POPP: Purchasing Opportunity Performance Program
Robin Jackson, M.C.I.P.S.
Robin Jackson, M.C.I.P.S., Director, ADR International Purchasing Consultants, Bracknell, Berkshire, UK, RG12 1RP, +44 1344/303078
Dr. Peter Evans, F.C.I.P.S.
Dr. Peter Evans, F.C.I.P.S., Director of Strategic Purchasing, ADR International Purchasing Consultants, Bracknell, Berkshire, UK, RG12 1RP, +44 1344/303078
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Introduction. Over the past 15 years the major automotive manufacturers and, more recently, major retail chains have pursued a policy of year-on-year price reduction from their suppliers.
Driven by the highly competitive markets in which they operate and their inability to increase (or even maintain) margins by raising prices to their customers, these companies have adopted a top down approach to driving lower prices and increased value from suppliers.
There is no reason to believe that these "cost down" pressures will abate. Indeed, based on the experience in other fields of innovative business management (for example, TQM and SPC), it is expected this trend will gain momentum and extend across more and more business sectors.
The Need. This inability to increase prices to customers to offset increased costs, combined with year-on-year increasing costs from suppliers, will significantly squeeze margins, put pressure on profits and may threaten the very survival of the business.
Given this all too frequent scenario, how does a company faced with this "double whammy" manage it's own suppliers to encourage cost reduction and the delivery of increased value?
We believe that the only way is to fundamentally change purchasing activity from it's traditional functional focus to a reliable business process.
World Class Tool for Change. The vehicle ADR has designed to affect this change we have called "POPP"(Purchasing Opportunity Performance Program). The key concepts and principles of the process are:
- POPP is a purchasing driven business process.
- POPP is a cross functional process.
- POPP is a strategic alliance between your company and your suppliers
- POPP is a WIN/WIN solution. That is, it increases both the profitability of your company AND that of your suppliers.
- POPP is a business process focused on technological advance as the basis for increased competitiveness.
How does POPP work? POPP is based on the principles of Value Management. It uses Value Analysis and Value Engineering techniques to identify, and then eliminate or minimize, all non-value adding processes and activities in the supply chain.
Our approach uses a simple formula:
VALUE = FUNCTION/COST
The task for both buyer and supplier is to increase the value delivered by increasing the functionality or reducing cost. The emphasis, therefore, is on the total acquisition cost of supply and the value it brings to the end product.
This task requires the support and commitment of all functional disciplines within both the buyer's business and the supplier's business. Using Value Analysis and Value Engineering techniques the aim is to:
- Delete - eliminate non-value adding activities
- Reduce - minimize/eliminate usage
- Downgrade - "fit for function"
- Substitute - identify & introduce alternative products or processes
- Change - use something else
- Standardize - minimize/eliminate complexity
Preparing & implementing POPP. There are a several key phases to the successful introduction of POPP.
Phase 1. In this preparation phase it is essential that the following activities are undertaken:
- Segment expenditure by supplier to determine those supply sources which can be controlled through open market competitive forces.
- Rationalize the current supply base through a comparative analysis of performance.
- Introduce a simple, but robust, supplier performance assessment process to identify supplier's strengths and weaknesses.
- Squeeze supplier margins to focus them on cost and value by using market testing, resourcing, conditioning & negotiation.
- Identify those suppliers on whom you are dependent. These are the suppliers which will demand the initial POPP focus and investment.
- Build a good understanding of the costs and supply chain of these "strategic alliance" suppliers.
Phase 2. Having completed the segmentation and analysis in Phase 1, you must now prepare the business for the implementation of POPP:
Obtain a mandate from the senior management of the business to implement. Develop the management and administrative systems in the business necessary to monitor progress, identify barriers to implementation. Design and introduce the process (an example is shown below).
Figure 1: POPP DECISION TOOL - MACRO FLOWCHART
(graphic not available in text-only version.)
The process should be robust but simple. The key requirement is transparency. That is, all involved should be able to be kept abreast of progress (success AND failure).
- Ensure the necessary resource is available.
- Establish a cross functional team to test, challenge and implement the savings identified.
- Ensure that all information is shared by the team. That is, the benefits and the value of existing material/product/service.
- Establish clear responsibilities, authorities and accountabilities for all members of the team.
- Establish clear action plans which include the time frame for implementation.
Phase 3. From Phase 1, select the initial suppliers who are to be exposed to the process.
- Develop a "briefing pack" for suppliers identifying the requirements of them and those on you.
- Visit suppliers to give introductory presentations to POPP.
- Obtain commitment from suppliers before proceeding.
- Develop and provide training in Value Analysis techniques to team members AND suppliers
- Pilot the process.
Phase 4. After the pilot, and having identified and made any changes that are necessary, the process should then be extended over a period to the majority of your suppliers. It is important to remember that:
The process must be seen to work. Suppliers will quickly become disillusioned if value enhancement and cost reduction ideas appear to disappear into a "black hole" or take too much time to be assessed. Publish results - no proposal should be disregarded or labeled as "a waste of our time". All proposals should be given full consideration. Challenge perceptions, preferences and history. Use ideas which are not feasible as a foundation for developing new proposals and in the design stages of new product development. Record and publicize successes.
An example of the effects of these four phases are shown in Figure 2. Figure 2 (graphic not available in this text-only version.)
Key requirements for the successful introduction of POPP. As you will have seen from the above explanation of the process, recognition of the impact of the "double whammy" effect on your business is not enough to implement POPP. There is also a need for the business to recognize that:
- There is a limit to the amount of "internal" cost reduction that any company can undertake; that is, the law of diminishing returns comes into effect.
- "Leverage" Buying is limited in what it can achieve in the long term.
- Suppliers are experts in their field and their expertise should be tapped to provide cost reduction and/or value enhancement.
- Suppliers should support your manufacturing and product.
- Suppliers are Strategic Partners, not your enemies.
- The purchasing/supplier interface is vital for the survival of the business.
- There is a need for fundamental change in the way we manage suppliers and purchased cost.
- Fundamental change will require a reorganization of the business, changes to previously held responsibility, authority and accountability, resource to manage it, training to make it work and senior management support to make it happen.
In summary, success will only come from those businesses committed to the process with the resource and expertise to make it effective. This cannot be stressed too much. Failure to provide this framework will quickly render the POPP approach ineffective at best and, at worst, it will severely impact supplier relationships which could increase purchased costs.