Learning Objectives
To understand:
 linkages between companywide business and procurement strategies
 procurement strategy development process
 critical procurement strategy areas
 make-or-buy and outsourcing strategies
 the differences between international and global sourcing
 the rationale of global sourcing
 the nature of competitive advantage associated with global procurement
 the relative costs and benefits of globalised procurement.
4.1 Companywide Strategic Framework

To effectively manage their supply chain activities and relationships, organisations
should have a clear understanding of their business objectives, customers, products and
processes, inputs required and sources of these inputs. That is, they should have a good
understanding of where they are positioned in the broader value-adding network/chain:
who they are, and importantly, who they are not, why they are there, what they do, who
for, how, when, and who they are competing against. They should also have a good
understanding of their operating environment, particularly the many ways in which
governments regulate and support business activity. They should know their actual and,
where possible, potential rivals and, thus, be able to determine their relative strengths and
weaknesses as members of the value-adding network/chain. In short, they should have a
strategy – an overall plan for securing and deploying resources to establish and sustain a
competitive advantage. A strategy is the firm’s game plan is the essence of strategic

This Topic considers this decision from the point of view of commercial (for-profit)
organisations. The same issue will be examined from the perspective of public sector
organizations in the next Topic. If you have not studied Strategic Management, you will
find it helpful to read chapter 6 of MHGP; chapter 2 of L&F; or chapter 2 of Baily et al

In the commercial environment, the development and articulation of the overall business
strategy allows the firm to determine its:

 business philosophy and core values;
 field of activity/operating environment;
 vision (reasons for existence), mission (broader aims) and specific objectives;
 capabilities (including technologies);
 resources;
 organisational structures;
 management and information systems; and
 location and timing of specific business activities.

And, the application of strategy:

 gives the firm a sense of purpose and coherence to collective decision making;
 reduces uncertainty;
 provides inter-temporal consistency and coordination of objectives and resource
 links mission with vision;
 communicates business mission and core values; and
 offers room for stretching into more ambitious targets.

Ideally, the development of strategy should be an intended (ex ante) and design-based
activity to guide the firm’s management rather than an ex post realisation of what has
happened. But for many firms, the development of strategy is process-driven and realised
through practical interaction between key players rather than methodically planned and
applied. Often though, especially for emergent firms, the grand strategy is a rather fuzzy
concept, with strategic ‘management speak’ obfuscating the lack of clear business
objectives and direction. But, to cite Kenichi Ohmae, one of the gurus of Strategic
Management, however it is arrived at, “What business strategy is all about is, in a word,
competitive advantage” (see below).

Bozarth and Handfield (2006) provide a discussion of the broad strategy, which frames
the development and application of SCM, including procurement activities. They too
emphasise the hierarchical nature of strategy formation. Their top-down model of
strategy development is adapted here as Figure 4.1.

In the figure, procurement and supply chain considerations are included in the higher
level Business Strategy in that the firm’s boundary (the scope and scale of in-house
operations) and the role of its supply chain partners are determined. There are two
procurement-related decisions that must be taken at the strategic policy level:
 the make-or-buy decision to determine the organisational boundary; and
 the source selection decision to determine whether the firm wishes to source its
requirements competitively or deal with particular suppliers only.

Other aspects of procurement are essentially functional-level strategies which translate a
business strategy into specific tactics and tasks for the functional areas. What Bozarth and
Handfield emphasise are three primary requirements underlying the successful
application of a procurement strategy:

1. a clear understanding of the performance dimensions valued by customers and the

trade-offs involved;
2. a good alignment between the firm’s business strategy, its procurement strategy
and other functional strategies; and
3. the development of core competencies (those organisational capabilities which
customers value most and competitors find hard to imitate) in the firm’s
procurement operations.
Figure 4.1 Top-down model of strategy
Source: Adapted from Bozarth and Handfield (2006), Figure 2.1: 24.
Mission Statement
 reasons for existence
 core values
 business domain
Business Strategy
 targeted customers/markets
 areas of sustainable competitive
advantage/core competency
 role of supply chain partners
 time frame and performance objectives

Strategic Alignment
Procurement Strategies
 translate business strategy
into procurement strategies
 develop supporting core

competencies in procurement
operations and practices
4.2 Organisational Boundaries
Other Functional
 operations and supply
 marketing
 finance
 human resources
 research &
 engineering

A key decision that all organizations must make is where to establish their boundary, i.e.
they must determine which activities they perform themselves in-house (“insourcing”)
and which they arrange or allow to have performed by other, separately owned
organizations (“outsourcing”). The choice that organisations make here is the outcome of
the so-called make-or-buy decision which, because of its potentially wide-ranging
implications, should be viewed as a matter of strategy, even though it often is not taken
seriously enough. Outsourcing necessarily involves greater specialization as
organizations switch from sourcing goods and services internally to obtaining them from
external sources. How firms specialise should reflect their competitive strengths, but if
they make make-or-buy choices without sufficient thought, they may surrender
competitive advantage or opportunities to develop it.

As noted above, the procurement function/department/unit often makes important
contributions to the decision but needs to do so: (a) in alignment with high-level
corporate and business objectives; (b) in a manner integrated with the decisions of other
business functions. Cost-cutting to maintain price-competitiveness and profitability is a
key driver for choosing outsourcing, so it is important to identify where outsourcing
offers the greatest potential for economies. This, in turn, requires appropriate cost
analysis. On the other hand, however, even if outsourcing offers significant economies, it
might be short-sighted to buy rather than make if the long-term penalty is loss of core
competences essential for competitive performance……………………………….

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