Will The Last Buyer Please Stand Up!
Elaine Whittington, C.P.M., CPCM, A.P.P.
Elaine Whittington, C.P.M., CPCM, A.P.P., Educator, G & E Enterprises, http://pages.prodigy.com/BSYH21A, Sunland, Ca 91040, 818-352-4995, E_Whitt@prodigy.com
84th Annual International Conference Proceedings - 1999
Abstract. As the year 2000 approaches, the purchasing task is being impacted by technology and changes in business tactics. Will the task as we know it today disappear? A growing number of firms have combined the tasks of buyer and planner, outsourcing is growing and enterprise management has overcome the MRP and MRPII schemes. Supply chain management is the theme for all "world class" firms and the question is: will the purchasing job survive and if so in what form? Perhaps the "last buyer should stand up".
The business world is constantly changing. It is important to stay abreast of these changes and to be sure that the "mind set" of the purchasing professional and that of the firm are focused on the end result. We have all heard of the buggy whip company who found themselves out of business while the competing buggy whip company who visualized their business as one who provides vehicle acceleration was able to expand and serve the next generation of hardware (the automobile). Success came when the business focused on what was to be done, not on how it was to be done. Our firms and ourselves must adapt to the changing times if we are to be successful in today's market place.
In order to adapt it is important to understand the new words and acronyms of the next decade. We are being bombarded with new phrases and words: cross functional teams, strategic alliances, world wide web, outsourcing, enterprise management, enterprise resource planning, supply chain management, logistics and electronic commerce. Along with the new words are the inevitable new acronyms, which are also cropping up: OBI (Open Business Initiative), WWW (Worldwide Webb), ERP (Enterprise Resource Planning), SOP (Sales Operation Planning) and so many more.
It is a given that most firms will be doing business on the internet in the near future. This may be as little as searching catalogs for a product and as much as placing contracts on the web. Most of us are already utilizing e-mail both internally and with our suppliers. Hardly anyone can travel without taking a notebook computer if only to pick up the e-mail and communicate with our firm and our suppliers.
Again, in this arena there are many new words and concepts to absorb. We must understand the difference between internet, intranet and extranet. We must know how to use search engines and know that a domain name does not insure that a real firm is at the other end of the cyberspace connection.
The other effect of the web is quickly becoming a reality. Requisitioners are rapidly making the transition into the "buyer." Procurement cards and the web have eliminated the need for the buyer to "call in the order." Buyers are no longer a PO number source and with this change we, the purchasing professionals, must find the new place in the firm where we can "add value" and do a very different purchasing task. That task, which will be explored later, has everything to do with arming other people with technology to handle the clerical part of the responsibility. For many of us, this freedom to bring new and innovative ideas to the job is exciting. Others are frustrated because of the loss of the "gatekeeping" chore, which they so coveted.
Let us explore together the two most driving areas of the purchasing or supply process. The two areas that will impact our jobs the most: outsourcing and supply chain management. We will start with outsourcing, which isn't really a new idea at all but just a different swing on the "make or buy" decisions we have been making for years. The one thing we know about "make or buy" judgments is that rarely does management include purchasing people in the decision and once made the determinations never seem to change, even if they should.
Recently, management has "rediscovered" outsourcing and are looking at the entire process in a different light than ever before. It is most important to look at core competency as well as the state of technology when making these conclusions. Outsourcing seems to go in cycles.
While many firms are currently outsourcing a great deal, Honda Corporation claims that they have reduced cost by bringing tasks back in house. Most firms are on the other side of the cycle at the present time and are outsourcing for several good reasons: to reduce cost, to free up capital, to share risks, to replace outdated systems, to use current technology, to reduce administrative costs, to improve service and to eliminate inventory.
There are five basic rules to follow when looking at outsourcing:
- Strive to improve cost and service.
- Concentrate on Activity Based Costing.
- Understand that internal costs grow faster than external costs.
- Find integrated supply providers.
- Manage technology.
Outsourcing has other ramifications, which must be considered. They are the human concerns. Jobs may be lost, there may be additional resources needed to manage the outsourced tasks, some personnel may need to be transferred and retrained. Current talents may be obsolete and new ones may need to be developed and there is always a worry about morale and productivity during the process.
Secondly, the real costs of outsourcing must be considered. There will be costs to transition and coordinate the outsourced task. When comparisons are done we often leave out some of the real costs. Be sure to include organizational overhead, handling, checking and verifying procedures, personnel development, approvals and contract administration.
Writing a good outsourcing contract is where the purchasing task shines in importance. The statement of work, necessary insurance coverage, indemnification/liability and termination clauses must be specially formatted to handle these special circumstances. Outsourcing can be a great tool in adding to the firm's bottom line if it reduces inventory, maintenance, cycle time, working hours and headcount.
However, it is important to monitor the process to assure its effectiveness.
What about supply chain management (SCM)? What is it anyway? Supply chain management is actually a natural advancement from what we have been heading towards in the purchasing profession for many years. We first had MRP (Material Requirements Planning) which concerned itself with raw material and actually replaced EOQ (Economical Order Quantity). This was replaced by MRPII (Manufacturing Resource Planning) which looked at not only material but also the size of the facility and the resources. Now the evolution has taken us to ERP (Enterprise Resource Planning) within the Supply Chain Management theme. It essentially links the entire process of the business base from the production of the product or service to the delivery to the customer. It has the capability to look at the entire process not only locally but nationally and globally. SCM is the ultimate in the supplier/customer relationship in which two firms share risk taking and visions. It has been said that in the future firms will not compete, but supply chains will compete. Supply chain management links the entire procedure and assures success in both the manufacturing or service area and delivery to the ultimate customer. It utilizes the team concept and introduces a new software approach, which is called ERP (Enterprise Resource Planning). There are a number of firms which are claiming to do the best ERP job: SAP (Systems Application & Products), Oracle, jdedwards, Baan and Peoplesoft to name a few. Firms like Hewlett Packard, IBM and Intel are among those who are working to have the best supply chain.
How will this effect the purchasing task? Greatly. We have heard talk that the effective purchasing department is operating strategically rather than tactically. The time is here when those ideas are no longer visions, they are realities. As mentioned earlier, the gatekeeping task of the purchasing job has been replaced to some extent. Purchasing must now find the best supplier for their supply chain needs, they must make good outsourcing decisions, they must look at the long term and most of all they must write contracts which will bind the firm in the future and produce good value added results. The relationship with our suppliers will be much more intense and committed on both sides. This concept takes partnerships and strategic alliances to an entirely new level. Superior customer service and satisfaction is the focus to all world class firms who will be successful in the new environment.
Is your company heading toward supply chain effectiveness? This test was outlined in the article, Supply Chain Management by Michael Donovan in Electronic Buyers' News, October 14, 1996. Ask yourself these questions:
- Have you reduced total cycle time (order to shipment) 50% last 3 year?.
- Have you reduced inventory - 50% last 3 years?
- Do 98% of all orders reach your customers on time?
- Have you reduced the supplier base - 66% last 5 years?
- Has supplier lead time been reduced - 50% last 3 years?
- Have you decreased scrap, rework, warranty costs - 50% last 3 years?
- Has cost to produce product - reduced 20% last 3 years?
- Has cost of quality -reduced 50% last 3 years?
- Have direct material costs - decreased 10% last 3 years?
- Has the product development cycle - reduced 50% last 3 years?
Nine to ten yes answers indicate that you are highly focused/top performing. Seven to eight yes answers indicate that you need to work on the weak spots. Five to six yes answers shows little progress and four or fewer means you may be left behind. Where do you stand?
When considering supply chain management be sure to include location, product, inventory and transportation in the formula for the decision. The purchasing professional can be an important part of the supply chain team. Supplier selection and monitoring are most important in the successful supply chain management scheme. This is an on-going task as technology changes and outsourcing requirements are modified. Suppliers must be included in goal setting, early involvement in new projects and risk sharing can ensure success. Another important factor in successful supply chain management is the ability to clearly communicate with all members of the team.
What does all this mean to the purchasing professional? The buying task as we know it today will indeed disappear. With it will go the perception of the buyer as "nothing but a clerk." Organizationally, purchasing will often find itself in a place called "distribution functionality" or "strategic supply" located where their customer is. There will be three types of tasks for the purchasing professional of the future:
- Contract negotiator and developer
- Technical expert (computer skills)
The facilitator is the "people" oriented person who is able to lead the team and assure proper blending and use of all necessary skills. Purchasing people will still be required to write and negotiate advantageous contracts for their firms. Finally, there will be many technical challenges to purchasing on the net and finding product in the world of cyberspace as well as other EDI (Electronic Data Interface) tasks. Some firms will be large enough to require different individuals for each of these jobs and some smaller firms will need that "superstar" who is all of these things rolled up in one.
In summary, the dream of the requisitioner is about to come true as they will be the ones who call in the order or place the order electronically and then follow it up, if necessary. The purchasing professional will be occupied locating and qualifying sources, writing and negotiating good contracts and managing the interface with the "supply chain."
The good news is that the time has finally arrived when management understands the importance of the purchasing professional. It is now understood that the corporation's non-labor spending demands must have their attention, must utilize top corporate talent, needs the best tools for managing information and must be controlled for comprehensive corporate winning strategies. They now realize that this area may be the last frontier for corporate cost control. One that has been overlooked for a very long time. Management also appreciates that new strategies will pay big dividends and if the corporation makes the purchasing skill one of their "core competencies" they will reap many benefits. As you can see that is the important message which top management must hear to make your firm "world class."
The last buyer as we know him or her today, may well be the last buyer. The purchasing task will not disappear but will be an entirely new challenge and with it will come new respect for a very important facet of the business community. It could be the era we have all been waiting for when management finally sees and appreciates our ability to have an effect on the bottom line. Perhaps the last buyer will be replaced by the first "supply demand engineer."
Journal or magazine articles
Managing Office Technology, September 1995
Brown, Raysman, Millstein, Outsourcing New Tool in Managing Office Technology, Business Laws, Inc., January 1995
Donovan, Michael, "Supply Chain Management," Electronic Buyers' News, October 1996
McClintock, Fred, "Know the Terms, Avoid the Lingo," Purchasing Today®, September 1997
McKeller, John, "The 'How To' of Outsourcing Contracts," Purchasing Today®, September 1996
Porter, Ann, Millen, "Buying As A Core Asset", Purchasing, November 1998