Achieving Legitimate Purchasing Process Improvement
Mark Gordon, C.P.M., CPIM
Mark Gordon, C.P.M., CPIM, Sourcing & Supplier Development Manager, Lucas Aerospace Geared Systems, Park City, UT 84060, 801/647-2724
Dan Gordon, C.P.M.
Dan Gordon, C.P.M., Contracting Agent Lucas Industries, Hampton, VA 23666, 804/766-4217
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Purchasing departments are typically measured by how well suppliers or individual Buyers perform, but it is also important to measure how well the entire Purchasing function and its processes perform, by comparing key attributes to those of world-class companies. A Purchasing Diagnostic is a tool to determine if a Purchasing organization has the appropriate strategy, structure, systems, skills and training necessary to meet its business objectives.
Project Background: Rationale for Diagnostic Development. The Center for Advanced Purchasing Studies' (CAPS) 1993 statistics indicate that Purchasers in the major industries shown are responsible for over 90% of all company expenditures, yet account for less than 2% of company employees: Note: (/) designates column breaks in the following table:
- CAPS metric / Aerospace & Defense / Automotive / Electrical Equipment /
Electronics Purchase $ as % of sales $ / 37% / 61% / 50% / 37%
% of total purchases made by Purchasing / 91% / 97% / 91% / 95%
$ spent per professional Purchaser / 3.7m / 26.5m / 6.4m / 7.5m
% of Purchasing employees vs. total / 2.2% / 0.9% / 1.1% / 1.1%
Lucas Industries' worldwide manufacturing businesses, all of which fall into the 4 categories shown above, exhibit similar characteristics, with over 40% of incoming revenues spent on direct materials and an additional 10% on indirect materials and services. Another 10% of the Purchasing spend is needed to acquire these goods and services. This Total Acquisition Cost (TAC) includes the expenses of execution, quality, inventory and transportation. Totaled, the average Lucas site spends 60% of its revenue on direct materials, indirect materials and services, and the process necessary to acquire them.
Because the Purchasing organization at each Lucas business is so large in responsibility yet so small in size (supporting site annual sales in the $25-100m range), Lucas developed a Purchasing Diagnostic methodology to:
- enable each business unit to assess the effectiveness of Purchasing against world-class standards;
- allow the business to assess strengths and weaknesses in Purchasing; and
- enable a forward action plan to be constructed which drives the business to world-class performance.
In order to accomplish these objectives, it was necessary to identify the world class performance standards and "best practices" against which the manufacturing sites could be benchmarked. Lucas gathered this information externally from its customers, competitors, and other respected companies including Xerox, IBM, Toyota, Nissan, Rover and British Telecom.
While recognizing that these companies would likely exhibit world class Purchasing performance, Lucas also needed internal benchmarks, especially for those divisions in its aerospace and industrial sectors (since automotive industry benchmarks are more readily available). To accomplish this, the company collected internal data which would identify current best practices across the major Lucas sites. This internal database was not exhaustive, but rather was intended to be expanded upon through the application of the Purchasing Diagnostic at the various Lucas businesses.
The Diagnostic methodology was developed in late 1993 based on the internal and external benchmark data that was collected, and was performed at ten Lucas sites over the next 18 months.
Purchasing Diagnostic General Methodology. The Purchasing Diagnostic follows the following four-step process: Initiation; Interviews; Analysis; and Action Planning. The Diagnostic requires approximately 3 to 4 weeks elapsed time to conduct, with the last 1.5 weeks spent in interviews, presentation generation, and briefings with company management. The entire process is conducted by a 2- or 3-person "Diagnostic Team."
I. Initiation Phase.
The Initiation Phase requires 2 to 2.5 weeks of elapsed time, and involves:
- Agreement by site management to participate in the Diagnostic;
- Commitment of required human resources to the process;
- Issuing of a preliminary questionnaire to the business;
- Collecting of internal data on: Current spend levels and patterns; Supplier performance measures; Buyer performance measures; Buyer capabilities and work distribution; Total Acquisition Costs.
- A management briefing session to kick off the project.
II. Interview Phase.
The Interview Phase requires 4 or 5 days, and involves on-site and off-site (supplier) interviews designed to verify the data provided by the business and to establish performance measurements against benchmark indicators. This phase consists of personal interviews with 8 to 16 people depending on the size of the business and the scope and structure of the Purchasing organization. The majority of these interviews require only 1 to 1.5 hours each, but must be carefully coordinated to allow the Diagnostic to be completed quickly. In addition to the company interviews, at least two supplier interviews are conducted. The minimum list of core interviewees includes:
- General Manager
- Finance Manager
- Quality Manager
- Operations or Mfg'g Manager
- Engineering Manager
- Purchasing or Sourcing Manager
- Supplier #1 Management Team
- Supplier #2 Management Team
- Buyer for Supplier #1
- Buyer for Supplier #2
An expanded interviewee list could also include, based on the outcome of the core interviews:
- Supplier Development Manager
- Procurement Manager
- MIS Manager
- Chief Estimator
- Materials Manager
- Additional Suppliers & Buyers
- Accounts Payable Manager
- Human Resources Manager
The Diagnostic Team will attempt to identify all relevant subjects prior to performing the Diagnostic, but additional participants may be identified through the core interviews, and supplemental interviews set up as schedules permit. The core interviews are structured so that answers to fairly straightforward questions allow the interviewers to determine appropriate performance levels. In most cases several interviewees are queried on each performance attribute, so multiple viewpoints are secured. Since several organizational levels are involved in the core interviews (e.g., Buyer, Purchasing Manager, General Manager), the attributes are compared at tactical/operational levels and at more strategic/management levels.
Supplier interviews are also conducted using structured questionnaires designed to compare the business' Purchasing process from the suppliers' viewpoint, including their level of involvement with the Buyer and with the business as a whole. Supplier interviews are done in conjunction with plant tours to allow the Diagnostic Team to become familiar with the processes (business and otherwise) employed by the suppliers. Through these sessions the Diagnostic Team gains a perspective on the business from an outsider's viewpoint, and also gains valuable information on how the business deals with its suppliers versus the best industry practices of these suppliers' other customers.
III. Analysis Phase.
The Analysis Phase requires 1 to 2 days, and involves the information consolidation and comparison of all the data collected before and during the interview process.
The internal company data initially provided, as well as the supporting information gathered through the interview process, is analyzed by the Diagnostic Team and compared against internal company benchmarks and against the external world-class best practices. The preliminary questionnaire and interview formats are designed to allow the Diagnostic Team to measure site performance against 8 focus areas which are subdivided into a set of 17 defined benchmarks:
Note: (/) designates column breaks in this table:
PERFORMANCE AREAS / BENCHMARK ATTRIBUTES:
Significance of Purchasing / Size and Complexity of Spend.
Sourcing Strategy / Make vs. Buy Strategy; Sourcing Strategy.
Integration with Product Development / Design Involvement.
Strategic Sourcing Status / Supplier Selection; Cross-Functional Communication.
Organization for Sourcing / Purchasing Structure & Responsibility; Skills, Development & Training.
Supply Base Performance / Supplier Performance System & Ratings.
Supplier Development / Supplier Development Program; Purchasing/Sourcing Organization; Supplier Quality Assurance Systems;
Systems / Sourcing Information; Supplier Payment System; Purchase Order Authorization; Material Control Systems; Purchasing Measures of Performance.
The Diagnostic Team first rates each benchmark attribute on a scale of 1 to 5 based on observed and measured performance. Following is an example of a rating for the "Supplier Quality Assurance Systems" attribute of the "Supplier Development" performance area:
- Level 1 - All direct and indirect incoming goods inspected. SQA visits to only key suppliers.
- Level 2 - Significant amount of incoming goods inspected. SQA visits to all suppliers.
- Level 3 - Supplier processes certified. SPC and process FMEAs used. Supplier QC plans based on awareness of critical product features.
- Level 4 - Minimal incoming inspection. Effective system in place for tracking supplier quality, corrective actions, and related costs.
- Level 5 - Joint development systems in place with suppliers to improve process quality.
The Diagnostic Team then develops overall ratings for the 8 performance areas. "Significance of Purchasing" is rated as low, medium or high based on 5 elements identified through the Diagnostic process. The other 7 areas are rated based on the combined benchmark attribute scores. Each area is then assigned a "traffic light" rating of red, yellow or green based on the 1-5 rating and adjusted for other factors such as the Significance of Purchasing, the industry's overall performance, customer expectations, competitors' performance, and the company's own expectations. The "traffic light" ratings indicate:
- RED - Current performance well below (industry) world class. Seriously inadequate processes, resources or systems, or not recognized as important by the business. Requires immediate (0-6 mos.) and drastic attention.
- YELLOW - Current performance below (industry) world class. Inadequate processes, resources or systems. Requires medium-term (6-12 mos.) improvement.
- GREEN - Current performance is at (industry) world class standards. Some long-term (12-24 mos.) continuous improvement beneficial in maintaining performance.
In general, low attribute ratings (1 or 2) will indicate a "red light" and high attribute ratings (4 or 5) will indicate a "green light" for the performance areas. IV. Action Planning Phase. The Action Planning Phase requires approximately 1 to 2 days. It begins with the development of specific forward action plans designed to improve performance in the areas where they are most needed, and concludes with a formal presentation of these recommendations to the company Diagnostic participants.
This is the most critical phase, as it requires the Diagnostic Team to develop sensible, workable performance improvement plans for the business based on the information collected during the many hours of interviews and data analysis. This is done by, for the 7 rated performance areas, creating short-term (0-6 mo.), medium-term (6-12 mo.) and long-term (12-24 mo.) plans designed to ultimately bring performance up to world-class, or as close to it as the business can get given its resource constraints. The Diagnostic Team must give the business a clear indication how it scores on the 7 rated performance areas, and give a clear path to improving performance in each area that requires it.
An example of some specific performance improvement recommendations
Supply base performance inadequate to meet business needs:
0-6 months: Establish, communicate and enforce minimum supplier performance requirements: Quality=95%, Delivery=90%.
6-18 months: Benchmark suppliers against best in company, in industry, and of customers.
Supply base not being sourced or managed well: no evidence of "Strategic
0-12 months: Focus on total costs of quality, inventory, and execution as well as pricing.
12-24 months: Define make-vs-buy strategy; establish supply base for new customer base.
Current computer systems support business needs.
12-24 months: Improve user system skills via training; Provide needed hardware tools (printers); Improve user PC skills via training.
The Diagnostic Team then develops a formal presentation for the company consisting of:
- A review of the Diagnostic process,
- A summary of the findings, and
- A forward action plan for the business.
The presentation is a blend of statistics and ideas, objective data and subjective feedback. The facts about the company's performance are presented stand-alone, then backed up by other evidence gathered during the process including quotes from the interviewees. The recommended actions must be straightforward and easy to understand, and any findings that could be contentious are cleared with key personnel before the presentation. The wording of the presentation should be positive, accentuating the company's strengths and presenting the weaknesses as opportunities to improve. After the improvement plans are outlined, company resource requirements are identified and project deliverables clarified. At the end of the presentation and open discussion session, which will require a total of 1.5 to 2 hours, ownership of the Diagnostic via the presentation material is transferred to the company.
Follow-up and Results.
At this point the job of the Diagnostic Team is over, unless the company's management requests further assistance in carrying out the recommended actions. Like a physician's diagnosis, the Purchasing Diagnostic is for the company's eyes only, is not shared with any outsiders, and whether or not anything is done to cure the symptoms of "illness" is entirely up to the "patient." If the response to the Diagnostic final presentation is positive, and if the company expresses a desire to implement the recommended action plans, the Diagnostic Team should follow up with the company 6 months to 1 year later to see what changes have been made and what performance improvements have resulted.
Several of the Lucas businesses reacted favorably to the Diagnostic, and examples of some positive actions taken include the following:
- Reorganization of Purchasing into a strategic function (Supplier Development) and a tactical function (Procurement) to split focus on short-term and long-term activities.
- Increased emphasis on quality, delivery and cost performance by improving supplier measurement system data integrity and enforcing elimination of non-performing suppliers.
- Establishment of a Strategic Sourcing group to work more closely with Design Engineering in sourcing of new components and technologies.
- Lily, Bob (Lucas Industries) et al. "Lucas Industries Sourcing Diagnostic Methodology." October 1993.
- Condon, Nick (Lucas Engineering & Systems). For assistance in training one of the authors in conducting the diagnostic. February 1994.