According to Hopkins (2011), PSM has evolved from just-in-time ideology (the 1980s) to outsourcing (the 1990s) and finally moved over to eBusiness (the 2000s) because of the development of the Internet. Figure 4 presents the summation of the evolutionary development of PSM and its pivotal phenomena and affairs during the shift from an administrative function to a strategic function.
Figure 4. The changing face of PSM.
The evolutionary development of PSM started from the 1940s-1960s when PSM was associated with logistics due to delivery reliability and on time deliveries In the 1950s, logistics term was widely accepted in business as a part of operational management and it was kept in close relationship with production. Purchasing’s role was noticed as materials movement within factory or firm got increased attention. In other words, purchasing was kept as a part of inbound logistics and materials management. Later, in the 1960’s the importance of material inflow and outflow found favor in business sciences in which case research areas such as materials requirement planning and material resource planning were evolved. (Monczka, et al., 2005; Cousins et al., 2008, p. 11)
Until mid-1970s, purchasing was seen primarily as an administrative function rather than strategic (Ansoff, 1968; Farmer, 1974). According to Monczka et al. (2005), purchasing was paralleled by materials management, and buyer supplier relationships were characterized as arm’s length relationships. In the 1980s, PSM was focused on buying at the lowest price and it was integrated
1940- 1980- 1990- 2000-
2010-JIT-purchasing
Strategic role of purchasing and supply management
Strategic function
more into operations management. Purchasing started to gain attention as its potential and contribution to Supply Chain Management (SCM) was realized (Cousins, 2008, p. 12). Moreover, Porter (1980) had presented the five forces model of competitive advantage where he emphasized purchasing and also introduced the meaning of bargaining power. In spite of purchasing was recognized to be important, it still remained in close relationship with manufacturing, especially lean manufacturing and JIT instances, because of the popularity of the Toyota Production System (Womack et al., 1990). The Toyota Production System was the major phenomena in the 1980s even though Kraljic (1983) had published his article where he claimed purchasing must become strategic sourcing. According to Carr and Smeltzer (2000, p.
40), in 1980s purchasing function was occupied with employees without any or less purchasing specific skills. This indicates that purchasing was still not achieved strategic importance.
In the 1990s supply chain management started to integrate into strategic decision making as management realized purchasing’s potential to substantial money savings (Cousins, 2008, p. 13). According to Gadde and Håkansson (2001, p. 23-24) supply chain management and outsourcing were the main trends on purchasing since the 1990s, as core competence of the company (Prahad and Hamel, 1990) relieved that each company should focus on a few core business activities that will bring long term competitive advantage (Quinn, 1999; Quinn and Hilmer, 1994). The outsourcing tendency entailed value adding role in the strategic decisions (Quinn, 1999), which meant strategic decisions should be made through value-based thinking rather than cost-based thinking. In reference to that, PSM’s contribution to company’s strategies (as an enabler) was understood and PSM discussions turned more strategic. According to Bailey et al. (2005) and Lysons and Farrington (2006), purchasing had become proactive instead of being responsive. However, in SCM research the trend was opposite: the whole
supply chain must become responsive through “agility” so that a company can survive in volatile markets (Christopher, 2000).
In the 2000s eBusiness was a big trend in business because of the development of the Internet (Hopkins, 2011). It entailed a whole new dimension for PSM: intellectual assets and information. As industrialized economies had shifted from natural resources to intellectual assets during the last decades (Hansen et al., 1999), the shift had generated a whole new focus for management: information sharing, communications and knowledge management (Hadaya and Cassivi, 2009). In that case, achieving competitive advantage, management focus had shifted not only to the importance and the utilization of knowledge and information in companies, but also between companies (Monczka et al., 1998; Li et al., 2005).
The rise of the Internet also enabled the acceleration of globalization. In PSM that meant increasing need for extended procurement and overall orientation of purchasing activities in order to secure the profit base of a firm (Arnold, 1989, p. 19; Christopher, 1998). Moreover, globalization was thought to offer the best opportunity to achieve major performance gains (Trent and Monczka, 2003). As international purchasing achieved strategic significance, it generated a higher level purchasing, global sourcing (Arnold, 1989, p. 19-20;
Trent and Monczka, 2003; Monczka et al., 2005).
Even though SCM was still considered the major research area and business focus in the 2000s, PSM had achieved strategic importance. By the 2000s, at the latest, PSM was not seen as merely a function or operational business area for reducing costs anymore. From the strategic perspective purchasing was characterized more as a value adding function (Saunders, 1997; Hughes et al., 1998; van Weele, 2002; Baily et al., 2005; Lysons and Farrington, 2006).
Today PSM is expected to bring value as modern PSM is seen more sourcing than purchasing (Trent and Monczka, 1998; Paulraj and Chen, 2005b; Chan and Chin, 2007; Hopkins, 2010). The foundation of the modern purchasing and supply management is based on the value chain theory (Porter, 1985).
Traditionally authors refer to Porter’s (1985) value chain when describing the purchasing and supply function in industrial companies (van Weele, 2002).
However, the traditional value chain model of Porter includes only an internal perspective of a firm and does not acknowledge the value adding activities between the firms in a supply chain. Therefore, value chain thinking needs to be expanded towards relationships and activities between buyers and suppliers which several authors have underlined in purchasing and in supply chains (see e.g. Smeltzer et al., 2003; Melnyk et al., 2010).