The purchasing department,
once the poor relation of the organisation, has been transformed in the modern automotive
company to a function of major importance which is central to business operations. The
reasons for this fundamental change, a trend which is likely to become even more
widespread in the future, are threefold:

The tremendous
impact of purchased materials and services on profitability

On average over 60 per cent of a vehicle manufacturer’s costs are paid to its
suppliers of goods and services. Traditionally vehicle manufacturers have always
concentrated on labour efficiency and productivity – much on-going effort being
expended to make sure that labour costs are as tight as possible. Such focus is, of
course, vitally important, but it is estimated that, in today’s automated factories,
labour costs represent only about 10 to 15 per cent of total production costs. Future
on-going cost reduction, a crucial requirement for any successful manufacturer, will only
come from improving the spend on bought-in goods and services – and it will be the
purchasing function which has to deliver such cost reduction.

The increasing
prominence of automated manufacturing

More and more automation in production requires evermore rigorous control over the design,
delivery and quality of purchased materials. The management of the supply chain into the
vehicle manufacturer is now vitally important to ensure, with certainty, that goods of
perfect quality are delivered in the right quantities at the right times. In such a
setting, purchasing has to establish and maintain excellent vendor relations and has
substantial influence over manufacturing costs.

The emergence
of just-in-time manufacturing

Just-in-time manufacturing demands the line-side delivery of small and frequent shipments
in exact quantities and with perfect quality. These requirements put great pressure on
purchasing departments to plan, control and communicate precisely and carefully with
suppliers. The approach has made the purchasing department one of the key players in the
control of manufacturing.

Not only has the scope of
purchasing been broadened by just-in-time, but the room for error has been reduced to
practically zero. The importance of this change cannot be underestimated because it has
led to the emergence of a new ethos in purchasing – just-in-time purchasing.

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The just-in-time philosophy aims to reduce waste by supplying items only when they are
needed. Such a system obviates the need for large warehouses and large amounts of work in
progress (with usually huge savings in inventory costs) and allows an increase in factory
flexibility as perceived by the customer. Just-in-time relies on good discipline, accurate
planning and massive effort throughout the supply chain because the failure to produce (or
receive) a product can stop the assembly line entirely, there being no stocks in the
pipeline to fall back upon.

Just-in-time purchasing
demands a high level of vehicle manufacturer/supplier co-operation. The manufacturer does
not expect to hold stocks of components to allow for the inadequacies of the supplier, but
instead expects to receive good components as near as possible to the moment they are
required. The supplier, on the other hand, needs to be taken into the confidence of the
vehicle manufacturer, particularly in terms of the visibility of the forward order book
and developments in product design.

LaLonde and Cooper, writing
for The Ohio State University, contended that the level of co-operation required between
supplier and manufacturer in a just-in-time purchasing environment makes the development
of new types of supplier relationship absolutely necessary and not simply desirable. The
key elements of just-in-time purchasing are:

  • vendor development and
    vendor relations undergo fundamental change. The nature of the relationship between
    manufacturer and supplier shifts from being adversarial to being co-operative;

  • purchasing departments
    develop long-term relationships with suppliers, with a trend towards fewer suppliers;

  • price continues to be
    important, but delivery schedules and product quality are of equal importance. Mutual
    trust and co-operation become the primary basis for supplier selection;

  • suppliers are encouraged
    to extend just-in-time methods to their own suppliers;

  • suppliers are ordinarily
    located near to the buying company’s factory, or if they are some distance away they
    are usually clustered together;

  • shipments are delivered
    in small, standard-sized containers with a minimum of paperwork and in exact quantities;

  • delivered material is of
    near-perfect quality.

Traditionally, purchasing
departments selected suppliers with the lowest price and then monitored them tightly so
that they did not deliver bad product. This has now switched to finding the supplier with
the best product and making him part of the manufacturing process.

Such supply chain
integration is now regarded as an indispensable element for success in manufacturing, and
supply chain superiority will provide a decisive competitive advantage. Manufacturers now
realise that they must bring more to the table than merely improved processes. They must
adapt quickly to increasingly unpredictable shifts in market demand, achieving greater
efficiencies in product development, sourcing, production and distribution. A company can
only achieve this by interfacing closely with its suppliers.