Purchasing - Creating Value, Not Buying It!

Author(s):

Stephanie Coleman
Stephanie Coleman, Manager - Procurement Services BellSouth Telecommunications, Inc., Atlanta GA 30375 (404) 420-8666.

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

Purchasing has been described as buying the right products, in the right quantities, at the right time, at the right prices, and from the right source. It has also been defined as the manager of outside manufacturing. However, increased competitive forces have prompted corporate leaders to expect Purchasing to assume a more strategic role in the firm. Corporate strategy is no longer just positioning fixed activities along its own internal value chain. Successful companies reinvent the value chain, hence creating new value systems by leveraging the competencies and relationships between suppliers, manufacturers and even customers. These ever changing relationships prompt us to consider Purchasing or Procurement as more than buying, as managers, discoverers and cultivators of strategic relationships. This evolving role will require more sophisticated competencies of Procurement professionals and will therefore also necessitate changes in the roles of Procurement's leaders.

SERVICES
In today's environment, all corporate processes are candidates for critical review. Any process not essential to the strategic focus of the corporation, and not performed as well or better than any outside source should be seriously considered for outsourcing. This allows the firm to concentrate its resources in those areas that will provide uniqueness or competitive advantage to the firm in the eyes of the end customer. Therefore Procurement's first priority will be to minimize the resources and efforts allocated to acquiring products and services that have low risk potential or provide minimal impact on the value of the firm's products and services as perceived by the customer.

Procurement will accomplish this through decreasing involvement in transactions by increased implementation of EDI, integrating suppliers into the firm's value/manufacturing chain, and even outsourcing those procurement activities that do not impact the product or service that is provided to the customer. Examples include the outsourcing of procurement of office supplies, MRO items and other administrative goods and services and vendor owned stockrooms at buyer locations. One innovative practice involves shop floor vending machines that dispense tools to workers, requiring only a code entry that automatically generates the transaction and bills to the proper account code. Another practice uses credit cards with precoded spending amounts and categories that provide electronic billing for purchases with approved vendors and provide account codes, quantities and purchase information but eliminate purchase orders, shipping delays, voucher preparation, approval and processing.

Procurement will also need to play a lead role in the simplification and standardization of "over spec'd" products. Providing value analysis of specialized features and leading cross functional teams to develop less unique alternatives will provide greatest value and reduce risk to the firm. Procurement will also cultivate symbiotic relationships with key suppliers to bridge the gap between suppliers' and buyers' processes. By using Total Quality management principles and problem solving tools, intercompany teams can remove redundant efforts, identify and correct the sources of quality problems, and share in the benefits.

As the firm begins to outsource non-strategic business processes such as Human Resources, Distribution, Payroll, and even some aspects of Manufacturing, etc. the development and management of these arrangements could fall to Procurement. Periodic assessment of capital ownership, supplier performance, and impact to the business as well as the transition to an external service provider will be services Procurement will provide to the firm. The objective is for the external provisioning to be transparent to internal users and external customers at an equal or greater service level and at an equal or lower cost.

The greatest potential area for Procurement to contribute to the overall competitive position and profitability of the firm will be in the acquisition of those products and services that make the firm's offerings attractive to its customers. By representing "outside manufacturing" or the supply side of the product or service development or delivery process, Procurement should play an integral part in product/service development.

The Purchasing professional should be the player on the team who supplies market intelligence regarding the procurability and cost of acquisition of proposed materials while products/services are under design or consideration. This would include consideration of the availability of sufficient quantities of input, capabilities (both current and future) of potential suppliers (especially in areas of rapid technology change), and the impacts of economic, political, technological or even weather changes on the procurability of critical components. In fact, Procurement should even be providing how the firm's purchase could impact the total supply market, and how that would affect future purchases. As an example, a major fast food company was considering adding a shrimp sandwich to its menu. The procurement member on the product development team advised against adding the product, indicating that the restaurant's need for shrimp to satisfy potential demand would be so large that it would drive the price of shrimp to a cost where they ultimately would not be able to sell the product. Obviously, the new sandwich was not added to the menu.

Providing intelligence on potential strategic alliance partners, as well as developing and establishing the alliance arrangement will be valuable services of Procurement. In those areas where the firm is not the best provider of technology, parts of manufacturing, distribution, etc., an integrative relationship with another firm may be desired. Information on other firms: their strategies, their competencies, their potential as competitors, their financial viability, and their corporate values will be supplied by Procurement to the development team. Once selected, Procurement will establish the alliance relationship that outlines the scope of the integration of the firms, the relationship between the employees of each firm, expectations, measurements and the ownership and use of intellectual property, both pre-existing and jointly developed.

Procurement may also play a role in developing fresh perspectives for alliance relationships. one example is an alliance BellSouth has with a large minority construction firm operating in Atlanta. This firm has a reputation for mentoring smaller minority firms. BellSouth requires construction work in nine southern states and for insurance reasons requires expensive bonding and insurance coverage. In this alliance, the construction firm subcontracts work from BellSouth to the local firm and mentors the firm in business practices. The local firm and its community's economy benefit; BellSouth is able to increase its spending with minorities; and the Atlanta firm profits and helps others.

Another example of innovative approaches deals with the cash flow cycle. In a strategic relationship between a supplier of critical food items and a restaurant chain, the supplier is not paid for meats until the sale of the food product to the customer. It is important to note that the supplier is the sole supplier to this firm and the firm has sufficient buying power to insure the success or failure of its supplier. Therefore, a great deal of trust and respect is built into this long term relationship that shares risk. However, it is often several months between the time meat is purchased and the end product is sold, effective increasing the payable period and saving the restaurant significant amounts of money.

SKILLS
As Purchasing changes its role from a reactive server to a proactive business partner, the skills and competencies required of its practitioners in the past will no longer be sufficient. In order for Procurement professionals to operate at maximum effectiveness, with maximum decision making capability and minimal supervision, broader backgrounds in business, technical and procurement skills are required. In addition to obtaining and maintaining the traditional skills of contracting, inventory management, quality assurance, negotiation and price analysis, Procurement professionals must understand how their decisions impact their firm, its suppliers and the industry. They must also be capable of using that knowledge to the benefit of their company.

Areas of business competency that must be developed include market analysis; the procurement professional must be able to monitor and understand market and supply trends. He must be aware of the technological, political and economic forces that impact the industries of his suppliers and of his firm and be capable of developing different sourcing strategies that accommodate, prevent or capitalize on the various forces as appropriate. The Procurement professional must also be aware of the competitive strategies of the various players in those industries and the impact various sourcing decisions could have on the overall industry or even on the buyer's firm's competitiveness. The advent of more and more alliances, outsourcing relationships and other methods of integrating the supplier into the firm's value chain will force the buyer to be able to perform sophisticated evaluations of potential external team members for the firm. The buyer will need to be able to provide in-depth financial and competitive analyses of outside organizations, the strategies and the competencies that they bring to the table that could benefit the buyer's firm.

In addition, the buyer will also need a broad general business understanding and a good grasp of his own company's strategy and direction in order that sourcing and partnering decisions will be made considering total value provided to the firm. In concert with this will be the need for the Procurement professional to provide an awareness and advocacy of his firm's intellectual property rights in the form of patents, copyrights, pre-existing and developed information. By understanding the value of IP, as well as his firm's strategic direction and the strategic direction of other firms, the buyer will be best equipped to develop the most favorable relationships and business arrangements for selling, merging or sometimes even giving IP to other firms.

The Procurement professional will also need more highly developed technical skills. He will need to understand his firm's manufacturing techniques and those of his suppliers as well. This will help him determine procurability and probable costs of inputs as he plays a larger role on cross functional product development teams. Skills in product analysis, value analysis and material specification development will also be essential as Procurement maximizes its role in decreasing new product development cycle time.

Organizational management skills were not previously thought of as essential for Procurement. However, if it is to be a strategic thrust to the firm, managing its external relationships to a competitive advantage, Procurement must have the "people skills" necessary to best leverage its hard business skills. As more and more cross functional teams are created to launch new products, improve the old etc., Total Quality Management skills will be of benefit. Problem solving and information gathering tools and techniques, as well as team building and facilitation techniques will prove invaluable to the purchaser. These skills will help identify gaps and redundancies in supplier and buyer processes that once rectified could reduce costs or improve quality. These skills will also enable the purchaser to continuously improve the acquisition process for each product, reducing the risks associated with the supply process. Team building capabilities will help to build the trust required in cross functional and cross corporation teams necessary for the success of business alliances and enhanced business relationships. Internal consultation competence will also be an asset as other departments look to Procurement to provide cross industry knowledge, market impact and other information. Finally, "deal maker" and "paradigm buster" skills will help the Procurement professional add value by viewing the value chain from a different perspective and perhaps providing a non traditional entry spot or role for the supplier (i.e. vending machines for shop floor tools or cash flow risk sharing).

LEADERSHIP
The nature of the procurement function will be altered, from reactive support service to strategic force. Work will most often be performed as a contribution to an inter-departmental, interactive team. A higher level of complexity and sophistication of individual tasks', coupled with the necessity to make decisions more quickly and at a lower level of the organization will necessitate a transformation in the view of "management." Team management will be like a jazz band with the leadership role changing as expertise needs change and without regard to an individuals "rank" within the company. The traditional management hierarchy will fall away and it will be physically impossible for the work group or functional manager to direct, control or even monitor the activities of subordinates. The only way for the leader to insure the team's succeed or even coordinate its activities is through a change from management to leadership.

Peter Drucker has compared leadership in the future to conducting an orchestra. Each worker or musician is a specialist that works together with others in teams toward a common goal or mission. Therefore, leadership's new role in Purchasing is to first communicate the mission and vision of the corporation and translate that to departmental imperatives. Leadership must cultivate an environment of achievement, service and sense of team with the rest of the firm, with a goal to balance the needs of key constituencies; customers, shareholders and employees.

The leader is then responsible for insuring that the competencies required to add value to the firm are available within the organization by insuring that continuous learning is expected and valued. The leader must also insure that selection, training and reward systems underscore contribution, service, learning, innovation and expertise.

The Procurement leader must also display, through his actions and the actions of any mid-level manager that organizational empowerment is a reality, not a phrase. The leader must structure his organization to facilitate increased employee independence, automate or eliminate routine processes. Procurement professionals must really make the decisions that they have been equipped to make and be accountable for the results. Procurement processes must not be burdened by nonessential approval procedures and limitations of authority.

Finally, Procurement leaders must work to change the attitudes of non Procurement managers through aggressive marketing of the competencies and successes of his organization. The Procurement leader must align his organization's capabilities with the needs of his internal clients, allowing them to recognize the potential value added through Procurement's involvement.

As companies re-think, re-engineer and re-invent themselves, only those processes that add value to the firm and provide it an advantage over its competition will be seen as processes to be maintained within the organization. Those that can be done better elsewhere will be outsourced or eliminated. Procurement has an opportunity to not only protect its role but expand it into one that plays a critical role in the success of the firm by enhancing its functions through new services, increased competencies and strong leadership that empowers Procurement's associates to take action and obtain results.

BIBLIOGRAPHY

Cammish, Robin and Keough, Mark. "A Strategic Role for Purchasing." The McKinsey Ouarterly 1991 Number 21-38.

Cavinato, Joseph L. and Freeman, Virginia T. "Fitting Purchasing to the Strategic Firm: Frameworks, Processes and Values." Journal of Purchasing and Materials Management Winter 1990: 6-10.

Cavinato, Joseph L. and Freeman, Virginia T. "Strategic Purchasing Management." Lectures from Pennsylvania State University's Executive Education Program, April 1993.

Cavinato, Joseph L. (editor). "A Quadrant Approach to Procurement." ARDC Prisms. Volume 1, Number 1 1993.

Drucker, Peter. "Tomorrow's Manager." SUCCESS, October 1993, 80.

Quinn, James Brian. The Intelligent Enterprise. New York: The Free Press, 1992.

Reck, Robert and Long, Brian. "Purchasing: A Competitive Weapon." Journal of Purchasing and Materials Management Fall 1988: 2-8.


Back to Top