Strategic Management: Formulation and Implementation

The Cost Of Purchase Inputs

Procurement has strategic significance in almost every industry. Every value activity employs purchased inputs of some kind, ranging from raw materials used in purchased fabrication to professional services, office space, and capital goods. Purchased inputs divide into purchased inputs and purchased assets.

The starting point in analyzing the unit cost of purchased inputs is to develop purchasing information. All significant purchased inputs should be identified, and listed in the order of importance to total cost. After sorting purchased by size, regularity of purchase and real cost change, a firm should the identify where it makes the purchasing decision. A final step in developing information about purchased inputs is to record the suppliers for each item and the proportion of purchases awarded to each supplier over an ordering cycle.

The same cost drivers identified above shape the cost behavior of purchased inputs, in combination with the bargaining relationship between the firm and suppliers that grows out of industry structure.

The cost behavior of suppliers will have an important influence on both the cost of inputs and the ability of a firm to exploit supplier linkages. Supplier cost behavior is analyzed in the same way as a firm's cost behavior.