The History and Development of Purchasing Management and Its Theoretical Framework: A Review of Transaction Cost Economics

The History and Development of Purchasing Management and Its Theoretical Framework: A Review of Transaction Cost Economics

Richard Glavee-Geo
Copyright: © 2016 |Pages: 23
DOI: 10.4018/978-1-4666-9639-6.ch022
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Purchasing as a management or academic field of study has seen a rise in its awareness. The strategic role it assumes in most organizations and businesses is as a result of the need for firms to reduce cost and to counter increased competition. However, this recognition evolved from ‘‘humble'' beginnings up to the strategic importance it assumes today in some organizations and as a major field of study in the academia. The historical development of purchasing is worth studying so as to better understand and appreciate the important role it now assumes. Much literature and many theoretical frameworks have been developed to help explain various phenomena in the purchasing field. Transaction cost economics is one of such theories that have been applied. The contribution of transaction cost economics to the growth of knowledge in the purchasing and channel studies has been enormous.
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Historical Development Of Industrial Purchasing

The development of purchasing as a field of study and a profession all started with industrial purchasing with significant contribution from the field of marketing. Philip Kotler’s (1967, 1972, 1976) very popular and one of the most frequently used marketing textbook: Marketing Management: Analysis, Planning and Control chapter on producers, resellers, and government markets sets the tone for the agenda on business marketing. Purchasing started with the emphasis on marketing philosophy where the product concept was very dominant during the 1850-1915, followed by the era of the selling concept (1916-1960) and the new concept of marketing after the 1960s.

The Period 1850-1915 (The Product Concept)

The product concept period was marked by production orientation. The expansion of mileage of railroads; the rapid development of the steel industry; the increase in population; developments in communication and transportation especially in the USA spurred the rapid expansion of markets and the use of mass production techniques. The availability of electric power coupled with the development of better machinery led to the mechanization of manufacturing processes and procedures, notable being the automobile industry (Weeks & Marks, 1969).

The era of the product concept was characterized by firms concentrating on how best to efficiently produce goods without much thought on how to sell or market those goods that were produced. Hence, the focus was on how to produce rather than how to solve the problem of selling the goods or providing some level of customer service. For example, the emphasis on efficient production and price typifies Ford’s production technology such that “between 1909 and 1914, Ford’s mass production method reduced the retail price of the Model T from US$950 to US$490 leading John D. Rockefeller to call Ford’s Highland Park plant the industrial miracle of the age’’ (McIntyre, 2000, p. 269).

Despite the reduction in Model T’s price as a result of the new production methods, mounting customer dissatisfaction with dealer service threatened to reduce the sale of the Model T automobiles. During this period, many firms expanded in size so as to control the emerging markets and to gain increasing economies of scale. Consequently, excesses began to show in the production capacity of these firms. This led to the ushering of a new era where sellers begun seeking out new buyers. Advertising and personal selling, therefore, became of much importance to most of these firms (Weeks & Marks, 1969).

Key Terms in this Chapter

Selling Concept: This refers to the period from 1916 to 1960 which was characterized by firms’ concentration on increasing sales.

Product Concept: This refers to the period from 1850 to 1915 which was characterized by production orientation where the emphasis was more on how to efficiently produce goods.

Kraljic Matrix: This is a matrix introduced by Kraljic in his 1983 Harvard Business Review publication. Kraljic provided a classification of items that firms procure into four different categories based on their profit impact and supply risk.

Marketing Concept: This is the period after 1960 where the emphasis shifted to meeting the needs of customers and firms begun to place more attention to being customer centric.

Bounded Rationality: Individuals are limited by the information they have in order to make a decision in the decision-making process due to the limitation of rationality of individuals.

Strategic Triangle: This is a model which is useful for strategy development and showcase how firms relate to their customers, suppliers, and competitors.

Transaction Cost: This is the cost incurred in making an economic exchange such as search and information cost.

Transaction-Specific Assets: This is the extent to which investments made to support a particular transaction or relationship have a higher value to that transaction or relationship than they would have if deployed for any other purpose.

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