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CHAPTER 4
PROCUREMENT AS A SUPPORT AND STRATEGIC FUNCTION WITHIN COMPANIES
for those who are less experienced. At least a quarter of the unit cost savings
from international purchasing disappears, on average, when estimating the total
cost of purchase ownership. This is due to hidden costs associated with longer
cycle times, lengthened supply chains, and increased administrative and budget
costs incurred during global strategy development and execution.
One thing is certain: many firms are sourcing globally and in so doing have
realised savings. These savings have, however, not come without time, effort
and some false starts as well as a steep learning curve. Many firms continue to
look to foreign sources of supply for lower costs and as potential future markets.
However, jumping on the international bandwagon because everyone else is
doing it is not a sound argument; pursuing global sourcing as part of a well-
thought-out supply strategy makes a better argument [5].
4.5.4 LONGER-TERM SUPPLIER RELATIONSHIPS AND SUPPLIER
DEVELOPMENT
Long-term supplier relationships involve the selection of and continuous
involvement with key suppliers, with the aim of reducing costs and improving
service levels overall. In some cases procurement may find that suppliers’
capabilities do not match current or future expectations but it may wish to
develop the supplier because it has the potential to perform well. In this case,
procurement will work with such suppliers to facilitate improvement.
The strategy to use a smaller number of suppliers/vendors frequently means
an alliance or partnership with suppliers/vendors because of the need to
assure an adequate supply of quality materials over time at an optimum total
acquired cost. The partnership/alliance concept encompasses more than just
the procurement process, since companies are developing partnerships today
throughout the supply chain. For example, partnerships are also evolving with
transportation companies, contract logistics companies (third-party providers)
and channel members.
Outstanding supplier performance normally requires extensive communication
and co-operation between the various representatives of the buying and selling
organisations over a long period of time. In recognition of this, progressive
procurement organisations are pursuing ways and means of limiting their total
number of suppliers and maximising the results from fewer key suppliers.
Bringing new suppliers on-stream is expensive and is often accompanied by a
period of learning and frustration on both sides. Frequent supplier switching for
the sake of a perceived lower price may not result in the best long-term value.
As quality improvement programmes and JIT production efforts take hold,
proximity of the supplier’s premises to those of the purchaser becomes a
significant consideration. An innovative and aggressive supplier development
effort, with existing and new sources, holds high promise as a review of existing
suppliers discloses gaps and as new technology evolves into new requirements.
System and philosophical compatibility between purchaser and supplier has