Revolutionary Ways to Transfer Purchasing Responsibilities to Users and External Organizations
George L. Harris
George L. Harris, President, Harris Consulting, Inc., Lexington MA 02173, 617/674-0041.
82nd Annual International Conference Proceedings - 1997
Abstract. In this paper, descriptions of how purchasing organizations have strategically decided to transfer some of their traditional responsibilities to other internal and external organizations will be covered. The use of purchasing cards, blanket purchase orders, buyer/planner utilization, outsourcing companies, users as supply managers, and systems contracting will be explored and exemplified.
Introduction. As a rule, the business of procurement has always been to ensure that goods and services are procured in a cost-effective manner to meet required quality and delivery needs. To achieve this goal, most procurement organizations have structured their procurement processes so that qualified suppliers can both fulfill these needs and provide a competitive advantage to their respective companies.
As companies have downsized and new technology has become available, procurement organizations have also devised ways to reduce their administrative costs and reduce the overall cost of doing business with their suppliers. Companies continue to view Electronic Data Interchange (EDI) as a way to reduce the costs of transactions. Coupled with Bar Coding, they have reduced the costs of receiving and accounts payable functions as well.
Other noteworthy initiatives are:
- Use of Kanban as ordering and inventory controls
- Automated Requisition and Purchase Order Systems
- Paperless Procurement Systems
- Internet-based order and forecast signals
These and other initiatives have reduced the overall costs of purchases, and have provided a shorter cycle time for products and services to be delivered. Both users and purchasers have benefited tremendously.
Yet more must be done to service the user community. In fact, the size of Procurement staffs have declined over the last few years. As a result, more and more direct responsibility for purchasing activities is being given to users on a daily basis. Most companies compete on how quickly they can respond to a customer desire, whether it be for a new or mature product. The balance of this paper will discuss some innovative and revolutionary ways that organizations are empowering users to manage portions of the procurement process in order to increase internal customer satisfaction by reducing the cycle time from identification of need to receipt of goods or services.
First Things First: The Procurement Card. A discussion about involving users in the procurement process would not be complete unless Procurement cards are discussed. Procurement literature abounds with articles and advertisements regarding the value of issuing cards to users to purchase low dollar products and services. At the last NAPM conference, there were no fewer than 12 suppliers espousing the merits of the card. I have deep reservations about the use of Procurement cards despite that fact that many companies are either using or considering the use of these cards in their operations.
First, the card doesn't necessarily control the costs of low dollar purchases. It only ensures that a purchase order need not be issued, and that the requisite Procurement activities are not required. In fact, costs for these items are most likely more expensive than if Procurement personnel were involved. Users typically are not trained in cost/price analysis. At a minimum, users should make a determination that the price is fair and reasonable, which is not done in my experience.
Second, not all administrative activity is eliminated. Invoices must be scrutinized, paperwork must be completed by the user, control of the purchase cards must be institutionalized, and user non-compliance must be dealt with.
Third, since in most cases contracts are not established with companies authorized to accept the card, unqualified companies are providing products without any scrutiny.
Last, purchases are more difficult to track even with the most sophisticated systems. Most are geared to collecting and reporting data on issues such as taxes, expenditures with small businesses, and account budgeting. Valuable information such as commodity and part spending is not typically available, which makes trend analysis more difficult.
On balance, companies save some administrative time but they can conceivably lose more than what they gain. If one completes a simple analysis, these losses can be highlighted more succinctly:
- Suppose a company spends $20,000,000 per year.
- Assume 5% of the dollars lend themselves to purchase cards.
- Of the $1,000,000, assume about 1000-1500 transactions.
- Assume with procurement assistance, company saves 10% or $100,000
- Savings equate to two full-time people
Most companies have not reduced personnel to the above extent. One could argue that time is gained by procurement staff to concentrate on the larger dollar procurements, but there is little empirical data that indicate significant gains in this area either.
In other words, there are other ways to involve the user in accomplishing procurement work which are more beneficial to the company as a whole. I will discuss these opportunities and provide working examples of each in use with the noted advantages and disadvantages.
Use Of Bid Calendars. Bid calendars can be used as a tool for contract management, typically as a signal by the user that a particular contract will be up for re-negotiation or renewal. It can also be used as a planning mechanism for new purchases so that the individuals involved can plan appropriately to avoid last-minute decision-making.
Involving users in this process might mean using their particular skills and expertise to identify and evaluate potential suppliers for the goods and services contracted for and identified on a published bid calendar. This would also mean that the purchaser schedules and conducts cross-functional meetings periodically during the year to review the planned procurement of goods and services. This would focus the user community on assisting in determining the supplier base for each procurement, evaluating current supplier performance, and ensuring that they receive efficient service to their requests. It would help eliminate surprise procurements, and lower the overall cost of ownership.
User-Generated Procurements. Once procurement has identified the best suppliers, received the user's assistance in evaluating suppliers, negotiated effective cost, quality and delivery terms, the user can then be authorized to commit the company and manage the purchase. I know of two reasonably effective implementations, one in the automotive industry and one in the medical products manufacturing industry.
In the case of Worldwide Motors, over $70 Million in MRO type procurements are being orchestrated by a team of four purchasing professionals, three of whom are buyers. They are responsible for establishing the contracts for all purchases over $10,000, working with users on evaluating bids, negotiating and establishing the relevant terms and conditions. Bids under $10,000 are completely managed by users. Users are completely responsible for contract or purchase order management, including change orders.
To establish this system, users are first trained on the company's six step Procurement process. They become certified by working with the procurement staff on a number of initial purchases and change orders. They are then authorized to become Procurement agents once they have received approvals of their requisitions. Purchases over $25,000 must be authorized by a senior member of management.
Purchasing provides standard contract boilerplate for use by the user, and assists when necessary in disputes or contract formation issues. They coordinate activities with the legal staff, and make it easier for the user to purchase standard items by establishing national purchase agreements. They recently developed an automated purchase order system so that the user can transmit the completed purchase order directly from the system.
Users are audited from time to time by the Procurement department to ensure that they are following established guidelines. Initial results have been outstanding as Procurement is becoming even more involved in user purchases. The drawbacks have included lack of regular training, so inexperienced users are in fact buying, and the audit system needs more clout in that violators are too often "let off the hook" by management.
In Medproduct's case, SAP was recently installed at their facility. Users were trained in effective purchasing practices and the proper way of entering data in the purchasing system. Specific users in each department have been authorized to commit the company, by employing these established policies and procedures.
Procurement has established contracts covering more than 91% of the purchases made be the company, so most of the expenditures are made once requisitions are approved and are directed to bona-fide and qualified suppliers. The Procurement responsibility has been deployed much like the traditional quality control function. So far, the move has been successful given the importance of ensuring that only qualified suppliers receive production orders, particularly in this highly-regulated industry. The only drawbacks have been that users often need additional assistance and do not ask for Procurement involvement; thus, problems take longer to resolve. Also, training has not been completed in a timely fashion.
Consortium Procurement. Hospitals, governments and universities have for years formed Procurement consortiums and cooperatives to gain leverage for their Procurement dollars and tap needed technical resources. One benefit of this type of is that suppliers are pre-evaluated, qualified and "certified" by the Consortium organization. This reduces the total Procurement resources required to perform these activities at each individual customer as well as the needed supplier resources, which ultimately reduces the total cost of ownership.
After the supplier is certified, and a master agreement or contract is executed, the user can directly purchase the goods and services covered under these contracts provided the appropriate requisition has been approved. The user tracks supplier performance and, together with Procurement, provides feedback to the consortium on supplier performance. Examples of these arrangement include the Voluntary Hospitals of America (VHA) and the Massachusetts Higher Education Consortiums (MHEC).
There is a groundswell of consortiums which are springing up around the country, consisting of small companies desiring to share resources and receive lower total costs for their purchases. These consortiums are focused on traditional MRO type items, such as travel, printing, pest control, maintenance, overnight delivery, transportation, computer systems and services, office supplies, temporary services and advertising.
Drawbacks using or belonging to consortiums include:
- Lack of real savings if organization is a large user
- Lack of organization involvement or use of contracts
- Poor feedback to suppliers on performance
- Lack of third-party price justification
- Lack of proficiency on part of consortium.
Based on what I have seen, there will be many more consortiums as organizations discover the value of partnering and cooperating with each other, particularly for less strategic purchased goods and services.
Electronic Trading Posts. Today, one of the most innovative and new ways to purchase products and services is through the Internet. Electronic trading posts, such as the GE TPNPost, allows users to follow a proscribed method of procurement to source their requirements.
TPNPost is a secure on-line commerce network linking suppliers and buyers, an electronic channel for distributing information around the world, a suite of tools for conducting interactive negotiations, and an easy-to use extremely low-cost means of selling and buying products and services.
Typically, an organization joins the service. Users are trained and authorized to employ the services of the Post. Users enter in a description of a requirement, and suppliers respond to this request online. Suppliers provide standardized qualification information. Users evaluate the bids, conduct negotiations with suppliers on a private-offer basis; and, negotiation rounds are conducted until the user believes a fair and reasonable offer has been made. Once completed, the system tracks the purchase, sends a purchase order, and completes the transaction.
Potential drawbacks include using auction techniques to achieve a low price, focusing too much on purchase price rather than total costs, and the unauthorized purchase of Items by users. This new mechanism, however, does allow the Procurement community an opportunity to empower knowledgeable users to perform procurement functions in an effective and systematic way. In fact, GE has employed this system for two years and reports significant improvements in user satisfaction and procurement efficiency.
Summary. Procurement organizations can tap the user community's technical and management capabilities in extraordinarily effective ways by employing both creativity and careful deliberation. By using the best of today's techniques: consortium buying, user-generated procurements, bid calendars and private electronic networks, users can receive the independence they desire and procurement can reap the rewards of lower total cost and higher internal customer satisfaction.