Impact of Global Purchasing and Supplier Integration on Product Innovation

There is no clear definition of the term global purchasing in the literature. The term is instead intimately related to and intermittently used together with terms such as international or multinational sourcing, offshore sourcing or outsourcing. Generally, global sourcing is a broader concept than international purchasing and is concerned with coordinating materials flow, processes, designs, technologies and suppliers across a company's global locations. We adopt the term global purchasing and base it on the definition of Quintens et al: "The activity of searching and obtaining goods, services and other resources on a possible worldwide scale […]", which also includes integrating and developing the supplier base.

Mol et al. showed that scope (the fact that the company purchases globally) has more impact on innovation than scale (the percentage of goods or services purchased outside the home country). The reason may be that innovative firms may need to search for key components globally, while still purchasing most items locally. Mol et al. and Karjalainen and Salmi differentiate among three types of purchasing based on the different challenges and transaction costs that trade zones create: domestic purchasing, regional purchasing and global purchasing. While our focus is on the global impact, we distinguish between global purchasing, i.e., purchasing a significant quantity of the selected component category outside the firm's home continent and regional purchasing, i.e., within the firm's home continent.

Priorities and outcomes

To shed further light on the issue of why companies purchase globally, we first analyze innovation-related motives. One motive concerns the ambition to acquire cutting-edge knowledge, competencies and technology from suppliers located all over the world. A related motive for global purchasing stems from the fact that some specialized components and technical expertise are only available in certain locations. This means that truly innovative companies struggle to find local suppliers that conform to the requirements for the innovative content of their components. These two motives reflect the ambition to become more innovative and can also be seen as a company's wish to gain access to assets or resources that are unique to some extent. The motives also explain why the development of advanced technological products has become a global and interorganizational process that involves a number of geographically dispersed firms and suppliers. Indeed, technological and innovation factors have been identified as the most important drivers for global purchasing.

Although many authors have researched the concept of global purchasing, few have investigated its relation to innovation performance. Several studies of global purchasing have analyzed the effects on product delivery. For example, Golini and Kalchschmidt report that although global purchasing generally has a negative impact on inventory, the adoption of supplier integration can reduce that effect. Another rather common theme in the study of global purchasing is the trade-off between costs and delivery flexibility or agility. Holweg et al.  developed a model of risk and the negative effects of global purchasing, but their model does not include the direct effects on innovation. As an indirect effect, they include the potential loss of intellectual property rights. In purchasing, appropriate measures of supplier product innovation performance are the time taken to bring a product/service to market (or TTM) and the level of innovation in products/services from suppliers. Research has also found a trade-off between the level of product innovation and TTM.

Since global purchasing opens up access to cutting-edge competencies and technologies, it is reasonable to expect it to improve innovation performance, in terms of the level of product innovation provided by suppliers. Product standardization and the increased use of IT, including common tools such as e-mail, web-based meetings or ERP systems, are also likely to reduce the need for geographically close suppliers. On the other hand, we know from studies on advanced product development that the innovation and knowledge integration processes are characterized by fuzzy interfaces between different technologies and competencies, a complexity that mandates proximity, co-location and integration of key activities. Other factors that can lead to an increased need for geographical proximity are concurrent engineering, a high degree of customization and an emphasis on knowledge sharing. Global purchasing could thus be expected to slow the innovation process and thereby prolong TTM. Since most firms likely know this, they are likely to put more effort into trying to reduce TTM if they have a global supplier base. We thus extract the following hypotheses (see also Figure 1):

Figure 1. Conceptual model, H1 and H2

H1a. Firms purchasing globally prioritize a higher introduction rate of new products than firms that do not purchase globally.

H1b. Firms purchasing globally prioritize improving TTM for new products to a greater extent than firms that do not purchase globally.

H2a. Firms purchasing globally experience a higher level of supplier product innovation, compared to firms that purchase globally.

H2b. Firms purchasing regionally experience a shorter TTM by their suppliers, compared to firms that do not purchase globally.

Supplier integration – tools and proficiency

A basic driver for global purchasing and outsourcing is the ambition to extend the firms' organizational and technological capability by coordinating networks of suppliers. This suggests that global purchasing may have no clear and straightforward impact on product innovation. Rather, how the firm is able to build up the ability to exploit potential capabilities in the networks determines the outcome. This ability can be referred to as supply chain integration and is defined as "the degree to which a manufacturer strategically collaborates with its supply chain partners and collaboratively manages intra- and inter-organization processes".

Since this paper deals with purchasing, we will focus only on the integration of suppliers in intra- and interorganizational processes. That integrating suppliers in company processes will have an impact on performance is nothing new. Already back in 1983, Kraljic advised firms to form strategic partnerships with suppliers if the supply market is highly concentrated and the impact of the purchased components is high. In fact, many supply chain articles advise firms to integrate their suppliers in order to improve performance, including innovation. Many recent studies have also found that the integration of suppliers is indeed associated with better innovation performance.

When suppliers are located geographically close to their customers, communication becomes easier. To get the same innovation benefits from distant suppliers, a larger degree of formal supplier integration may thus be needed. Previous studies have found it advantageous for companies that prioritize delivery speed and reliability to choose local suppliers, although supplier integration can compensate for some of the negative effects of distance. Other studies have also found that supplier integration is required for harnessing the innovation potential of new suppliers when outsourcing manufacturing. Perols et al.  found that supplier integration in NPD is effective for improvements in TTM. Other studies have found that logistics-related integration has an impact on company performance, including product innovation.

A stream of literature focuses only on the innovation effects of geographic proximity. For example, Liu et al. report that although globalization has increased the geographical spread of innovation networks, local networks continue to be critical for innovation, because some knowledge is easier to extract in geographically close networks. Although geographical proximity is generally considered to be beneficial for innovation, some studies question whether the positive innovation effects are due to geographical proximity alone. Yet the studies of geographical distance and its effect on innovation generally do not have a purchasing perspective, meaning that they do not take into account supplier integration or proficiency. This is surprising, considering that Kleinschmidt et al. found that supplier integration has a bigger effect on the success of global NPD projects than any other NPD process capabilities.

The purchasing function is at the core of implementing the business strategy and managing integration needs related to global purchasing. Several studies have indeed shown that high skills in purchasing lead to superior performance in many areas, including innovation, but the empirical evidence is surprisingly weak. This paper suggests that the weak evidence is due to a lack of studies measuring both the scope of global purchasing and the level of proficiency. Here we build on studies of how purchasing capabilities may leverage suppliers' innovativeness. Narasimhan and Das stressed the strategic importance of purchasing and specifically showed that purchasing proficiency and practices in such activities as buyer-supplier relationship development had a clear impact on manufacturing firm performance. Cousins et al. developed a typology of purchasing roles, featuring differences in strategic involvement, status, internal integration and skills of the purchasing function. Based on British data they showed that purchasing roles were related to supplier integration and firm performance.

Supplier performance depends on how skilled the purchasing department is at forming good working relationships with suppliers. Similarly, Ragatz et al. showed that practices aimed at integrating suppliers in NPD are more important for NPD success than practices aimed at selecting and evaluating suppliers. Thus, we focus on proficiency in integrating suppliers. Since global purchasing is more complex than local or regional, the impact of purchasing proficiency is likely to be higher for firms purchasing globally, but the literature still lacks conclusive empirical evidence.

The previous discussion shows the need to consider both the actual supplier integration and the purchasing department's skills at integrating suppliers. We thus aim to test the following hypotheses (see Figure 2):

Figure 2. Conceptual model, H3 and H4

H3a. Supplier integration is more beneficial for firms purchasing globally, compared to firms that do not, in terms of the level of supplier product innovation.

H3b. Supplier integration is more beneficial for firms purchasing globally, compared to firms that do not, in terms of the level of TTM.

H4a. Proficiency in supplier integration is more beneficial for firms purchasing globally, compared to firms that do not, in terms of supplier product innovation.

H4b. Proficiency in supplier integration is more beneficial for firms purchasing globally, compared to firms that do not, in terms of supplier TTM.