Privatization and Supply Chain Management

Andrew Cox, Lisa Harris, David Parker

• Publisher: Routledge
• Year: 2005
• ISBN:
  9781134690374
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book brings together two of the 'hottest issues' in current management thinking: the impact of privatization on the performance and behaviour of the companies involved, and the increasingly important role of purchasing and supplier relationships. The notion that efficiency is improved with privatization is critically examined. The authors examine whether privatized organizations have recognized the importance of the procurement role and developed both their procurement functions and supplier relationships so as to enhance competitiveness. Grounded in economic theory, and providing rich case study material, this volume makes a major contribution to an increasingly important area. It will be of interest to students and researchers in economics, business and management studies.

1

Privatisation, corporate supply management and procurement competence

This book is about the extent to which privatised companies have, or have not, achieved an operational increase in the professionalisation of their purchasing and supply function, or have developed a more strategic approach to procurement competence through an understanding of supply chain alignment. The differences between these two approaches to the effective management of external resources have been described in detail elsewhere (Cox, 1997a, 1997b and 1998), but these are summarised under the following headings.

Purchasing and supply functional professionalism

By purchasing and supply functional professionalism is meant that process by which corporate decision-makers recognise the need to improve their existing structures and processes, as well as practitioner skills and capabilities, within the purchasing and supply function in their company. This recognition normally involves, first, a focus on immediate cost reduction, through a reduction in headcount internally, or through the immediate aggressive renegotiation of external supply contracts. Only after this search for (what economists refer to as) static efficiency gains may come a second stage. In this stage, a reappraisal of the purchasing function in relation to existing in-house functions (in particular the existing manufacturing and production function) may occur. This may involve a reappraisal and a repositioning of the purchasing and supply function within the corporate hierarchy, with an increasing focus on ways to improve the internal and external cost structure behind the delivery of the function.

Relatedly, this reappraisal can lead to a new commercial role and responsibility for purchasing and supply management. Instead of its historic role as a reactive administrative function, purchasing can become more actively involved in internal and external supply chain management. This process normally involves the function developing a more active approach to supplier appraisal, development and performance. This new approach normally involves a rejection of price offerings from suppliers in favour of a focus on the total costs of ownership, and the development of a more sophisticated understanding of the range of supply relationships that are available to achieve long-term value for money. This may also involve an emphasis on the total integration and management of the existing logistics and supply chain, as the basis for waste reduction and operational efficiency throughout the corporate supply chain for current products and services. It may also involve a significant reappraisal of the insourcing and outsourcing of historic support service to the company. This focus on new processes and ways of doing things is normally referred to (by economists) as the search for dynamic efficiency.

Procurement competence and supply alignment

The professional approach to purchasing and supply functionalism described above can still be seen, however, as primarily reactive in conception. While there is little doubt that a reappraisal of the purchasing and supply function, and the interventions that are necessary to achieve this, require a more proactive and innovative approach by purchasing professionals, this approach is still primarily located within an operational effectiveness way of thinking about competitive advantage. The reason for this is because the modus operandi of this approach is based on two distinct, but linked views of how to achieve operational effectiveness for existing products and services. The first goal is the desire to improve the internal alignment of the current purchasing function with other operational silos within the company by redefining roles and responsibilities. The second aspect is a linked attempt to deliver current products and services in a more operationally efficient way through a more professional approach to existing logistics and supply chain processes and relationships.

As effective as this may be in improving the current operational effectiveness of the way in which products and services are delivered, it can be argued that this innovation is still within the existing product and service delivery paradigm. The company is still trying to find a more effective way of delivering existing products and services. This is a relatively reactive way of thinking about corporate success when it is compared with a truly proactive approach that focuses on how a company can realign the structure of power within current supply chains in order to create competitive advantage. Such an approach might focus on the wholesale outsourcing of existing primary production (rather than support) processes, in order to deliver supply chain functionality to customers in a superior way, which competitors would find difficult to imitate (Lonsdale and Cox, 1998; Cox and Lonsdale, 1998). It might also lead to the search for ways in which completely new products and services can be created to transform the current focus of the company entrepreneurially.

Sustained competitive advantage in the long term requires that companies must do more than simply innovate with the internal and external delivery of existing products and services. Clearly, sustained competitive advantage requires that companies also focus on how to create new products and services in the primary supply chains within which they are involved.

This proactive and innovative way of thinking about supply chain power and functionality requires more than just a focus on purchasing and supply professionalism, it requires an understanding of effective resource leverage and procurement competence throughout a company. The reason for this resides in the fact that product and service innovation is almost always a supply chain phenomenon. This means that an understanding of the importance of supply innovation and control is an essential requirement for the effective management of corporate strategy and operational practice in well-run businesses, whether they have been recently privatised or not. This way of thinking about corporate strategy and operational practice is referred to here as procurement competence and supply alignment.

This study assesses the degree to which the newly privatised companies in the UK have been able to come to terms with the need to focus simultaneously on static and dynamic efficiency through cost reduction and purchasing and supply functional professionalism, and transformational efficiency through supply alignment and procurement competence. Overall, the research findings demonstrate that, while a majority of the privatised companies analysed (and even some of the public sector organisations studied as a control group) have made tremendous improvements in the professionalism of their internal and external purchasing and supply functions, very few have demonstrated any real understanding of supply alignment and procurement competence. This finding can mean only one of two things. Either corporate decision-makers do not understand what procurement competence and supply alignment is, or, they can only arrive at this after a learning process.

The research in this study suggests—as outlined in Figure 1.1-that this learning process is a three-stage phenomenon. The first stage involves an immediate cost reduction phase with a focus on internal and external process restructuring. This may be equated with improvements in static efficiency. Most of the privatised companies studied in this work have clearly developed this approach, although at different times and in a variety of ways. The second stage involves a professional development phase in which the company improves the competence of its existing purchasing and supply function, and seeks to find ways to improve operational effectiveness for the existing logistical supply chains, delivering current products and services. This second phase may be equated with improvements in dynamic efficiency through changes to create new processes and ways to deliver existing products and services more effectively and efficiently. Only some of the privatised companies in our survey had developed this approach, although a majority of those studied were clearly focused on moving in this direction. The third stages involves the procurement competence and supply alignment phase.

In this final phase, corporate decision-makers begin to understand that effective resource leverage through the development of procurement competence and supply alignment is a strategic, as well as an operational competence (Cox, 1997a). Once this is understood, the new competence begins to drive the strategic goals of the company. This third phase appears to indicate a new form of efficiency and effectiveness, which is referred to here as transformational efficiency. In this phase the company seeks to achieve improvements in its ability to make profits (or deliver exceptional public service) by shifting the boundary of the firm in line with the structure of the supply chains within which it operates. It also demonstrates an ability to manage existing or new products and services with a more flexible approach to make-buy decision making in the organisation’s primary, as well as support, supply chains (Lonsdale and Cox, 1998; Cox and Lonsdale, 1999).

Figure 1.1 The three phases of efficiency improvement.

Only one or two of the companies involved in this study appear to have begun to recognise the importance of this way of thinking and, even in these cases, only halting steps have been made in this direction. This leads one to conclude that far from this learning process being inevitable, it may only be developed by extremely competent individual decision-makers within particular companies. This finding confirms the argument, developed theoretically elsewhere by one of the current authors, that the development of procurement competence and supply alignment is not inevitable, but requires a high degree of intellectual sophistication by corporate decision-makers (Cox, 1997a, 1997b and l998).

THE STRUCTURE OF THE BOOK

If the summary above provides an insight into the basic findings of this study of privatisation, purchasing and supply management and procurement competence, it is important to understand how these conclusions have been arrived at. This is assisted by a description of the structure of this book.

In Part I, the context within which privatisation occurred in the UK is described and a basic summary of the research methodology is provided. Chapter 2 outlines the reasons why nationalisation was used in the UK and why it was replaced by privatisation and with what expectations by the Conservative governments of the 1980s and 1990s. The chapter shows that, while the policy was opportunistically conceived and demonstrated little concern for improving purchasing and supply management as such, in theory and practice it was inevitable that once privatisation had occurred there would be an inevitable pressure to increase the professionalism of the purchasing and supply function. The primary reason for this was the need to find immediate cost improvements in existing operational structures and processes, as shareholders replaced the government as owners.

It is further argued in this chapter that, whether or not this immediate pressure for cost improvement in existing functional processes and competencies (gains in static and dynamic efficiency) will give way to continuous corporate improvement and innovation (gains in transformational efficiency) is an open question. There is no inevitability about privatised companies moving beyond the search for immediate short-term cost reductions and becoming supply chain aligned and competent in procurement. This is the major theme that underpins everything in this book. It equates to the earlier distinction made between the three phases of cost reduction, developing professionalism and supply alignment. Overall, the research in this study demonstrates, in terms of Figure 1.1 (see page 4), that privatised companies have achieved considerable improvements in static efficiency (phase 1) and in dynamic efficiency (phase 2), but have a considerable way to go in achieving transformational efficiency (phase 3).

Chapter 3 provides an overview of the way in which these research findings were arrived at. The basic methodology in the study is explained and the rationale for the choice of the twenty-eight privatised companies and four public sector control organisations in the survey established. The basic structure of the study was built around a survey questionnaire of these participating companies. The key questions asked focused on four operational hypotheses about expected changes in purchasing and supply behaviour in public bodies after they had experienced privatisation. These hypotheses tested primarily for static and dynamic efficiency gains, and were structured around cost reduction and purchasing and supply functional professionalism.

In order to understand in more detail the reasons for these changes, and to understand the operational difficulties which privatised companies experience in achieving these static and dynamic efficiency gains, ten interviews were conducted with a sample of the participating companies. Since these interviews did not provide complete answers regarding the difficulties experienced in achieving transformational efficiency gains, in-depth case studies were undertaken of five of the participating companies. These were undertaken in order to see to what extent they had moved beyond cost reduction and functional professionalism in the direction of supply alignment and procurement competence. The aim was also to understand, if they had made only halting progress in this direction, what were the major reasons for this relative failure.

The basic empirical research findings of the study are presented in Parts II and III. In Part II there are four chapters concerned primarily with evidence about the degree to which both privatised companies and public bodies have been able to achieve static and dynamic efficiency gains through cost reduction and purchasing functional professionalism. Chapter 4 summarises the key findings from the questionnaire survey of twenty-eight privatised companies in the UK. It shows that virtually all of the companies are pursuing static and dynamic efficiency gains, but not necessarily in the same ways or with the same degree of success. While almost all of the respondent companies have introduced immediate cost reduction programmes after privatisation, fewer have developed a fully professional approach to the management of the purchasing and supply function. Despite this, it is clear that well over 50 per cent of respondents are pursuing the developmental phase outlined earlier. There is little evidence, however, that many of the companies are in fact even beginning to think about the transformational efficiency gains available through the third, supply aligned, phase.

In order to understand the reasons for these trends, as well as to understand the causes of differential performance within and between different types of privatised companies, three additional chapters are provided in Part II. These chapters give more detailed evidence of the history and development of the purchasing and supply function and the specific reasons why particular processes, structures and competencies have been developed since privatisation. Chapter 5 provides an insight into the recent developments in UK utilities companies since privatisation. The particular case studies are British Gas, Welsh Water, South West Water, PowerGen, Scottish Hydro-Electric and NORWEB. Chapter 6 provides a similar service but for privatised, non-utilities companies. The case studies here are the Rover Group and Rolls Royce. By way of a control, to test whether any of the static and dynamic efficiency gains were being developed independently of privatisation, two case studies drawn from existing public agencies are provided in Chapter 7. The case studies provided here are of London Underground and the Civil Aviation Authority.

The case studies presented in Part II provide detailed evidence about the difficulties experienced by a range of private and public bodies in achieving static and dynamic efficiency gains, when moving from an immediate cost reduction focus (phase 1) to a more developmental, functionally professional approach (phase 2). As one might expect, this reappraisal of the purchasing and supply role is, other things being equal, relatively easier in the private than in the public sector. The case studies show, however, that, when the public sector has intelligent people in place in purchasing and supply, and a conducive senior management and government environment to work within, the developmental phase can also be achieved. Relatedly, even though a company has been privatised, the case material reveals that there may still be serious obstacles to functional professionalism within some companies. Privatisation is, therefore, not an automatic guarantee of the speedy achievement of dynamic efficiency gains, even if it reduces the range of constraints on static efficiency normally experienced by those operating within the public sector.

This conclusion is interesting because, irrespective of the relative degree of success that privatised and public bodies appear to have experienced in achieving static and dynamic efficiency gains, it is clear that the majority of public and private practitioners analysed do not appear to aspire to anything more than a relatively more professional, reactive role. By this, one means a desire to provide current products and services within existing supply chains as efficiently as possible. This being the case, and because there was so little evidence of the search for transformational efficiency gains in our initial research findings, it was decided to undertake a further five in-depth case studies. These case studies, which are presented in Chapters 8 to 12, include the utilities companies, Severn Trent and South West Electricity, the non-utility companies British Airways and British Steel, and the publicly owned Post Office. These case studies were undertaken in order to ascertain to what extent the four privatised and one public enterprise have begun to address the issue of transformational efficiency gains. It was also important to understand, if they had not begun to m...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Acknowledgements
• 1 Privatisation, corporate supply management and procurement competence
• Part I Privatisation and the management of purchasing and supply
• Part II Empirical findings: the survey results and case material
• Part III Cases in strategic supply alignment and purchasing and supply professionalism
• Part IV Future options for supply alignment and procurement competence in privatised companies
• Appendix
• Glossary of terms
• Notes
• References
• Index