged on an internal-external or on a horizontal-vertical basis. Some transactions have a main stream of distributive strategies corresponding to the more basic types of supplier relationships, which I would define as classical purchasing. Approximately 80% of the number of suppliers account for 20% of the purchase value of a typical company in the manufacturing sector. From the interviews I have conducted, it seems that purchasing management willingly continues with these "arms-length" relationships. That is why we can be certain that purchasing management in the future will need to develop competition strategies widely and in a professional manner, even though so many contemporary authors and management specialists tend to advocate partnership and co-operation as the most professional and acceptable approach.
My findings show that in fact only about 5% of a company's purchase value and 0.3% of its supplier base relate to deep, intensive strategic alliances. This represents a mere handful of a company's suppliers, often only partially integrated, as co-operation in product development and the degree of involvement is often limited.
Different categories of supplier relationships create the foundation of the supplier base of the company. When changes are made in the supplier base structure, some types of relationships decrease, while others increase. One common change in these circumstances, according to my findings, is that purchasing companies tend to work with fewer suppliers for "classical" purchasing. As a result, the purchase value increases from those suppliers with which the purchasing company employs integrative strategies. This is particularly apparent from the high purchase value noted in the category of "operational co-operation". That type of co-operation represents about 70% of the total purchase value and just about 20% of the number of suppliers in the companies surveyed. A great proportion of all purchases for production is transacted in the operational co-operation or classical purchasing mode and not, as might be expected, in deep strategic alliances or in a situation of vertical integration. Moreover, this situation looks set to continue, but could vary between different companies.
The main pattern for many companies, for example for the purchase of production items, or of computers, is to use two suppliers, either as two parallel suppliers or by means of double sourcing. A trend towards single sourcing is also indicated, but it is mainly a simplified picture of how single sourcing applies to leading edge companies in Sweden. The difference between industry sectors is accordingly less than we might have imagined.
For production supply two parallel suppliers are invariably preferred to direct single sourcing. This conclusion is also confirmed from other studies within, for example the Japanese automotive industry, where (as a result of our misunderstanding and confusion of the hybrid system which applies there) we have not really appreciated that, in many aspects, they are using a main sourcing strategy similar to that used in Sweden.
Multiple sourcing is relatively unusual, even though that strategy is prominently reflected in the "classical" textbooks. It is most frequently used for generic products, such as consumable supplies. Triple sourcing is most common in situations when a company is building up a new, third supply source in a developing country or in a country located in a politically unstable region.
Direct single sourcing is mainly used for strategic alliances, which are built on the basis of sharing long-term strategies. But single sourcing is also frequently used in operational alliances, where the cost of tooling renders parallel sourcing impossible. Other types of single sourcing are those related to monopoly markets, here defined as publicly controlled sole sourcing, and those built on technological barriers or internal supply, here defined as market related sole sourcing.
If the strategic core business of a company does not demand critical technology and the customer does not pay more for a company-unique solution, significant cost reductions could be made by limiting uniqueness to those project-stages where it could be justified from a strategic and economic point of view. Companies and purchasing management do not normally use this type of differentiation of a supply system related to defined strategic and strategic/critical project-stages, corresponding to the external and internal environment of a company. If they did so, purchasing management would become an even stronger external market resource than hitherto.
Linköping: Linköping University Electronic Press, 1998. , 240 p.