Engarde! Defend yourself from being Outsourced!
Norbert J. Ore, C.P.M.
Norbert J. Ore, C.P.M., Purchasing Manager, Sonoco Products, Hartsville, SC 29551, 803/383-7738.
Wade C. Ferguson, D.B.A., C.P.M.
Wade C. Ferguson, D.B.A., C.P.M., Contract Administrator Santee Cooper, Moncks Corner, SC 29461, 803/761-8000.
82nd Annual International Conference Proceedings - 1997
Outsourcing is a reality in today's organizations. Will your purchasing department become a candidate for outsourcing? To position yourself to answer the inevitable question, "Why should your purchasing operation continue to exist?" it is necessary to have an understanding of both outsourcing and the core competencies required of the purchasing process. What value does your purchasing operation bring to your organization and can you continue to justify your existence? Will your operation be viewed as a value-added, core competency or just internal overhead?
What should NOT be outsourced? Is there any activity within an organization that CANNOT be outsourced? NO! It is possible to outsource any and all activities in an organization. So why not outsource "everything?"
Before making any outsourcing decision, an organization must determine its core competencies. In other words, "What process(es) or service(s) does your company provide as the foundation of its business?" (Damato, 1996). Think of core competencies as "key" competencies. Ask yourself the question, "What functions are strategic and critical to our success?" A basic rule when considering any outsourcing opportunity should be to concentrate organizational resources on core (key) competencies and outsource the rest. Keep what is strategic and critical, while letting others do what is tactical (Ore, 1996).
Outsourcing Purchasing. Purchasing IS being outsourced every day, perhaps even in your own organization. New programs like Purchasing Cards, Vendor Managed Inventory, and Integrated Supply are means of outsourcing work that has previously been the functional domain of purchasing. Thus, the next logical question is, "Why not go the rest of the way?"
According to J. Brian Quinn, author of The Intelligent Enterprise, the cost of all internal services go up at a faster rate than the cost of external services. Internal services that are not core to the organization will eventually become overpriced (Quinn, 1993). The marketplace will determine the value of core services and in a robust organization, the added value of core services will be recognized and the employee "providers" of those services will merit higher rewards (i.e. the cost of the service is outweighed by the added-value of the service). Unfortunately, the cost of non-core, internal services will also increase, at the same rate as core services, but generally without an off-setting perception of increased value. Eventually, the cost of non-core services become inflated, moving management to question the continuing need for the internal providers of the services. Purchasing is not exempt from this process, and Quinn's hypothesis applies to Purchasing as it does to all functions or processes in the organization that are not core competencies or in direct support of core competencies.
Look to the global marketplace. What is happening in the global marketplace? What is expected from your organization in this environment? According to one group of corporate strategy researchers:
The most powerful way to prevail in global competition is still invisible to many companies. During the 1980s, top executives were judged on their ability to restructure, de-clutter, and de-layer their corporations. In the 1990s they'll be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible - indeed, they'll have to rethink the concept of the corporation itself. The twin concepts of core competence and business processes figure prominently in most discussions of corporate strategy (Prahalad & Hamel).
While top management deals with the challenge to rethink the corporation, there is much to be learned from the concept of core competencies and business processes that will allow us to better position Purchasing and Supply Management for the future. These concepts apply equally in the private and public sectors.
Another corporate strategy group suggests "The core competencies concept helps top managers answer the fundamental question What should we do?' and the business processes perspective addresses the question How should we do it?'" (Snyder & Ebeling, 1992). Purchasing and Materials management responsible for meeting the challenge of the increasingly dynamic materials and services acquisition process must first focus on the issue of "What should we do?" in a relevant fashion, before developing plans of action (i.e. answer the question, "How should we do it?")
What should we do? Examining the future direction of purchasing and supply management provides insight as to its value as an internal function. The following scenarios of purchasing and supply management are provided by the Center for Advanced Purchasing Studies' Purchasing Futures Research Project (Carter & Narasimhan, 1996).
- The absolute number of jobs within purchasing will decrease, as will the layers of management. Purchasing organizations will adopt flatter forms with less emphasis on hierarchy and less distinction between positions. Functional silos will become obsolete. The classical functions of marketing, manufacturing, engineering, purchasing, finance, and personnel will be less important in defining work. More people will take on project work focused on continuous improvement of one kind or another.
- Fundamental restructuring and reengineering will become a way of life at most companies. The primary focal points will be a new market-driven emphasis on creating value with customers, as well as greatly increased flexibility, a new business-driven attack on global markets (which includes a deployment of information technology), and fundamentally new jobs.
- Work will become integrated in its orientation. The payoffs will be made increasingly through connections across organizational and company boundaries; included are customer and supplier alliances, with a general focus on improving the value-added chain.
- New measurements that focus on strategic directions will be required. Metrics will be develop, similar to the cost of quality metric, that incorporate the most important dimensions of the environment. Similar metrics will be developed to support the new uses of information technology.
- New people-management approaches will be developed. Teamwork will be critical to organizational success. Human resource management will become less of a staff function and more closely integrated with the basic work.
Where are the Core Competencies in Purchasing? From available research, we can discuss several sources of core competency resulting from root changes in the purchasing process.
First, purchasing is becoming totally knowledge-based. Successful purchasers in the future will have knowledge that does not exist elsewhere in the organization in a form that relates directly to managing the supply side of the business. This knowledge will encompass market analysis, negotiation, managing internal and external relationships, global sourcing, change management, planning and organizational skills, risk management, communication in multi-media, cultural awareness, product knowledge, cost analysis, group dynamics, leadership, computer literacy and government regulations.
Second, processes will dominate organizations, not functional entities. Early in the second half of this century, three processes institutionalized themselves within the corporation - technology, quality and Human Resources. In the current decade, two additional processes are gaining significant stature - Information Technology and Purchasing. Note that it is the "process," not the function that has gained in importance. Just as the processes associated with technology, quality and HR have spread throughout the organization, IT and Purchasing are now making a quantum leap forward. IT because it is emerging from under the financial authority of the firm and entrenching itself in the business processes related to the mainstream of the organization, i.e. manufacturing, order fulfillment, etc. And purchasing because of the recognition of the importance of the effective acquisition of materials and services for the organization - a supply chain viewpoint that strategically positions an organization in total balance with it customers and their customers, its suppliers and their suppliers. Successful purchasers in the future will be those individuals and departments who have learned how to effectively participate in all five of these processes.
Third, is a focus on three major VALUES!
Value One - CUSTOMERS. Customers will continually increase their demand for more, for better, for faster, while holding fast to the expectation that suppliers remain flexible and provide the latest in information technology. Customers will increase their demand for Vendor Managed Inventory, Integrated Supply and other services in addition to products. Sellers will respond by incorporating these new services into their product mix. Sellers will be challenged to find ways to include the cost of these service in the price of their product.
Value Two - SUPPLY CHAIN. Organizations will continue to enhance their ability to provide the greatest value to customers by creating a supply chain that provides the best combination of quality, cost, and cycle time. Sharing of information throughout the supply chain will provide responses to requirements in nanoseconds.
Value Three - PERFORMANCE MANAGEMENT. New metrics will be required to manage performance. Whether inside or outside the organization, concern for people and their ability to thrive on change will be integrated into every process.
What can you do RIGHT NOW, to Defend Yourself? First, develop an understanding of your organization's mission and strategy. Second, develop an understanding of what your organization's core competencies are. Third, formulate a purchasing strategy that will identify and develop purchasing core competencies in support of the overall organization strategy. Purchasing strategy must be linked to business strategy, and therefore integral to the overall operational strategy.
In order to identify and develop purchasing's core competencies, remember that real core competencies are the things that you do more effectively and efficiently than others. Here are some guidelines to use as you search for and develop your core competencies:
- Do not try to develop too many core competencies at once. It is best not to over-reach, in fact, if you try to develop more than 3 areas of core competency, you are probably kidding yourself.
- Do not settle for superficial statements such as "provide quality products," or "commitment to customer satisfaction." Instead, drill down beneath the surface to identify your true value to the organization.
- Do not invest your valuable resources on activities that have little payback.
- Ensure the existence of Value in everything you do.
- Purchasing's core competencies will, in most instances, be derived from sourcing and contracting - the strategic side of the process - rather than the tactical side which is transactional in nature and could easily be outsourced.
- Opportunities to develop core competencies can be found in all areas of the purchasing process. Be sure to consider each aspect of the process. Here are just a few places to look:
- Sourcing - identification of suppliers, request for quotation process, supplier qualification, contracting
- Supplier Management - order placement, order management, expediting, discrepancy processing, approvals, supplier evaluation, contract management
Conclusion. Purchasing's role in the organization continues to evolve and purchasers must accept their new organizational roles and learn to better integrate purchasing into the strategic framework of their firms. Failure to identify and develop purchasing's core competencies could potentially remove the perceived need for purchasing expertise internally, causing management to search elsewhere for the service at a reduced cost to the organization. Without an aggressive and positive approach toward demonstrating purchasing's core competencies, the function runs the risk of becoming a victim of outsourcing rather than a key contributor to outsourcing decisions.
Carter, J.R. and Narasmihan,R.(1996). Purchasing and Supply Management: Future directions and trends. International Journal of Purchasing and Materials Management, 32(4), 2-12.
Damato, V.L. (1996, September). What's at the center of your business? Purchasing Today, p.4.
Ore, N.J. (1996). The outsourcing decision: Why, what, when, and how. NAPM InfoEdge, 2(2).
Prahalad, C.K. and Hamel, G. The core competence of the corporation, Harvard Business Review, p. 213-225.
Quinn, J.B. (1993). The Intelligent Enterprise. NH: Dartmouth Press.
Snyder, A.V. and Ebeling, H.W.,Jr. (1992). Targeting a company's real core competencies. The Journal of Business Strategy, 13(6).