Purchasing in the 21st Century
Eberhard E. Scheuing, Ph.D., C.P.M.
Eberhard E. Scheuing, Ph.D., C.P.M., NAPM Professor, St. John's University, New York, NY 11439, 718/990-6770.
82nd Annual International Conference Proceedings - 1997
Abstract. By transforming itself into a profession, purchasing has become a key contributor to organizational competitiveness and performance. Moving from transactions to relationships, it has been reinventing itself to fit its new role as strategic sourcing leader. By continuously enhancing its skills mix and the performance of its resource base, it has become a driving force for change that is altering the way organizations do business. In the 21st century, purchasing will be a world class player on an organization's strategic leadership team, employing state-of-the-art tools in shaping its destiny.
Reinventing Purchasing. Reinventing purchasing involves the radical redesign of the nature, role, and activities of purchasing in the context of the virtual, horizontal, learning organization of the future. This requires a complete rethinking of what purchasing does and how it goes about its responsibilities. Mere incremental changes and improvements will not do. Starting with a clean sheet of paper, the role of purchasing in the process of creating and delivering value to customers needs to be fundamentally reengineered.
The Context: New Organizational Paradigms. Traditional organizations are bureaucratic structures that become dysfunctional because they failed to change with the times. Characteristics of traditional organizations include:
- vertical "silos" and separation of functions,
- "over the wall" processes,
- rigid hierarchy,
- bureaucratic "red tape,"
- lack of efficiency and effectiveness, and
- lack of process ownership, flexibility, and responsiveness.
In contrast, horizontal organizations focus on customers, not products; processes, not tasks; value creation, not bureaucracy; and integration, not separation of functions. Accordingly, horizontal organizations have the following characteristics:
- delayered, flat structure,
- cross-functional teams,
- focus on customer satisfaction,
- streamlined processes, and
- employee ownership and empowerment.
Similarly, learning organizations are sensitive to evolving environmental conditions; searching for and seizing market opportunities; continually adapting to new parameters; and changing to reinvent themselves and stay ahead of the competition. Consequently, learning organizations are characterized by a strong external focus; benchmarking for best practices; creativity and flexibility; openness and adaptation; and change leadership.
And a virtual organization is a lean, agile, highly productive organization at the hub of a network of strategic alliances. Facing highly competitive and volatile environments, more and more organizations are reexamining their markets and operations to:
- capitalize on promising opportunities,
- refocus on their core competencies,
- streamline processes for greater agility and efficiency,
- leverage resources for maximum impact, and
- enhance their competitiveness and performance.
Figure 1: Virtual Organization - (graphic not available in text-only version of this paper)
Virtual organizations possess the following characteristics:
- Advanced information technology: They have internal and external databases, high-speed information network linkages, and electronic data interchange with partners.
- Flexibility: Impermanence of their own structures allows them to link with and de-link from partners as opportunities change.
- Dependence: No longer self-contained and autonomous, virtual organizations cannot function without their partners who contribute vital inputs to the network.
- Borderless linkages: National boundaries as well as traditional distinctions between suppliers, competitors, and customers lose meaning as networks synergistically combine inputs into value-added outputs.
- Excellence: The single most powerful force in virtual organizations is the unrelenting commitment to excellence, which orchestrates the unique competencies of several organizations for world class outputs.
As purchasing transforms itself within this new organizational context, it takes on a very different look and outlook. The following 28 theses attempt to capture some of dramatic changes occurring in purchasing as it moves from department to core competency.
21st Century Perspectives.
- The function will be Sourcing, not Purchasing. For all too many people, purchasing means issuing purchase orders, doing the paperwork to execute decisions made by others. It is no surprise then that less than half of an organization's total spend goes through purchasing (Fearon and Bales 1995). Fortunately, purchasing is rapidly getting out of the business of clerical transaction processing by using purchase cards and other productivity enhancers. The term sourcing correctly suggests expertise in identifying, monitoring, and improving the performance of responsible and responsive sources.
- It will be energized by a Vision, not just governed by a Mission. Purchasing's mission is a statement about its nature and purpose within an organization, describing its role, competencies, and approach to doing business. While it defines what purchasing currently is and does, a purchasing vision is a statement about the function's future nature and role. It is an inspiring concept of a team of world class professionals, strategically partnering with suppliers and customers to enhance the competitiveness and performance of all players.
- It will be driven by Customer Requirements, not Requisitions. Sourcing professionals are passionate about knowing their customers and meeting their requirements. Internal and external customers judge the value received from sourcing and will defect if their expectations are not satisfied.
- It will emphasize Value Creation and Delivery, not Procedures. Value is the relationship between a product's performance and its cost. Customers value a quality product delivered on time at a competitive price.
- It will treat suppliers as External Resources, not vendors. Suppliers are sources of ideas, technologies, and savings in time and money. Vendors merely execute orders and meet specifications.
- It will focus on Bottom Line Contributions, not Price. The traditional emphasis of purchasing's critics, price is merely one element in a product's total cost to an organization. A higher price may well be justified by a product's bottom line impact in the form of energy conservation.
- It will enhance the organization's Competitive Advantage, not its bureaucracy. Forever searching for better processes, materials, and technologies, and tapping into supplier talent and capabilities, sourcing professionals can make valuable contributions to an organization's competitiveness.
- It will engage in Global Sourcing, not just Local Purchasing. Powerful reasons lead sourcing professionals to search the global marketplace for competent, competitive sources. Local purchasing has its place in an organization's sourcing spectrum but it is often limited in scale and scope.
- It will build Strategic Alliances, not have Adversarial Relationships. Purchasing products from multiple vendors in an adversarial mode, one transaction at a time, has been the traditional pattern in the U.S. This unenlightened approach is a far cry from modern sourcing's efforts to partner with key suppliers for mutual benefit (Scheuing 1994).
- It will utilize Long-Term Contracts, not Purchase Orders. Purchase orders are inefficient means of dealing with suppliers. Even short-term contracts signify very limited commitment. Multi-year contracts establish relationships and set annual cost reduction targets.
- It will pursue Continuous Improvement, not Incoming Inspection. As W. Edwards Deming has said, one cannot inspect quality into a product; the damage is already done by the time inspection occurs. Problem prevention and continuous improvement enhance production, reliability, use characteristics, and sales.
- It will practice Joint Cost Management, not Pressure Tactics. The traditional approach of "squeezing" vendors for lower prices ignores their legitimate need to earn fair and reasonable profits. Joint cost management involves shared responsibility for understanding and reducing cost in the supply chain for mutual benefit.
- It will enjoy Early Involvement, not Emergency Requisitions. In a typical purchasing department, at least 40% of the requisitions received require immediate action and expedited shipping. Tomorrow's sourcing professionals will participate in new product processes from the outset and involve selected suppliers as well.
- It will invest in Continuing Education, not use Trial-and-Error Purchasing. No profession can sustain and advance itself without ongoing efforts to update and upgrade skills and knowledge. This is why the C.P.M. program, like other professional designations, requires periodic recertification. Sourcing without appropriate education is dangerous because it can run afoul of the law and fail to protect an organization's legitimate interests properly.
- It will consider Outsourcing essential services. As organizations identify and focus on their core competencies, they often find it beneficial to transfer responsibility for non-core services to external providers.
- It will employ state-of-the-art Information Technology. Computers have become essential tools for sourcing professionals as they use their desktops or laptops to store, process, and communicate information, access databases, identify, link up with, and pay suppliers, and surf the Internet. Electronic commerce is on a roll and will be the mode of choice in the next century.
- It will see professionalism applied to All Purchases. While it is neither likely nor desirable that all purchases will move through purchasing, aggressive promotion of professional approaches to sourcing throughout an organization will capture even non-traditional buying.
- It will strive for dramatic Cycle Time Reduction. Because time is money, reducing the time consumed by a process reduces cost and increases the organization's competitiveness. Dramatic cycle time reduction can be achieved through process mapping and reengineering.
- It will utilize Benchmarking to assess and improve performance. Benchmarking means measuring, comparing, and improving. It encourages identification and application of best practices as identified in comparisons with other organizations. For years, CAPS has assisted many industries and companies in this effort.
- It will use Customer Satisfaction Measurement to build customer loyalty. Customers are any organization's lifeblood. Without its internal customers, sourcing will vanish. By carefully measuring their satisfaction levels, sourcing can learn how and where to improve performance, and create loyal customers who refer others.
- It will offer Satisfaction Guarantees to ensure customer feedback and satisfaction. By providing satisfaction guarantees to their internal customers, sourcing professionals can flush out sources of dissatisfaction and help customers achieve desired results.
- Leaders, not Managers. Managers do things right; leaders do the right thing (Bennis 1989). Leaders inspire and enable others, managers direct and control them. Sourcing needs leaders who coach their teams, not managers who act as bosses.
- Broadly skilled Professionals, not poorly trained clerks. Kolchin and Giunipero (1993) identified the skills and abilities required of purchasers in the year 2000 which include a broad array of analytical, communication, decision making, and business leadership skills. Across America, a major effort to upskill purchasing groups is under way at many organizations.
- Empowerment, not Control. The dual effects of downsizing and better education lead to the need and demands for greater decision making authority by purchasers, their customers, and suppliers. Empowered purchasers can make decisions on the spot and take ownership of situations. Some organizations are streamlining their rules to allow for greater flexibility in a rapidly changing environment.
- Creative Knowledge Workers, not inflexible bureaucrats. Sourcing professionals are every bit as creative as their colleagues in other functions. They are more and more broadly educated, and they are using their creativity to bring innovative solutions to their customers.
- Cross-Functional Teamwork, not departmental Separatism. The functional separation introduced long ago by Alfred P. Sloan at General Motors has outlived its usefulness and, in fact, become counterproductive. Enlightened organizations have instead been embracing the use of cross-functional teams in building and leading supplier relationships. Involving all internal stakeholders in the process of selecting, monitoring, and developing suppliers produces impressive results.
- Responsibility, not Limitation. It is a well-known fact that most employees like assuming responsibility for results but they require appropriate authority to get the job done. Limiting their ability to act stifles their willingness to act. In fact, responsibility or accountability goes hand-in-hand with empowerment which can also be described as responsible freedom.
- Pay for Performance, not just fixed salary. Purchasers can impact an organization's bottom line every bit as much as its marketers. While salespeople have long received incentive pay, purchasers who save money have historically been told that saving money was their job and that they should not expect extra compensation for delivering savings. Slowly, but surely, some organizations have begun to reward purchasers for their performance. This trend needs to grow.
21st Century Policies.
21st Century Processes.
21st Century People. In the 21st century, the sourcing function will be characterized by:
Outlook. Sourcing in the 21st Century will be an exciting career opportunity and a major contributor to organizational performance. It will be led by broadly skilled professionals who view themselves as empowered risk managers and relationship leaders, utilizing the latest business tools to enhance the competitive advantage of their organizations.
Bennis, Warren. On Becoming a Leader. Reading: Addison-Wesley 1989.
Fearon, Harold E. and William A. Bales. Purchasing of Nontraditional Goods and Services. Tempe: CAPS 1995.
Kolchin, Michael G. and Larry Giunipero. Purchasing Education and Training: Requirements and Resources. Tempe: CAPS 1993.
Scheuing, Eberhard E. The Power of Strategic Partnering. Portland: Productivity Press 1994.