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suMMARy AnsWERs To KEy quEsTions 193

suMMARy AnsWERs To KEy quEsTions

What is purchasing and supply strategy?
A supply network is an interconnection of organisations that relate to each other
through upstream and downstream linkages between the different processes and activi-
ties that produce value in the form of products and services to the ultimate consumer.
Purchasing and supply strategy is the strategic direction of an organisation’s relation-
ships with suppliers, customers, suppliers’ suppliers, customers’ customers, and so on.
It includes understanding the supply network context, determining supply network
relationships and understanding the dynamics of the supply network.

What should we ‘do’ and what should we ‘buy’?
Deciding on the extent of outsourcing (or lack of vertical integration) involves an
operation in drawing the boundaries of its organisation in terms of the direction of
integration, the extent, or span, of integration, and the balance between its vertically
integrated stages. In doing so, an organisation is primarily trying to leverage the advan-
tages of coordination, and cost reduction, as well as trying to secure product and pro-
cess learning. However, the disadvantages of vertical integration can be significant. The
internal monopoly effect is often held to inhibit improvement. In addition, vertical
integration is said to limit economies of scale, reduce flexibility, insulate a firm from
innovation and be distracting from what should be the core activities of the firm. In
determining what is effective, the firm must pay full attention to the possibility of
opportunistic supplier behaviour. Insights from transaction cost economics can be used
to help make these types of decision.

How do we buy; what is the role of contracts and/or relationships?
Contracts are those explicit (usually written, often detailed) and formal documents
that specify the legally binding obligations and roles of both parties in a relation-
ship. Contracts and relationships are the basic ingredients of any supply arrangement.
Market-based supply depends on contracts, while ‘partnerships’ are built on relation-
ships. The issue of trust is important in partnerships; strong trusting relationships can
facilitate outsourcing even critical activities. Long-term partnerships with a relatively
small number of strategic partners have been put forward as a way of maintaining the
coordination and low transaction-cost effects of vertical integration, while at the same
time avoiding the internal monopoly effect on operations improvement. The major prob-
lem with partnerships, however, is the difficulty of maintaining the attitudes and activi-
ties that bolster the high degree of trust that is necessary for them to work effectively.

How do we manage supply dynamics?
Because supply networks are interrelationships of independent operations, the way in
which each operation relates to the others in the network provides an opportunity for
supply network distortions. These distortions can be considered in both a quantitative
and a qualitative sense. Quantitative distortions are caused by the necessity to manage
the inventories between operations in the supply network. This can lead to short-term
imbalance between supply and demand, the overall effect of which is to amplify the
level of activity fluctuations back up the supply chain. So, relatively small changes
in ultimate demand can cause very large changes in the output levels of operations

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