Durable Vinyl Siding Corporation’s Procurement Costs

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Table of Contents

Introduction
Overview
Computerization
E-commerce
Outsourcing
Recommendations
Conclusion
Reference List

Introduction

Strategic sourcing is one of the most critical areas of strategic management that regulates all procurement activities of a company (Oshri, Kotlarsky, & Willcocks 2015). Successful organizations recognize that procurement should not be treated as only a cost function, but rather it has to be regarded as a valuable instrument that can help them to meet their long-term objectives. Therefore, if a company wishes to acquire a competitive edge in a market, its chief procurement officers (CPOs) have to be concerned with the creation of a system of effective strategic sourcing. To this end, it is necessary to take a strategic sourcing orientation and use the most current technological solutions for centralizing and managing procurement data. Not only do such instruments allow effectively control all aspects of procurement such as “spend analysis, capability sourcing, supplier selection and evaluation, contract management and relationship management” (Oshri, Kotlarsky, & Willcocks 2015, p. 30) among others, but they also help to analyze sourcing activities in the performance dimension. Moreover, heads of procurement department can use modern electronic systems for procurement management in order to align their activities with organizational objectives.

The aim of this paper is to examine a case study of a siding manufacturer, Durable Vinyl Siding Corporation (DVSC), and to provide its director of sourcing and procurement with extensive information on methods for reduction of procurement costs. The paper will analyze the differences between computerization, e-commerce, and outsourcing while focusing on the advantages and disadvantages of each option.

Overview

The desired reduction in procurement costs is not possible without the close management of material and information flows (Poluha 2016). Taking into consideration the fact that in manufacturing, the entire organization hinges on the effectiveness of the supply chain, its optimization can influence many variables of business governance. Therefore, the procurement department has to make sure that it explores all avenues for improving its performance criteria. Given that procurement activities have to be conducted with compliance with laws and regulations, it is especially important to make sure that the methods used for the reduction of procurement costs do not violate them. Currently, DVSC relies on manual methods for keeping track of its procurement processes (Coyle et al. 2009). Not only do these methods increase a chance of legal violations by introducing a substantial number of human errors into procurement documents, but they also cause data disintegration and redundancy. Therefore, the director of sourcing and procurement is recommended to consider alternative options for the company’s purchasing strategic plan.

Computerization

Computerization has completely changed the landscape of modern management. Supply management has not been an exception in this respect and has seen a radical transformation of all procurement processes. No one would deny that the competitive nature of the modern business environment “makes the effective use of computer-based procurement an operational necessity” (Gitau & Iravo 2014, p. 319).

The use of the Internet for business operations has made possible placing purchase orders through web platforms, which would not have been possible two decades ago. Computerization can help to boost productivity and reduce “cycle times generated through the automation of routine processes such as requisition and purchase order generation, quotation, bidding, order tracking, expediting, supplier payment, and procedural compliance” (Sollish & Semanik 2012, p. 267). By leveraging computer systems, it is possible to make buying decisions in accordance with “market trends in buying and availability” (Sollish & Semanik 2012, p. 267). Computer systems also allow procurement departments to standardize and speed up their requests for information (RFIs), thereby substantially reducing the cost of the procure-to-pay process. Using such systems, businesses have even been able to improve their selection in areas such as maintenance, repair, and operations. Moreover, transaction costs for low-value items necessary for these areas can also be reduced with the help of computer technology. Furthermore, computerization serves as an effective research tool “allowing purchasing professionals to shop around and compare suppliers’ capabilities and to peruse online catalogs” (Gitau & Iravo 2014, p. 321).

A supplier-managed inventory program is a computerized tool that has to be considered for use in DVSC by the director of sourcing and procurement. The instrument allows a higher level of collaboration between buyers and sellers, thereby facilitating the sharing of demand and supply data. With the help of supplier-management inventory programs, procurement departments can have access to all sellers’ inventories and pay only for those items that they use. (Sollish & Semanik 2012). This method of managing one’s procurement process is called consignment inventory, and it allows freeing substantial share of resources across the whole supply chain of an organization.

It should be noted that the use of computer-based procurement tools necessitates internal and external integration to ensure a high level of procurement efficiency, which can be considered a minor drawback of the option. Companies that are willing to maximize their procurement performance have to coordinate their purchasing processes on an organization-wide basis. Therefore, the successful integration of computer-based procurement solutions depends on the company’s ability to create unified interfaces across its distinct functions and processes. Effective managers have to go beyond the traditional approach to supply chain in which “the various functional-level decision-makers’ primary concern focuses on their own departments” (Gitau & Iravo 2014, p. 320). External integration requires treating suppliers as an essential component of the procurement process and necessitates active collaborative efforts on the part of buyers.

E-commerce

E-commerce (EC) is an effective method for improving the efficiency of operational processes of procurement departments. Amani (2015) defines EC as “the act of buying or selling goods or services over the Internet” (p. 10). The use of EC for the facilitation of interactions between business (B2B) is called e-procurement, and computer-based platforms for conducting B2B commerce operations are known as electronic procurement systems (Amani 2015). There are many areas of e-commerce; however, the rate of adoption and rapid progress of B2B e-commerce suggests that it is the most important one. The differences between computerization and e-commerce are not pronounced; therefore, they do not merit rigorous scrutiny. However, it has to be mentioned that widespread adoption of computer-based procurement solutions by organizations in both private and public sectors has led to the promotion of e-procurement platforms, which can be viewed as a logical continuation of computerization.

In recent years, procurement managers have recognized that the use of the Internet for the facilitation of purchases can have a revolutionary effect on the way companies conduct their purchasing practices. Whereas computerization can only spell benefits in the areas of maintenance, repair, and operations, e-procurement systems can be used for streamlining and reducing costs of purchases related to “sales, administration and maintenance, travel-related items, cleaning, solvents, and transportation services among others” (Amani 2015, p. 2). If companies that adopt e-procurement solutions are able to eliminate manual purchases, they can achieve savings of more than 40 percent in transaction costs for direct procurement (Amani 2015). According to Croom and Brandon (cited in Amani 2015), implementation of e-procurement systems can reduce up to 75 percent in purchasing transaction costs and up to 18 percent at purchasing price for indirect procurement.

Just like computerization, e-procurement can speed up the processes of identification, negotiation, and evaluation of products offered by different suppliers. Another advantage of both e-commerce and computerization is the ability to render procurement process invisible for outsiders. Similarly, both methods allow making procurement process completely transparent for insiders, thereby increasing the efficiency of purchasing operations and reducing inventory management costs (Amani 2015).

It should be noted that similar to computerization, e-procurement is associated with minor disadvantages. Technology that is being used for both methods of cost reduction can become a barrier that hinders integration with suppliers that do not have a technologically-friendly organizational culture. Adoption of computerization and e-procurement or e-commerce can also be impeded by a lack of employees’ support or absence of skilled staff with a sufficient level of information system knowledge (Amani 2015). Amani (2015) notes that even if a company has qualified personnel in its information systems department, the professionals will have to face another type of technology, which necessitates new maintenance activities and costly learning process.

The prohibitively high cost of implementation of e-procurement platforms may prevent organizations from heading to change. Another disadvantage of e-procurement is the necessity to have an external environment that is supportive of the system in terms of regulatory and legal boundaries of the industry (Amani 2015). Procurement department managers should also be cognizant of the fact that security of transactions can be compromised when it comes to e-commerce. This disadvantage of the technology has to do with the fact that “data transmitted on it can be garbled and reassembled wrongly at the other end, or can display only partially because of incompatible software” (Amani 2015, p. 15). The realization of computerization and e-procurement benefits is hard to measure because the success of the implementation of both methods of cost reduction is radically different across various companies and industries. Therefore, not all organizations are willing to adopt e-procurement solutions given a lack of evidence on the impact of the replacement of existing procurement methods and technologies. Moreover, choosing a proper e-procurement platform is a daunting task that prevents the heads of procurement departments from heading to change.

Outsourcing

With the ever-growing level of complexity of supply chain management (SCM) functions of the modern businesses, many managers of procurement departments opt for outsourcing their procurement activities to a professional third-party (Lu, Meng, & Goh 2012). The providers of outsourcing services help their clients to manage one or several areas of their SCM thereby increasing its responsiveness. Other advantages of procurement outsourcing over computerization include but are not limited to, a third-party’s demand pooling, expertise in SCM, and intricate IT or operational infrastructure (Lu, Meng, & Goh 2012). Given that purchases of goods and services can account for 50 to 90 percent of a company’s cost of goods sold, it would be unwise for managers of procurement departments not to consider outsourcing some strategic and tactical processes related to procurement function of their companies (Brewer, Wallin, & Ashenbaum 2014). According to (Brewer, Wallin, & Ashenbaum 2014), an additional benefit of procurement outsourcing is a reduction of administrative costs by up to 70 percent. Other advantages of the option are enhanced contract compliance and increased behavioural and process discipline (Brewer, Wallin, & Ashenbaum 2014).

Procurement outsourcing can be divided into two categories: direct outsourcing and indirect outsourcing (Lu, Meng, & Goh 2012). Direct procurement outsourcing “includes all goods purchased which then directly enter into the production process of the company” (Lu, Meng, & Goh 2012, p. 33), whereas indirect procurement outsourcing includes the purchases that a company makes to enable its activity. Indirect procurement outsourcing is being rapidly accepted across the globe because organizations tend to rely on third-party suppliers of services that lay beyond the scope of their procurement departments. Unlike computerization and e-commerce, procurement outsourcing is associated with advantages of better leverage, professional negotiators, and smaller headcount (Brewer, Wallin, & Ashenbaum 2014). The extant literature on the issue provides competency performance as the main reason for adopting this cost-reducing strategy. From a competence perspective, a company will be better off if it focuses on its core competencies while outsourcing all remaining activities (Lu, Meng, & Goh 2012).

However, it should be noted that some scholars recognize procurement as a strategic function, and argue that “outsourcing this function may lead firms to miss important innovations that could maker manufacturing more efficient” (Brewer, Wallin, & Ashenbaum 2014, p. 5). Moreover, supplier relationships are also referred to as strategic; therefore, a company’s procurement competence is related to its ability to leverage these relationships (Brewer, Wallin, & Ashenbaum 2014). This disadvantage of the cost-reducing option is especially important since DVSC seeks an effective way to improve its financial performance. However, taking into consideration the fact that the company’s resources are constrained, it might be better off focusing on other activities. For example, the procurement of indirect materials cannot be considered a critical area of SCM strategy of DVSC; therefore, it is recommended that the company joins third-party outsourcing agreement. Additional disadvantages of procurement outsourcing, which are not inherent to computerization and e-commerce, are reduction in supply-base visibility that can result in the unauthorized replacement of suppliers, exploitation of suppliers, overbilling, “loss of buying-firm leverage and general risk of supplier opportunism” (Brewer, Wallin, & Ashenbaum 2014, p. 7).

Recommendations

The strategic sourcing plan for DVSC should establish a high-level approach to cost reduction that is only possible through the implementation of improvements in the form of inventory reduction, better quality, and lower prices (Sollish & Semanik 2012). The review of current market conditions and cost profiles of the company has helped to identify three cost-saving opportunities: computerization, e-commerce, and outsourcing. Supplier performance and spending history in the areas that are directly related to the company’s mission suggest that DVSC has to put more emphasis on value engineering as a means of finding ways to consolidate its spending and use fewer suppliers. Moreover, there is a need to overhaul the entire internal procurement process in order to implement cost-saving opportunities covered by opportunity analysis.

Opportunity analysis has helped to better understand each of the three avenues for cost reduction “that exist in the market, outside of the relatively limited picture taken from the organization’s experience” (Sollish & Semanik 2012, p. 69). The results of the analysis suggest that in order to resolve the procurement issues at DVSC, it is necessary to combine two cost-reducing options: e-commerce and outsourcing.

In the area of direct procurement, the director of sourcing and procurement of the company, is advised to take e-commerce approach to the improvement of the efficiency of operational processes of the procurement department. By implementing e-commerce solutions, DVSC will be able to eliminate manual purchases, thereby saving up to 40 percent in transaction costs (Amani 2015). Furthermore, the company will be able to streamline its maintenance, repair, and operations-related procurement process, thereby substantially reducing the headcount of its procurement department. Moreover, the processes of identification, negotiation, and evaluation of products offered by different suppliers will be invisible to outsiders, which is extremely important in the area of direct procurement.

In order to achieve cost-reduction in the area of indirect procurement, DVSC is recommended to use outsourcing services of a professional third-party. Taking into consideration the fact that procurement of indirect goods and services often lays beyond the scope of procurement departments the company will be better off if it focuses on its core competencies while outsourcing all remaining activities (Brewer, Wallin, & Ashenbaum 2014). By doing so, DVSC will be able to enjoy numerous advantages of the option, which include but are not limited to a third-party’s demand pooling, expertise in SCM, and intricate IT or operational infrastructure (Lu, Meng, & Goh 2012).

Conclusion

Opportunity analysis has shown that the combination of e-commerce and outsourcing is the optimal approach to resolving the procurement issues at DVSC and achieving maximum cost-reduction. E-commerce should be applied in the area of direct procurement, while the benefits of outsourcing will be more pronounced in the area of indirect procurement.

Reference List

Amani J 2015, Critical assessment on effects of e-procurement in enhancing project performance among private sector organizations in Tanzania: A case of applied technology, Web.

Brewer, B, Wallin, C, & Ashenbaum, B 2014, ‘Outsourcing the procurement function: Do actions and results align with theory?’, Journal of Purchasing & Supply Management, vol. 171, no. 1, pp. 4-11.

Coyle, JJ, Langley, CJ, Gibson, BJ, Novack, RA, & Bardi, EJ 2009, Supply chain management: a logistics perspective, Cengage Learning, Ohio.

Gitau, M & Iravo M 2014, ‘Factors affecting computerization of procurement functions in the service industry in Kenya: A case study of CIC Insurance Group LTD’, The Strategic Journal of Business & Change Management, vol. 2, no. 17, pp. 318-338.

Lu, Q, Meng, F, & Goh, M 2014, ‘Choice of supply chain governance: Self-managing or outsourcing?’, International Journal of Production Economics, vol. 154, no. 1, pp. 32-38.

Oshri, I, Kotlarsky, J & Willcocks, L 2015, Achieving success and innovation in global sourcing: Perspectives and practices, Springer, New York.

Poluha, G 2016, The quintessence of supply chain management: What you really need to know to manage your processes in procurement, manufacturing, warehousing and logistics, Springer, New York.

Sollish, F., & Semanik, J 2012, The procurement and supply manager’s desk reference, John Wiley & Sons, New York.

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