1.5 Purchasing's Strategic Contribution

The decisions you make as a purchasing professional impact both top-line growth (i.e., revenues) and bottom-line profitability. Your firm simply can't compete if you don't manage the acquisition side of your business well. First, let's take a look at how your decisions influence sales growth. Then we'll dig into the numbers that reveal purchasing's value to your firm.

The Value Proposition Effect

Purchasing's strategic importance starts with one simple fact: purchased goods and services are almost always your firm's largest cost category. For the typical manufacturer, purchased inputs are about 50–80% of cost of goods sold (COGS). Even for service companies, acquired inputs are often 30–40% of COGS.

This fact means that purchased inputs exert a huge influence on your firm's value proposition—that is, the value you promise to customers. Specifically, purchasing has a huge impact on your firm's cost, quality, delivery, innovation, agility, and other value-added capabilities (see Figure 1-4). Let's exemplify the value-proposition effect by taking a closer look at how purchasing influences quality and innovation.

Quality

High quality often equates to a strong brand image, which can spur sales. By choosing the right supplier, you improve the quality of products and services your firm sells. By contrast, a defective part means a defective product—and a bad customer experience. Who do you think your customers will blame? They won't blame the supplier; they'll blame your firm. You don't want to be responsible for tarnishing your firm's quality image.

Of course, not all purchased inputs are equally important. You want to pay particular attention to those that directly affect the customer experience (e.g., seat material in a car or the fabric for a hoodie). Other items such as those that the customer will never notice—for example, fasteners or cardboard packaging—need to function well. But you might be able to reduce your product's final price to customers by initially spending less on these items.

Innovation

Like quality, innovation has a huge impact on brand recognition. If you build a team of highly innovative supplier partners, they will help make sure that your products stand out in the marketplace—for the right reasons. Compare and contrast the following two examples that illustrate how companies rely on suppliers to bring innovation to the marketplace. Pay close attention to the outcomes and their impact on brand reputation and market success.

• Intel Inside: Perhaps, you've seen the "Intel Inside" sticker and heard Intel's famous bong. Computer makers like Dell and Lenovo know you are addicted to fast, reliable computing power. That's why Dell, Lenovo, and the other big computer makers don't just partner with Intel as a strategic supplier, but they also advertise that Intel chips power their machines.

• The Taptic Glitch: Shortly after Apple launched its highly anticipated Apple Watch, the Wall Street Journal ran the following headline: “Apple Watch: Faulty Taptic Engine Slows Rollout.” What’s the story? Apple worked with two suppliers to innovate the taptic engine—a novel device designed to produce a tapping sensation on your wrist. In long-term testing, taptic engines made by AAC Holdings Inc. proved unreliable. As a result, this innovation glitch forced Apple to slow the long-awaited Apple watch rollout, leading industry observers to call the launch “faulty.”

The story is similar for other value dimensions like cost, delivery, and agility. As a purchasing professional, what does this mean to you? Answer: How well you acquire, develop, and coordinate the capabilities of your supply team determines not just what value you promise customers, but also how well you can deliver to that promise. Simply put, your supply network determines how competitive your products are in the marketplace.

Source of Competitive and Market Intelligence

The strategic contributions of purchasing and supply management go beyond operating performance. Purchasing is a vital source of competitive intelligence in a company. In fact, only two functions of a business (marketing and purchasing) work with the world beyond the four walls of your company on a day-to-day basis.

1. Marketing. Marketing works with customers and provides insight into what tomorrow's best markets and hottest products will look like.

2. Purchasing. Purchasing works with upstream suppliers and provides vital knowledge about what new materials and technologies are being discovered and developed—and how they will affect the marketplace.

For purchasing to fulfill its competitive-intelligence role, you need to keep your eyes open and be an active and strategic scanner for relevant information. Equally important, you need to tap into the thousands of eyes and ears across your suppliers.

For example, if the CEO asked you the following questions, you would want to have informed and intelligent answers:

• How do you expect additive manufacturing to affect the make-versus-buy decision? How are competitors and suppliers exploring or exploiting additive technologies? What types of investments should we be making now?

• What is graphene? I've heard it is going to change the world? Where do you think it will make the biggest impact? Do we have the right suppliers to help us compete if graphene takes off as a viable material? What types of investments should we be making now?

Based on what you know right now (i.e., without a Google search), would you have lost or earned credibility with your answers to these questions? You should start building your scanning habits now. As a purchasing professional, you are the eyes and ears of your firm. Your job is to sense changes in the environment, discern their meaning, and help make the plans that will assure your firm stays relevant in a chaotic and dynamic world. Your supply team can help.

For example, in today's chaotic world, assuring access to scarce resources makes a huge competitive difference. Consider three examples, one historical:

• Making Soap. As the Civil War loomed in the United States, managers at Proctor & Gamble (P&G) realized that rosin—a critical ingredient in soap—could only be acquired in New Orleans, Louisiana, a southern confederate stronghold. They quickly bought an enormous supply of rosin at $1 a barrel. When wartime shortages drove the price of rosin to over $15 a barrel, P&G prospered; they even won Union Army contracts to supply soap and candles.1

• Staying Aloft. In the early 2000s, Southwest Airlines used a commodities hedge to protect against price increases in jet fuel. The result: when oil prices skyrocketed, Southwest Airlines made money as key rivals struggled.

• Surviving a Pandemic. The COVID-19 pandemic triggered a series of supply shortages. One of the biggest involved microchips and the auto industry. Early in the pandemic, economic lockdowns cratered new car demand. Reactively, auto makers canceled orders of computer chips. Consumer electronics companies snapped up the excess chip supply. As the pandemic ramped down, demand surged, and automakers couldn't get enough chips to ramp up production. Empty dealership lots led to skyrocketing prices. The average cost of a new car in the U.S. topped $45,000 in December 2021, an all-time high, and is now (as of May 2023) $48,528.2 One car company, Toyota, didn't cancel as many chip orders during this time, and was able to keep production lines running. The result: Toyota produced and sold more cars, overtaking GM in 2021 as the best-selling auto maker in the US.

As a purchasing professional, you always need to ask, "What do I buy that might suffer a supply shortage?" Proactive scanning makes you a better decision maker—consider our examples above. By anticipating supply shortages, you can buy in advance like P&G, hedge against price increases like Southwest, or become a customer of choice for key suppliers like Toyota. You need to know resource markets well enough to ensure that your firm never suffers a work stoppage because of a materials shortage.

Impact on Image and Social Policy

Have you ever heard of Kathie Lee Gifford? Kathie Lee is perhaps best known for co-hosting Live! with Regis and Kathie Lee or for being Takl's spokesperson. However, in 1996, her "girl-next-door" image was tarnished when the National Labor Committee, a human rights group, announced to the world that Kathie Lee's popular clothing line was produced by child labor working in sweatshops in Honduras. However, just like most people don't know what the working conditions are at the plants that make the clothes they buy, Kathie Lee knew nothing about the sourcing relationships that brought her clothing line to the store. But, her lack of awareness didn't matter because the damage to her reputation had been done.

You may be thinking, "That was the 1990s. Things like that don't happen any more." If so, you'd be wrong. In 2011, Patagonia, perhaps the world's most socially conscious clothing brand, extended its supplier audits to Tier 2 suppliers. The result: Patagonia found tragic levels of worker abuse. Workers were forced to work long hours at substandard wages. Worse, some workers were forced to pay fees of up to $7,000 to "brokers" just to secure a job! Adam Fetcher, Patagonia's global PR director, said, "We quite frankly discovered modern slavery in our supply chain." Patagonia moved quickly to remedy these abuses, requiring Tier 2 suppliers to treat workers more fairly. Imagine what might have happened to Patagonia's reputation and sales if these abuses had been brought to light by an undercover reporter instead of Patagonia's own auditors.4

Purchasing's reliance on outsourcing and offshoring—i.e., working with suppliers that operate production facilities located in far off lands—almost defines reputation risk. For example, did you know that in 1997, Nike unintentionally popularized the phrase a living wage? Consider the following excerpt from a New York Times editorial:

Unfortunately, image isn't just a fashion industry phenomenon.6 Apple also found itself in the social-policy spotlight when workers at a Chinese supplier began committing suicide to protest inhumane working conditions.7 In the eyes of many critics, when a company chooses to buy from external suppliers, the company becomes an accomplice to their suppliers labor practices.

Your job is to make sure your suppliers—and their suppliers—do not cross any legal, regulatory, or ethical boundaries. That is the only way to ensure that your sourcing practices don't tarnish your company's image.

To summarize, a well-crafted and well-executed purchasing strategy does more than merely help you buy the right stuff at the best price. Great purchasing practice helps you bring unique, highly valued products to the market, identify supply opportunities and threats before rivals do, and protect your brand's image. The result: you earn customer loyalty.