Developing a Purchasing Strategy: Real Time
George L. Harris
George L. Harris, President Harris Consulting, Inc., Lexington, MA 02173 617/674-0041
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Strategies Make a Comeback.
Strategic thinking and the formal development of business and functional strategic plans are now back in favor, reversing a trend which started in the late 1980s. Formal strategies were abandoned due to economic conditions, lack of focus on key plans for implementation, stepped up attention given to process and operational improvement, and perhaps more decentralized decision-making and management.
Purchasing strategic plans include missions, objectives, strategies, and implementation plans and flow directly from the overall business unit strategic plans. As such, they are aligned to the business plan and results can be tracked directly to the overall business.
Purchasing representatives develop these plans in one of three ways:
- Category 1: Part of overall business strategic planning team
- Category 2: Provider of input into the business plan when requested before finalization
- Category 3: Provider of input once business plan has been developed
Although most purchasing professionals and senior managers would prefer being active members of business strategy development, it is very unlikely that this will be the case. In fact, providing input to the plan prior to finalization would be quite a welcome change. In actuality, most purchasing departments who do get an opportunity to participate find themselves in Category 3. Sadly, many top purchasing managers are unaware of existing strategic plans.
Purchasing management should take a proactive, more aggressive role in learning their company's business plan and taking steps to move into Category 2 or even Category 1. Most purchasing organizations in Malcolm Baldrige Award winners have achieved this status.
Growing Importance of Purchasing Plans. What purchasing management is learning in 1995 is that without bona-fide strategic plans which are tied to corporate business plans, it can't optimally achieve progress in the following areas:
- Commodity management
- Supplier certification
- Supplier reduction
- Lead time reduction
- Best value
- EDI/bar coding
- Inventory policy
- Long term contracts
And the list goes on. Purchasing should taken the proverbial "bull by the horns" and develop a strategic plan which aligns with the business plan. If no plan is available or developed, develop an understanding of the plan by reviewing the decisions which have been or are being made.
Business Strategic Planning. Let's first look at the components of the business strategic plan. It is comprised of:
- Competitive priorities
Graphically, the components of the business strategic planning process can be represented as follows: (graphic omitted in text-only format of this paper)
Each step of the process is described in the pages which follow.
1. Competitive Environment: This step is a classic Michael Porter industry analysis that focuses on the relative power and dynamics of five industry forces- customers, suppliers, barriers to entry, rivalry among competitors, and substitutes.
1a. Competitors' Functional Capabilities: This assessment may include information about a competitor's drive for supplier partnerships, use of EDI and bar coding, supplier optimization activities, control of the supply base, and price leverage over suppliers. This assessment is key to Purchasing's input to the business' strategic planning process.
2. Internal Capabilities: This is a rigorous and objective analysis of the things that the business does well and those that it does less well. It should include an assessment of each key functional area, the availability of capital and the company's financial condition, the condition of current assets, core competencies, and the organization's culture. It is important because it provides the basis for a reality test for the multiple options that a business can consider in determining its strategic direction.
3. Opportunities and Threats: This is the output of the external environment assessment. It indicates what a business must defend against and what it should take advantage of.
4. Strengths and Weaknesses: This is the output of the internal capability assessment. It indicates what skills and capabilities a business can leverage or what limitations a business has in taking advantage of opportunities and in addressing threats.
The next three steps provide a description of the strategic direction of the business. Together, they answer the questions: who, what, and how. All three things- business mission, business objectives and business strategy- must be specified so there is a clear sense of where the business is going.
5. Business Mission: A business must define the scope and purpose of its activities in a way that people can identify with. This is the business mission. The mission generally remains constant over time- even though the organization may be adapting and changing its specific activities. A comprehensive statement of mission includes the following:
Customer and business needs: An indication of the generic needs that the business intends to satisfy and the customer whose needs it is satisfying.
Overall Purpose: An indication of the major thrust of the organization, the principal business that it is in.
Identity: An indication of the kind of organization the business sees itself to be something that begins to make the organization distinctive, to establish its individuality.
Values: A statement of the values for which the system stands (such as fulfilling customer needs, being an innovative organization, and providing improved work force quality of life). These values represent the underlying assumptions and beliefs that people in the organization hold.
While a mission statement is considered to be relatively constant over the short term, the organization may not necessarily have achieved it. In some cases, the development of the mission may begin to set a whole new direction for the business in response to changes in technology, customers, and the competitive environment. The mission statement describes how the business wants to be known, what the business wants to become, or what the business can reasonably be in the short term (three to five years).
6. Business Objectives: For a business, objectives represent major areas against which the organization will allocate resources and prioritize its efforts- in other words, the results it hopes to achieve. Objectives describe market or competitive positions to be attained, new frontiers to enter, or improvements and innovations to be made. There are typically no more than five to seven stated objectives so that they provide focus for the organization in determining which kinds of activities should get major attention and which should be handled as status quo or business as usual. Objectives are quantitative in nature.
7. Business Strategy: Where the mission statement identifies "who" the organization is and the objectives determine "what" the business is trying to achieve, the strategy specifies "how" it will be accomplished. The business strategy defines how the organization will exploit opportunities in the marketplace or respond to competitive threats by taking into consideration the needs of customers, the actions of competitors, and the organization's own capabilities. Strategies, therefore, denote a general program of action that is needed in order to attain the objectives.
7a. Competitive Priorities: Implicit in a determination of the appropriate strategy for the business is an understanding of the key cost and performance factors that are critical for success in the business. These cost and performance factors are determined based on a clear understanding of the customer segments that the business is serving and the unique needs and wants of those customers. It also incorporates an understanding of the advantages and disadvantages that competitors have with respect to cost, quality, and service. The supply chain should also be considered in this step.
8. Functional Missions, Objectives, and Strategies: These statements contain elements similar to the business mission and are derived from them. These statements specify what the relationship is between the functional organizations and the rest of the business.
9. Implementation Planning: In order for the objectives of functional groups to be achieved, the organization must move beyond the specification of broad courses of actions to specific implementation plans. There are three areas for implementation planning:
9a. Work Systems: Systems take several forms- including a specific, one-time action; practices (actions repeated under similar circumstances); procedures (sequences of actions directed at a single goal that is repeatedly pursued); programs (interrelated actions to achieve an objective that is pursued only once); and policies (decision rules for selecting a course of action).
9b. Resource Planning: Resource requirements, acquisitions, and allocations must all be determined. There are four classes of resources- financial, facilities and equipment, purchased items, and personnel.
9c. Organization Planning: There are five variables in the design of an organization- tasks (diversity, difficulty, and variability); reward systems (compensation system, promotion basis, leadership style, and job design); information and decision process (decision mechanism, frequency, formalization, data base); people (promotion, training and development, transfer, and selection); and structure (choices regarding division of labor, departmentalization, configuration, and distribution of power).
10. Execution: Simply stated: "Do it". The quality of the strategy will be determined by results achieved. Results should be tracked and evaluated on a regular basis. Input on results should be "fed" back to the business strategy stakeholders for possible business strategy revision and to the "assess internal capabilities" step which might impact the overall business direction.
Elements of the Purchasing Strategic Plan. Determining the strategic plan for Procurement would include a carefully crafted purchasing mission (Who), key purchasing objectives (What), and a broad statement of purchasing strategy. A detailed implementation plan would follow along the lines discussed above. Data must be available to the purchasing strategist, which would include:
- Commodities purchased
- Dollars purchased
- Number of suppliers
- Total costs: quality, poor delivery, credit
- Supplier capability and performance data
- List of existing purchasing program
- Purchasing headcount
- Purchasing budget
- Information systems assessment
- Inventory status
- Use of technology
The components of the implementation plan must align with corporate or business-wide activities, such as networking goals and personnel training and development. Core competencies of purchasing personnel must also be conducted and available for evaluation.
Example of Application. I have developed the business plan for Worldwide Chemicals Corporation, a fictitious company, but the plan was adjusted from a previous customer's attempt at an effective business plan. Their plan is as follows:
1. Business Mission: The Worldwide Chemical Company is a leading supplier of high-quality performance chemicals that provides enhanced properties and processibility to manufacturers, compounders, and fabricators of polymers. (1) We establish this leadership position and contribute to the overall growth of the polymer industry through product innovation, effective manufacturing, active marketing development in the industry, and leading-edge customer service. (2) We will continue to operate in a culture that values excellence, participation, responsiveness, individual fulfillment, and concern for the environment. (3) We will provide an excellent return to our stockholders over the long term.
2. Business Objectives.
2a. Profitable Growth: Grow at the rate of 10% per year; achieve a Net Profit Before Tax of greater than 20%. 2b. Market Position: Maintain market leadership position as #1 or strong #2 in all segments.
Broaden product line into new product areas, measure as a percent of sales. Grow the overall market by developing new applications; measure as a percent of sales. 2c. Image as "Leader" in the Industry: Sought out as the preferred partner for technical support and development of new applications due to product quality, timeliness of response, ease of business relationship, and best value provided.
3. Business Strategy. Overall strategy is one of differentiation of products through both technology and business acquisitions and through exploratory R&D. This differentiation strategy is supported by:
- Selling the unique service benefits currently offered and the breadth of the current product line; shortening potential lead times;
- Developing new products for current and future applications before competitors;
- Ensuring sufficient capacity to meet ongoing demand as well as pursuing new business opportunities;
- Integrating global information and business strategies across the Pacific Rim, Europe, and South America;
- Increasing flexibility and speed of response to customers;
- Increasing ability to meet just-in-time requirements of our customer;
- Lowering our overall costs of doing business.
4. Competitive Priorities. We shall compete through leveraging our product quality and productivity and the implementation of a differentiation strategy through new products and services. In the past, the key constraints in achieving this have been manufacturing capacity, supplier responsiveness and R&D. We shall also develop strategic alliances with our customers and suppliers in order to develop a more nimble, continuous supply chain.
The purchasing strategic plan is based upon the overall goals of the business. These overall goals can be mapped against the potential purchasing plans:
- Product Quality
- Shortening Lead Times
- Best Value
- Supplier Certification
- Supplier Lead Time Reduction
- Total Cost Purchases
The job of the purchasing strategist here is to continue this mapping process and ensure that complete alignment with the company's strategic plan is achieved. Any inconsistencies or incongruities should be communicated to the key business strategy manager.
The Future is Now. In order to provide the kind of long term value expected from Purchasing, a strategic plan must be put in place today. This plan can be developed by using the templates and examples cited in this article. The call for strategic thinking is significant in light of the initiatives ongoing in Purchasing. Failure to get on the "Strategy" bandwagon will forever cause a purchasing organization to ask, "If we don't know where we're going, how do we know when we've gotten there?"