Five Steps to Effective Procurement
George L. Harris
George L. Harris, President, Harris Consulting, Inc., Lexington, MA 01824, 781-674-0041, email@example.com.
83rd Annual International Conference Proceedings - 1998
Abstract. Many companies today are searching for the combination of objectives and initiatives to ensure that their procurement operations are effective. These objectives are meant to satisfy both present and future requirements. Oftentimes, the objectives are constructed simply by considering what was successful during the previous period or as a result of considering a few best practices from the public domain.
What is needed is a focused list of objectives for any procurement function which will result in improved efficiency. This list must be chosen from a plethora of options, including those which are covered in procurement publications. Some of the items to be considered, however come from outside the procurement literature, and in fact, can be determined from applying a successful application in other functions to the procurement field.
Based on hands-on applications, and over ten years in the consulting world where observations can be made, the list contains five key elements:
- Customer Service
- Supplier Performance
- People Capabilities
- Cost Performance
- Future Direction Setting
As I see it, all of these elements must be present for a given procurement operation to be successful. All of the elements can apply to procurement departments in any industry, and can fit successfully in any type of corporate structure and size of company. These elements can be described using a pyramid which logically starts with people capabilities and culminates in establishing future directions for the organization. The pyramid is indicated below:
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In sum, any procurement department manager can succeed if he/she applies these five elements to their operations.
The balance of the paper will address the specific aspects of each of the five elements, including successful applications and best practices.
People Capabilities. Without the right skill sets and competencies, procurement departments will be unable to participate in the key activities of the organization and satisfy the needs of users. The quality of the people resources, then, will greatly impact whether the procurement operation is effective over the long term.
The assessment of people capabilities start with the definition of the types of resources needed to satisfy the business. What type of management is needed? Will the operation be decentralized? Where in the organization will decisions be made? What types of purchases will be made and what are the key initiatives to be completed? What skills are needed to complete the expectations of the users?
The assessment can be accomplished by employing a matrix defining the position and the skills required, such as the one used by Bose Corporation. This matrix is used to define training and development requirements.
This information can be used for defining the job descriptions, making hiring or promotion decisions, or developing appropriate training. A key follow-up activity is to use the matrix to assess the current organization and people. Shortfalls can be identified and action plans, whether organizationally or training-wise, can be put in place.
This information is ideal for other uses
- Developing annual budgets
- Establishing new hire plans
- Describing the requirements for promotability
- Advising management of constraints and status.
Customer Service. No matter how you perceive the value of procurement, it is still s service function. Without sales, nothing would be bought form outside suppliers. Further, without design, products or services could not reach the marketplace. Finally, without equipment downtime, the expedited part would not be needed to be sourced. But what I have seen exist is the lack of customer service mentality, both from an internal and external perspective.
In training classes, I have heard buyers complain about rush requirements from external customers and the special requirements of internal customers..the endless complaints about engineering desiring a special supplier or part which are difficult to source. This is not an acceptable way to approach the procurement task. In fact, one of procurement's core competency is customer service orientation. Appropriate measures, then, should be put in place to measure not only procurement's overall performance but also the performance of staff.
These measures might include:
- Requisition turnaround time
- Supplier Performance
- Responsiveness of Buying personnel
- Supplier turnaround time
- Administrative improvement
Since procurement clearly provides a service, the needs and expectations of each internal user must be identified and evaluated. Firm descriptions of requirements must be developed and the user should acknowledge the completeness of those requirements. Potential areas of concerns include:
- Cycle time for processing
- Ability to substitute
- Compliance with budget
- Information and feedback
- Tracking mechanism
- Policies and Procedures to be Followed
In the process of developing customer needs, it would be extremely beneficial to evaluate the key processes used to complete purchase transactions. This would mean some level of continuous improvement and flowcharting of the procurement flow, perhaps with user assistance.
The supplier is also a customer of procurement as they receive specifications, RFQs, policies, and ongoing direction. They also provide ideas and suggestions for improvement. One of the ways to determine the extent to which customer needs are satisfied is to conduct a user and supplier satisfaction survey on a periodic basis. Honda, Pratt & Whitney, and Foxboro receive excellent feedback when they ask for supplier feedback. Otis and Carrier even ask the supplier to provide comments on completed supplier assessments and audits.
The use of these type of feedback mechanisms provide an independent and regular way to receive customer input so that improvement can occur. For example, Honda evaluates its service to suppliers by reviewing answers to the following questions:
Customer Survey Form
Purpose: To identify areas of concern that, with improvement, can strengthen a supplier customer relationship
- Do you trust the following contact points of this company?
- Is communication in general clear and timely?
- How well are quality expectations communicated?
- How well does the company collaborate in continuous improvement?
- How well are agreed payment terms met?
- How well do prices and terms reflect total costs to the customer, services provided, mutual improvement goals, and sharing of prosperity?
- How well does the company collaborate on advanced product or process technology?
- How does the company compare overall with all other customers?
- Please comment on your overall experience with this customer in the past year or two. Are they improving? At what rate?
- What one or two changes would you most like to see this customer make that would enable increased benefits to the two of you? In what areas would the greatest benefits be achieved (such as quality, cost, technical progress, dedicating of capacity to them, etc.)?
Leading companies ask their users and customers to participate in solving service problems and measuring the results of action plans. An efficient method of resolving conflicts should also be put in place to handle conflicts such as when an engineer desires a part to use in new product design and must utilize the procurement process or comply with purchasing policies and procedures.
Supplier Performance. A procurement department, at some level, can be only as effective as the suppliers that it manages. After all, procurement ultimately makes the buying decision on selected suppliers and they must ensure that the suppliers meet the user requirements.
One of the initial steps to accomplish in ensuring that supplier performance meets user requirements is to align the actual measures with those requirements. In this way, procurement can evaluate the cause and effect of customer satisfaction. For example, the number of suppliers certified, thereby allowing the supplier to ship directly into stock, can specifically address a requirement form the quality area that incoming inspection must be eliminated and supplier quality must improve. Another example could be supplier lead time or cycle time from time of order when the user is expecting quick or Just-in-Time deliveries.
Once these measures have been established, perhaps with user participation, procurement can then ensure that supplier improvement occurs in the key measures. There are a number of excellent examples of procurement practices in this area. Some of these include:
- Motorola's supplier performance of 200ppm
- Dupont's measure of procurement and suppliers
- Allied Signal's supplier improvement process
Dupont's measures are extremely comprehensive and track one or one with their customer's needs. An example of those measures are as follows:
- Conformance to Materials Requirements
- Evidence of SPC
- Continual Improvement
- Planning for Quality
Value in Use
- Price Behavior
- Price Competitiveness
- Inventory Management
- Suitability for Use
- Measures of Participation
- Order Handling and Invoicing
- Delivery vs. Schedule
- Safety and Environmental
Supplier Capability and Technology
- Sales/Technical Service
- R&D Resource Application
- Delivery vs. Schedule
Allied Signal has a process to improve supplier performance as part of its cross-functional effort to improve overall divisional performance. The process is reflected as follows:
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Procurement should ensure that sufficient resources are applied to the task of supplier improvement. Without expending resources, procurement will not achieve the level of supplier performance needed to support the business' objectives.
Cost Performance. In some respects, the results of the efforts in the lower part of the pyramid will drive cost performance, however they are measures and described. Again, cost performance should be tracked and measures in a meaningful way. For instance, standard cost measures, although a response to the financial community, has long been viewed as a poor measure of purchasing cost performance yet many organizations use some form of this measure to establish product cost, price, and profitability.
Many procurement departments are evaluating a more extensive way to track cost performance, such as total costs. These procurement organizations have found that although total cost measures are difficult to establish and maintain, they are a true measure of overall supplier and procurement performance taking into consideration items such as:
- Supplier quality and delivery performance
- Payment terms
- Freight and packaging
- Warranty costs
These total costs measures can be used in the following aspects of the procurement process to:
Qualify - Select - Award - Measure - Report
Allen -Bradley has established a balanced cost scorecard for its suppliers. Every month, suppliers receive a report which describes how much their poor performance has cost the company based on a measure of $1000 of purchases. This information is used to identify gaps in each supplier's performance and to establish improvement plans.
Digital and Pratt&Whitney also use a balanced measure to select suppliers and measure procurement effectiveness using a weighted scale based on supplier delivery and quality performance. As mentioned earlier, these systems are difficult to establish and maintain but they do provide a more accurate of true procurement performance and can be used for supplier improvement activities.
Future Direction. Once the data in the first four areas have been identified, the future direction of the procurement department can be established. As has been previously presented, the procurement strategy should be based upon and aligned with the organization's overall strategy taking into consideration the strengths and weaknesses of the procurement areas as well as suppliers.
A division of Honeywell involved their suppliers using a Supplier Alliance process which tracked with the company's goals. Over 44 suppliers were involved in this initiative, and the key elements were JIT deliveries, supplier in-plants, and early supplier involvement in the product development process.
Sony has developed a supply management approach designed around the process of selecting suppliers. They look for supplier long term capability, ability to meet or exceed quality expectations, maintenance of quality when volume increases, and a commitment to reduce total costs of goods and services.
Another example is the supplier strategy used by Gilbarco. They are attempting to move to world-class suppliers by establishing partnerships with single-source suppliers and achieving the lowest total costs.
The selection of a future direction will govern the organization, the competencies, the measures, and the performance of the organization. Some procurement departments can develop the direction from the ground-up using the data garnered from the lower parts of the pyramid. Others can use their organization to set up the future direction, but you definitely need both elements to achieve success.
In Summary. Procurement can be effective if it uses a systematic approach to improvement. One of the tools they can use is the five steps indicated in the identified matrix. Each of the elements of incrementally useful in achieving procurement success. By following each of the elements identified, procurement can develop action plans for improvement, communicate current and future goals to the organization, measure their performance, and satisfy the goals of their users. This methodology is borne out of world-class performance and can be used in any industry or organization.