7.1 Introduction

Until the 1990s, business executives predominantly viewed sourcing or purchasing as a straightforward, transactional task, primarily focused on the procurement of materials at the lowest possible cost. This period was marked by a narrow perspective of the sourcing function, where its role was largely confined to cost minimization. Sourcing executives were often stereotyped as tough negotiators, whose principal skill lay in extracting significant discounts from suppliers. Under this framework, the sourcing function was relegated to a marginal role within businesses, with little recognition of its potential strategic contribution. The emphasis was squarely on the efficient execution of purchases, with the broader implications of sourcing decisions on the company’s strategic positioning largely overlooked. This approach mirrored the prevailing business attitudes of the time, where cost efficiency was often the paramount, if not the only, consideration in procurement decisions.

However, this view has evolved appreciably. Modern businesses recognize the need for the purchasing function to transcend short-term cost reductions. The contemporary approach to purchasing encompasses driving long-term, sustainable material availability and forming supply-side partnerships. Material innovation has become an integral part of the purchasing function’s objectives. Several factors have contributed to this shift:

• Increased Expenditure on Purchasing: Manufacturing firms allocate between 40% to 80% of their total cost of goods sold to purchasing components and services, a trend that is also rising in service companies. This indicates that the purchasing function now handles a larger portion of costs, significantly influencing business profitability.
  • In the automotive industry, for instance, companies like General Motors and Toyota allocate a significant portion of their total cost of goods sold to purchasing. This includes not just raw materials like steel and rubber but also advanced electronic components and software services. This trend is mirrored in the IT services sector, where companies such as IBM and Accenture increasingly spend on purchasing software licenses, cloud services, and specialized consulting services. These expenditures significantly impact the overall profitability of these businesses, highlighting the strategic importance of the purchasing function.
• Innovation and Market Opportunities: The ability of purchasing to aid in product innovation by choosing appropriate suppliers and nurturing the right relationships has become a key driver for demand and revenue generation.
  • A prime example can be seen in the electronics industry. Companies like Apple and Samsung leverage their purchasing function to drive product innovation. By strategically sourcing novel materials and components, such as advanced microchips or new display technologies, from a network of global suppliers, they can introduce groundbreaking features in their products. This not only aids in setting their products apart in a competitive market but also plays a crucial role in defining new market trends and customer demands.
• Changing Supplier Dynamics: The growing size and influence of suppliers have rendered the traditional approach of exerting pressure for lower prices less effective.
  • The pharmaceutical industry provides a clear illustration of this shift. Pharmaceutical giants, previously dominant in their supplier relationships, now face a scenario where suppliers of active pharmaceutical ingredients (APIs) have grown in size and bargaining power. This change is particularly noticeable with suppliers from regions like India and China, where a concentration of API manufacturers has led to these suppliers having greater influence in price and supply negotiations. The traditional tactic of pressuring these suppliers for lower costs is increasingly less viable, necessitating a more collaborative and strategic approach in supplier relationships.

These developments suggest the necessity for a strategic redesign of the purchasing function. Strategic sourcing is about aligning sourcing decisions with long-term business objectives. This approach has elevated the role of the Chief Purchasing Officer (CPO) to a top management position, often involving participation in board-level meetings and a deep understanding of business strategy. This strategic alignment allows the CPO to craft purchasing strategies that not only consider cost reduction but also contribute to innovation, lead time reduction, and marketing strategies based on supply constraints.

This expanded role of sourcing necessitates a departure from the conventional negotiator role to a more holistic facilitator of business objectives. In this chapter, we delve into this evolved role of sourcing, discussing key aspects like:

• What to Buy: Decisions regarding in-house execution versus outsourcing. For instance, one bank might choose to employ its own sales executives, while another might opt for contractual sales executives from a human resource supplier.
• How to Buy: Formulating distinct material categories and developing tailored buying policies for these categories. This could mean intense negotiation for some products and leveraging supplier relationships for others.
• Who to Buy From: Determining the ideal supplier profile and the optimal number of suppliers to engage with. For instance, it might be ideal to buy some goods from a small supplier while others from a large supplier.