Available online at www.sciencedirect.

com

ScienceDirect
Procedia Economics and Finance 21 (2015) 594 – 600

8th Nordic Conference on Construction Economics and Organization

Purchasing strategies in industrialised building - A comparison of

Australian and Swedish companies
Louise Bildsten*
Lund University, 221 00, Lund, Sweden

Abstract

Companies adopt different rationales for purchasing in order to make production processes as efficient as possible. This paper
presents the results of an investigation into how purchasing strategies can vary between companies and countries. Two
industrialised building companies, one in Sweden and one in Australia, were the objects of study. The purpose was to compare
and understand the rationale behind their purchasing strategies. The interviews and the observations in the factory revealed the
differences in the purchasing strategies due to the companies’ prerequisites, expectations and cultures. The strategies proved to be
different in terms of the split between in-house and outsourced work. Some aspects of the respective strategies did, however,
prove to be similar, such as the purchase of prefabricated structural components. It could be useful for researchers and
practitioners to appreciate the advantages and disadvantages of different supply structures, not least parallel sourcing. In this
latter regard, benefits appear to outweigh potential disadvantages that single sourcing confers even where partnerships exist.

©
© 2015
2015 The
TheAuthors.
Authors.Published
Publishedby
byElsevier
ElsevierB.V.
B.V.This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Selection and/ peer-review under responsibility of Tampere University of Technology, Department of Civil Engineering.
Selection and/ peer-review under responsibility of Tampere University of Technology, Department of Civil Engineering
Keywords: Building materials; industrialised building; prefabrication; purchasing strategy

1. Introduction

In any industry, purchasing strategies play an important role, not only for the purchasing function but for the
business as a whole (Cousins & Spekman, 2003). Purchasing strategies set the scene in terms of the nature of the
relationships between the company and its surrounding environment of suppliers, which can be traced back to the

* Corresponding author. Tel.:+46-736-661-889; fax: +46-462-224-420.

E-mail address: [email protected]

2212-5671 © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Selection and/ peer-review under responsibility of Tampere University of Technology, Department of Civil Engineering
doi:10.1016/S2212-5671(15)00217-8
 Louise Bildsten / Procedia Economics and Finance 21 (2015) 594 – 600 595

seminal work of Coase (1937). To remain competitive, suppliers develop innovative methods of adding value, either
through an enhanced product or serviced package (Normann & Ramirez, 1993). For buyers, this can create
opportunities as well as threats, which need to be acted upon with an appropriate strategy (Teece, 2007).
The production of prefabricated building components involves decisions on how much work should be done in
the factory or undertaken by suppliers or subcontractors. The transaction cost theory by Williamson (1975) implies
that whether to make or buy is a trade-off between trust of the supplier and the complexity and cost of making
everything in-house. A transaction cost consists of ex ante costs (i.e. for preparing the contract and selecting the
supplier) and ex post costs (i.e. for handling the transaction once the contract is signed). However, the transaction
cost theory has been criticized for neglecting the context within which the transaction takes place in terms of the
relationships between the actors (Everaert et al., 2010). Håkansson and Snehota (2006), among others, argue that
companies do not exist as isolated islands but, instead, operate in networks. One could say that purchasing strategies
depend on a network of available capabilities in the surrounding environment, which is an argument that connects
with the early work of Penrose (1959) and later work by Teece (2007). Factors such as natural resources, culture,
politics and geography affect how companies operate together, which can be similar but which can also be different
between countries. Each particular setting of resources has its unique way of aiming for efficient management
(Peteraf, 1993) with the goal of making the most of these conditions (Teece, 2007).
This paper is concerned with purchasing strategies in industrialised building based upon a comparison of two
companies taking responsibility for manufacturing modular building components, where one is situated in the north
of Sweden and the other is in Queensland, Australia. The aim is to examine the rationale for the respective
company’s purchasing strategies and therefrom to determine the conditions that favour particular sourcing decisions.

2. Purchasing

2.1. Strategic purchasing

Purchasing has not always been regarded with strategic importance; instead, it has long been seen as an
administrative task (Monzka et al., 2008). According to Paulraj et al. (2006), strategic purchasing is (1) formal long-
range planning, (2) part of the overall strategic goals and planning of the company and (3) visibility for purchasing
professionals. This can be interpreted as a combined top-down and bottom-up perspective, where there is awareness
and communication between senior management and operations. Thus, the views of Paulraj et al. (2006) can be
extended by a fourth dimension – the interaction between purchasing and production. After all, everything has to fit
together in the end. In small companies, such as in the case of sole traders or those that are a little larger, it might be
feasible to have detailed insight of production from the top and from the bottom; however, in larger construction
businesses, strategic purchasing can be a daunting task. As construction is a project-based business, there can be
different views between the project teams and the purchasing department, which can be a challenge (Ellegaard &
Koch, 2014). Inevitably, some decisions must be delegated to the project team and specialist subcontractors. It is
vital that the person responsible for the purchasing decision has knowledge about the construction process in order to
make the right choices (Carr & Smeltzer, 1997). This means that everything does not need to be centrally
coordinated, but just centrally controlled. However, depending on the size of the company, its nature and the
environment, there could be different degrees of what is centrally coordinated and what is centrally controlled.

2.2. Boundaries of the company

The delegation of purchasing tasks inevitably leads to the question of outsourcing. The construction of a building
is a complex undertaking (Gidado, 1996) and can indeed be viewed as an opportunity for outsourcing. A reason for
this can be derived from transaction cost theory (Williamson, 1975), wherein outsourcing is regarded as decreasing
complexity. Moreover, construction involves many tasks that require the services of specialist subcontractors.
According to the core competence concept (Prahalad & Hamel, 1990) and delegated supplier structure (Womack et
al., 1990), companies should concentrate on what they do best. This moves the boundary of the company and
596 Louise Bildsten / Procedia Economics and Finance 21 (2015) 594 – 600

determines what it is doing. There are a number of forms of business model that can occur through backward and
forward integration of the company (Nordin et al., 2010). Fig. 1 illustrates some examples of how companies place
their core business. It can be, for example, a company that simply delivers raw materials or one that also includes
some manufacturing of the raw material for another company that is mostly focused on assembly and, perhaps, retail
too. It can sometimes be hard to know where the boundaries are between companies. Some companies undertake
some manufacturing and outsource other services, which makes the boundaries fuzzy. This is typical in traditional
construction where many companies work together.

Raw Manu-
Assembly Retail
Materials facturing

Fig.1. Examples of companies and their boundaries.

The examples of boundaries in Fig. 1 outline possible business models. Each of the dashed circles describes the
key components of the internal business processes which can be regarded as a business model (Morris et al., 2005).
However, business models are affected by the interaction with external stakeholders beyond the boundaries (Zott et
al., 2011). How the boundaries occur depends both on transaction costs as well as on internal and external
capabilities (Argyres & Zenger, 2012). The “glue” between the boundaries and the external capabilities found in the
environment can be represented by a supply or sourcing structure. The chosen structure depends on the particular
situation.

2.3. Sourcing structures

Sourcing structures represent the different ways in which companies can work together. According to Cousins et
al. (2008), there are four primary structures: single, multiple, delegated and parallel. The different structures relate to
a strategy that depends on the prevailing situation and the needs of the company. The characteristics of these
structures will now be discussed.
Single sourcing is when a buyer has only one source for a particular good or service – see Fig. 2(a). This might
depend on the high cost or the strategic importance of the end product (Kraljic, 1983). An architect or client might
also have specified a particular product. Sometimes, there might only be one source of supply because of the market
structure. The advantages of single sourcing are that it is easier to exchange ideas for new product development;
there is also the opportunity to redesign the products and processes and to move towards cost transparency. The
downside is that there is only one source of supply and that could put the buyer in a position of weakness if the
relationship is not maintained (Faes and Matthyssens, 2009). Another scenario could be that the supplier goes out of
business which would also be difficult for the buyer. Furthermore, single sourcing could limit the buyer’s flexibility
to acquire innovation (Yusoon et al., 2015).
Multiple sourcing means securing multiple suppliers for a product or service – see Fig. 2(b). The supplier is
chosen based primarily on price (Zeng, 2000). In this type of structure, the buyer is able to choose and compare
capacity constraints with supplier performance before placing an order. The relationships between buyer and
suppliers are, in this case, loose with a high degree of competition, low switching costs and low levels of technical
competence. With this approach, continuity of supply is maintained on a short-term basis, enabling price-reduction;
 Louise Bildsten / Procedia Economics and Finance 21 (2015) 594 – 600 597

however, if the market price increases it can become expensive. Moreover, there might be more focus on price than
total cost (Ellram and Siferd, 1993).
Delegated sourcing was pioneered in the aerospace and automotive industry (see Womack et al. (1990) and
Lamming (1993)). This structure applies when there is one supplier for an entire sub-assembly as opposed to an
individual part – see Fig. 2(c). The buying company delegates authority of this assembly to a key supplier known as
the 1st tier supplier. The 1st tier supplier in turn works with the suppliers of components for the sub-assembly. The
advantage for the buyer, when adopting the delegated supplier structure, is that it has reduced the number of
suppliers with which it can have close collaboration and is, therefore, able to reduce transaction costs.
Parallel sourcing was developed as a concept through game theory by Richardson (1993) to optimize supplies
for the buyer. This structure is a combination of single and multiple sourcing that aims to have the advantages of
both, whilst excluding the disadvantages. Parallel sourcing occurs when a buyer has a single sourcing relationship
for the components within a product group whilst having a multiple sourcing relationship across product groups –
see Fig. 2(d). The parallel sourcing model in Fig. 2(d) shows two circles that illustrate two building construction
projects which, in simple terms, have two types of subcontractors, A and B. Type A subcontractors, for instance
electrical installations, are different companies in the two projects. Type B subcontractors, for instance mechanical
installations, are similarly two different companies in the same two projects. In this way, the buyer has alternative
sources of supply if necessary. The buyer can thereby maintain price competition and avoid capacity constraints
while still working closely together within each product group.

a b c d

B B B B

S
SB1 SB2

SA SA1 SA2 SA3 SA4 SA SB SA1 SA2

Fig. 2. (a) Single sourcing; (b) Multiple sourcing; (c) Delegated sourcing; (d) Parallel sourcing.

3. Method

In order to understand the rationale behind different purchasing strategies, a case study approach was undertaken.
According to Faes and Matthyssens (2009), qualitative research is most suitable for dynamic purchasing strategies
where the research is at an exploratory stage. The study of such a phenomenon also includes contextual factors,
including industry idiosyncrasies and the organisation of in-house work and outsourced work, where a case study is
a suitable research strategy (Johnston et al., 1999). Case studies were further considered appropriate since ‘an in-
depth study of a real-life phenomenon in its true context’ was contemplated (Yin, 2008). “True context” here means
visits to component producers, where data were collected through interviews and observations of work practices.
The Australian company chosen for the case study is one of Australia’s largest privately-owned building
construction companies. It was established in 1912 and has grown as a family business to the present day, where the
annual turnover is roughly 1.3 billion Australian dollars (approximately €900 million) for the whole group of
companies. It has the distinction of being the leading producer of modular (volumetric) components. The modular
buildings’ portfolio now includes residential housing, student accommodation, mining camps, motels, and
commercial and industrial buildings. The company’s factory was visited and the process was ‘walked through’ with,
and explained by, the head of operations. The interview was of an unstructured focus group character, allowing the
598 Louise Bildsten / Procedia Economics and Finance 21 (2015) 594 – 600

interviewee to speak freely about operations and sourcing. The head office was also visited and interviews were
conducted with two managers. These interviews were tape-recorded and analyzed with the qualitative analysis tool,
Nvivo, to distinguish and compare patterns of purchasing strategies.
The Swedish company is also a family business and was founded in 1924. It started as a combined sawmill and
general contractor and now has a turnover of 600 million Swedish crowns (about €63 million). In 1994, the
company decided to industrialize its entire production by using volumetric timber-framed modules. Its product
portfolio includes residential buildings, student accommodation and hotels. The company was chosen due to its
leading position in the context of modular (volumetric) component design. It was studied over a total period of three
years (see also Bildsten, 2014), where the work in the factory was observed over an intensive period of four months
with the aim of determining the case for outsourcing. Observations, workshops and discussions involving personnel
responsible for operations and management in the factory aimed to give, as Flyvbjerg (2001) argued, in-depth
understanding of the particular context and a rich and accurate picture of the organization within the factory. The
results of the discussions were analysed manually and the findings were confirmed with multiple contacts in the
company – see below.

4. Results

4.1. Case study I: Australian company

The company undertakes traditional site-based projects and has, in recent years, begun also to use modular
building methods. The modular (volumetric) building technique was developed after visiting Australian
prefabrication factories to learn about best practice production methods. The factory produces 16 units per week
when operating at maximum capacity – see details below. The factory has been running for four years. At present,
six people are employed directly by the company in purchasing, scheduling and related areas. The rest are
subcontractors. In total, there could be as many as 150 people working in the factory when operating at maximum
capacity. The size of each unit is 14.4m long by 3.3m wide, which is a limitation imposed by road transportation.
Throughput time is 22 days. Each unit is framed with prefabricated steel studs that are purchased continuously from
the same supplier. A carpentry subcontractor installs the frames and floors. A supply and install contract is used for
all subcontractors, except for the carpentry subcontractor who installs products acquired by the contractor. On
smaller projects, the same subcontractor is employed across the projects. For larger projects, the company goes out
to tender but invariably ends up with the same subcontractor as employed for the smaller projects. As revealed in
one of the interviews, it is important to know how to work together and so the same subcontractors are used over
and over. One particular comment was that “you get married to them and you get used to them; otherwise, you have
to learn the same things over again.” For the interiors, they use a broker who is given a list of goods that the
customer wants to be included for the particular project and who then supplies the goods at the lowest possible cost:
it was claimed to be even lower than without a middleman. The broker buys most of the products overseas, from
countries such as China, Taiwan and Malaysia. These include cabinets, toilets, furniture, washing machines, fridges
and television sets. The broker delivers to fit the production schedule of the factory.

4.2. Case study II: Swedish company

The company’s modular building technique was developed in collaboration with a nearby university. The factory
produces 45 units per week when operating at maximum capacity. The company’s factory has been running for 45
years. At present, 179 people are employed directly by the company. In addition, there are subcontractors for
painting and electrical installations. The volumetric components are framed with prefabricated timber studs that, in
common with the Australian company, are continuously purchased from the same supplier. As an overall purchasing
strategy for the company, its approach is to eliminate the middleman and buy directly from the manufacturer unless
it is able to do something that is value-adding. Gypsum boards, as well as other components, are delivered every
week by the manufacturers to the warehouse according to the factory’s production schedule. In the case of gypsum
 Louise Bildsten / Procedia Economics and Finance 21 (2015) 594 – 600 599

boards, wood fibre boards and insulation products, tender procedures are applied and the company typically moves
between two suppliers of the same product. In fact, the company has long-term supplier agreements with all of these
suppliers. The products are then installed by the company’s own carpenters. Cabinets and bathroom appliances are
sourced through a single supplier arrangement running typically for a couple of years before renegotiation. The
company does not normally include furniture or loose equipment in its product offer to clients.

5. Analysis

The two case companies seem to have divergent rationale for their respective purchasing strategies. The
Australian company uses a “supply and install” strategy. At the same time it uses the same supplier across projects;
but sometimes likes to switch between projects, although only between known suppliers. There seems to be a strong
element of delegated sourcing because the company does not buy directly from the manufacturer; at the same time,
it is close to parallel sourcing because it switches between suppliers on some projects. It can be concluded that the
Australian company operates on a close relationship with suppliers that provide something value-adding. The
sourcing structure is delegated in order to take advantage of external capabilities possessed by their suppliers. An
advantage of this arrangement is that the company is not so vulnerable to “ups and downs” in the market, because it
has not invested so much in staff and machinery. Specialist subcontractors concentrate on the tasks that they know
best and are responsible for buying components about which they have sufficient knowledge. In terms of Fig. 1, the
company is an assembler.
The Swedish company, on the contrary, aims to undertake most operations in-house and skips the middlemen to
target the tiers lower down in the sourcing hierarchy. The structure is one of multiple sourcing in order to take
advantage of economies of scale when purchasing commodities. However, the company constrains its sourcing to,
typically, two suppliers for each product, which is a parallel sourcing strategy although it is less tiered than in case
of the Australian company. The reasons for this might be that the capabilities and opportunities in its environment
are different. In Australia, the availability of timber is not as great as it is in Sweden; whereas, Australia has greater
resources in terms of steel, aggregate and sand for making concrete. The purchase of commodities puts a lot of onus
on staff knowing “something about everything” in the factory, which is knowledge that has to be developed over
time. Possessing this knowledge is a capability in itself. However, each task might not be as good as when a
specialist does it. Moreover, the complexity increases in the effort to coordinate all workers.
The working environment for suppliers is also different between the two countries. In Sweden, specialist
installers of different trades might not be available. One interesting similarity is that framing is sourced in the same
way in both companies, through single sourcing. The large investments in the factory and staff make the company
dependent on a stable workload and healthy order book. The knowledge of what to purchase is decided on a high
level in the company, which means that the staff who work with the components are less able to use their knowledge
of preferred components to influence decisions. In terms of Fig. 2, this company is a manufacturer and assembler.

6. Conclusion

The purpose of the study was to examine the rationale for purchasing strategies within two industrialised building
companies and from that to determine the conditions that suit particular sourcing decisions. Theoretically, the study
indicates that the supplier relationships investigated can, to a large extent, be categorized as parallel sourcing.
However, the make or buy decisions are different and depend upon on the availability of suitable suppliers. An
exception seems, however, to be ‘framing’ that has a single source of supply in both cases. The strategies of the
companies depend on the availability of capabilities in the form of materials, subcontractors and collaboration with
experts.
From a management perspective, it seems as though the challenges of developing innovative modular
(volumetric) products depends upon collaboration with external parties that possess the necessary “know-how” or
which allows modular products to be developed in collaboration. The lessons to be learned are principally that it
takes time and a large investment to develop capabilities in order to make everything in-house. Moreover, stable
workloads and healthy order books are a prerequisite in this case. Outsourcing requires specific capabilities to exist
600 Louise Bildsten / Procedia Economics and Finance 21 (2015) 594 – 600

in the business environment and so each company must act accordingly with its own purchasing strategy that
reflects the realities of the market. Future research should be directed at suppliers in order to obtain a supplier-side
perspective of purchasing decisions and to determine whether or not this aligns with those from the buyer side.
Comparison of these two perspectives might then provide further insights for researchers and companies.

References

Argyres, N.S. and Zenger, T.D., 2012. Capabilities, Transaction Costs and Firm Boundaries. Organization Science 23 (6), 1643-1657.
Bildsten, L., 2014. Buyer-Supplier Relationships in Industrialized Building. Construction Management and Economics 32(1-2), 146-159.
Carr, A.S., Smeltzer, L.R., 1997. An Empirically Based Operational Definition of Strategic Purchasing. European Journal of Purchasing and
Supply Management 3(4), 199-207.
Coase, R. H., 1937. The Nature of the Firm. Economica 4(16), 386-405.
Cousins, P., Lamming, R., Lawson, B., Squire, B., 2008. Strategic Supply Chain Management – Principles, Theories and Practice, Prentice Hall,
Essex.
Cousins, P., Spekman, R., 2003. Strategic Supply and the Management of Inter and Intra Organizational Relationships. Journal of Purchasing and
Supply Management 9 (1), 19-29.
Ellegaard, C., Koch, C., 2014. A Model of Functional Integration and Conflict - The Case of Purchasing-Production in a Construction Company.
International Journal of Operations and Production Management 34(3), 325-346.
Ellram, L., Siferd, S. P., 1993. Purchasing: the Cornerstone of the Total Cost of Ownership Concept. Journal of Business Logistics 14(1), 163-
184.
Everaert, P., Sarens, G., Rommel, J., 2010. Using Transaction Cost Economics to Explain Outsourcing of Accounting. Small Business Economics
35(1), 93-112.
Faes, W., Matthyssens, P., 2009. Insights into the Process of Changing Sourcing Strategies. Journal of Business and Industrial Marketing 24 (3-4),
245-255.
Flyvbjerg, B., 2001. Making Social Science Matter: Why Social Inquiry Fails and How It Can Succeed Again. Cambridge Press, Cambridge.
Gidado, K. I., 1996. Project Complexity: The Focal Point of Construction Planning. Construction Management and Economics 14(3), 213-225.
Håkansson, H., Snehota, I., 2006. No Business Is an Island: The Network Concept of Business Strategy. Scandinavian Journal of Management
22(3), 256-270.
Johnston, W. J., Leach, M. P., Liu, A. H., 1999. Theory Testing Using Case Studies in Business-to-Business Research. Industrial Marketing
Management 28(3), 201-213.
Kraljic, P., 1983. Purchasing Must Become Supply Management. Harvard Business Review 61(5), 109-117.
Lamming, R., 1993. Beyond Partnership: Strategies for Innovation and Lean Supply. Prentice Hall, New York, NY.
Monzka, R., Trent, R., Handfield, R., 2008. Purchasing and Supply Chain Management. International Thomson Publishing, Cincinnati.
Morris, M., Schindehutte, M., Allen, J., 2005. The Entrepreneur’s Business Model: Toward a Unified Perspective. Journal of Business Research
58(6), 726-735.
Nordin, F., Öberg, C., Kollberg, B., Nord, T., 2010. Building a new Supply Chain Position: An Exploratory Case Study within the Construction
Industry. Construction Management and Economics 28(10), 1071-1083.
Normann, R., Ramirez, R., 1993. From Value Chain to Value Constellation: Designing Interactive Strategy. Harvard Business Review 71(4), 65-
77.
Paulraj, A., Chen, I.J., Flynn, J., 2006. Levels of Strategic Purchasing: Impact on Supply Integration and Performance. Journal of Purchasing and
Supply management 12(3), 107-122.
Penrose, E., 1959. The Theory of the Growth of the Firm. Blackwell, Oxford.
Peteraf, M. A., 1993. The Cornerstones of Competitive Advantage: A Resource-Based View. Strategic Management Journal 14(3), 179-191.
Prahalad, C. K., Hamel, G., 1990. The Core Competence of the Organization. Harvard Business Review 68(3), 79-91.
Richardson, J., 1993. Parallel Sourcing and Supplier Performance in the Japanese Automobile Industry. Strategic Management Journal 14(5),
339-350.
Teece, D. J., 2007. Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance. Strategic
Management Journal 28(13), 509-533.
Williamson, O., 1975. Markets and Hierarchies: Analysis and Antitrust Implications. Free Press, New York, NY.
Womack, J. P., Jones, D. T., Roos, D., 1990. The Machine That Changed the World. Free Press, New York, NY.
Yin, R. K., 2008. Case Study Research: Design and Methods. Sage Publications, London.
Yusoon, K., Choi, T. Y., Skilton, P. F., 2015. Buyer-Supplier Embeddedness and Patterns Of Innovation. International Journal of Operations and
Production Management 35(3), 318-345.
Zeng, A. Z., 2000. A Synthetic Study of Sourcing Strategies. Industrial Management and Data Systems 100(5), 219-226.
Zott, C., Amit, R., Massa, L., 2011. The Business Model: Recent Developments and Future Research. Journal of Management 37(4), 1019-1042.