Applicability of a Strategic Tool to Reveal and Classify Problems and Mitigate Risks in Purchasing

Abstract

Despite the increasing importance of supply chains especially today, when terrifying changes (war, pandemic situation, Industry 4.0, and so on) take place, there is no useful tool to reveal and classify the existing (internal and external) problems in purchasing that affect decisions. The purchasing decisions have a strong financial and production impact because there is a continuous risk and an enforcing hurry on how to grant the supply. A way to minimize risk is to make the proper strategic decisions based on identifying factors that influence purchasing procedures since there are factors that are specific to the purchasing environment only and comprehensively depict this complex work.

The key objective of the article is to show – and also to test – the applicability in the practice of a tool that could mitigate risks by the help on how to identify and classify/group the factors that affect, influence, or determine the business and purchasing procedures, therefore, operations, KPIs as well as financial outcomes.

The applied methodology was case studies research where semi-structured deep interviews were conducted with the head of purchasing organisations (highly qualified professionals/leaders, e.g. CPOs). The research took place at five multinational and/or large companies in Hungary which are at a high maturity level with well-established business procedures. There are detailed practical examples described in the article as well as the applicability of the tool is shown; the cases can help managers to recognize the deficiencies in their own organisations, while they can be also a compass for scholars on what the research topic could be.

Introduction

Despite the increasing importance of supply chains especially today, when terrifying changes (war, pandemic situation, Industry 4.0, and so on) take place (Sárközy, Balog, & Kumar, 2022), there is no useful tool to reveal and classify the existing (internal and external) problems in purchasing that affect decisions. The purchasing (as strategic) decisions have a strong financial and production impact (Tóth, Gyurcsik, & Karabassov, 2020) because there is a continuous risk and an enforcing hurry on how to grant the supply. A way to minimize risk is to make the proper strategic decisions based on identifying factors that influence purchasing procedures since there are factors that are specific to the purchasing environment only and comprehensively depict this complex work. (Note: purchasing or procurement, the words are used interchangeably, also as substitution of the purchasing division – in this case, written by a capital letter.)

Although it is clear that nowadays procurement has a significant role in how sustaining competitiveness, and a crucial contribution to business success, however, only a few procurement models appear which could be used by procurement managers as a guideline to support purchasing decisions; according to our literature review, apart from the model of Wittinger (2022), we did not find other one that could be considered a comprehensive model, so involves all aspects, therefore, it can be efficiently used in practice (as other models can be used such as the BSC – Balanced Scorecard, Kaplan & Norton, 2006 or Porter’s five forces, Porter, 2008); unfortunately, the approach of the studies to purchasing matters is too deep (discussing the entire company) or partial (considering only some parts of procurement); nevertheless, we found a large body of articles that have introduced or defined important models or concepts related to various aspects of business and purchasing processes, as highlighted below:

Kleindorfer et al (Kleindorfer, Singhal, & Wassenhove, 2005) constructed a model to explain the (extended) Supply Chain from the sustainability point of view; nevertheless, between “Suppliers” and “Production” there is no Procurement shown at all. Seuring & Müller (2008) also defined a conceptual model of sustainable supply chain management, where triggers are identified. Unfortunately, the framework of the model the same oversteps the boundaries of the procurement; furthermore, it depicts superficially only the parts which are involved in the relations. The model analyses the relations at the company level, instead of analysing them at the organisational level. Also, De Boer et al (De Boer, Harink, & Heijboer, 2002) developed a conceptual model to analyse the impact of electronic procurement on the purchasing process and purchasing costs, on the organisation and IT systems; they made distinctions among several electronic procurement forms and investigated their impact – one by one – unfortunately on the Purchasing department and “Rest of the organisation” level only.

Li & Nagurney (2015) developed a multitiered supply chain network model, where the competitive behaviour of each tier of decision-makers is described along with several strategic variables. Other articles studied and put the greatest accent on cross-functional integration and internal cooperation such as Ellegaard & Koch (2014) and Barki & Pinsonneault (2005) or Rozemeijer, Weele, & Weggeman (2003), while Rezaei & Fallah Lajimi (2019) and Saccani & Perona (2007) discussed and catalogued the buyer-supplier relationship and cooperation. Furthermore, models exist in the literature to address procurement fraud risk problems such as the article of Venter (2007) that can be applied as a comprehensive internal framework for risk managers and auditors to limit the companies’ exposure to procurement fraud.

Nicoletti (2017) depicted in his work the increasing complexity of the business environment, especially of procurement, which requires a significant intervention in the process- and information-management. He developed several models in his work, that describe the business, financial and communication channels, and agile solutions; nevertheless, there is no model which consists of internal and external parts at once, furthermore, involves all the affected stakeholders at the same time. Den Butter & Linse (2008) also discussed various types of costs that managers need to consider in purchasing decisions; they distinguished objective “hard” and subjective “soft” factors, where further internal and external factors are set up.

Gelderman et al. (2017) developed a model to depict relations between actors, factors, and implementation at the organisational level; according to them, “Actors” are the top managers, procurement professionals, and budget owners, while “Factors” are the management support, information/communication, organisation, and external pressure. However, the mentioned actors belong to the internal part of the company only (for instance Suppliers are not represented at all), while the presented “external pressure” among the factors should be part of the external features.

The model of Cousins (2002) highlights Suppliers and identifies Internal and External groups, however, both of them have missing parts. The same, Bals, Laine, & Mugurusi (2018) defined the macro-level dimensions of the purchasing organisation/work; they also identified External and Internal parts and enumerated several factors and dimensions, nevertheless, we can recognize – for instance – the lack of regulations and rules, however, during the purchasing processes there is a great accent on the legal compliance since this prudency will protect the supply and mitigate the risks.

The matrix of Kraljic (1983) is one of the few models that are still valid today and actually used – even though it is old. It focuses on the supply side but does not deal in any depth with other aspects. Apart from its partial discussion only of the purchasing work, several other studies and articles rest on the Kraljic matrix such as Perdana & Mulyono, 2021; Bianchini et al., 2019; Rezaei & Fallah Lajimi, 2019; Kang, Hong, Bartnik, Park, & Ko, 2018; Hesping & Schiele, 2016; Bensaou, 1999, and many others.

Thus, with regard to the literature – and its short review above – we decided to use for our case studies the comprehensive model of Wittinger (2022); because the key objective of this article was not to only show the practical examples of five large and multinational companies but also to test the applicability of a chosen model as a solution for detecting purchasing deficiencies.

Wittinger (2022) constructed a purchasing model (Figure 1) that consists of factors forming two groups, the group of forces (requestors, suppliers, internal regulations, and external rules) and drivers (strategies, IT-solutions, cross-functional integration, and supplier management), while the model also has two parts, an internal (the left one) and an external (the right one). If we pay attention to the whole environment of the purchasing work, we consider that this model involves all the aspects having an impact on procurement.

Based on the chosen model and the gathered articles depicted above we applied a synthesis of the set of factors enumerated in the given literature; Figure 2 is to show the result of the comparison, it depicts the appearance of the factors. We will discuss the applicability of the factors in the analysis part (another chapter) of this study.

Methodology and data collection

As the aim of the research was to explore and understand, therefore, as research methodology we applied case study research. The purpose of case study research is to understand phenomena by observation, explore potential problems, and draw adequate conclusions from studies (Yin, 2012).

We used multiple-case study research and semi-structured in-depth interviews for data collection that were held – at each company – with the head of purchasing organisation; the interviews were supplemented with direct (personal) observations during interviews and processing additional information (data, figures, and documents) provided by the interviewees. The interviews lasted between 80 and 100 minutes and all of them were audio-recorded and notes were made as well. After examining the 5 cases one by one, to analyse the factor matching we used a cross-case synthesis method.

The sampling strategy was based on theory to find the best sample that fits the theory. We chose leading companies that are representative ones in their industries (chemical-pharmaceutical, energy, and trans­portation-logistics) because these companies are forced to follow the most dynamic development. We wanted to examine large companies because we assumed to find organisations at a high maturity level of development, with well-established procurement/supply chain procedures that are continuously monitored and developed, and where integrated regulations and practice-based workflows ­exist.
In Figure 3 we show the details regarding the research and its participants: short data about the inquired companies and purchasing departments (the company size and the level of procurement organisation) and figures of participants (the name of the leader’s position, the interviewee’s professional experience), furthermore the time (i.e. interval of time) when the research took place.

The interview consists of two separate parts. The first part of the interview involved general questions about the interviewee (e.g. job position, its starting date, the length of the professional experience in purchasing area, etc.), about the company and the organisational unit (FTE – Full-time equivalent – of the company and department, the level of the purchasing department and its budget, number of suppliers and contracts, etc.); it has also incorporated questions about weaknesses and strengths as well as questions regarding factors that influence the purchasing work and/or have an impact on it. In the second part* of the interview, we revealed the applied model and inquired respondents about their opinion in connection with it, its factors, and its validity. (* Note: the second part of the interview is discussed in another article since it outsteps – in length and topics – the boundaries of this paper.)

Description of the cases

The selected companies (Figure 4) are large and multinational companies with a presence in several countries in Europe and worldwide that belong to the key sectors of the economy, namely the chemical-pharmaceutical, energy, and transportation-logistics industries. All these companies are matrix organisations in terms of the company’s business structure; t; therefore, they apply multiple and complex reporting levels, as well as cross-functional integration/cooperation and advanced Supplier Management.

Their statistical staff count is more than 15 000 FTE (on average), with large procurement departments, a high purchasing budget (generally more than 500 million EUR the minimum is also above 250 million EUR), over 500 pcs of new contracts yearly (on average) and thousands of suppliers. Since the companies are at a highly developed level regarding the business processes, they all apply efficiently the best practices, run the operations based on benchmarking, and use the common standards of business management.

In the next part, we describe the background of the procurement organisations; we depict the collected information regarding the departments’ practice (in terms of deficiencies and strengths), as well as data about the general conduct of purchasing procedures.

Company A

Currently, there is no detailed procurement regulation; the purchasing processes are run based on the LDA (List of Decisions and Authorities) and on purchasing guidance which involves and describes shortly the procurement principles. The multinational company runs integrated procurement procedures due to several companies and subsidiaries included in the group.

The leader mentioned as main problems the following ones:

Procurement does not always clearly understand the business requirements and goals, due to the lack of professional knowledge connected (in terms of category management) to that particular requestor area. It could be a reason why procurement associates experience such opinions (and conduct) from requestor areas that at their organisational unit everyone has already possessed such procurement skills that are needed during the purchasing processes – even though they are not buyers; therefore, procurement associates and their purchasing knowledge are not evaluated at their proper value. Furthermore, the requestor organisation does not always trust Procurement. It tends to avoid involving it in the purchasing processes; in other cases, the requestors think that some purchasing cannot be done otherwise than on the exemption from bidding mode only (i.e. without any bidding procedure). But in this case, there will not be enough accent on the suppliers’ selection, even though nowadays there is a huge supply risk because of uncertainties and market changes. As the leader sees, there is a need to change the mindset, to implement an operating model based on strong category management, and the responsibility must be understood on the end-to-end pattern.

The main strengths mentioned by the leader are as below:

Despite the evaluation of the purchasing associates by the colleagues of other units, they have strong procurement skills, they possess advanced purchasing professional knowledge. Therefore, the contracts are concluded circumspectly, the associates pay attention to the risks coming from suppliers and try to handle them by proper clauses/conditions involving all the needed internal regulations in the contract.

Company B

In Company B there is procurement regulation; the purchasing processes are run based on that, on the LDA and on the RACI (Responsibility-Accounting-Control-Information) matrix as well as on several other internal regulations. The Procurement budget consists of two parts, OPEX (Operating Expenditures) and CAPEX (Capital Expenditure), where the operating costs are 2,5-3 times bigger than the investment expenditures. They also launch as often as possible competitive procedures on the integrated level (if possible) affecting more countries to realize as much as possible savings during the bidding.

The leader mentioned as main problems the following ones:

Sometimes there is a lack of professional knowledge regarding the specialization of the requestor areas, therefore, learning skills need to be developed. Even though there are often competitions launched, Procurement does not profit duly from the e-action opportunities, the associates do not like to use it during the procedure. Furthermore, Procurement does not have the necessary strategic thinking, the associates do not feel and understand the strategic reasons. Also, the manner of the behaviour must be changed, there is a need to boost the company’s internal cultural level and conduct.

The main strengths mentioned by the leader are as below:

The purchasing associates have advanced negotiation skills as well as everyone is at a developed level of assuming responsibility for his/her decisions.

Company C

There is procurement regulation, the purchasing processes are run based on its rules on an integrated level. The acknowledgement of Procurement depends on the particular purchase category; in some cases, is better in others, less so. The procurement planning is done only on the previous year-basis, therefore there are sometimes discrepancies between the plan and reality.

The leader mentioned as main problems the following ones:

Procurement does not possess the appropriate IT systems and solutions, thus IT-platforms must be strengthened. The e-auction opportunities should also be strengthened, even if there are associates and partners (e.g. suppliers) who do not support it. There is a lack of technical codes and standards and of advanced maintenance planning; it could be a reason why the design and schedule of requests are of relatively poor quality several times. Although the acknowledgement/legitimacy of Procurement can be experienced, however, in most cases, there is no chance that the purchasing work to be evaluated with these three words at once “good, cost-saving, and fast.”

The main strengths mentioned by the leader are as below:

There is a good company culture, the cooperation among colleagues works smoothly; there is a high problem-solving skill in the purchasing organisation, its credibility level is good as well as the professional knowledge in terms of (some) purchase categories. There is great purchasing potential due to the company’s size, its well-known name and prestige, and its liquidity.

Company D

There is procurement regulation, the purchasing processes are run based on its rules and with the help of existing IT-platforms. Several IT-systems (e.g. purchasing-specific ones) were introduced in the very few years. The acknowledgement of Procurement has evolved more in the past years; it runs its activity connected to the subsidiaries based on SLA (Service Level Agreement).

The leader mentioned as main problems the following ones:

There is a quite fragmented state of IT systems and solutions, these must be reorganised in some sense. There are deficiencies in the interconnection among applications or in their usage. There is also a quite low level of maturity and the knowledge transfer in terms of category management is at a low level as well. Procurement must develop soft skills, such as change management, communication, people and organisation development. Procurement must also put a bigger accent on how to classify the supply risks.

The main strengths mentioned by the leader are as below:

The procurement is a good community, the associates trust each other. There is also good cooperation among different organisations, systematic meetings are scheduled, and the procurement area is acknowledged by the colleagues inside the company. The associates have strong procurement skills, and they act in a proactive manner. Now, procurement strategy exists, and it is well-known, because previously the associates had not known in detail strategy, therefore they did not see the whole strategic process.

Company E

There is procurement regulation, the purchasing processes are run based on its rules, based on an integrated level (connected to several group companies). During the procurement procedure, the company always sets up and applies Evaluation Committee for bias-free bidding evaluations.

The leader mentioned as main problems the following ones:

The purchasing processes – in general – can be quite poorly planned, therefore, the purchasing requests need to be developed from the time-management point of view since the scheduled requests are too often too late launched. There is a need for a higher level of transparency and strategic support; trust among different organisations (e.g. between procurement and requestor departments) is at a quite low level. There is also a need to enhance the digital platforms, since not all IT platforms are the proper ones.

The main strengths mentioned by the leader are as below:

There is generally known that purchasing and saving are not synonyms, these two are not equivalent. It is also acknowledged that procurement creates value. The category management stands on a strong professional basis/pillar.
Analysis of cases, the cross-case factor matching
We argue that the reasons behind the deficiencies (if any) can be derived from the enumerated purchasing factors and the problems can be also solved with their help (Wittinger, 2022); therefore, in this part, we will analyse the applicability of factors – more exactly of the drivers only – as potential solutions to the revealed deficiencies. The reason why we will consider the drivers only is that the purchasing cannot influence the forces (the actors of the procedure), nor their existence because they are constant elements (Wittinger, 2022). The cooperation always takes place between two parties (customer-supplier), while the regulations/rules are a must considering that procurement is surrounded by the law to protect the company against happenings such as faults in fulfilment, breach of contract, and so on. Thus, since we argue that the chosen model is a comprehensive one (it involves all the factors that could affect the purchasing work), the solution is to find a problem-solving opportunity among the drivers. In the next part, we will shortly explain how we understand the drivers and why they could be problem-solving opportunities.

The drivers connect – internally and externally – the parties of purchasing processes and drive the procedures; because the procurement procedures are driven by the workflows (in line with stipulated strategies), and they take place on certain IT systems and applications. Thus, these elements create the framework of and provide a background for purchasing work, lead the procurement processes, and influence their operation and management (Wittinger, 2022). Based on the above explanations, in the next part, we will discuss the drivers only.

Strategies

The literature argues (and the interviewees confirmed it) the importance of strategies (of procurement as well), because “strategy describes how an organisation intends to create value for its stakeholders” (Kaplan & Norton, 2004, p. 1); also, the collaborative procurement strategies – as an integrated part of all strategies – can enhance the efficiency in projects (Eriksson et al., 2019). Therefore, the purchasing strategy must be well understood by associates and in line with other departments’ (functional and/or business) strategies, so, it is part of the entire company’s strategy.

IT solutions

During the interviews, we experienced how big an accent the leaders put on IT solutions. The need to focus on core business and to increase effectiveness is accomplished – among others – by the opportunity and speed of information exchange inside and outside of the companies; such circumstances made IT solutions and e-procurement vital for companies and the entire global economy (Nivetha, 2021; Afolabi, Ibem, Aduwo, Tunji-Olayeni, & Oluwunmi, 2019; Chae, Yen, & Sheu, 2005; Ronchi, Brun, Golini, & Fan, 2010).

Cross-functional integration

The importance of cross-functional integration (cooperation among co-divisions) is unquestionable – interviewees see it the same – since the well-recognized function of cross-functional teams is to increase purchasing performance (Poberschnigg, Pimenta, & Hilletofth, 2020; Foerstl et al., 2013); because due to it – as the cross-functional team members integrate diverse perspectives and competencies during processes – the purchasing processes become much more achievable and the process will be better adjustable to the requirements (Meschnig & Kaufmann, 2015). Nowadays, integration and involvement of cross-functional teams in common projects of the company is a must, since we build and value knowledge-based economies (Ferreira, Pimenta, & Wlazlak, 2019).

Supplier Management

A critical and so complex part of the purchasing work is the management of supplier relationships – the so-called Supplier Management (Hallikas et al., 2020; Wittinger, 2019; Handfield, Petersen, Cousins, & Lawson, 2009); the interviewed professionals have agreed with this viewpoint because the purchased materials will form a considerable part of the manufactured products (Tate, Ellram, & Dooley, 2012) and good cooperation between procurement and supplier can contribute significantly to the product value ( Zimmer, Fröhling, & Schultmann, 2016; Seuring & Müller, 2008); also, because today the biggest accent is on the risks and their mitigation (Ogunranti et al., 2021; Hallikas et al., 2020; Lanier, Wempe, & Swink, 2019; Faisal, Banwet, & Shankar, 2006).

According to the part above we would like to show how we consider the factors (drivers) to be applied as problem-solving opportunities, more exactly how we can identify the deficiencies by matching them to the factors since each problem can be defined as an element in the model.

Figure 5 is to show the problems and deficiencies collected from the cases as well as depicts the possible solutions that could be feasibly by factors (drivers). In summary, to solve the problems aroused in the cooperation between the companies’ co-organisations, cross-functional integration to be used; it must be enhanced and understood that only common aims (and problems) exist. Similarly, in the case that there is no proper understanding of strategies this knowledge and skills must be enhanced. To eliminate the risks in connection with the IT platforms and Supplier Management, in both cases the IT systems must be developed, and more conscious management of suppliers must be done.

Conclusions

There is a need for concepts that help procurement decisions in practice to avoid financial loss, highlighting the importance of systems-thinking orientation in purchasing as well as of purchasing practice evolution where the theory and practice move towards more conscious management. Because the practice and theory must evolve together to secure for leaders and their organisations keep pace with the rate of technological and environmental changes. We must, therefore, acknowledge the existence of and connection among several contingency factors of such a complex environment as the purchasing work.

Nevertheless, during the interviews, we experienced that, there is a lack of some applicable strategic tools in the practice while evergreen problems and deficiencies still exist even in the biggest companies with professional business operations. This paper provides an in-depth insight into the actual purchasing practice of large multinational companies through testing a holistic model. The selected model and its elements can be a useful tool for professionals and scholars how to consider the complex environment of procurement and understand the interaction of factors with each other. Furthermore, the discovered features provide opportunities for other companies to draw conclusions or learn. Because a properly set up and used model can illuminate the existing problems and improper routines (if any), can explore the roots of deficiencies, and can highlight the new challenges connected to the factors/elements of the purchasing work.

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Dr. Maria M. Wittinger
Instructor and purchasing professional,

Ph.D. candidate
Corvinus University of Budapest

Dr. Krisztina Demeter Professor, DSc
Corvinus University of Budapest

Dr. Avornicului Mihai Associate professor
Babeş-Bolyai University