The biggest advantages of outsourcing include a business does not have to:
- Absorb the actual purchasing, storing of raw materials.
- The costs of machinery.
- The cost of running that machinery
- The costs of recruiting, employing people to produce the product and also the support personnel required looking after the needs of employees.
Outsourcing can also pose a few problems as some businesses have outsourced their entire product ranges in the hope of achieving short term cost savings, only to find that they lose the knowledge and expertise from actually manufacturing products that allows them to develop new products.
Manufacturers often outsource older products as they concentrate their production efforts towards making current and new product ranges. If a business decides to follow the outsourcing route, then our advice would be to concentrate on older product ranges and keep tight controls on suppliers to ensure they do not gain excess amounts of information.
Outsourcing can provide for vast savings, and if achieved in a logical manner, where the suppliers are integrated into the exact requirements of the business will allow for competitive advantage. But be aware of the pitfalls; do not outsource simply to achieve a short-term gain look at the long-term impact on your business.
One of major purchasing decisions a business has to decide upon is whether it actually makes its products or simply outsource the production to another company. This decision making task is commonly phrased as the make or buy decision.
Dyson ltd though a very well established business should understand the various types of goods available in the market and for the procurement of these goods, it should analyse all the possibilities before making the final decision.
To make life easy and successful Dyson ltd should consult other functions within the organisation to come to decision. Interrelated functional units along the value chain form business organizations. The relationships among these functional units vary from one organization to another, but are usually well defined in organizational charts. These interrelationships, in turn, create dependence among the functional units. In the context of customer service, the interrelationships among functional units are viewed as processes. The roles performed by a functional group along the value chain for others, can be regarded as "outputs" of the former. The functional group receiving the output is considered the "internal customer."
To better serve internal customers, the functional groups providing outputs must first identify their internal customers, their corporate needs, and their expectations. Typically, internal customers for any organisation include production, financial officers, marketing personnel, and Human resources personnel, purchasing etc.
Organisational control is the process whereby an organisation ensures that it is pursuing strategies and actions, which will enable it to achieve its goals. The measurement and evaluation of performance are central to control and mean posing 4 basic questions: -
- What has happened?
- Why has it happened?
- Is it going to continue?
- What are we going to do about it?
The first question can be answered by performance measurement. The measurement of the purchasing department can be done in two ways. They are quantitative and qualitative.
Qualitative assessments are subjective and intuitive. Qualitative assessment using judgemental impressions regarding the contribution of purchasing to supplier goodwill, partnership sourcing, value analysis, and internal customer satisfaction is applicable when procurement is regarded as a strategic business function. From this perspective the focus will be on effectiveness, defined by van wheel as the extent to which by choosing a certain course of action a previously established goal or standard can be met. Purchasing performance is therefore the extent to which a goal is reached or not. There are three criteria for measuring qualitative performance. They are:
- General or specific
- External or internal assessment. External-head of the purchasing department to the purchasing reporters
- Internal-head of purchasing function staff or senior staff.
Quantitative assessment using such measures as ‘number of orders placed, reduction in lead times, price savings, reduction of admin costs etc, will tend to be used where purchasing is regarded as a clerical or commercial activity.’
It is necessary to establish an information base that monitors achievement. The provision of regular information on the procurement profile, markets, supplier performance and contract management is essential and will include detailed monitoring of specific measures such as cost reduction or containment, response times, customer service levels and quality levels of goods and services.
Establish performance measures in relation to specify strategies and key processes. It is important to get good information of the extent and objective has been achieved. Measures need to be relevant, specific agreed by stakeholders and within the control of the department.
Rapid improvements in technology are also changing the conduct of business between buyers and their suppliers. Electronic connections facilitating real-time ordering and payment, “credit card” purchases of materials, components, and supplies by line employees, and longer term, more intimate supplier relationships are drastically changing the day-to-day responsibilities of buyers and procurement managers. Traditional measures such as purchase orders or money per buyer are quickly becoming obsolete. They do not adequately capture the value created for organizations by supplier partnerships that yield higher quality, more timely response, and more reliable inputs. Through the recent development in technology, companies have been able to control waste, reduce risk of exposure to vender failure, and have their own expertise, which has enabled a special connectivity, speed and security. The traditional method of writing everything down has been drastically altered through the automated systems of need recognition and specifications. Managing information of available suppliers have been made easier, which above all has led to the longer term relationships with suppliers reducing risks. Some of the examples of IT in purchasing are bar coding to procure goods instead of having to write the process down and spreadsheets to record the products bought.
The relationship with the supplier is important for Dyson ltd not only because it has impact on the customer relationship, but also because it can affect the very competitiveness of a business. Bonding with the existing suppliers is very important.
It will be beneficial for Dyson ltd to have long-term supplier relationship for a long time. Some of the benefits of having long-term relationships are:
- Top level commitment
- Flexibility
- Total quality management
- Proactive purchasing
- Openness and trust
- Working together
Companies that create relationships quickly with the best suppliers have the potential to belong to more powerful demand chains than their competitors, and possibly even exclude them from the chains. Increasingly, competition will be between chains of relationships rather than among individual companies. The winners will be those companies that opened up to integrate their capabilities with the best suppliers and did so before their competitors.
Supplier Appraisal
Supplier appraisal is of particular importance where:
- Potential suppliers do not hold ISO certificate
- The items to be purchased are of critical importance
- It is intended to adopt a policy of single sourcing based on partnership purchasing.
Supplier appraisal is done to evaluate the performance of suppliers in respect to one or more factors such as, price, quality, and delivery etc. the various methods for appraising a supplier are:
- Desk research, by using data such as balance sheet, references etc of the suppliers already in publish.
- Field research to generate further data regarding the technical production and managerial capacity of the supplier
- Subjective rating, to rate the supplier’s performance critically with low cost. Such appraisals may have some drawbacks. They are that these appraisals are ‘in the head’ of the individual buyer and they often have a ‘halo’ effect, which is the tendency to be biased in favour of a supplier.
- Quantitative rating, are such appraisals which are brought forward to cover the drawbacks of subjective appraisals. These appraisals are based on the collection of data on the suppliers.
- Vendor rating forms are the appraisals to identify the overall competency of the supplier. It shows the quality, delivery, commercial, technological and management efficiency of the supplier.
Conclusion
Purchasing is a vital part of any business. The primary role of a purchasing section is to get the raw materials required for the business for its day-to-day running at the cheapest possible prices.
By developing a strategic focus, the purchasing function will look towards strategic sourcing to find suppliers who can both benefit the business in terms of offering lower prices, but also to engineer a partnership where suppliers are motivated to improve product quality, reliability, reacting to the business needs in time of growth and decline, but to also aid the business with research in new product development.
As a result of the research, Dyson ltd can apply the following recommendations for strategic purchasing and to maintain a competitive edge in the market.
1. Purchasing management should be aware of the firm's competitive posture to understand how purchasing may add value to the firm.
2. Implement proactive purchasing strategies that will add value to the firm. These initiatives include such activities as total cost management, early purchasing involvement in organizational activities, early supplier involvement in new products and process, long- term supplier alliances, outsourcing and involvement in activities other than traditional purchasing. Proactive purchasing involves forward-looking activities that involve risk but add value to the organization.
- Activities that simple procure materials and services by responding to internal customers’ requisitions should be computerised if at all possible.
- Purchasing management should always be a asking it how the purchasing function can better add value to the firm and increase its competitive posture.
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In their leadership positions, purchasing managers should
- Possess and demonstrate a high level of commitment and belief that purchasing can make a contribution to the organisation.
- Become missionaries to the rest of the organisation; preaching for the importance of purchasing in the company
- Communicate to top executives in terms of executives’ visions and tactics rather than in purchasing terms
- Possess a learning orientation that consists of new ways to do business.
- Introduce and fully embrace change that will increase the value of purchasing within the organisaiton.
4. Purchasing strategy must be consistent with the corporate strategy. Purchasing management should take every available opportunity to demonstrate how purchasing strategy supports and helps to implement corporate strategy.
5. Hire and train competent purchasing employees who are articulate, analytical and assertive. These employees must possess knowledge of the business and its products, have good coalition building and team skills, and are able to develop and use metrics that measure purchasing performance.
6. Design and implement a purchasing structure that is a loose-tight fit. This requires that purchasing be centralized for processes in which control and consistency are important but decentralized where a high level of interactions with customers is preferred.
7. Strive to possess high visibility throughout the organization and have easy access to the chief executive office. These two attributes are more important than the formal position of the chief purchasing officer within the organizational structure.
