Seven Strategic Ways to Improve Purchasing's Performance
Peter E. O'Reilly, D.P.S., C.P.M.
Peter E. O'Reilly, D.P.S., C.P.M., Assistant Vice-President, MetLife, New York, NY 10010, 212-578-2470, firstname.lastname@example.org
84th Annual International Conference Proceedings - 1999
Abstract. As we speed toward 2000, Purchasing professionals need to be both energized and forward thinkers if they are to succeed in increasing the value added role Purchasing plays in their firms. What is essential is expanding the use of strategic methods in procurement activities. This paper will focus on seven dynamic ways to assist Purchasing Departments increase their performance levels, while enhancing their importance to their customers.
Reevaluate Staffing. In today's business climate one of the most difficult strategic decisions centers on the size of current staffing. Downsizing has become a routine element of doing business today. Questions relating to staffing reductions tend not to be based on whether there will be decreases, but rather on how many positions will be lost.
Many Purchasing Departments are facing a dilemma when it comes to staffing: meeting increasing business demands, while reducing personnel. While outsourcing some of our services may be a convenient answer, it is not without its drawbacks, such as added costs and loss of control. Purchasing organizations are being recognized as key contributors to improving firms' bottom lines. As such, many new opportunities, in the form of being responsible for new products and services, are being presented to Purchasing Departments. So numerous situations exist where Purchasing Departments are coming to grips with new customer demands, but with less staff to provide the necessary services.
Much has been written in the past few years about the need for Purchasing to become more strategically oriented, rather than transactional-based. Basically, this means moving Purchasing professionals away from the processing of traditional purchase orders, and similar responsibilities, to higher value and higher impact ROI projects.
Such a shift is a significant step in the direction of better utilizing personnel to optimize cost savings. However, much more is required in terms of having a Purchasing staff that is capable of meeting the dynamic needs of its customers, not just in the future, but in the present as well.
If the complexity of the work processed by Purchasing Departments is changing so too are the skills necessary to perform these activities. The performance level of Purchasing organizations will only increase if radical revisions are made in the type of professionals sought to serve in Purchasing Departments.
It is generally agreed that it will be necessary to have Purchasing staffs proficient in computer skills, team building, and business procedures. Many Purchasing Departments are recruiting candidates from leading MBA schools, as well as, from other organizations. While this approach may be helpful in filling new or open positions, what about the existing staff?
Most Purchasing personnel have risen to the challenge of learning new skills to maintain not only their jobs, but also to enhance the overall performance of their organizations. What of the personnel who cannot meet the requirements of the new job skills? It is here that some difficult decisions will have to be made for the well-being of the whole Purchasing Department.
Not only will performance levels suffer if necessary personnel changes are not made, but there will be a drop in staff morale as those with the necessary value-added skills are asked to handle more and more of the work load. It will be better in the long run if the management of Purchasing Departments makes staffing decisions sooner rather than later to ensure that their organizations continue to play strategic roles in their firms.
Customers. Peter Drucker says that service entities only exist if customers want them to. That is certainly true for most Purchasing Departments. Purchasing professionals only have limited resources to service their customers. Thus, there is an urgent need to concentrate talents in those areas that will benefit customers the most.
The key to achieving this objective is to give customers a greater sense of participation in the activities of Purchasing Departments. This can be achieved by a variety of means such as focus groups, customer councils, surveys, pilot programs, supplier demos, and supplier performance evaluations.
Focus groups allow Purchasing organizations to gather feedback on specific issues, usually from middle management or a particular customer base. Customer councils permit Purchasing professionals to interact with the senior management of other departments. This approach opens strategic dialogues at a higher level than normal contact would allow. Surveys on the performance of Purchasing Departments tend to target a wider sampling of a firm's internal customers. Responses to surveys can identify gaps between service expectations and service perceptions.
Pilot programs introduce customers to new technology, products or services at earlier times than normally. They also show customers that Purchasing Departments are proactively looking at strategic opportunities to improve customers' cost and performance numbers. Allowing customers to be major players in such initiatives as supplier demonstrations and evaluations are also excellent ways to increase the performance levels of Purchasing. This will be discussed in the next section of this paper.
Suppliers. As the size of Purchasing staffs is reduced, there will also be a loss of internal expertise with some of the products and services offered to customers. This knowledge drain can and should be filled by other sources, such as suppliers. Changes in business products and services are too numerous and dynamic to expect Purchasing Departments to track completely. It is here where the suppliers' role can be expanded.
Numerous articles have been written about the role of Purchasing as a facilitator in the Supply Chain Management structure. Using the "expertise" of suppliers is an excellent example of Purchasing professionals playing the facilitator between suppliers and customers. Bringing suppliers into the picture early with customers, on large projects in particular, can greatly enhance the chance of successful outcomes.
An excellent method of involving suppliers is through supplier councils. Such councils generally include all strategic suppliers, especially those that are competitors. A key objective of such sessions can be the exchange of "best practices" offered by the various suppliers. These "best practices" may be taken from the suppliers' operations themselves, or from techniques used by some of their other customers.
Other approaches to improving the performance of Purchasing Departments through the expanded role of suppliers include supplier demonstrations and supplier performance evaluations. Demos allow internal customers to be given detailed descriptions of the operations of specific products or services, such as personal computers, software, and color copiers. It is hoped that such presentations will enable customers to see possible operational benefits. These presentations also show customers that Purchasing provides services other than the processing of requisitions.
Supplier performance evaluations not only give Purchasing Departments an idea of the service levels of suppliers, but also provide direct feedback to the suppliers as well. Allowing customers to participate in these evaluations gives a greater degree of strategic importance to the survey outcomes and adds credibility.
Technology. The expanded use of technology is the quickest way of moving the Purchasing function from a transactional orientation to one of a more strategic nature. The increased role of electronic ordering can diminish the current role Purchasing plays in the placement of orders and can put customers in direct contact with strategic suppliers.
Technology related to ordering activities should decrease the staffing and associated expenses of Purchasing organizations, thus allowing for performance improvements. In addition, the pricing / cost discounts available from strategic suppliers for utilizing web sites should contribute significantly to the firm's bottom line. Technology that provides electronic tools for order status and supplier technical information can also help the service levels of Purchasing Departments to rise.
Management. Too often Purchasing Departments operate with little or no involvement of their senior management. This is especially the case with Purchasing organizations in the various service sectors of the economy. To be truly effective, Purchasing staffs have to have the full support of their senior management. Such support needs to be dynamic and not passive.
Senior management can be an excellent resource in winning over customers, particularly with their peers, the management of the internal lines of business. Purchasing can involve their senior management through a number of ways such as customer councils and strategic planning sessions. Asking the senior management to participate in these activities provides for interactive progress reports on what Purchasing is currently working on and planning to become involved in. Having senior management as a team player in Purchasing's strategic initiatives can be an excellent way of breaking down barriers between customers and Purchasing.
Strategic Planning Sessions. The more Purchasing organizations know about the procurement needs of their customers, the better they can do their jobs. This rather basic statement goes to the core of improving the performances of Purchasing Departments. Ideally, to accomplish this objective, Purchasing should be involved with the strategic planning process of their customers. The direct approach to this is simply asking to be invited to planning meetings. Showing how Purchasing, with the knowledge gained from such strategic planning sessions, can contribute to the objectives of their customers should result in repeat invitations.
Sometimes an indirect approach can be effective in gaining access to the customers' strategic planning processes. This approach involves inviting customers to attend the strategic planning sessions of Purchasing Departments. Such invitations can serve two purposes. First they will involve customers in developing the customer-driven strategic plans for Purchasing organizations. Second, they will establish a sense of reciprocity: inviting customers to Purchasing planning sessions can lead to reciprocal invitations to participate in customers' strategic planning sessions. In either case, the more interaction between Purchasing Departments and their customers in strategic planning can only enhance Purchasing's ability to better serve their customers.
Results. What to measure is always a problem. A multitude of yardsticks has been offered over the years for Purchasing Departments to use in gauging their performance effectiveness. In this paper, however, just two recommendations will be made on the subject of measuring results.
The first suggestion is to focus only on a few key strategic metrics. These critical measurements for Purchasing Departments should be aligned with the strategies being pursued by both Purchasing's customers and the parent organization. A coordination of effort is needed here to prevent wasted time and resources on the part of Purchasing Departments. Regardless of a firm's corporate-level strategy, it will always be important for Purchasing staffs to focus on reducing costs. Such a strategy allows the corporation to gain a degree of flexibility that can, and should, equate to a competitive advantage.
The second suggestion is not to develop and use performance measurements in a vacuum. When deciding on what to measure, research should be done on what other firms in the industry count. A comparison with external sources, such as competitors or world class companies, adds a good deal of credence to any critical performance metrics a firm's Purchasing Department utilizes. Sources for external benchmarking yardsticks include CAPS (Center for Advanced Purchasing Studies), NAPM, and consulting firms, such as The Hackett Group and Kearney, that offer benchmarking services in the area of procurement.
While each firm or industry may have specific criteria it wishes to use for measurements, some basic metrics should not be ignored. Examples include savings dollars per operating dollars, customer satisfaction levels, and procurement dollars processed per Purchasing staff member.
Conclusions. A reoccurring theme of this paper (and presentation) is to do procurement work smarter, or face significant ramifications (such as continued downsizing, loss of value added responsibilities, etc.). This all begins and ends with having the right people in the Purchasing organization. Heart-wrenching decisions may have to be made to accomplish this objective, today's challenges require a staff capable and willing to "exceed the bar".
Focusing on the needs of Purchasing's customers is also mandatory, if performance levels are to rise. Giving customers a greater voice in determining Purchasing's priorities and allowing them to have more interaction with suppliers are steps in that direction. Purchasing Departments can improve their effectiveness by better utilizing the expertise of their suppliers.
Advances in technology, especially as they relate to migrating Purchasing personnel from transactional work to strategic, value-added activities, need to be an integral aspect of Purchasing's strategic planning. The senior management of a Purchasing organization has to become an energetic player in the strategic role played by Purchasing. Finding the time to conduct strategic planning sessions is essential, as very little can be gained without strategic plans. Developing critical metrics that can be benchmarked with external sources will provide Purchasing Departments with valuable performance measurements. All of these factors will contribute to Purchasing organizations growing in importance in the eyes of their customers and of their firms' leadership.