Tuesday, October 12, 2010

Aligning Environmental Dynamism, Purchasing Strategy Formulation, Implementation and Performance

In the recently concluded Academy of Management Annual Meeting that was held Montréal, Canada,I presented the findings from an ongoing research that my co-authors(Jayanth Jayaram and Ajay Das) and I are currently engaged in.This study investigates the alignment between environmental uncertainty, purchasing strategy formulation, purchasing strategy implementation and purchasing performance.By drawing similar parallels from the strategic management literature that have investigated environment-strategy-performance linkages, this research makes a unique contribution to the literature by examining these relationships at a finer grain functional level of purchasing. The research study posits that coping with environmental uncertainty, in particular, the purchasing environment, involves purchasing strategy formulation, which in turn influences purchasing strategy implementation via supplier selection and monitoring ongoing supplier performance evaluation. A combination of choosing appropriate supplier selection criteria and monitoring supplier performance ensures that the benefits of alignment of purchasing strategy with environment translate into better purchasing performance. Specifically,the following research questions are addressed in the study:

- How does environmental dynamism influence purchasing strategy formulation, characterized in terms of purchasing function’s participation in strategic planning?

- How does purchasing strategy formulation translate into different types of purchasing tasks associated with strategy implementation?

- How is purchasing performance influenced by purchasing strategy formulation and purchasing strategy implementation?

The hypotheses are tested using survey data by means of structural equation modeling. The results provide support for the tenet that purchasing function’s strategy alignment enhances the purchasing task-performance relationships. However, these relationships varied according to the type of purchasing performance that was considered. In particular, relationships affecting strategic or operational tasks were not uniform and there was a differential effect on different types of purchasing performance measures.The results of this study have implications on how routines, as well as roles and responsibilities of purchasing and suppliers enable purchasing performance via dominant pathway relationships.Specifically, the results suggest that purchasing cost performance improvement is attained through a strong alignment of environmental dynamism with purchasing strategy formulation and the translation of purchasing strategy formulation into tasks associated with purchasing strategy implementation. The findings suggest that supplier’s strategic performance evaluation enables supplier’s operational performance evaluation, which in turn leads to improved purchasing cost performance. 
Quality, delivery, and flexibility performance of the purchasing function are influenced by three distinct paths. The first path is through purchasing strategy formulation to strategic supplier selection criteria and in turn to operational supplier selection criteria. The second path relates to the direct association between purchasing strategy formulation and operational supplier selection criteria. The third path is via the link between purchasing strategy formulation to supplier’s strategic performance evaluation, and in turn to supplier’s operational performance evaluation. Operational supplier selection criteria and supplier’s operational performance evaluation influences delivery, quality and flexibility performance dimensions. As compared to other purchasing performance dimensions, purchasing innovation performance is directly impacted by purchasing strategy formulation. Furthermore, the path linking purchasing strategy formulation with strategic supplier selection criteria also impacts purchasing innovation performance.Taken together, the results show differential pathways or routines based on the individual performance dimension that is being tracked.  The findings suggest that irrespective of the purchasing performance dimension, purchasing strategy formulation must be closely aligned with environmental dynamism. The dominant pathway for the translation of purchasing strategy formulation into improved performance is through positive significant impact on strategic supplier selection criteria and on supplier’s strategic performance evaluation. The association of purchasing strategy formulation with operational supplier selection criteria, albeit weak, also enables translation of strategy formulation into improved performance.  The managerial implications of the findings are that firms characterized by substantial changes in customer requirements related to quality, price, technological features, delivery and customization should involve purchasing in strategy formulation. This strategy formulation process impacts purchasing strategy implementation in two distinct ways. In the initial strategy implementation phase, purchasing is involved in devising supplier selection criteria. At this phase purchasing function’s involvement in cross-departmental joint business goal setting, active participation in corporate strategy meetings, recommendation and influence on end products are positively associated with strategic and operational supplier selection criteria. Subsequently, purchasing strategy implementation involves assessing the ongoing performance of the selected suppliers. The results suggest that purchasing strategy formulation is positively associated with strategic supplier performance assessment.  The multi-dimensional nature of purchasing performance is influenced by purchasing strategy implementation in varying ways. This suggests that at the corporate level it is important to have an understanding of the practices that are necessary to achieve specific performance improvements. Purchasing function’s cost performance is influenced by the supplier performance assessment phase of purchasing strategy implementation. Purchasing strategy formulation enables a firm to evaluate supplier’s strategic performance in terms of product technology, assistance in product development efforts, potential to undertake necessary investments, global reach, and ability to navigate technological changes. These strategic performance assessment measures enable an evaluation of supplier’s operational performance, typified in terms of supplier’s performance on cost, quality, product customization, delivery flexibility, and volume flexibility.  Similar to cost performance, purchasing function’s quality, flexibility and delivery performance are also positively influenced by a similar routine that links purchasing strategy formulation, supplier’s strategic and operational performance evaluation and performance. However, in addition to this routine, quality, flexibility and delivery performance are also influenced by the supplier selection task of purchasing strategy implementation. The results reveal that purchasing function’s innovation performance is directly influenced by purchasing strategy formulation and by the strategic supplier selection criteria. Operational supplier selection criteria and supplier’s performance assessment were not found to be positively associated with innovation performance. These findings emphasize the need for careful resource allocations to various purchasing strategy implementation tasks depending upon the specific performance dimension that need to be improved.  The results of this study also present implications for the reciprocal relationship between performance dimension and managerial attention to the tasks associated with purchasing strategy implementation. For example, firms that evaluate purchasing solely in terms of cost performance would instill a behavior focused on supplier performance evaluation. However, when firms give recognition to additional dimensions of purchasing performance, this instigates attention on both supplier selection and supplier performance assessment phases of purchasing strategy implementation. Evaluation of purchasing in terms of innovation performance is still relatively limited in industry. The study informs that firms seeking innovation performance from purchasing should include purchasing in strategy formulation process. Further, a focus on innovation performance motivates the purchasing function to give higher degree of attention to strategic supplier selection criteria. Finally, the findings of this study have implications for talent management in the purchasing arena. Recognition of routines that work relative to individual purchasing performance dimension that is being optimized and isolation of new and emerging routines over time constitute important tasks for purchasing personnel who are desirous of advancing in their careers. This aspect is especially important given the high turnover rate amongst high performing purchasing managers. Firms who are desirous of remaining at the cutting edge of performance frontiers should place special emphasis on attracting the right talent pool and retaining this talent in order to preserve the intellectual knowledge base (pertaining to routines) that is prevalent within firms.

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