What role does PSM have in the practice of processes and techniques?

According to the survey commissioned by the Ministry of Transport and Communications Finland, in 2005 logistics costs were on average 13 % of the turnover (equivalent of 24.4 billion euros), which is a relatively high figure in international comparison. Awareness of the importance of logistics is generally good. Firms assess their competence in logistics as relatively good, especially in large companies, retail trade, and logistics firms. The most important development needs are: supply chain visibility (large and international companies);

competence of staff (SMEs); and partner networks and customer service (logistics firms).

Procurement, buying, and inventory management were among the main areas of improvement in both industry and trade companies, especially at supervisor and mid-management level.

Among senior management, business strategy was seen as the main area of development.

(Naula, Ojala & Solakivi 2006, 66.)

On the other hand, Quayle (2002b) surveyed firms with fewer than 200 employees in the United Kingdom and found that only 19 % of the surveyed firms had a separate purchasing function, and that purchasing was of a very low priority to the firms. Morrissey and Pittaway (2004) argue, however, that small and medium-sized enterprises do see purchasing as important, although they may not have a discrete purchasing function.

In recent years, collaboration has become the focus of supply chain systems. At the same time outsourcing is a widespread practice in business today. Companies aim to focus on their core activities and to transfer less critical functions to their subcontractors. This has led to increased outsourcing with even more emphasis on the PSM function as the selector of proper suppliers. Generally speaking, outsourcing refers to practices where activities that were previously performed in-house are transferred out of the company. Some are doing so because of tactical considerations; they are outsourcing specific business functions such as accounts payable or customer service centre operations to reduce costs. Others are taking a more

strategic tack, including the outsourcing of sets of capital-intensive activities like manufacturing, distribution, or IT, so as to grow without adding capital (Carter, Markham &

Monczka 2007).

There have also been interests towards outsourcing of the ownership of fixed assets or the whole manufacturing process. Morgan and Monczka (2003) see that the nature of the outsourcing decision threatens directly supply management; it is naturally strategic for any company because of its impact on supply capabilities. Carter et al. (2007) come around to Morgan and Monczka’s view by stating that the outsourcing of procurement activities is a strategic option. Arminas’s (2003) study indicates that 22 percent of companies (of a total of 219) outsource some purchasing areas whereas more than a half of UK companies and 64 percent in France are likely to outsource procurement by 2006. Also Carter et al. (2007) evaluate that outsourcing of procurement is growing although it is not yet widespread.

In outsourcing and partnering literature, success factors for the relationship have been reached rather extensively (e.g. Ellram 1991; Mohr & Spekman 1994; Ellram 1995; Lee & Kim 1999;

Tuten & Urban 2001). A few presented models (Ellram & Edis 1996; Zhu, Hsu & Lillie 2001) discuss rather thoroughly the planning, developing and implementing phases of an outsourcing partnership. Kern and Willcocks (2000) have presented a model of outsourcing relationships. Their model is applicable mainly from the customer’s point of view and focuses on the relationship management element of the process. They also highlight the behavioural aspects of a relationship. Increased outsourcing has been one of the reasons for the need of more systematic partner selection. According to Parolini (1999), problems arise when competition becomes more varied; some companies almost completely outsource the working phases of production, others move them to countries with low labour costs and so on. In Parolini’s opinion the real problem is not the method, but the object to which the analysis refers: industry. In outsourcing decision making, it is important to figure out how different factors influence the total costs and why one alternative is the best solution from the perspective of costs.

A strategy which leads to the outsourcing of all non-core activities has its own risks and problems, as failure of these activities can jeopardise organisations’ core business. Also, the

cost of choosing a suitable company to outsource an activity to and managing this arrangement can be high, and the cost may in fact be greater than if the activity was performed in-house. When the potential for vulnerability and competitive edge with respect to an activity is high, the need for tight control over sourcing is required, which suggests either carrying out the activity in-house, through joint ownership, or through detailed long-term outsourcing contracts. (Browne & Allen 2001, 254-255.)

Enterprises have gradually moved from operational purchasing to more strategic activity, and this has lead to an increased importance of supplier relationships. Monczka et al. (1993) identify a series of steps from least to most supplier responsibility as follows:

1. None: The supplier is not involved in design. Materials and subassemblies are supplied according to customer specifications and design.

2. White box: This level of integration is informal. The buyer “consults” with the supplier informally when designing products and specifications, although there is no formal collaboration.

3. Gray box: This represents formal supplier integration. Collaborative teams are formal between the buyer’s and the supplier’s engineers, and joint development occurs.

4. Black box: The buyer gives the supplier a set of interface requirements, and the supplier independently designs and develops the required component.

Identification and analysis of potential suppliers should be done in an early stage of the process. As Simchi-Levi et al. (2004) state, firms have found it useful to involve suppliers early on in the design process. The authors (2004, 178) emphasise that “…firms must develop a strategy that helps them to determine the appropriate level of supplier integration for different situations“. In the 1980s and 1990s, there was a proliferation of texts on purchasing, having common themes of selecting, using, and developing suppliers in line with strategic goals and overall business objectives.