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Over the past 25 years, the role of procurement within companies has changed dramatically from that of simply buying goods and services to overseeing an integrated set of management functions. Procurement has crept into every aspect of management, from category management to managing supplier relationships, contracts and payments, and strategy. As companies look beyond short-term costs and the scope of procurement-related issues has grown, procurement professionals are paying more attention not just to what they spend on goods and services but to the broader costs of operating, maintaining and replacing the items and resources they purchase over time.
Despite procurement’s increased level of importance, it has yet to achieve the high-level recognition it deserves. There are two main reasons for this. First, it is often difficult to document procurement’s specific contributions: Were the cost savings the result of skillful negotiations with vendors or a fortuitous shift in the market? The financial benefits of a favorable procurement deal often extend beyond the initial purchase price to other aspects of performance (for example, improved working capital or reduced financing costs), so there is more than one bottom line to consider. Second, the line between the responsibilities of procurement and those of other stakeholders can be ambiguous. The result: Procurement often shares whatever successes it achieves with other groups; in failure, however, it typically gets all the blame.
The need to place procurement in a broader strategic context has become all the more pressing in the current era of increasing globalization. Global sourcing links procurement decisions to strategic decisions. “Make or buy” decisions — for example, whether to move production offshore to your own subsidiaries or outsource it to outside producers and subcontractors — are typically made at the senior executive levels. However, other important decisions (such as where to buy, from whom and under what conditions) are usually handled by procurement professionals. The reality is that these decisions are no longer based entirely on an understanding of direct purchase costs or on easily observable transaction costs, such as transport expenses and import duties, but on many other types of transaction costs as well, including those related to cultural, institutional and political differences. In this article, we will explore the role of these other transaction costs in sourcing decisions and offer a new framework for evaluating costs associated with sourcing and procurement in an increasingly globalized market.
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1. Ronald Coase, winner of the Nobel Memorial Prize for economics in 1991, introduced the concept of transaction costs in economic theory: See R.H. Coase, “The Nature of the Firm,”