As companies struggle to increase customer value by improving performance, many companies are turning their attention to purchasing and supply management. Consider, for example, John Deere, the company featured at the beginning of this chapter. Close to 70 percent of a cost of a tractor is comprised of externally obtained materials. It does not take a financial genius to realize the impact that suppliers can have on a firm’s total cost. Furthermore, many features that make their way into final products originate with suppliers. The supply base is an important part of the supply chain. Supplier capabilities can help differentiate a producer’s final good or service.

    Because manufacturers spend an average of 55 cents out of every dollar of revenues on goods and services, purchases are clearly a major area for cost savings. During the 1980s, superior management of supplier relationships gave Japanese automobile producers a $300 to $600 per-car cost advantage, an advantage that GM, Ford, and Chrysler did not have.

    Purchasing and supply management also has a major impact on product and service quality. In many cases, companies are seeking to increase the proportion of parts, components, and services they outsource in order to concentrate on their own areas of specialization and competence. This further increases the important relationship between purchasing, external suppliers, and quality.

    The following example illustrates this important link between supplier quality and product quality. In a case that gained widespread attention, European soda drinkers became ill after consuming Coca-Cola products. Coke’s chief scientist said that a major culprit was quality lapses at a Belgian bottling plant that allowed contaminated carbon dioxide, the gas that creates the soda fizz, to enter Coke’s final products. A spokesman for Coke confirmed that the Belgian plant did not test carbon dioxide of analysis verifying the quality of the gas. This example illustrates how lapse in managing supplier quality can tarnish the reputation of even the world’s greatest brands.

    Purchasing, acting as the liaison between suppliers and engineers, can also help improve product and process designs. For example, companies that involve suppliers early, compared to companies that do not involve suppliers, achieve an average 20 percent reduction in material cost; 20 percent improvement in material quality; and 20 percent reduction in product development time. Development teams that include suppliers as members also report they receive more improvement suggestions from suppliers than teams that do not involve suppliers. Early supplier involvement is an area where purchasing can begin to add new value.

    Many executives will agree that a focus on effective purchasing has become a critical way to gain competitive advantage. An executive vice president for telephone products at AT&T summarized this feeling during the 1990s when he said, “Purchasing is by far the largest single function at AT&T. Nothing we do is more important.