A Financial Perspective of Purchasing Decisions

Abstract

The auto industry is one among the most dependants on suppliers, signifying the increased importance of purchasing decisions to auto firms. Mergers, acquisitions and new car-model projects have led to an increase in purchasing business. This has led to a large material cost turn over for auto firms. The increased size of purchasing business is a key indicator of scale economies that should be optimized in the input material supply chain. This achieves valuable synergies, combined with strategic sourcing for competitive business with suppliers. However, all these developments signify the impact of purchasing decisions for an auto firm’s financial health. Thus, purchasing decisions should come after considerable financial scrutiny to achieve valuable suppliers. This study investigated methods used by purchasers in evaluating suppliers and the basis for justifying purchasing decisions at Volvo Car Corporation from a financial standpoint. On the basis of this investigation, the study suggests a Total Value Model (TVM) to analyse and evaluate supplier-sourcing alternatives to arrive at efficient purchasing decisions from a financial point of view. The TVM is based on Volvo Car Corporation purchasing processes and tested using an illustrative purchasing example but can nevertheless be adopted and applied by other industries supported by suppliers. It comprises three independent variables, NPV cash flows to suppliers that consolidate all supplier commercial data to one value measure for comparison other than decisions based on price only. The NPV synergies address and consolidate valuable synergies in the model framework and lastly NPV options standing for value created as a result of strategic sourcing decisions addressed through a real options approach. TVM therefore evaluates suppliers based on total value to the purchasing firm. Its simple to use, the work still remains with the purchaser and its framework perspective is very valuable to practitioners.