Why and How to Reengineer the Purchasing Process

Author(s):

Ben H. Laaper C.P.M.
Ben H. Laaper C.P.M., Director, Purchasing & Materials, DSM Engineering Plastics Evansville, IN 812-435-7620

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Overview: In spite of great intentions, lots of momentum, hundreds of articles and numerous books on the subject ; many companies continue to flounder at "Reengineering the Corporation". It seems that many organizations are just waiting for the "Magic Wand of Reengineering" to strike. Yes, Reengineering requires top management support and leadership since most projects address major customer service and lead-time process re-designs.

Even today, as we are rapidly approaching the 21st century, we find that at least 75% of all companies maintain a strictly traditional Purchasing process. Even at divisions and within certain plants of numerous Fortune 100 corporations do we still encounter such elaborate, out-dated, non value-adding systems. Surely, just about every chief executive has championed partnerships or strategic alliances with it's major suppliers which in many cases has enabled Purchasing Professionals to streamline the raw material acquisition process. Processes such as Electronic Data Interchange (EDI) have flourished with key partners, and has demonstrated the potential for substantial operational cost reductions. Unfortunately however, even of those who have successfully launched EDI, research has shown that more than 80% use it as a real tool with merely a handful of carefully chosen partners.

In order to gain not only respect, but a real purpose, let alone control, purchasing must re-invent itself and transform from a function into a process. To re-invent itself however, purchasing personnel must examine it's mission and thoroughly understand the difference between the basic concepts of purchasing and buying, concepts which have become blurred over time. Where as Purchasing should be concerned with the strategic planning aspects of the procurement process, buying itself deals with the execution of daily transactions and replenishment, actions which should be performed as closely to a company's end-user as possible. Consequently, sourcing or procurement marketing, the process of developing partnerships and strategic alliances needs to become organizationally divorced from the buying process. Sourcing is a strategic process which needs to be within a "Matrix" organizational position, where it's members participate in numerous cross-functional teams with Marketing, Research & Development, Engineering, Production and Quality Assurance. The actual buying process should be performed at the plant or consumption level in a re-designed process that is void of paper and which facilitates direct supplier integration, where practical, with the requisitioner or end-user.

Every company or institution, no matter how small, does some type of procuring and every individual within those organizations consumes some type of goods, services or supplies. Yet, just about every company struggles as to how these purchases are actually made, how they are received and how they get paid for. Some companies employ all kinds of systems and methods, often resulting into an Accounts Payable nightmare. The new era of empowerment has in fact fueled this situation as more and more employees "kind of do their own thing" in obtaining supplies, which as a consequence brings about an often uncontrollable invoice reconciliation process.

The Traditional Process: Its imperative that we have a thorough understanding of the traditional process methods prior to reengineering them. Once you subject the entire current procurement cycle to process mapping you might be shocked how truly cumbersome and bureaucratic it is. Traditional methods, are still prevalent in the majority of our manufacturing companies. Primarily small to mid sized companies, in the range of $25.00 - $200.00 MM appear to fall into this trap. The entire method of traditional purchasing is so control oriented that once implemented it seems to feed of itself and grow indefinitely, absorbing multi supplier tiers along the way, resulting in a diminishing level of control or no control at all - just plainly lot's of busy work. The graphs below show a comparison between the traditional Purchasing function, and the reengineered Purchasing process.
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As you can see the traditional function deals with primarily with reactionary, passed down, non synchronized functions. It is highly paperwork control oriented (clerical) in nature and in itself doesn't add much value. In turn such departments also will pass large volumes of paperwork down the pipeline to the next victim, most likely Accounts Payable which then will attempt to reconcile copies of the purchase order with receiving reports, packing slips and supplier invoices.

The new Process: Where do we go from here? The problem is, most procurement professionals are so involved in the day-to-day operations that they don't always feel sufficiently integrated to bring about change, especially change that impacts the entire organization.

Since we are looking for profound and radical change, we need to be willing to start from scratch. Years of Continuous Improvement have brought about greater efficiencies, increased respect and selective partnerships for many purchasing organizations. However, if you still receive numerous requisitions for supply items and raw materials; auction most purchases; issue many written orders; deal with invoice errors; work with non certified suppliers; suffer from extended lead times and/or have too many multiple sources than it's high time to recruit support from upper management for Reengineering.

To be credible however, you must propose a well thought out plan that recognizes the principles of Reengineering by re-inventing the entire process. According to the original authors of Reengineering the Corporation, Michael Hammer and James Champy, Reengineering means: "Starting all over, starting form scratch".

Your proposal must espouse their "Three Rs" :

• RETHINKING
• REDESIGNING
• RE-IMPLEMENTING

Be guided however by the following; Tips on Reengineering:

• Customer Focus : Process must add value and benefit external customers.
• Integration : Stand alone functions and procedures are a thing of the past.
• Strategic Thinking : Project must enhance competitiveness.
• Clear Target : Reduce costs while improving Customer service

To get results, you need to get to the core of your mission by rolling out a program that attacks current methods and procedures and develops a new process as if you are staring totally anew. To make leap frog improvements you need to re-route transactions for replenishment directly into your suppliers. Furthermore, the process must challenge the entire Requisition to Accounts Payable process.

At minimum this process must include:

• Reduction of overall cycle time for Purchasing
• Decentralize authorization & replenishment methods
• Curtail approvals required
• Increase $ authorizations within areas of responsibility
• Empower end users
• Re-design the invoice reconciliation process

Optimize departmental activities :

• Empower requisitioners & eliminate paperwork
• Purchasing to leverage volumes into system contracts
• Receive directly into stocking areas or point of consumption
• Decentralize proof of receipts to suppliers
• Eliminate need for Receipt/P.O/Invoice reconciliation

Convert to monthly consolidated invoices
Reduce total Procurement Cost:

• Curtail transaction costs for high volume, low value purchases
• Strategically integrate suppliers at all levels
• Remove waste from all Processes
• Paperwork elimination through new release methods

Tools to prepare for Reengineering : Many companies are pursuing Continuous Improvement Processes within the framework of TQM. However, to be sustainable, these improvements must become inter-linked into a fully Reengineered process. The subjects of TQM and Reengineering often get interchanged since they both focus on processes. TQM tends to be oriented toward problem solving, to optimize certain functions, one at the time. Reengineering however, defines the boundaries of a process and eliminates all functions that constrain the process by challenging process fundamentals and their very existence. "Why" for example are requisitions required ? To satisfy the accountant ? To launch a purchase order, to formally receive products. Or to direct the flow of receipts? Non of these functions make any sense, nor add value; "so let's challenge and attack the whole requisitions process" would be a Reengineering approach.

However, in order to fully prepare the environment we need to eliminate unnecessary functions and aggressively attack the core functions that will remain necessary within certain processes. The following: "Tools to prepare for Reengineering" should be used as enablers to get the process going:

• ABC Accounting; measure costs instead of price exclusively
• Lead-time reduction; how long does it really take
• Supplier consolidation; allows for supplier integration
• Just-In-Time; eliminate all these wasteful steps
• Win/Win negotiations; a redefinition of competition
• Empowerment; unleash the power of knowledge, make everyone accountable
• Computerize; only what is necessary and tap into supplier data base to prevent duplication of efforts
• Decentralize; all day-to-day buying activities as close to end-user as possible
• Eliminate transactions; where unnecessary and non-value adding
• Supplier certifications; make suppliers accountable for quality and accuracy
• Supply Chain Management; integrate suppliers through your entire organization

Elimination of Paperwork : The section above, covering : "The New Process" showed various processes which are fertile ground for reengineering, however in the pursuit of eliminating the paperwork different release and authorization methods might be required depending on product classification.

• Raw Materials , Sub-Assemblies and Manufacturing Components :
• EDI; establish direct link with supplier computer-to-computer communication
• Kan-Ban; a signal or sign to supplier to replenish inventory
• Fax-Ban; submit signal or sign to supplier electronically
• Factory and office supplies and Services :
• Pull Systems; inventory replenishment tool
• Kan-Ban; a signal or sign to supplier to replenish inventory
• Systems Contracts; single sourced. Supplier managed paperless system
• On-site supplier stores; purchase on-site. No inventory liability
• Blanket Agreements; method to outline annual agreements
• Procurement Cards; user makes direct purchases. Card provider supplies analytical data
• Non recurring; Factory / Office Supplies :
• Procurement Cards; user to reconcile monthly bill. Card provider supplies analytical data
• Credit Cards, user to reconcile monthly bill. Helps eliminate Petty Cash Personal checks; company supplied checks with a not to exceed amount

References:

Michael Hammer and James Champy, Reengineering The Corporation

David K. Carr and Henry J. Johansson, Best Practices In Reengineering NAPM Insights, February, 1995

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