Potential and Limits of Outsourcing Procurement

E-Procurement at BMW Group and Daimler Chrysler AG

Term Paper (Advanced seminar), 2014

32 Pages, Grade: 2.0


I. Table of content

II. Table of abbreviation

III. Index of Tables

1. Introduction

2. Basics
2.1 Basics of Procurement
2.1.1 Definitions and explanations of terms
2.1.2 Functions and Responsibilities
2.1.3 Objectives
2.2 Basics of Outsourcing
2.2.1 Definitions and explanations of terms
2.2.2 Fields of Outsourcing
2.2.3 Objectives

3. Potential and limits of Outsourcing Procurement
3.1 Potential of Outsourcing Procurement
3.1.1 Conventional Possibilities
3.1.2 E-Procurement and E-Procurement Service Provider
3.1.3 Outsourcing with E-Procurement using
the example of BMW Group
3.2 Limits of Outsourcing Procurement
3.2.1 The problem of Know-How-loss
3.2.2 Loss of Control
3.2.3 Reduction of Synergy
3.2.4 Limits of Outsourcing Procurement with E-Procurement using the example of DaimlerChrysler AG

4. Summary and Future Prospects

5. Appendix

IV. List of References

II. Table of Abbreviations

illustration not visible in this excerpt

III. Index of Tables

Tab. 1: Functions of Procurement (process oriented)

Tab. 2: Objectives of Procurement

1. Introduction

The increasing complexity of the business environment and the internationalization of business activities in the past decades have led to an increase of market dynamics. For companies, it is therefore increasingly important to be flexible from the tactical and strategical point of view, to keep costs under control and to maintain or even increase their level of performance with regard to worldwide competition.[1]

Companies have to adjust their internal organizational structure concerning cost –and efficiency aspects, also with regard to the core competences each company specializes in. The outsourcing of competences to certain suppliers and service providers is regarded as a main strategy to secure competitiveness.[2]

Therefore, the usage of new communication -and IT-tools is getting more and more important.[3]

This paper shows the potential and limits of outsourcing the Procurement when companies try to restructure their organization. Beside conventional possibilities of outsourcing, new electronic procurement-solutions have become more popular during the last decades. The focus of this paper lies on such new electronic procurement-solutions. Chapter 2 describes the basics of Procurement and Outsourcing. Based on this, chapter 3 shows potential and limits of both, conventional solutions of outsourcing and also new modern solutions. To get a more practical view, the paper describes the topic by means of two examples from the automobile industry by BMW Group and the DaimlerChrysler AG. Finally, the paper gives a summary and a preview regarding upcoming business challenges of outsourcing procurement.

2. Basics

2.1 Basics of Procurement

2.1.1 Definition and explanation of terms

The term Procurement is covering all company and market-related activities which help allocating necessary products a company cannot produce itself.[4]

In science and practise, the terms Procurement and Purchasing/Buying are partly used as synonyms.[5]

Thus, both terms are explained in the following section:

According to Arnold, in science the term “procurement” is almost always used as the process-related basic function before production and sales.[6] Dobler/Burt perceive procurement in a broader sense also including strategical functions: „The procurement process, or concept, encompasses a wider range of supply activities than those included in the purchasing function. And it typically includes a broadened view of the traditional buying role, with more buyer participation in related materials activities. [...] In comparison to the typical implementation of the purchasing concept, procurement essentially tends to be perceived in a broader and more proactive sense, with some focus on strategic matters.[7]

Purchasing is regarded as a subfunction of Procurement and rather concentrates on the buying-process of the productions factors.[8] Trading-firms consider Purchasing as a key-function. The tasks of the purchaser also cover responsibilities in sales. In industrial/ -manufacturing companies, purchasers are mainly responsible for market-related tasks, e.g. to negogiate buying real assets. Thus, the term Purchasing is perceived in a narrower sense.[9]

2.1.2 Functions and Responsibilities of Procurement

The main function of Procurement is the realization of customer’s preferences on the procurement market.[10] Procurement functions can be structurized in different ways. Roland derives the single tasks in procurement- from the purchasing functions.[11]

The following section describes different views of procurement functions .

The varied use of the term procurement in theory and literature has its origin in the different functions attributed to it. Arnold, Heege and Tussing perceive the procurement functions in a narrower sense than the task of buying operation materials from the market. In a wider context, the allocation of manufacturing, human ressources and capital is also comprised in the term.[12] In a narrower sense Bloech and Rottenbacher consider only purchasing as a function of procurement.[13] In a broader context they also mention material planning as a procurement function.[14]

The functions of procurement are shown from a process-orientated point of view in table 1, structered into the different phases of procurement: Procurement preparation, initiation, completion, realisation and control.[15]

illustration not visible in this excerpt

Tab. 1 Functions of Procurement (process-oriented)[16]

During the first phase (Procurement preparation), the demand must be identified; followed by the search for suppliers and their selection. After a number of offers have been solicited and assessed, the contract negotiations can be finalized with an order. The fourth phase (Procurement realisation) is characterized by supervising the timeline of the contract and the best logistical solution. The last phase (Procurement control) consists of goods, supplier, invoice verification and quality control.

This kind of traditional procurement process as shown in table 1 can be organized even more efficiently by outsourcing certain phases to external service providers by using electronic procurement-solutions (E-Procurement). This will be focused on in chapter 3.

2.1.3 Objectives of Procurement

In general, a procurement target is regarded as the desired condition, resulting from actions within the field of procurement.[17]

The targets of procurement depend on business objectives and must be derived consequently from the corporate target system and must be coordinated with other departments’ targets.[18]

The planning of the objectives of procurement is characterized by choosing one dominant objective. Afterwards secondary targets being compatible with the mainobjective can be defined. Then, it must be verified that the defined objectives of procurement are compatible with other departments’ targets.[19]

The formal objectives (cost reduction, performance enhancing, maintaining autonomy) can be defined on the basis of the main objective of procurement (securing the supply of the company).[20]

In order to be able to determine concrete activities, the main objectives must be subdivided into global objectives and into more differentiated subordinateobjectives. [...] Friedl divides procurement objectives into strategic and tactical-operative targets according to their maturity.[21]

Strategical procurement targets are the securing of material supply, quality aspects, position on the procurement market and price stability. Friedl considers the optimization of procurement costs, the securing of material quality, liquidity and the readiness to supply as tactical-operative targets, The concrete activities must then be allocated according to their respective maturity.[22]Table 2 will give you a well-structured overview.

illustration not visible in this excerpt

Tab. 2: Objectives of Procurement[23]

2.2 Basics of Outsourcing

2.2.1 Definition and explanation of terms

Outsourcing is an artificial word, which derives from the Anglo-Saxon language on the basis of the words outside, resource and using. At the beginning of the 1990ies, the term outsourcing has been adopted by the experts on the German market in the course of congresses regarding Outsourcing.[24]

Outsourcing means that external sources are used for the supply of the company. Thus, the usage of external sources is based on purchase decisions.[25]

Furthermore, the term implicates, that ressources are handed over to third parties. Third parties can be e.g. a subsidiary, a service provider, a venture capital company or a third person completely unknown to the company. The first two options mentioned are often described as internal outsourcing, the last option as external outsourcing.[26]

The partially synonymous use of the terms Outsourcing and Make-or-Buy points to the same central point of both concepts, namely the question, if inhouse production should be outsourced to an external market partner or if it should be continued on their own premises. Classical make-or-buy-decisions are primarily used to cover peaks of demand by working together with an external partner. Outsourcing-decisions have are rather of strategical importance which result into a long-term cooperation with suppliers.[27]

The fifties were marked by changes in the big companies. Several departments and auxilliary plants were increasingly outsourced to service providers orcommitted to third parties respectively (Outsourcing of complete functions) in order to reduce costs.[28]

Since the end of the eighties, the motivation for outsourcing was increased by the economical pressure resulting from internationalisation and rising market dynamics.

Changes in cost and organizational structures were necessary for the maintaining of stability and flexibility of the companies.[29]

Since the beginning of the nineties, traditional structures have been changed and new organisational concepts were launched; e.g. new management concepts like Lean Management /-Production.[30] The Lean-concept forms the basis of outsourcing.[31] It is based on concepts for the internal organisation of a company and on concepts for the external relationships between companies.[32]

Internal Lean concepts are e.g. Just-in-time[33], Kaizen[34] and the fractal organisation[35].

Outsourcing as well as Single –or Doublesourcing[36] and Globalsourcing[37] are concepts for external relationships. The opposite pole to Outsourcing is Insourcing. If the productivity of the staff within a company is increasing, but at the same time the sales volume is already at maximum level, the company will be searching internally for new employment (Insourcing) in order to avoid high social costs.[38]

2.2.2 Fields of Outsourcing

Basically, Outsourcing is possible in all areas of a company. Attempting to structure fields of Outsourcing means having a closer look at the organizational structure of a company. Koppelmann structures the different managment-levels of the company by differentiating between the first, second and third managment-level.[39]

The first management-level is represented by the top managament/ executive management, whereas Outsourcing in this context covers typical management staff functions. This concerns the consulting of the executive management. In the future, company-owned consulting-staff functions within big organisations will be outsourced completely or at least outsourced in relation to different projects.[40]


[1] cf. Koppelmann, (Outsourcing), p. 9.

[2] cf. Femerling, (Strategische Auslagerungsplanung), see foreword.

[3] cf.. Schneider, (Outsourcing), p. 7f.

[4] Arnold, (Beschaffungsmanagement), p. 3.

[5] cf. Grochla/Schönbohm, (Beschaffung in der Unternehmung), p. 4f.

[6] Arnold, (Beschaffungsmanagement), p. 5.

[7] Dobler/Burt, (Purchasing and supply Management), p. 35f.

[8] cf. Corsten, (Lexikon der Betriebswirtschaftslehre), p. 108.

[9] cf. Grochla/Schönbohm, (Beschaffung), p.5f.

[10] cf. Bichler, (Beschaffungs- und Lagerwirtschaft), p. 31.

[11] cf. Roland, (Beschaffungsstrategien), p. 12.

[12] cf. Arnolds/Heege/Tussing, (Materialwirtschaft und Einkauf), p. 20.

[13] cf. Bloech/Rottenbacher, (Materialwirtschaft), p. 9.

[14] ibid., p. 4.

[15] cf. Friedl, (Grundlagen) p. 64; Lippmann, (Beschaffungsmarketing), p. 50ff; Hammann/Lohrberg,

(Beschaffungsmarketing), p. 7; Bichler, (Beschaffungs- und Lagerwirtschaft), p. 32.

[16] Source: own creation based on Roland, (Beschaffungsstrategien), p. 12f;

Bichler, (Beschaffungs- und Lagerwirtschaft), p. 32.

[17] cf. Friedl, (Grundlagen), p. 83f.

[18] cf. Hammann/Lohrberg, (Beschaffungsmarketing), p. 47.

[19] cf. Stangl, (Beschaffungsmarkforschung), p. 13.

[20] cf. Grochla/Schönbohm, (Beschaffung), p. 25ff.

[21] Friedl, (Grundlagen), p.103.

[22] ibid., p.103.

[23] Source: own creation based on Friedl, (Grundlagen), p. 103.

[24] cf. Horchler, (Outsourcing), p. 3.

[25] cf. Koppelmann, (Outsourcing), p. 2.

[26] cf. Köhler-Frost/Baaken, (Outsourcing – Eine strategische Allianz besonderen Typs), p. 13.

[27] Reichmann/Palloks, (Make-or-Buy-Kalkulationen im modernen Beschaffungsmangement), in:

Hahn/Kaufmann, ( Handbuch Industrielles Beschaffungsmanagement), p. 419-421.

[28] cf. Koppelmann, (Outsourcing), p. 13f.

[29] cf. Warnecke, (Die Fraktale Fabrik – Revolution der Unternehmenskultur), p. 12ff.

[30] cf. Weber, (Alternative Organisationskonzepte der betrieblichen Datenverarbeitung), p. 6-38.

[31] cf. Womack/Jones/Roos, (Die zweite Revolution in der Autoindustrie), p. 77ff.

[32] ibid., p. 77ff.

[33] Just-in-Time decribes the organisational principle of internal and external supplier systems

regarding system components needed for the production. cf. Womack/Jones/Roos, (ibid.), p. 67ff.

[34] Kaizen describes the collective process towards a continuously stepwise improvment of the

production process. cf. Ibid, p. 61ff.

[35] The fractal organisation is self-organised ist selbstorgansierend and high dynamically. It consists

out of flexible teams which solve tasks and problems independently and on own response.

cf. Warnecke, (Die Fraktale Fabrik – Revolution der Unternehmenskultur), p. 136ff.

[36] These concepts describe activities concerning a reduction to limit the number of suppliers donw to

only one or two. cf. Bichler, (Beschaffungs- und Lagerwirtschaft), p. 42-43.

[37] Globalsourcing is seen as a systematical extension of the procurement policy towards internaional

procurement sources with strategical character. ibid, p. 43.

[38] Koppelmann, (Outsourcing), p. 2.

[39] cf. ebenda, p.7f.

[40] cf. Koppelmann, (Outsourcing), p. 8.

Excerpt out of 32 pages


Potential and Limits of Outsourcing Procurement
E-Procurement at BMW Group and Daimler Chrysler AG
Industrial Management, Accounting and Corporate Planning
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ISBN (Book)
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Outsourcing, Procurement, Daimler, BMW, Chances, Risks, Potential, Limits, Grenzen, Möglichkeiten, Beschaffung
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Martin Ruppe (Author), 2014, Potential and Limits of Outsourcing Procurement, Munich, GRIN Verlag, https://www.grin.com/document/275426


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