The Status of the Purchasing Function

In the initial version of the synthesis chapter of its future book, the GERPISA "Production Organization" group presented a vision of the firm which hypothesized there to be four principal functions: produce, design, organize and sell. This approach was debated, legitimately enough, particularly with regard to the integration of other functions. Moreover, the group was criticized for having excluded the purchasing function, which most automobile makers now consider to play a key role, if only because purchasing can represent up to 70-75 percent of the pre-tax value of the average car.

The aim of this "viewpoint" is not to definitively justify this exclusion, but to explain the status accorded to other functions - purchasing, finance, etc. - in the processes of the firm on the basis of my personal views, including my personal interpretation of the discussion that has taken place within the "Production Organization" group. Let us therefore open the discussion, even the debate! It is not a matter of defending a position of principle but of developing an argument, and perhaps arriving at a consensus. Contrary views are therefore welcomed.

The "golden diamond" of the four major functions is a general analytical framework, broadly inspired by contemporary discussion in industrial economics and managerial economics. The firm is defined as the entity which ensures design, production and sale of the products of its principal activity according to its own particular organization, which it sets up to attain the hoped-for outcomes (profits, market share, etc.) as a function of its general strategic objectives.

Purchasing and logistics, human resources and finance, amongst other functions, thus appear as the means that are mobilized and developed so that the chosen goals can be attained. In other words, strategy determines the general objectives of the firm and major operational decisions then concern a big and key question: what to produce and sell, how, and at what price?

The make or buy question comes in afterwards, as a "residual" decision, once the other decisions have been taken. From this viewpoint, purchases appear to be a more operational than strategic variable. It is decided to make a certain automobile model, to make it according to certain methods, at a certain pace, to sell it to a certain kind of clientele. What is purchased is then decided as a function of what the firm wants or knows how to make or what it does not know or want to make. If it is "strategic" to integrate a certain activity, for whatever reason, then it is necessary to possess the appropriate technical, human and above all financial means.

Is it possible to define a firm's strategy after having made the make-or-buy decision? In other words, do purchases constitute a strategic objective as such and defined in advance? My response to this question is negative. The goal of the firm is to produce and sell, not to buy. Purchases are an operating variable and a tool for managing costs amongst other things, derived in the sense that they flow out of previous decisions.

The same position can be defended regarding wage and financial costs: the firm is neither a bank or a financial institution, nor a social service office. It adopts the costs corresponding to human and financial needs which are implied by the realization of its general objectives, all the while respecting systems of state regulation and constraints due to labour markets and sources of finance.

While it has been criticized and rightly so, neo-classical theory has not been contested on one point: the firm has to produce by buying factors of production (capital and labour) and intermediate consumption, in this case its purchases, to attain a certain level of production.

To say that the purchasing function is strategic because it represents up to 70-75% of the pre-tax turnover of the automobile producers (which are strictly speaking more assemblers than producers) is not in contradiction with a "residual" interpretation of purchases. It is because models are designed and made according to very particular methods and because the strategy of focusing on competencies has prevailed over that of vertical integration that purchases have become so important. But this is taking place via the "produce" function. In more trivial terms, the direction taken by the decision is the right one: one buys what one has decided not to make, and not; one does not make what one has decided to buy. None of which reduces the strategic character of purchases in terms of the financial sums at stake and their importance to the quality and cost of vehicles.

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