Value Based Purchasing

Value Based Purchasing

Value Based Purchasing

This entry focuses on companies as buyers involving purchasing and related activities impacting on the supply side of firms. Purchasing and other activities influencing the supply side of companies are important in two respects. First, purchasing involves the operations necessary to supply a firm with its input in terms of materials, products, equipment, services, and so on. Efficiency and effectiveness in these processes are critical to the performance of the buying firm. Second, knowledge about the buying processes of a company is important to its suppliers. Such information supports ambitions of selling firms to influence potential buyers. Thus, the understanding of organizational buying behavior is a significant issue in the marketing literature. In this entry, attention is directed to the perspective of buying firms (Axelsson, 2005).

What corporations buy is used in various ways. Some acquisitions are aimed at direct utilization or further processing in the operations of the company, for example, oil, pulp, steel plates, and such. Other items appear as identifiable parts of the buying company's offerings to its customers. Some of these, such as the engine of a car or the processor of a computer, may be particularly significant to the functioning of the end product. These purchases are made on a continuous basis, which is also the case for items that are used in the manufacturing operations of the company, such as hand tools and fastenings. Other purchases are conducted on an irregular and less frequent basis, for example, large machinery and buildings (Christopher, 2005). The variety in the nature of what is purchased calls for diversity in purchasing arrangements and supply strategies. In this discussion of corporations as buyers, the following issues are examined: the role of purchasing in the company, purchasing efficiency and the role of suppliers, frameworks for analysis of purchasing issues, and strategies for purchasing.

The Role of Purchasing in the Company

Companies buy things to be used in their own operations. The purchasing department is therefore only one of the company functions involved in what is ongoing at the supply side. In many situations, the features of the purchased item are specified by the technical functions in the company. Both product development and production have considerable impact in this respect and may sometimes determine not only the specification of what to purchase but also from whom to buy. In decisions concerning what supplier to select, the viewpoints of other functions may be critical. The finance function will evaluate various alternatives in terms of price and financial stability. Logistics and quality give priority to suppliers depending on their capacity and reliability in delivery and supply consistency. In situations where the input is critical to the functioning of the products sold by the company, the marketing department will be influential in decisions concerning purchasing and supplier selection (Farmer, 2009).

Given the interdependencies between departments and their functions, the organization of the buying company impacts its activities at the supply side. There are two main organizational alternatives when it comes to the ...