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Adding Value Through Strategic Management of Goods and Services

Author(s):

Lisa Liles Peters
Lisa Liles Peters, President, Liles Peters & Associates, Houston, TX 77479, 713/343-1342.

82nd Annual International Conference Proceedings - 1997 

Case for Action. Companies today are faced with ever increasing competition and must constantly adapt to changes in marketplace regulations/deregulations, globalization, advancing customer focused technology and services, growing quality requirements and constant cost improvement pressures. Strategically managing purchased goods and services positions a company to turn these changes into a competitive advantage by leveraging the company's buying power and maximizing the contribution of the supply base through aligned interests.

Now is the opportunity for the Purchasing organization to stand out as a strategic leader, and offer specific plans on how strategic management of purchased goods and services can contribute to company objectives. To do so, they must clearly understand what is meant by strategic procurement and define their role in the change effort. They must also have a plan for implementation of the change throughout the company.

Definition. Strategic procurement involves segmenting purchased goods and services into commodity groupings and developing short and long term business plans for key groupings. These business plans are focused on reducing total cost and maximizing the contribution towards company business objectives. This approach requires companies to move away from the functional and transactional focused purchasing practices and move towards a horizontal, process approach to procurement requiring:

  • Linkage to Company Business Objectives
  • Business Market Intelligence
  • Total cost decisionmaking
  • Cross functional input
  • Smaller, more integrated supply base
  • Management of the entire supply chain
  • Customer Focus

This process approach has caused a shift in procurement philosophy over the last ten to fifteen years from low price buying to total cost management. With the advent of process re-engineering, many Company Managers have begun to regard their business as a number of different processes, that cross several department and company boundaries, and result in producing the product or service their company ultimately sells. Current thinking recognizes the supply process as one of these many business processes. This changed the perspective of procurement from that of managing a transaction, to that of managing the cost of an entire business process--the process that starts with design of the product or service and ends with the ultimate disposal of the product or completion of the service. This also changed the definition of total cost to being all the cost components associated with a supply process for a good or service from design to disposal.

(Total Cost Perspective graphic is not available in this text-only version.)

The objective of strategic procurement, then, is to identify key commodity groupings for your company and create business plans for each grouping that focus on reducing total cost and maximizing the value of this entire supply process.

Purchasing's Role. Because the cost of purchased goods and services can represent up to 55% of every sales dollar, companies are recognizing the importance of strategically managing this cost to increase profitability. Those that don't will fall behind their competition. The Purchasing Organization is best positioned within the company to lead this effort since they are generally viewed as the entry point for supplier inputs into the organization. Marketplace intelligence, supplier relationship management and risk management are all necessary skills and knowledge that the purchasing professional can employ towards leading the charge. Not doing so will put the Purchasing organization and professional at risk of being downsized or outsourced.

Overhead departments, that are not perceived as adding significant value to the company's strategic objectives, are prime candidates for meeting downsizing targets because it is more difficult to see their contribution in the bottom line of the company. More and more CEO's are starting to look at the various departments within their company to determine:

  1. which departments are value adders versus cost centers and
  2. how unique is this service, ie. can I get the same service at a equal quality and lesser cost from outside the company?

Those departments that are low value adders and can be obtained from outside the company at equal cost and quality are likely to be significantly downsized, eliminated or outsourced. So the purchasing profession must move towards strategic procurement to: (1) help their company meet competitive pressures of managing costs and (2) secure a place within the company as a long term value adder by leading the company effort in obtaining the lowest total cost through:

  • development and implementation of Commodity Business Plans
  • development of the supply base contribution
  • development of the proper interfaces within the supply process

Where purchasing staff have historically spent 70-90% of their time on transactional and tactical activities, they should move to spending 70-90% of their time on strategic and tactical activities.

(graphic not available in text-only version)

The Process. Moving into strategic management of purchased goods and services is not a simple task. It involves changing philosophies throughout the company around buying practices, acquiring new skills and creating cross functional/company participation and buyin. It is important to create, and widely advertise, a change initiative that the entire company can rally around. To achieve this, you must develop a well thoughtout plan for change that includes the following six key steps:

Perform a best practices gap analysis for your organization.
The first step is to understand what needs to change and how. To achieve significant improvement the company must move away from the transaction management practices and fully employ the more strategic best practices such as calculating and measuring total cost, selecting best value suppliers, redesigning the supply process and integrating key suppliers. Learn the most current leading edge philosophies and practices and how they are carried out in the work environment in other companies. Means for this include:

  • Attending public training seminars
  • Designing in house training seminars
  • Initiating/participating in benchmarking studies
  • Reading trade journals and current books
  • Joining professional organizations such as NAPM

Next assess your own organization against the best practices you have learned and identify the gap. The gap analysis requires looking both within the Purchasing Organization as well as beyond, at other departments within the company and how they are involved in the supply process. This requires gathering data such as # of purchase orders/invoices, amount of backdoor purchasing, cost of acquisition, etc. It will also require gathering qualitative data through interviews of key personnel throughout the company regarding such things as evidence of total cost analysis, supplier relations with Engineering/Operations, capability of Purchasing personnel, examples of integration of supplier suggestions and resources etc. This assessment becomes the foundation for the plan to make change within the company.

This is a difficult step because it requires looking at "how we've always done things" with a new set of eyes. Many of the best practices of today are just incremental steps of improvement over how things were done in the past--evolutionary versus revolutionary. For example, supplier relationships have been getting more cooperative for the last 10 to 15 years in many industries but how that cooperation is carried out is progressing further every couple of years. So in assessing the current practices, you must determine "how" cooperative supplier relationships are being managed today within your own company and how that compares to what others are doing. Also, what kind of measurable results are evident from various practices.

Establish clear objectives
Now that you understand what best practices can be implemented for improvement, establish a high level, quantifiable objective for your strategic procurement initiative. This objective must be directly linked to the company's objectives and mission, e.g. if the company's objective is to be low cost producer, your strategic procurement objective should focus on total cost reduction estimates. Anywhere from 3 to 15% of annual expenditures is a realistic estimate for yearly total cost reduction of goods and services when successfully moving from use of traditional to leading edge procurement practices.

Identify and Document Opportunities
Identify which goods and services to tackle first. Start with the goods and services that have the most potential for improvement to ensure a success early in the change process and promote interest in continuing the effort. In developing this priority list, you should start by assessing all commodities within Purchasing's sphere of influence. Keeping in mind to start small and get a few successes, look for ones that have a good balance of the following:

  • Significant impact on business objectives
  • Greatest savings/value potential
  • Least resistance to change

Once you have determined where the best opportunities are, begin preparation of a Commodity Business Plan for each commodity, listing:

  • Historical and projected annual expenditures
  • Current suppliers used and # of suppliers representing 80% of expenditures
  • Improvement objectives and projected savings
  • Key departments/managers involved in the supply process
  • Resources necessary for achieving improvements
  • Projected timeline to achieve results
  • Action plan

Gathering marketplace intelligence and conducting internal customer and supplier interviews will be helpful in identifying key opportunities. This document will be useful for organizing your thoughts, communicating the opportunity to gain support from management and as a starting point for your cross functional team when developing a final and complete Commodity Business Plan.

Establish Sponsorship
Now comes the hard part. For each Commodity Business Plan to result in adding value to the company's objectives, all the key functions/staff involved in the supply process for a that commodity must be in agreement on the strategy used to procure the item, the strategy used to deal with suppliers, how suppliers will be chosen and how performance will be managed and measured over the life of the commodity.

To gain support and participation in implementing strategic procurement, it is necessary to communicate your planned change to: (1) the CEO and their management team and (2) Business Managers and their key staff.

Communications should include:

  • education on total cost management practices and benefits
  • strategic procurement initiative objectives
  • linkage of those objectives to company/individual business objectives
  • specific commodity opportunities
  • proposed action plan
  • resources and actions you need from the audience to make this successful

To increase the visibility and ensure lasting commitment throughout all functions, many companies have established Supply Councils. These Supply Councils generally consist of high level managers from each of the key departments involved in the supply process. They can be very effective when prioritizing opportunities, getting all the players committed initially and holding cross functional teams accountable for results over the longterm.

Pursue Improvement Opportunities
Working with cross functional team members, the Commodity Manager will lead the effort to strategically manage each commodity opportunity. The steps involved are shown in the following diagram:

(diagram not available in this text-only version)

Measure results
Measure performance against the objectives and expected outcomes identified in step two above. Assign one department or individual to track cross functional team successes and communicate those results widely and at regular intervals. As one internal customer hears of others' success, they will be more inclined to join the effort.

Several critical success factors can help ensure the success of the transformation to strategic procurement:

Champion and adequate resources--Designate a senior-level Purchasing Manager as the champion, with complete accountability for success of the strategic procurement initiative. If possible, dedicate fulltime resources to aid the Champion in developing and shepherding the effort to strategically manage purchases. These dedicated resources work with the Champion, the purchasing staff and throughout the company, coordinating their input into a realistic plan of action. By designating these individuals with the responsibility of developing the plan, it allows the rest of the purchasing organization to be involved in the design and implementation without having to sacrifice their attention to their daily responsibilities.

Senior Management support--The buck stops with the CEO. The CEO sets the direction of the company as well as priorities for getting there. If you are going to be successful at employing resources throughout the company to achieve change, your CEO must believe in the need for change and actively support it with their direct reports.

Learning process-- An effective training program, designed to help all the players learn how to apply these practices to specific commodities and how to work together effectively as a team, will allow you to deliver results. Use the train-the-trainers approach. Create a training program that provides the Commodity Managers with the knowledge and skills they need to apply total cost management practices and also enhances their ability to educate cross functional team members and management contacts in the business.

Complete and timely communication--Establish a communication process that keeps key stakeholders everyone involved up-to-date on progress. Share measured results of how well the plan is progressing and individual results from the cross functional team efforts. Ensure your communications include:

  • The Purchasing organization
  • Senior management
  • Internal customers and possible external customers
  • Key suppliers

A team oriented approach--It is natural for some internal customers to become protective of their control over the decisionmaking on procurement matters that they have historically handled. Approach them as a "team player" with interest in helping them in their efforts to maximize the value of their procurements, offering them new ideas and new tools to make those decisions.

Timing--Every step in this effort should be identified and sequenced. For example, ensure the Commodity Managers get trained to lead cross functional teams before committing the resources to start work on commodity opportunities. Ensure your plan has a timeline established that allows continuous forward progress.

Summary. It is an exciting time in the purchasing profession if you are up to the challenge. Being a leader in strategically managing your company's goods and services can not only assist your company in improving profitability, but also offer you the knowledge and skills you need to be a valuable addition to any company where you choose to work.


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