William L. Michels, C.P.M.
William L. Michels, C.P.M., Director of North American Consulting, ADR International Purchasing Consultants, Ann Arbor, MI 48189, 313/930-5070
E. Jonathan Hughes, M.C.I.P.S.
E. Jonathan Hughes, M.C.I.P.S., Chairman, ADR International Purchasing Consultants, Bracknell, Berkshire, UK, RG12 1RP, +44 1344/303078
Introduction. In many organizations, the largest proportion of purchased expenditure is in non-production goods and services. These "nontraditional" areas, such as insurance, utilities, consultants, travel and advertising, are typically purchased without the benefit of professional buying practice and skills. The value for money obtained by more effective purchasing practiced on this expenditure represents a major opportunity. To maximize this opportunity in nontraditional purchased, nontraditional methods are needed.
Research. In April 1995, the Center for Advanced Purchasing Studies (CAPS) published the results of a study of the purchasing of nontraditional goods and services(1). Since what is considered nontraditional varies with each organization, the CAPS researchers suggest that conventionally raw materials, special and standard production items and MRO supplies are considered "traditional", and all other goods and services are considered "nontraditional"(2).
The CAPS study conducted a special survey of CEOs in leading Fortune 500 manufacturing and service firms, and in leading Forbes 200 entrepreneurial firms. Several interesting conclusions were drawn, including:
These are consistent with ADR's findings in its consulting practice. The case studies below are some examples of traditional - nontraditional expenditure data. One key column is the number of purchase agents in a typical company. For this paper, a "purchase agent" is one who spends an organization's money, but is not a member of the professional purchasing staff. (This chart has astonished many CEOs.)
CASE STUDIES: ADR CLIENTS
Industry Total % $ % $Non- # Full-time # Purchase
Spend $ Traditional traditional Professional Agents
Buyers Service Banking 10 million 20 80 8 500
Pharmaceutical 3 billion 60 40 450 4500
Consumer Products 1.5 billion 75 25 180 2850
Food 300 million 80 20 25 1700
From these case studies, we have learned:
Categories of Expenditure. The nontraditional items listed below are some areas that ADR includes in reviews to baseline best practice:
TYPICAL EXAMPLES OF NONTRADITIONAL EXPENDITURE
MISCELLANEOUS GOODS & SERVICES
Identifying Nontraditional Expenditure. ADR has developed a methodology for estimating nontraditional expenditure:
Having identified the costs for nontraditional expenditures, it is necessary to determine who has accountability for the expenditures. Places to look are:
The Approach. A key issue is one of purchasing as a process versus purchasing as a business function. Traditional purchasing is typically viewed as a functional activity, in which other departments do not participate. From the process viewpoint, purchasing is viewed as exchanging money for goods and services. However, Purchasing's role must be one of coordination and influencing the process. All too often, Purchasing has attempted to control all supply related activity with a tendency of applying leverage tactics in strategic situations.
Cross Functional Commodity Team Approach. The purchasing of nontraditional expenditures varies in complexity. Different levels of technical competence need to be applied. For example, capital equipment and information technology require rigid specifications to which the engineer should contribute performance specifications for equipment. The contract should be jointly developed between purchasing and other functions to meet the company needs.
Cross functional team success factors are:
Team Process. The objective of the team is to achieve a result which exceeds the sum of the individual contributions. There are a number of recognized process phases in any team activity. They may be categorized as follows:
Other Approaches. A second approach for managing nontraditional expenditure is to transfer the responsibility for the purchase into purchasing.
The third approach is to leave the responsibility outside of the Purchasing Department, but add measurement, cost and continuous improvement goals, and develop a comprehensive training package which will update nontraditional buyers in key purchasing skills(3). Some of the competency development areas to include in the training are:
If purchasing is to be viewed as a business process rather than a functional activity, it is essential that purchasing professionals understand their roles in influencing nontraditional expenditure. Purchasing can impact in the ways indicated above: purchasing can directly impact the expenditure; purchasing can act as an internal consultant/advisor for nontraditional purchase agents; purchasing can act as a cross functional team member dealing with nontraditional expenditure. The three different approaches should be applied depending on the portfolio position(4) of the category of expenditure concerned.
Purchasing professionals can play a vital role in the nontraditional areas if their approach does not attempt to dominate and take control of all aspects of the expenditure.