Purchasing in the Next Millennium: The Value-Added Contribution

Author(s):

Robert J. DeFusco
Robert J. DeFusco, EMC Corporation, Hopkinton, MA 01748, 508-435-1000, rjd_purchasing@msn.com.
Michael D. Clark
Michael D. Clark, Purchasing and Materials Consulting, Inc., Yarmouth, ME 04096, 207-846-4026, pmci@nlis.net.

83rd Annual International Conference Proceedings - 1998 

Abstract: Today's Best-in-Class corporations are transforming Purchasing into a value added corporate entity. How are they accomplishing this transformation? What are the successful ingredients being used by companies today to achieve improved bottom line results and maximized market share? This presentation will illustrate Purchasing approaches to these challenges and opportunities by presenting a "road map" of the value added methodologies being utilized in the 1990's to insure competitive market positions in the next millennium.

Introduction: There is much discussion and heralding of various company practices that contribute today to the corporate bottom line. Each company has it own model. Each innovation leads to a corporate turnaround, or market dominance, is deemed to be "pushing the envelope." Yet, is there a trend in the methodologies being implemented? Current Best-in-Class methodologies that are transforming Purchasing into a value added corporate entity appear to follow a pattern, one that crosses industries and company demographics. If a trend exists it seems to be centered around three major methods of reengineering: 1) Work Force Utilization; 2) the Use of Suppliers' Core Competencies; and, 3) Business Efficiencies and Measurements.

Work Force Utilization. As companies emerged from downsizing or reengineering activities to cut costs and add value they were confronted with the need to do more with less and to do it smarter. Whether by accident or by design companies realized that how they used and organized their work force was vital to success and leadership in their market. Several factors came out of this realization. Perhaps the single most dominant trend that can be seen in Best-in-Class companies is the transformation of the Purchasing function from a tactical, back room operation to a strategic, board room player involved in cross-functional strategic planning. These companies realize that Purchasing's strategic position with outside suppliers made it an important player in the decision making process. Thus, Purchasing has become the conduit for much of the information that flows in and out of the company. This information is now passed to suppliers in a variety of methods. Communication is, therefore, a practice that warrants inclusion as part of the methodology road map.

Chief among the new ways of utilizing the work force is to have cross-functional teams involved in the supply chain process. Purchasing leadership in these teams affect the coordination of the suppliers and the optimization of the supply chain cost. There are even those companies that are raising the bar a notch by utilizing in-house suppliers who become part of the cross functional team, reside on premises, track essential inventory levels, attend meetings, act as the buyers, and perform many of the buyer functions. Purchasing integrates this effort to assure coordination at the least possible cost. Sun Microsystems employs the following methodology:

To meet these Best-in-Class challenges companies have learned to adapt; organizations have to be flexible. Best-in-Class organizations have become "amoebae-like," fluid in their ability to tailor themselves to fast paced market changes and the rapid response requirements demanded by the global economy. Flexibility is a competitive advantage that adds value and increases a company's ability to take advantage of market opportunities

Confronted with the need to do more with less and to do it smarter, Purchasing re-engineered itself to be on par with Engineering and Marketing, both in talent and compensation. "There's a whole level of people that will have to be brighter, more able to deal with ambiguity, and more able to deal with both business and technical relationships across functions and companies," (i) according to Dr. Robert Monczka. A team is only as good as the individuals who comprise it and to attract those with the attributes to play a strategic role, to add value to cross functional teams, to communicate effectively in a highly technical arena, and to be flexible at times when an innate discipline is required, necessitated compensation and authority on par with other team members. Best-in-Class has to start with employees who are Best-in-Class and who are given the opportunity to prove it.

Use of Supplier's Core Competencies. Nearly a decade ago reducing the supplier base was embraced and became a common methodology for leveraging volume and pricing. However, the use of fewer suppliers has evolved into much more than simply discarding the rolodex in favor of a few business cards and pushing for volume discounts. Purchasing Today is adding value by pruning a narrow supplier base down to those whose core competencies are Best-in-Class. Those who have the ability to compliment Purchasing's supply chain needs are accorded a coveted position.

By honing the core competencies of its suppliers, as well as looking inward at its own core values, Purchasing methodologies have adopted outsourcing as a viable way to add value in the supply chain. As noted above, some companies are using the skills of its suppliers in house, as residents of the cross functional team, while other companies are outsourcing non-core value added functions that detract resources and effort away from its businesses' essential mission. What may have begun as restructuring and cost cutting to simply save money has become a sophisticated process of value added operations that blend more than one methodology ; the "road map" is becoming a grid of interlocking thoroughfares that do much more than save money, they improve market share as well as better meet customer demands. At Bates Meckler, Walter Roth explains, "For mailroom and copy center functions, outsourcing certainly seemed the most expedient, least expensive way of getting trained people, equipment, and supplies....But information technology outsourcing...and the outsourcing of financial functions, such as accounting, was not even considered until he looked into a contract firm. What sealed the relationship with the outsource supplier was the flexibility of that supplier."(ii) Some companies are outsourcing all non-core competencies. "Our core competency is new-product development and supplier management," says Bob Boehm, manager, North American logistics for Sun Microsystems Computer Co. (SMCC). "We outsource almost everything....other chip makers manufacture Sun's SPARC microprocessors. Sun relies on Seagate for disk drives; SONY for monitors; Samsung for memory chips; and Zytec for power supplies

Contract Manufacturing is one more methodology that is allowing companies to add value to the supply chain. According to Dr. Robert Monczka, "...there are still far too many organizations doing work where they are not getting any competitive advantage." Purchasing departments are identifying core competencies within their organizations, and where specific processes can be better managed and operated outside the company, contract suppliers are filling that need.

And, where Contract Manufacturing leaves off, partnering methodologies are prospering. "Dell Computer matches resellers' large-account service expertise through its internal capability and partnerships with service companies.(iii)" Partnering bridges the gap between fully outsourcing or merging with another company. It affords the flexibility to pick and choose those attributes of a supplier that best meet your needs without capital investment, the burden of redundancies, or the need to "downsize" resources. Further evidence of partnering can be found in the distribution channel. Perhaps the best competency for a company to have in the next millennium is the ability to recognize what it's own core competencies are, how they promote customer satisfaction up and down the supply chain, and lead to greater market share and profits. Anything else is better managed by those companies who have Best-in-Class core competencies that fill a niche for your company.

Business Efficiencies and Measurements. Best-in-Class companies do nothing else if not measure their business and wring out cost to improve business efficiencies. Those that have been doing it successfully have coupled various dependable methodologies to new breakthroughs in technology. Therefore, the key here is the use of new technology as a tool to take advantage of proven core competencies and bring them to a new realm. Continuous process improvement must factor in the advances of technology to stay Best-in-Class. At Cisco Systems "distributors are paid electronically within days. There are no invoices(iv) Use of electronic data interchange (EDI), more powerful computer applications for database applications and modeling techniques, and intra/internet communications all upgrade the "road map" and allow Purchasing to measure added value with Best-in Class methodologies.

To excel, Best-in-Class companies must be able to know the relative position of their suppliers to one another, their own operations to their competitors, and their customers' needs and demands within the marketplace. Benchmarking is a methodology that is widely used by companies foremost in their field. It is becoming integrated with newer technology to allow for rapid analysis and comparisons over time. "That's why almost all of the service centers surveyed are benchmarking their quality performance against their competition, sharing this market intelligence with their own employees, and developing cost-modeling and cost-reduction processes. 'We want to build successful supplier partnerships with our customers,' says Lustedof Ryerson Tull/Central, "but we need to find out where we stand in terms of quality and we need to bring all of our employees into the process to either fix problems or anticipate changes in customer needs or expectations.(v)

Once upon a time making a manufactured product was done all under one roof. However, look under the hood of any automobile and the piece parts and subassemblies are from all over the world. Today's "smoke-free" room discussions center more around the logistics of how to bring all the ingredients together in the most cost efficient fashion. The trend ties to other methodologies on the "road map" like outsourcing, contract assembly, and use of technology. These value added practices are tearing down the vestiges of vertical integration and flattening out the hierarchy of who builds, assembles, and ships. No where is that more evident today than in the PC and electronics industry. The debate is being waged as to whether more added value (or less cost) can be attributed to a product by having final assembly done by the "supply channel" or by the manufacturer. But in the case of Dell Computer it has already elevated the logistics of distribution and created a new supply-chain model by selling direct to the end user. It's like in the movie Chinatown, when Faye Dunaway chants "he's my husband, my father," is Dell manufacturing or distribution? It's both! Logistics is being transformed by value added methodologies to create Best-in-Class processes that make a decided difference to one's markets.

Because the average manufacturer spends approximately 55 cents of each dollar of revenue on goods and services it has become crucial for the methodology "road map" to include total cost analysis. Purchasing can make or break a company on the price it pays for goods and services. Best-in-Class companies are recognizing this fact and are not just looking at purchase cost, but using total cost analysis several levels up and down the supply chain to determine real cost to the operation. "Purchasers at companies like AT&T and Chrysler...are... lowering the total cost of each part or service they buy.... They see price as one aspect of total cost. (vi) More significantly Best-in Class companies again are melding methodologies with total cost analysis. If a company wants to ride the highway into the next millennium total cost analysis needs to be a "road map" methodology accompanying Purchasing departments on every step along the way.

Conclusion. Is there a trend in the methodologies being implemented today to add value to the corporate bottom line? Not only is there a trend, but value added methodologies are clustering together and reinforcing each others' strengths. Technology is enhancing the use of total cost analysis; outsourcing is fostering a new level of logistics that shorten the pipeline to the customer; partnering is driving the improvement of communication flow; benchmarking is using technology models to analyze total cost of suppliers to determine the Best-in-Class supplier with whom to partner. Purchasing departments of Best-in-Class companies are driving these models and transforming Purchasing into a value added corporate entity. It would behoove any company in the 1990's who is not utilizing these "road map" methodologies of Best-in-Class companies to initiate a program now. Because it would appear that those companies that have begun, are not only reaping benefits, they are finding that one methodology eventually leads to the use of another, and as time goes on a web of methodologies becomes intermingled into a plan, a "road map" of continuously improving processes that will carry that company forward. This pattern of value added methodologies is the planning model businesses can use to seize control of Purchasing's paradigm shift as we enter the next millennium.

  1. Purchasing Magazine, May 22, 1997, Integrated Supply Chains: How to Make Them Work, Jim Morgan
  2. The Outsourcing Institute Forum 2/4/96
  3. CMP Net November 17, 1997, Issue: 764, News Section: Top 25 Executives
  4. Purchasing Magazine, May 1, 1997, Is Integrated Supply the Way of the Future?, Jim Morgan
  5. Purchasing Magazine, May 1, 1997, DISTRIBUTION '97, Jim Morgan
  6. Fortune, February 20, 1995, Purchasing's New Muscle, Shawn Tully

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