Implementing the Virtual Purchasing Organization - a practical approach
Gerrit Kasteel, Director of International Purchasing, American Cyanamid Company, Ingleheim, Germany 55218, +49 6132/789201.
Peter Evans, Ph.D., FCIPS
Peter Evans, Ph.D., FCIPS, Principal and Director of Strategic Purchasing, ADR International Purchasing Consultants, Bracknell, Berkshire RG12 1RP, +44 01344/303078, firstname.lastname@example.org.
83rd Annual International Conference Proceedings - 1998
Introduction. The demands of leading edge businesses on their purchasing organizations are increasing as globalization pressures build.
There is irresistible pressure on the business for shareholder value which can be summarized in terms of:
- Improvement in earnings per share
- More new products to market......and faster
- Continuing innovation
- Total compliance with environmental, health, safety and legal requirements
- Responsible "corporate citizenship"
Many of these challenges can be addressed by challenging the ways of purchasing goods and services from suppliers. We are convinced that significant latent opportunity exists for increased contribution in this area. In this presentation we will show how to do it!
Objectives. The objectives of this presentation are:
- To indicate the demands placed by premier businesses onto purchasing and their supplier base.
- To differentiate between "traditional" purchasing thinking and some of the more progressive and successful approaches to dealing with suppliers.
- To demonstrate the practicality and key success factors for an alternative approach.
- To present practical examples where this approach has been used to create major business improvement leading to competitive advantage.
The Need. As control of purchasing expenditure becomes recognized for its critical influence in overall business performance terms, the strategic importance of source selection and continuing supplier management becomes significant.
The delightful thing about purchasing improvement is that every dollar not spent immediately falls to the profit line. Additionally, incremental non-cost improvements in value can be delivered in almost every scenario that can be imagined.
Development of procurement processes and capabilities to deliver and sustain these incremental improvements requires an analytical and innovative approach. We shall be describing some aspects of implementing significant changes in purchasing to create demonstrably superior business performance while providing additional stimulus and growth in the capability of many people involved in dealing with suppliers.
Getting Started. Before embarking on any significant journey, it is essential to establish the current location, have a view to the destination, have access to a map or directions and, hopefully, have some means of transport available.
The first stages involve gathering and sorting the essential base DATA:
- what is purchased?
- how much of it is purchased?
- who is supplying?
- who inside the organization is responsible for the spend?
In most organizations, the collection and assembly of this information takes an unexpected amount of time and usually raises a number of issues:
- systems are not able to give us the data;
- coding systems are inadequate;
- budgets lack detail;
- individual sensitivity exists over "ownership" of areas of expenditure.
The next question relates to ORGANIZATION and RESOURCES:
- purchasing is not usually highly respected in the business;
- dedicated resources are usually sparse;
- extra staffing is not a feasible option;
- competence development in purchasing has been limited.
One vision of traditional organizations would describe purchasing as one island in an organizational archipelago (see figure 1).
(figure 1 is not available in text-only version of this paper)
One of the key visions of purchasing improvement is the integration of all functions into the Purchasing process - we describe this as MAINSTREAM (see Figure 2).
(figure 2 is not available in text-only version of this paper)
The DIRECTION and STEERING of this process is vital to its continuation and success.
As well as the strategic guidance, the key to success is obtaining the commitment of appropriate and sufficient RESOURCES. In other words, we needed to get more time and energy from selected non-purchasing staff to carry forward purchasing related activities.
The concept of the VIRTUAL PURCHASING ORGANIZATION was developed - the key features were defined as follows:
- commitment of a key group of senior managers to form a PROCESS STEERING GROUP;
- realization that deployment of extra purchasing staff resources was unlikely to be a favored solution;
- acceptance that the specialist nature of some of the major categories of spend needed a cross-functional purchasing approach;
- the need to move to longer term STRATEGIC CONTROL for key categories of spend and suppliers.
Moving forward. With the above road map for purchasing improvement we were able to push forward.
The level of EXPECTATION OF PERFORMANCE was progressively increased in the following areas:
- price increases from suppliers were no longer acceptable;
- overall cost improvement (reduction) was expected each year;
- purchasing budgets were set with no acceptance of inflation;
- setting targets for cost and value improvement became the norm;
- long term purchasing strategies were expected to be developed, agreed, communicated and implemented.
Careful attention was paid to ALLOCATION OF PURCHASING PORTFOLIOS dependent on:
- Portfolio Analysis position;
- Number of using locations;
- Technical and organizational complexity;
- Structure of supply markets.
Essentially the Responsibility, Authority and Accountability for the entire portfolio of purchasing expenditures was allocated either to a nominated individual (usually functionally attached to purchasing) or to a TEAM.
PURCHASING TEAMS were initiated and chartered to develop strategies and oversee their implementation.
After some experimentation, the essential ways of working for purchasing teams were recognized and applied to further categories of expenditures.
The features of the purchasing teams were as follows:
- clear leadership with overall responsibility for the team and its performance;
- selection of team members with appropriate experience and seniority;
- recognition of the need to have others join the teams on an "as required" basis;
- the need to work in a structured way with preparation for meetings, clear agendas and timely communication of decisions and agreed action points;
- realization that the team itself did not always become involved in implementation of plans (and supplier meetings);
- development of SKILLS and TECHNIQUES of the team members. One of the unexpected consequences of working in this way is the improved purchasing awareness and capability of team members. This message is taken back into the business and applied doing their non-purchasing activities.
Credibility of the effectiveness of the virtual purchasing organization is provided by practical MEASUREMENT and REPORTING. The selected measurements should be auditable and transparent and include overall cost-trend (for the total spend portfolio), contribution to year to date profitability, comparisons with external marketplace and suitable indicators of value delivery and supplier performance.
Finally, we need to remember that the purchasing processes are carried out by individuals. CELEBRATION of success and RECOGNITION and REWARD should be considered an important part of purchasing.
Conclusion. This presentation illustrates how organizations can re-deploy existing resources to deliver significant and sustainable improvement in the value delivered from suppliers.
The purchasing function itself must be transformed from the traditional view into a modern, outgoing, progressive and facilitating role.
Focus on to core and strategic purchasing through a suitable allocation of the portfolio between individuals and teams will present the opportunity of continuing the journey well into the future.
Finally, based on experience, working in this way can make the workplace more diverse and enjoyable.