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Five Strategic Initiatives For Achieving World Class Purchasing

Author(s):

Dr. Peter E. O'Reilly, C.P.M., A.P.P.
Dr. Peter E. O'Reilly, C.P.M., A.P.P., Director, Global Strategic Sourcing, American International Group, New York, NY  10005, 212-770-8712, peter.o'reilly@aig.com or drpor@aol.com

86th Annual International Conference Proceedings - 2001 

Abstract. Purchasing organizations are facing unprecedented demands made on them by their customers, suppliers, senior management and themselves. The world of procurement is changing significantly every two years. The purchasing function today is very different than a few years ago and has placed a number of new challenges and opportunities upon the purchasing professional, especially on the management of procurement organizations. This paper will focus on five strategic initiatives that are at the forefront of the purchasing management's efforts in maintaining a high level of value added services, while remaining a dynamic, effective source of competitive competencies for parent companies.

Strategic Initiatives. While there are numerous efforts that purchasing managers may pursue in their quest to achieve meaningful corporate-related objectives, the five initiatives that will be analyzed in this paper include:

  • Development of purchasing professionals
  • Identification of cost reduction opportunities
  • Optimization of systems and technology-related tools
  • Improvement of customer service
  • Enhanced involvement of suppliers

Development of Purchasing Professionals. There is no greater dilemma facing procurement organizations today than retaining, training (or retraining) and recruiting purchasing professionals. The replacement of purchasing personnel involved in strategic sourcing endeavors often takes six or more months. During that time a heavy burden is placed on existing staffing, while customer service generally slips a few notches, or more.

The best strategy is to actively keep good performers, while making sure that the skill levels of the current staff matches the demands of the purchasing world. How best to keep personnel is a difficult question to answer. Paying a competitive salary is certainly a good start. Determining what constitutes a "competitive salary" can be found through studies performed by such organizations as CAPS, NAPM, and Purchasing magazine. In addition, internal human resource departments can be helpful in performing local salary benchmarking studies.

Also an important deciding factor in retaining employees in a purchasing organization is the challenges and opportunities offered by not only specific staffing positions, but the mission of the entire purchasing organization. It is difficult to motivate and keep interested personnel in organizations that are merely threading water. Most folks want to work in dynamic organizations that are clearly moving in an upward direction. A good way to ensure that there is a buy-in here is for the purchasing staff to collectively develop a mission statement that is both strategic and demanding.

The purchasing professional has already moved from the transactional-based environment to one that is strategic in nature. As the world of procurement is constantly changing, so too are the skills necessary to perform the work required by the purchasing professionals. Today there is a greater emphasis on computer skills, business knowledge, matrix management (or cross-functional teaming) capabilities, and customer service. Current staffing must have a well-founded knowledge of these new skills. There are numerous training methods for purchasing personnel to acquire these skills. For those purchasing folks that are not capable of accepting or grasping these new skills management may be forced to make difficult personnel decisions. To do otherwise would place an unfair burden on those purchasing professionals with the necessary skills to take the procurement function forward.

The recruitment of purchasing professionals, either to replace personnel or to fill new positions, is a very time consuming process. The effort required in this endeavor is often performed at the expense of other key strategic activities. Some helpful hints in the hiring of purchasing professional can include:

  • Have a clear understanding of the skill levels being sought
  • Use the recruitment process to upgrade the level of personnel in the purchasing organization
  • It may be necessary to pay more for "new" staff members than existing personnel
  • Use your human resources units to assist in determining where to post open positions and to screen candidates
  • Develop an interview process that optimizes your time, while having the right people participate in the interviewing.

Remember that the best recruiting methodology is not to have to recruit in the first place. The days of where people would spend their whole careers in the same units or even the same companies are over. It is, however, imperative to keep your high performers feeling good about their careers in your procurement organization for as long as possible.

Optimization of Systems and Technology-related Tools. Just about every purchasing organization has been inundated with a rush of e-procurement happenings. These activities range from the selection and implementation to e-procurement systems to a litany of Internet applications like exchanges and reverse auctions. Purchasing professionals, especially those in management positions, know some thing must be done, system-wise, but are often confused as to what to do and when to do it.

As previously mentioned, the world of procurement is ever changing. A vast part of this evolution in purchasing centers on the greater use of the Internet. There are some systems-related functions that purchasing departments need to evaluate with a greater sense of urgency than others. For the past two years it has become apparent that there are tremendous strategic opportunities associated with the use of e-procurement systems like Ariba, Oracle and Commerce One.

While these and their competitor systems are still developing, and probably will continue to do so, it is important for purchasing organizations to study and decide which system would best suit their needs as quickly as possible. The numerous strategic benefits, such as improved order cycle timing and greater spend analysis, are too vast to ignore for long. Waiting for all related systems ordering development work to be completely by the e-procurement suppliers is unrealistic.

The use of one of the Internet e-procurement systems is imperative to a modern purchasing operation, however, caution should be given when evaluating many of the systems tools. For the past year there has been much publicity about vertical exchanges and the greater use of reverse auctions. Vertical exchanges have been developed in many manufacturing sectors, such as automobiles, chemical, and food products. The idea of pooling the buying power of major industry players to reduce the costs of suppliers' parts and services, while improving supplier responsiveness, is a grand and worthy idea. However, quoted ROIs and promised cost savings have been slow in coming for many of these vertical exchanges. Likewise, the use of reverse auctions should be planned to achieve specific objectives, and not undertaken because it is a "hot" purchasing activity at the moment. The use of exchanges and reverse auctions do not replace good purchasing practices. They are meant to enhance these practices.

What is needed for purchasing organizations to do regarding e-procurement systems and related activities is to determine, in identifiable terms, just how may such functions perform strategic services for their firms. Jumping into any of these new e-procurement services without a strategic plan will just waste valuable procurement resources both in terms of both budgetary funds and staffing resources, as well as possibly leave a negative impact on the credibility of the purchasing department. Use e-procurement systems and support activities as tools for allowing you to achieve your strategic objectives.

Identification of Cost Reduction Opportunities. While the challenges to purchasing organizations have never been so monumental, so too are the opportunities to showcase the various value-added capabilities of the procurement function within most firms. The new e-procurement systems have given purchasing organizations a tremendous amount of visibility, especially in service industries.

The amount of buying data now available is at times incredible, compared to just a few years ago. Associated with such an e-procurement benefit, as the consolidation of buying power should be the development of a cost reduction program. After all, it is the cost savings identified and captured by purchasing departments that go a long way in showing senior management of most corporations and institutions why there is a need for an internal procurement function.

While the e-procurement systems have enhanced our cost reduction opportunities, it is up to purchasing staffs to achieve strategic bottom line results. The best way to move towards these goals is to develop a strategic plan on a cost reduction program. There is a major obstacle in accomplishing this program, and that is the lack of standardization as to what defines a cost reduction or savings. Most firms tend to use different criteria in the development of savings numbers. A purchasing department needs to formulate a cost savings definition and review this definition with stakeholders such as senior management, internal auditing, and the CFO's office. In this way, there is a high degree in the credibility associated with the cost reductions reported.

Savings is also a great way to demonstrate how purchasing organizations work towards helping their customers stay competitive. After all, the savings realized, for the most part, comes off the customers' budgets. There are several external benchmarking standards available to purchasing organizations to compare their savings with those of competitors or leading firms in business.

For firms whose value is based largely on their stock market numbers, purchasing departments should focus their cost reduction efforts on improving the EPS (earnings per share) rate. This is a way of showing senior management that its internal procurement function can be a significant contributor to the firm's overall bottom line.

Improvement of Customer Service. As Peter Drucker once stated, service providers are only in business because customers want them to be. The biggest problem facing most internal purchasing organizations in their relationship with their internal customers, over the years, has been complacency. What has been the incentive for purchasing staffs to provide top-notch service levels when they have served "captive" internal customers.

Over the past five years with the greater "threat" of outsourcing and internal customers moving away from using their firms' internal procurement units, there has been a marked improvement in the responsive rate of purchasing departments to their customers. Methods such as focus groups, customer councils and surveys have been excellent methods for purchasing professionals to better understanding the needs of their customers.

Focus groups permit purchasing staffs to get their customers involved in a wide array of activities, such as the use of new e-procurement systems and the introduction of new products and services. Focus groups show customers that purchasing organizations are open to the ideas of their customers. Customer councils involve the customers in the strategic planning process of purchasing organizations. The information exchanges from customer councils are important in purchasing management's attempt at setting strategic operational priorities and in the allocation of scarce resources, particularly those related to staffing. The councils also allow for reciprocity, as customers are encouraged to invite purchasing management to participate in their (the customers) own planning sessions.

Customer surveys are by far the easiest way of soliciting a good deal of feedback from a great number of customers. Using e-mail sources, such as Outlook and Lotus Notes, for customer surveys is an excellent way of gaining customer insight in a quick, inexpensive, and effective manner. Besides using surveys to ascertain the performance levels of purchasing departments, the surveys can also be utilized to gather customer input on strategic suppliers.

Enhanced Involvement of Suppliers. Most suppliers are quick to point out to purchasing organizations that "price" is not every thing in the selection of venders. For the most part purchasing, departments have viewed such comments, and rightfully so, with a high degree of skeptic. The whole supplier-purchasing relationship has evolved over the past few years to a point where preferred suppliers are providing an increased amount of strategic services to purchasing organizations.

This moment is the direct result of purchasing departments doing more with less. In other words, the success of purchasing units in gaining larger shares of their firms' buying have increased their reliance on selected suppliers to provide critical services, such as order entry activities and technical resources. Where purchasing departments a few years ago may have had buying teams focusing on particular goods and services; a few sourcing specialists have replaced these teams. In many situations the preferred suppliers providing sourcing assistance are located on-site, within the office space of the purchasing professionals.

There are some that would say that these services are not without their costs to the customers or companies. And that may in fact be true, but the overall cost to the customers, including the purchasing units, is less than staffing up to perform these services internally. Purchasing departments need to maintain their core competencies, such as providing a direction for the firms' procurement function and maintaining an effective supplier management program. The outsourcing of such transactional-driven services will only enhance the operational value of purchasing organizations. Every effort should be made to identify what services suppliers, could better support, especially when used in conjunction with the new e-procurement systems.

Conclusion. It is invigorating to be associated with as dynamic a function as procurement is today. With so much happening almost on a daily basis purchasing most be viewed in strategic terms. Plans need to be developed that will identify which of the numerous procurement activities will have the most strategic impact on one's firm or institution. The five strategic initiatives mentioned in this paper will take purchasing professionals a long way in that regard.


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