Nontraditional Purchasing Needs Nontraditional Methods

Author(s):

William L. Michels, C.P.M.
William L. Michels, C.P.M., Director of North American Consulting, ADR International Purchasing Consultants, Ann Arbor, MI 48189, 313/930-5070
E. Jonathan Hughes, M.C.I.P.S.
E. Jonathan Hughes, M.C.I.P.S., Chairman, ADR International Purchasing Consultants, Bracknell, Berkshire, UK, RG12 1RP, +44 1344/303078

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Introduction. In many organizations, the largest proportion of purchased expenditure is in non-production goods and services. These "nontraditional" areas, such as insurance, utilities, consultants, travel and advertising, are typically purchased without the benefit of professional buying practice and skills. The value for money obtained by more effective purchasing practiced on this expenditure represents a major opportunity. To maximize this opportunity in nontraditional purchased, nontraditional methods are needed.

Research. In April 1995, the Center for Advanced Purchasing Studies (CAPS) published the results of a study of the purchasing of nontraditional goods and services(1). Since what is considered nontraditional varies with each organization, the CAPS researchers suggest that conventionally raw materials, special and standard production items and MRO supplies are considered "traditional", and all other goods and services are considered "nontraditional"(2).

The CAPS study conducted a special survey of CEOs in leading Fortune 500 manufacturing and service firms, and in leading Forbes 200 entrepreneurial firms. Several interesting conclusions were drawn, including:

1. . Many firms do not measure nontraditional expenditures.
2. Many purchases are made without formal purchasing input.
3. 59% of total purchase dollars are spent outside of the purchasing department.
4. There is a large scope for improvement in profit.

These are consistent with ADR's findings in its consulting practice. The case studies below are some examples of traditional - nontraditional expenditure data. One key column is the number of purchase agents in a typical company. For this paper, a "purchase agent" is one who spends an organization's money, but is not a member of the professional purchasing staff. (This chart has astonished many CEOs.)

CASE STUDIES: ADR CLIENTS
Industry Total % $ % $Non- # Full-time # Purchase
Spend $ Traditional traditional Professional Agents
Buyers Service Banking 10 million 20 80 8 500
Pharmaceutical 3 billion 60 40 450 4500
Consumer Products 1.5 billion 75 25 180 2850
Food 300 million 80 20 25 1700

From these case studies, we have learned:

1. Most purchase agents (people spending the company's money) are doing the purchasing on a part time basis. Purchasing is not identified as a major component of their job function.
2. Purchasing effectiveness is not measured.
3. The budget process is inflationary and leads to increasing prices.
4. Supplier performance is not measured/demanded.
5. Purchase agents are not trained or poorly trained.

Categories of Expenditure. The nontraditional items listed below are some areas that ADR includes in reviews to baseline best practice:

TYPICAL EXAMPLES OF NONTRADITIONAL EXPENDITURE

MARKETING SERVICES
• Creative Agencies
• TV Production
• Design
• Trade Marketing
• Direct Media
• Market Research

MARKETING SUPPLIES

• Point of Sale Material
• Promotional Gifts

INFORMATION TECHNOLOGY

• Hardware Purchase & Lease
• Software Purchase & Lease
• Contract Programming
• Hardware Maint. Contracts
• Software Maint. Contracts
• Personal Computers
• Consumables
• Facilities Management

PREMISES

• Premises Leasing
• Cleaning Contracts
• Maintenance Contracts
• Security Contracts
• Professional Fees
• Office Furniture/Equipment

PROFESSIONAL SERVICES

• Legal Services
• Consultancy
• Financial Advisory
• Audit Fees
• Bank Charges
• Recruitment

MISCELLANEOUS GOODS & SERVICES

• Couriers
• Postage
• Air Travel
• Hotels
• Stationery
• Health Benefits/Insurance
• Training
• Uniforms
• Catering
• Publications
• Photocopiers
• Temporary Staff
• Recruitment
• Archives

UTILITIES

• Gas
• Electricity
• Water/Sewer Services
• Heating Oil

Identifying Nontraditional Expenditure. ADR has developed a methodology for estimating nontraditional expenditure:

• Using an organization's financial statement/Annual Report:
  Total Sales Revenue - Value Added Costs (salaries, overhead, general &
  administrative, etc) = Total Expenditure with external suppliers
  Total Expenditure - Material Cost of Goods Sold = Nontraditional Expenditure

Having identified the costs for nontraditional expenditures, it is necessary to determine who has accountability for the expenditures. Places to look are:

• Engineering
• Information Technology
• Transportation
• Finance
• Human Resources
• Marketing
• Facilities
• Production
• Administration
• Warehousing

The Approach. A key issue is one of purchasing as a process versus purchasing as a business function. Traditional purchasing is typically viewed as a functional activity, in which other departments do not participate. From the process viewpoint, purchasing is viewed as exchanging money for goods and services. However, Purchasing's role must be one of coordination and influencing the process. All too often, Purchasing has attempted to control all supply related activity with a tendency of applying leverage tactics in strategic situations.

Cross Functional Commodity Team Approach. The purchasing of nontraditional expenditures varies in complexity. Different levels of technical competence need to be applied. For example, capital equipment and information technology require rigid specifications to which the engineer should contribute performance specifications for equipment. The contract should be jointly developed between purchasing and other functions to meet the company needs.

Cross functional team success factors are:

1. Management commitment and support
2. Common mission and goal
3. Meaningful performance measurement
4. Defined Responsibility, Authority and Accountability
5. Agreed work plan
6. Consideration of business environment
7. Specialist knowledge and availability of resource
8. Access to information and data

Team Process. The objective of the team is to achieve a result which exceeds the sum of the individual contributions. There are a number of recognized process phases in any team activity. They may be categorized as follows:

CREATING THE TEAM
• Seeking commitment
• Seeking Leaders
• Contribution
• Understanding Expectations
• Performance Accountability

RESOLVING POLITICS

• Turf issues
• Frustration
• Authority
• Power
• Competency gaps

HARMONIZATION

• Securing agreement
• Developing trust
• Developing mission
• Openness
• Acceptance of responsibility

DELIVERING RESULTS

• Executing mission/plan
• Exceeding expectation
• Confidence
• Positive results
• Freedom of success

BREAK UP

• Euphoria
• Lasting relationships
• Let down
• Recognition
• Team Dynamics
• Defined Mission/Process
• Leadership
• Responsibility, Authority and Accountability
• Commitment and Resource
• Interaction/Involvement
• Maintenance of Self Worth
• Feeling of Contribution
• Open Communication
• Respect/Trust
• Respect for Others/Other Opinions
• Resolving Disagreement
• Listening

Other Approaches. A second approach for managing nontraditional expenditure is to transfer the responsibility for the purchase into purchasing.

The third approach is to leave the responsibility outside of the Purchasing Department, but add measurement, cost and continuous improvement goals, and develop a comprehensive training package which will update nontraditional buyers in key purchasing skills(3). Some of the competency development areas to include in the training are:

• Information Control & Conditioning
• Supplier Management
• Relationship Mapping
• Portfolio Analysis
• Bid/Quotation Analysis
• Purchase Price & Cost Analysis
• Cost Management
• Performance Criteria
• Negotiation
• Complexity Reduction

Conclusion.
If purchasing is to be viewed as a business process rather than a functional activity, it is essential that purchasing professionals understand their roles in influencing nontraditional expenditure. Purchasing can impact in the ways indicated above: purchasing can directly impact the expenditure; purchasing can act as an internal consultant/advisor for nontraditional purchase agents; purchasing can act as a cross functional team member dealing with nontraditional expenditure. The three different approaches should be applied depending on the portfolio position(4) of the category of expenditure concerned.

Purchasing professionals can play a vital role in the nontraditional areas if their approach does not attempt to dominate and take control of all aspects of the expenditure.

Bibliography

1. Fearon, Harold D., Ph.D., C.P.M., and William A. Bales, C.P.M. Purchasing of Nontraditional Goods and Services. Center for Advanced Purchasing Studies, April 1995.
2. Karoway, Cherish. "Who Spends What?." NAPM Insights, June 1995, 20-22.
3. Michels, William L., C.P.M., and Peter Evans, Ph.D. "Spotlight on Skills: The Important Ones." NAPM Insights, October 1995, 17-19.
4. Michels, William L., C.P.M., and E.J. Hughes. "Portfolio Analysis: The Mapping Tool for Developing Commodity Strategies." NAPM Conference, 1994.

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