Primitive or Advanced Purchasing: How Does Your Company Stack Up?
William L. Michels, C.P.M.
William L. Michels, C.P.M., CEO, ADR North America LLC, Ann Arbor, MI 48106-0366, 313/930-5070.
Rob Johnson, M.C.I.P.S.
Rob Johnson, M.C.I.P.S., Senior Consultant, ADR International Purchasing Consultants, Bracknell, Berkshire RG12 1RP, +44 01344/303078.
82nd Annual International Conference Proceedings - 1997
Evolution of Purchasing. This presentation seeks to consider the implications of the evolution of Purchasing through a series of three stages; from that of having a predominantly transactional focus, to that of ultimately delivering key strategic benefit to the organization.
ADR has classified the three stages of purchasing evolution to be service center, profit center and strategic imperative. Figure 1 details the Purchasing Evolutionary Ladder.
Service Center - Profit Center - Strategic Imperative
When Purchasing is in the Service Center phase within an organization, it can be characterized by a group of activities including:
- processing requisitions
- processing purchase orders
- processing receipts
- managing inventories
- administering rejected parts / materials
- record keeping
- releasing blanket orders
It is obvious that personnel in the Service Center phase are working on a short term basis. In most cases, this term is 0 - 10 days. There is little time for quantitative or qualitative analysis and purchasing focus is operational.
When one steps up the Purchasing Evolutionary Ladder to the Profit Center phase, the characteristics are somewhat different.
- Buyers are developing plans for 1 - 3 years.
- The need for high level tactical and principled negotiation skills is recognized.
- Contract creation and contract management are improved, resulting in year on year cost / productivity benefits.
- Rigorous multi-year forecasting is in place.
- Evidence of a comprehensive cost management program is in place, encompassing a structured cost containment and structured cost reduction program.
- Measurement of all actual costs is introduced and used in the business.
- Cost objectives are targeted, planned and achieved.
- All buyers focus on suppliers cost, not price. All buyers are capable of Purchase Price and Cost Analysis.
In this phase of the evolution, buyers are focusing 1 - 2 years out, analysis is a way of life and Purchasing's focus moves completely away from transactional to cost and value.
When purchasing becomes a Strategic Imperative of the business, cost reduction performance expectation is built into the company profit plan during budget development.
- Purchasing is involved in new product development from the onset of projects.
- Purchasing is able to facilitate business to business alliances.
- Purchasing exercises influence in nontraditional areas such as legal, marketing, auditors, consultants.
- Supply chain analysis exists on all major categories of expenditure.
- Written 5 year source plans are available on major categories of expenditure.
- Value delivery is maximized.
- Multi cross functional teams develop to attack sourcing issues.
- Purchasing assists the business in acquisitions.
- Purchasing plays a role in manufacturing initiatives.
- Purchasing assists the business by outsourcing non-core competencies.
At the highest level of Purchasing's Evolutionary Ladder, the time horizon is expanded to 3 - 5 years, the supply chain is proactively managed and Purchasing's scope is expanded across the business.
Definitions. What is meant by primitive and advanced?
The Oxford English Dictionary uses the following definitions which we consider to be of relevance to our intended approach within this presentation.
Primitive is defined as being of an undeveloped, simple or unsophisticated state, or being of an "old fashioned" kind.
We should not necessarily take the term primitive to have derogatory connotations, rather it should be used to reflect the level of sophistication utilized.
Some companies and markets may only warrant the use of relatively straightforward and "unsophisticated" approaches. However, the term primitive comes more to the fore where the environment and organization require the application of more creative and imaginative solutions than are capable of realistically being delivered. In such circumstances, 'simple' can be taken to be unsatisfactory.
Advanced, on the other hand, is defined as being 'ahead of the times'. Certain markets and organizations may not warrant such sophisticated approaches, and to seek to introduce them may prove counter productive and unnecessarily burdensome. However, where warranted, the application of such techniques can yield significant competitive advantage.
The key point at issue is how do the approaches and practices which are being applied by your purchasing function align to the real requirements and expectations of the organization within which you are working?
Satisfaction guaranteed. A further concept to consider in helping to inform our understanding of purchasing evolution is that of a "hierarchy" of needs as originally detailed by Abraham Maslow.
This concept was based on the progression in the nature, number and variety of 'physiological wants' experienced by an individual as he develops. Maslow proposed that once an individual's basic physiological needs, such as warmth, food, and a safe, structured, environment have been satisfied, higher needs of esteem and personal fulfillment would be released. However, none of these wants is absolute; as soon as one is satisfied, the fact of its satisfaction provides less of a positive incentive, while its capacity to create dissatisfaction, if disappointed, rapidly increases.
This is surely a principle that any strategically minded purchasing professional must acknowledge before embarking on any program of functional development. He or she must ensure that the purchasing 'hygiene' factors and basic performance criteria upon which the organization has come to rely and depend, however unsophisticated they may appear, continue to be adequately fulfilled.
It is possible to further illustrate this facet by using the concept of the Apollo moon landings of over 25 years ago. While the "Lunar module" was the capsule within which some of the most sophisticated equipment and technologies were incorporated, the moon landing could only succeed if the earlier aspects of the mission were successfully deployed.
The initial launch phase harnessed the more basic technology of huge power resources to achieve orbit, while the latter stages of the mission were facilitated through the operation of the host 'Command module'. If either of these earlier stages failed to achieve their purpose or operate satisfactorily, then the entire mission would have failed, irrespective of the sophistication of the technology within the lunar module.
Purchasing professionals looking to further develop the contribution of purchasing within their organization must recognize that they must ensure their own successful launch and subsequent orbit if they are to achieve their own giant leap forward.
The Origin of the Species. So what are the learning points to be derived from a consideration of the concept of evolution?
Evolution is the process of diversification and modification through sustained changes in form and function. Evolution leads to proliferation and specialization, with greater focus on specialisms. Evolution can mean suitability to the environment, rather than simply becoming the most 'advanced'.
One of the key messages that a study of the process of evolution could mean to those considering the development of the purchasing function is that when environmental conditions change, populations require new properties to maintain their fitness to the environment. It is vital that purchasing professionals stay attuned to the changing environmental conditions in which they are operating in order to best facilitate the most appropriate evolutionary enhancements. An awareness of these evolutionary principles serves to better inform the nature of developments needed as Purchasing develops from its transactional role, through that of being commercially aligned, to that of a more strategically aligned configuration.
When environmental conditions change, populations require new properties to maintain their fitness to the environment.
What are the facets by which evolutionary development and 'fitness' could be assessed? In order to better appreciate and understand the process of purchasing evolution within organizations, ADR has developed and utilized an appropriately specialized process which seeks to categorize the purchasing performance of client companies, and which serves to identify those areas requiring development, if 'fitness' for the organization's revised environment is to be assured into the future.
ADR's Baselining program considers 62 different attributes of Purchasing and details the competence / capability gaps to Best Practice. Figure 2 details some attributes that can be measured to determine your organization's "gap".
||Transactional activity. Operations dependent. Supply issues are the main focus.
||Greatly reduced transactional activity. Rigorous review of purchase categories with planning the key activity.
||Core focus is cost and values. Transactional purchasing reports to planning.
||Reports to manufacturing. RAA undefined.
||Reports to CFO / CEO. RAA definition emerging.
||Reports to CFO / CEO. RAA clearly defined.
||Transactional buyers with leverage skills.
||A mix of leverage and strategic skills.
||Appropriate thinking and behavior for all categories of expenditure. Relationship building skills. Business policy influence.
|Expenditure not controlled by Purchasing
||Major influence. Cross functional and cross business teams.
||PPV and Budget are Primary measurements.
||PPV and ZBM are measurements.
||PPV, ZBM, Supplier Performance and nontraditional measurements in place.
||Cost / Supply
||Cost, value and competitive advantage.
||Get it on time, meet budget.
||5% year on year cost / value.
What are the dimensions by which purchasing evolution can be assessed? One fundamental indicator is that of the approach adopted by the organization towards cost management. ADR believes that there exists a recognizable trend in how Purchasing seeks to manage their contribution to an organization's purchased goods costs.
At the less sophisticated level, Purchasing maintains a focus on achieving Price down, principally through an adversarial relationship with suppliers as a result of price reductions achieved at the expense of a supplier's margin.
As purchasing 'sophistication' develops, there is a discernible migration to focus on Cost Down, prior to focus on both Cost Out and Value Up at the more progressive end of purchasing thinking. The table below illustrates the various parameters of these approaches in more detail.
|Relationship with Supplier
The Challenge. A realistic assessment of your company and a gap analysis to Best Practice will provide the road map to continuous improvement. It is not essential that everyone move thorough the evolution, but, if your company misses the opportunity to lead this change, it could place itself at a serious competitive disadvantage.