--- To enhance the value and performance of procurement and SCM practitioners and their organizations worldwide ---



Do the MBP No, it's not the Mambo By Purchasing. ....it's Management By Policy

Author(s):

Ricardo R. Fernandez, C.P.M., P.E.
Ricardo R. Fernandez, C.P.M., P.E., Managing Principal, Advent Group, Inc., Miami, FL, 305/227-9478.

82nd Annual International Conference Proceedings - 1997 

Abstract. If you want to learn how to align your Purchasing/Supplier Management functions with the organization's key business drivers, then this is the place to be. We will use some tools that will systematically show how your area relates to the key business drivers. By understanding these links you will be able to prioritize your activities to more accurately reflect the needs of the organization. You will get more bang for your efforts and you will be able to prove it.

What's In It For You?:

  • You will take with you information and management methods that you can apply at your workplace to enhance your effectiveness in the view others in their organization.
  • You will be able to discuss these new management processes with others in your profession and to exchange ideas related to this topic in an interactive team discussion that is part of the presentation.
  • You will have fun. Great pains were taken to make the presentation interactive, interesting, and fun.

Objectives

  • Improve the ability of Purchasing Professionals to prove their link to the success of their organization.
  • Improve the success rate of Purchasing/Supply Management strategic policies.
  • Create a memorable experience for the participants so that they may more easily relate their learning to applications in their workplace.

Overview
The session starts by developing an understanding of the problems with most of today's management methods and especially Management by Objectives. We discuss the effects that these methods have on the overall organizational results. We then describe a methodology used by companies such as 3M, Florida Power and Light, and Xerox to name a few, that has totally changed the way organizations are managed. It is sometimes referred to as Management by Policy or Policy Deployment. The session then proceeds with the some interactive workshops to demonstrate how the Purchasing Professional would implement such a process in their area and maybe even help the whole organization shift into this management philosophy. This management process can provide the participant with a way to establish their department or division policies (i.e. targets and means) to be in the same direction as that of their organization. This is then reflected in their tactical plans, budgets, and cross-functional activities. These tactical plans are then translated to the Purchasing Professionals' daily activities. In addition, a monitoring mechanism is structured to provide a means to review, analyze and modify the direction taken based on the policy. The ultimate result is that the Purchasing Professional will have an ongoing management tool that will assist them in reaching the overall excellence in all areas in support of the organizational direction. The outcome will enhance the perception others have of the Purchasing Professional and the Purchasing or Supply Management areas.

What's Wrong with Management by Objectives? The great majority of your organizations are either using Management by Objectives as originally conceived or some variation on the theme. This is a very popular management process since it is very simple to administer and it is a great way for management from the top down to institute their goals to others in the organization with little effort or involvement. The problem is it doesn't work very well. It doesn't work because of some of the following reasons:

  • Control: The MBO management process is based on two key organizational concepts. The first is to create a strict control over objectives....not only in the creation of the objectives but also in the tracking and achievement of the objectives. This control hurts the overall performance levels that can be achieved by the organization since it is used to drive often illogical and unrealistic goals down the organization. Managers who have been caught at the end of this process will make sure that they achieve the goals that were driven upon them, no matter what the costs are to themselves or other parts of the organization.
  • Individual vs. Team: The second major problem deals with individual vs. team orientation of goal setting and achievement. The claim made in Management by Objectives is that it is important to place accountability on someone in order to assure that the objectives are met. This will force the person to act individually and in a competitive nature in meeting the goals rather than in a collaborative way that can be of service to others within the organization.
  • Decisions are Made Based on the Objectives Only: This is troublesome especially when it is the objective alone that determines the final outcome of the decisions. One must continue to look at the other areas affected and the good of the overall organizational system when making decisions. Sometimes the decisions will not favor the objective but one knows they are the right thing to do for the overall organization. Once the goals are set for Supplier Partnering during the year, an objective to eliminate more suppliers from the Supplier Base may affect one's dealing with some of the suppliers and the decisions taken with them. In this case the decision should consider all factors appropriately.
  • Inflexible: Once the MBO is set at the beginning of the year it is difficult to change since it is the MBO that will determine the performance results and corresponding merit increase for the manager. Trying to change an MBO is as difficult as trying to move a mountain. It is possible, but highly unlikely.
  • Results based on Attaining Objectives: The process of achieving those objectives is not important. What is important is whether or not the objectives were met. This again can lead to suboptimization of the overall organizational system. An objective that is attained in one area may affect the results in other areas. For example in a Purchasing setting, different buyers working with the same supplier for different commodities may bring a great results in one commodity at the expense of another commodity. These need to be better coordinated and aligned.

How does Management by Policy Differ? Management by Policy is an integrated systematic management process that begins with the organization's Vision and Key Result Drivers or Corporate Success Factors, continues through the deployment of these to all levels of the organization, the periodic review of progress and the improvement actions taken to assure success of the plans.

The Key Performance Drivers are those key measures or activities that the organization must do to succeed. For example some of the Key Performance Drivers may be Price, Quantity, Delivery, Quality and Reliability. This implies that your organization must improve and focus their efforts in order to improve these Key Performance Drivers. Everyone at all levels must do something or have a role in these improvement efforts. Therefore Policies or Strategies are developed at the highest levels of the organization and these are linked at the different levels of the organization so that all efforts at all levels are in support of the overall organizational direction.

Projects are developed that are usually cross-functional and team based. Although there may be one person that is selected to lead the team and to assure that the activities of the team are well coordinated, it is the responsibility of everyone on the team as well as the rest of the people affected in the organization to push in the same direction and to do whatever it takes to support the achievement of the Strategies and goals of the organization.

MBP differs significantly from MBO as follows:

  • Control: The control aspects of MBP are process driven. It is assumed in an MBP process that changes must take place in a process in order to achieve changes in results. For this reason the control is accomplishments through measures that are instituted in a process rather than measuring if certain activities have been completed or not. Therefore goals in the MBP process are developed in terms of process outcome. Plans are developed in order to effect changes in these process outputs and the plans are monitored as they are completed in order to determine their effectiveness on the desired result. This is a cause and effect relationship that is analyzed then to determine if the plan is being followed and if it in fact will accomplish the desired results. Otherwise, changes are made to the plans to assure the expected results are met.
  • Individual vs. Team: In MBP the focus is the team effort and not the individual who may have an objective to meet. It is also the process which the team follows that is important. In the case of MBP, you are not trying to figure out who's fault is it, but instead you focus on the steps in the process and the changes that are planned in order to meet expected results.
  • Decisions are Made Based on the Objectives Only: In MBP decisions are made considering their overall impact on the organizational system. The objective is not as important as understanding the process, making changes to the process and learning how the changes affected the process outcome. This creates an improvement impetus that guarantees continuous improvement.
  • Inflexible: Changes are made to the MBP plans as necessary throughout the planning cycle. Since the plans and the outcomes are not individualized as much as in the MBO, managers are more ready to change in order to make the right changes to the process. Periodically reviews are made to determine if changes are needed and they are made as appropriate.
  • Results based on Attaining Objectives: In MBP the process of attaining the desired results is more important than the results alone. One must understand the changes being made to the process and learn from those changes. Adjustments are made based on the effects observed from these changes. The goals come as a result of making the correct changes to the process. There is a complete reversal in the thinking of the MBO process.

What is Policy? A policy or strategy in the context of MBP is comprised of three components:

  • Target or Goal: This is what is to be achieved. The difference is that a great emphasis is made on not just completing some make-work activity but rather a favorable movement in some of the Key Performance Drivers of the organization. For example, one of the organizational targets may be to improve productivity in a line of products. It is incumbent upon the Purchasing organization to understand how they can assist the organization in meeting that target. One of the things they may do is to select products that require less installation, maintenance, and operating labor to use.
  • Means: There must be a way that this Target or Goal is expected to be met. This is the Means. The Means is best developed as a project plan that will change the process and will create some expected outcomes. This way not only will the process changes be monitorable, but also the expected results. In this way, during the review of the Policy during the year, it will be easier to determine if in fact changes are needed to the plan or not.
  • Measures: Someone once said that you can't manage what you don't measure. The third component of a Strategy must include a measure. This is the only way that management can determine if the expected results are being attained or not. It isn't enough just to say that the project is being completed on-time and within budget, more importantly one must determine if it is having the expected effect on the Key Performance Drivers. By having good measures Purchasing can prove the effect that they have had on the overall Key Performance Drivers of their organization. This will prove their value to the organization.

Plan, Deploy, Execute, Review, and Improve.
This whole MBP process can be summarized as follows: Plan: First the organization must set a direction and some mile-markers along the way. This is done by way of the Vision and the Key Performance Drivers. These then have to be deployed throughout the organization. In order to create this deployment, Policies/Strategies are developed at the highest levels. Business unit leaders, Directors, Managers and then supervisors are asked to develop their own Tactics that will support the Strategies at the organization level. These Tactics also must have the 3 components of Target, Means, and Measures as discussed earlier. These Tactics are Executed in order to achieve the desired results. As these are being executed, a periodic review will determine if in fact they are achieving their targets and what changes are needed. These changes are used to learn and to improve over time.

MBP in a Purchasing Function.
A Purchasing department needs to determine which are the Key Performance Drivers of the organization that they can most contribute to. They then need to develop specific Strategies and Tactics that are tied to and support these Key Performance Drivers. All of the improvement efforts of the Purchasing function should be aimed at achieving some outcome related to the Key Performance Drivers of the organization. Tools that can be used to make these ties include matrix analysis and correlation analysis. Also modified Quality Functional Deployment approaches can be used. These ties need to also be in tune with the needs of the internal customers of Purchasing and they need to consider their Supplier capabilities. Together Purchasing and their Suppliers can develop Strategies that support the overall Key Performance Drivers of the organization and if successful will significantly impact the overall success of the organization. This was evident with Chrysler's Purchasing department in Chrysler's evolution to automotive success. The Purchasing department tied itself closely with the needs of the company and became an integral part of its success.


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