Increased global competition, shorter clock-speeds , and greater customer demands have become the order of the day, demanding organizations to change how they do business. Beginning with the 1980s, organizations started to recognize that in order to address these challenging imperatives, a rethinking needed to take place on how suppliers were treated. Organizations realized that, especially due to increasing demands from customers, they would not be able to meet these stringent needs themselves any more in an effective and efficient manner, but needed the help of suppliers. As such, suppliers could contribute unique capabilities that would help organizations remain competitive, being able to more quickly adapt to changing needs. Driven by these new requirements, primarily antagonistic relationships changed to more collaborative ones, recognizing the unique value suppliers can bring to the table in helping organizations meet the demands of the changing landscape. This understanding, as well as how it reflects itself in organizational strategy, has been advancing ever since, leading to the importance of supply chain management (SCM) in general, and strategic sourcing in particular.
Within this context, information technology (IT) has been able to elevate the impact that strategic sourcing has on the competitiveness of the organization in unprecedented ways. While significant advancements have been made, we have just scratched the surface of what is possible. This book is intended to trace the evolution of technology use in procurement, describe its recent advances in terms of current applications and developments , and foreshadow what may be on the horizon. As such, it is meant to provide a thorough background of electronic procurement, to highlight the significant advances that have been made especially in the last 15 years, and to outline what is on the horizon. In essence, this book is all about how IT can be leveraged for procurement. Within this context, this book defines electronic procurement as the use of electronic means, primarily the Internet and cloud-based solutions, but also hardware-based software applications , to facilitate and enhance the purchase of goods and services through automation , integration , and information sharing.
This chapter is meant to set the stage, and serve as a foundation for the ensuing discourses. As such, in this chapter I start out with a definition of supply (chain) management and strategic sourcing. I will then outline how strategic sourcing has become so imperative in todayâs fast-paced competitive environment. In fact, leveraging supplier capabilities and considering supply chain partners as an integral part of an organizationâs strategy has become instrumental for many in order to stay ahead of the competition or even merely stay in business. The involvement and role played by suppliers has been critical. This discussion will serve as a set-up for the positioning of IT as a critical foundation for enabling such linkages.
Supply (Chain) Management and Strategic Sourcing
SCM takes a holistic perspective of an organization and views it as an integral part of a network of actors designed to fulfill the needs of customers. The supply chain encompasses all entities needed to provide the final product or service to the customer. In the extreme case, this can include all the supply chain partners, reaching as far back as the stage in which raw material is extracted from the earth, such as in an iron ore mine, through all the intermediate steps, to the final delivery of the product, such as an automobile, to the final customer. The management of the supply chain should however not stop there, but also include a reverse supply chain, encompassing the recycling, refurbishing, and remanufacturing of the productâs components after its end of life.
Strategic sourcing refers to âthe selection and management of suppliers with a focus on achieving the long term goals of a businessâ (Cavinato et al. 2015). Of particular relevance in strategic sourcing is the consideration of supplier capabilities , and how these may complement and extend an organizationâs own strengths. Capabilities can include resources such as research and development , unique engineering knowledge and know-how, competitive intelligence, patented or/and sophisticated technologies or processes, access to capital equipment, or superior insight into or knowledge of demand forecasts, trends, or consumer preferences. All of these afford the opportunity for suppliers to elevate the performance and/or features of an organizationâs products or services, further differentiating it in the marketplace, and responding to the changing imperatives noted above.
As such, together with the help of supply chain partners, an organization may develop products or services that are of such quality or differentiation that the organization itself would not have been able to achieve just by itself. This is indicative of the adage that organizations are not competing against organizations any more, but supply chains against supply chains. This critically illustrates the importance of strategic sourcing. As is evident by this discourse, purchasing has become much more than just âbuying thingsâ, and has been elevated to strategic levels. This is reflected in many organizations having established the role of the Chief Procurement Office (CPO), who generally reports directly to the Chief Executive Officer.
Several different terms have been used to refer to buying and related activities, including procurement, purchasing, and sourcing. I will be using these terms interchangeably in this book. If a finer-grained difference is made among these terms, however, then procurement has generally referred to as more tactical or operational activities associated with buying, sourcing has usually been the term used for the more strategic aspects, and purchasing is often used as a term in between these two dimensions. Procurement is also frequently used when referring to public or government buying activities. However, different uses of these terms are often dependent on the organization, and there is no commonly accepted definition (Schoenherr et al. 2012).
One additional definition I am particularly fond of is the one for supply management, which has also been used interchangeably with the above terms, and which is provided by the Institute for Supply ManagementÂź. The association defines supply management as âthe identification, acquisition, access, positioning, management of resources and related capabilities the organization needs or potentially needs in the attainment of its strategic objectivesâ (Cavinato et al. 2015). I start out most of my procurement courses with this definition, since it encapsulates the strategic nature of the function.
Specifically, what I emphasize is that the âidentificationâ part of the definition not only refers to the identification of products, services, or suppliers, but, more importantly, to the identification of new ways of doing business, new paradigms. This requires sourcing to think outside of the box, and develop new processes and ways of interacting with supply chain partners that had not been done before. Examples of this include the fundamental shift toward recognizing suppliers as true partners andâin many instancesâas an extension of the organization itself, which started in the 1980s. This has evolved ever since, with for instance, supplier suggestion programs and supplier conferences becoming increasingly popular in the 1990s. More recent approaches include supply chain finance, risk pooling together even with competitors, and co-opetition, that is, the approach of both collaborating and competing with supply chain partners (in the situation where for instance a supplier is also a competitor). It is these approaches that will set organizations apart.
Similar notions apply to the remaining terms in the definition. As such, âacquisitionâ not only refers to acquiring the needed products or services, but also acquiring the needed (and often more intangible) know-how and intelligence that the supplier may contribute. These aspects may become even more important than the mere product or service itself. Further, âaccessâ refers to the access to unique capabilities resident at the supplier. This becomes especially critical when there is an exclusive relationship with the supplier to utilize these capabilities , making this particular relationship difficult to replicate, and positioning it as the foundation for competitive differentiation.
To just illustrate one further component of the definition, since it demonstrates very well the gist of sourcing, is âpositioningâ. This suggests that suppliers can play an integral part in not only helping the organization to find a niche currently, but more significantly, in the future. As such, suppliers can create and shape the future for the organization, since supply partners may offer ideas and suggestions, as well as technology and help, in pushing the organization to levels that are greater than what the organization itself would have been able to achieve independently. Outside partners, such as suppliers, may be particularly apt in doing so, since they can provide an outside-in perspective or since they may possess a broader picture of the competitive landscape.
The Increasing Importance of Supply Management
Several trends have been elevating the role that suppliers play for an organization, thus making supply management a critical element in the quest for an organizationâs competitive differentiation and success. One of the biggest influences has been the trend toward outsourcing . Heightened emphasis toward this approach was seen particularly beginning with the 1980s and 1990s, an era that was thus also characterized by improving buyer-supplier relationships . It was during these years, that organizations realized that in order to meet the increasingly stringent customer demands, they were better off focusing on what they could do best, and outsourcing the remaining activities to suppliers.
This strategy was advantageous since now the organization was able to retain focus and hone the most appropriate skills, while suppliers, oftentimes being experts in what they do, could provide the inputs more effectively and efficiently than the organization would have been able to. While the organization could have developed these capabilities itself, this may have consumed an inordinate amount of resources, with the expertise then still needing further development . Relying on suppliers for these inputs offered a more expedient approach, adding flexibility to the organizationâs strategy as a further benefit. As such, the organization did not have to invest in potentially expensive capital equipment, but the supplier did. Further, if customer preferences were changing, the organization could more easily adapt, since it had not made these capital investments; the organization could switch to a different supplier that would meet the needs of the organization better. This added flexibility and agility enabled organizations to be more responsive to changing customer preferences.
This move toward greater reliance on suppliers however also led to a greater lev...