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Internal Customers Balance Purchasing Departments

Author(s):

Peter E. O'Reilly, C.P.M.
Peter E. O'Reilly, C.P.M., Assistant Vice-President, MetLife, New York, NY 10001, 212/578-2470.

82nd Annual International Conference Proceedings - 1997 

The Issues. A recent survey was conducted that explored what internal customers thought of the performance of their Purchasing Departments. The survey was based on the premise that service oriented organizations, like Purchasing Departments required a different measurement process than entities such as manufacturing concerns, which produced tangible goods. The analysis contained in this paper actively sought out significant input from internal customers, especially related to service levels these customers would ideally prefer to receive, as well as, the service levels they actually did receive from their Purchasing Departments. The conclusions developed as a result of this feedback will allow Purchasing Departments to be better prepared in meeting the numerous service-related challenges of internal customers.

Survey Technique. A little more than 10 years ago three professors at Texas A&M University proposed that service providers required a different type of measurement philosophy than that currently employed in the manufacturing sector. They concluded in their earlier research that service functions due to such factors as intangibility, heterogeneity, perishability and inseparability of production and consumption, require a greater deal of input related to customers expectations of service. With that in mind they championed the concept now known as Service Quality (or SERVQUAL). The major portion of the analysis employed for this paper is based on their SERVQUAL method of surveying customers.

My research focused on the distribution of a four-part questionnaire for internal customers and a similar part form that was to be completed by the management of the participating Purchasing Departments. The customer survey was addressed to the internal customers and requested information related to service expectations, service perceptions, the relative importance of service dimensions and miscellaneous service questions. Management's version of the survey included demographic data, management's view on meeting customers' perceptions, management's ranking of service dimensions and, finally, miscellaneous questions.

The survey was completed by 25 firms and institutions. Each participating organization was asked to distribute at least 20 surveys to their internal customers and to complete the management portion of the form.

A major element in the approach used for this research was asking internal customers to respond to 22 paired sets of statements that covered five different service dimensions. Each paired statement required internal customer feedback from both a service expectation level and that of a service perception level. A Likert 1-7 Scale was used to measure customer and management responses.

Demographics of Participants. Management was asked to provide generic data. As previously mentioned 25 organizations agreed to join in this research project. Of that total, 14 participants were in the service sector and 11 participants were related to manufacturing concerns. As far as type of organizational structures, 18 participants had centralized Purchasing Departments, while four had decentralized Purchasing Departments. The remaining three entities used a mixed centralized-decentralized format. Fifteen firms had employee bases of 10,000 or more people. Nine of the participants had annual billing of $50 million or greater. Seventeen of the organizations were responsible for buying greater than 50% of their firm's goods and services. Fifty-six percent (or 14 companies) had professional development programs. A similar number also had quality programs in place.

The management of 18 (or 72%) of the participating Purchasing Departments did seek some level of input from their internal customers. Sixty-eight percent (or 17 firms) of the survey respondents employed customer feedback a good deal of the time in planning their own operations. A similar number of participants were aware of the operating constraints faced by their customers that needed to be addressed. Eighteen companies or institutions felt that they received "some" to "strong" support from their CEO or senior management.

The Views Of Customers And Management Collide. Exhibit 1 contains the consensus findings of both internal customers and management on a number of service-related issues. A Likert Scale was employed for these responses, which allowed the participants a range of answers from 1 (strongly disagree) to 7 (strongly agree).

Exhibit 1 - SERVICE FACTOR ANALYSIS

SERVICE FACTORS
CUSTOMER RESPONSES
MANAGEMENT RESPONSES
Understanding Business Needs
5.02
6.00
Routinely Solicit Input
4.06
5.04
Provide Value Added Services
4.65
5.87
Allow for Cost Economies
4.88
6.27

As you can see Management's numbers of how well they are doing in providing these services are generally about one point higher than their customers. A possible cause for this discretion may rest in management's failure to be as involved with their customers as their customers would like. A greater degree of interaction with customers is obviously needed by management in all of these service factors.

In Exhibit 2 an analysis is made on the perception on whether Purchasing Departments are too service-driven or too price-driven in their approach to doing business from the vantage points of both internal customers and management.

Exhibit 2 SERVICE VS. PRICE ANALYSIS

SERVICE/PRICE APPROACHES
CUSTOMER RESPONSES
MANAGEMENT RESPONSES
Too Service-Driven
6 %
4 %-
Too Price-Driven
29%
16%
Service-Price Balance
65%
80%
Total
100%
100%

It would appear from this data that customers have a higher opinion of Purchasing Departments being too price-driven than that of the Purchasing Departments' management. Here lies a dilemma, as one of the tenets of a Purchasing Department is to have a positive impact on keeping operating costs for their customers down. The problem faced with the Purchasing Departments in the survey, as well as with Purchasing Departments in general, is to achieve that goal, while not being perceived as allowing other important elements, such as service and quality, to suffer.

A question asked to both internal customers and management pertained to how well the Purchasing Departments were doing on an overall basis in servicing their customers. Exhibit 3 has the side by side results. None of the internal customer groups participating in this study graded their Purchasing Departments as being "excellent." However, nine Purchasing Department management groups, or 36%, felt that their own organizations did in fact provide excellent" service levels. The discrepancy between the customers and management's views can be explained once again by a lack of understanding on the part of Purchasing Departments' management of their customers.

Exhibit 3 SERVICE LEVEL ANALYSIS

SERVICE LEVELS
CUSTOMER RESPONSES
# of Firms-%
MANAGEMENT RESPONSES
# of Firms-%
Excellent
0-0%
9-36%-
Good
16-64%
13-52%
Fair
9-36%
3-12%-
Total
25-100%
25-100%

The Five Dimensions Of Service. In developing the SERVQUAL technique the original research team identified five dimensions relative to providing service. These dimensions included: reliability, responsiveness, assurance, empathy and tangible. All of the 22 paired statements used in the survey had traits associated with one of these dimensions. By knowing the relative importance of each of these dimensions from the customer's point of view, Purchasing Departments can allocate scarce resources appropriately. Customer feedback on the importance of each of these dimensions was applied to weighing the expectations - perceptions service gaps that will be discussed later in this paper. Exhibit 4 contains the results of both customers and management on the relativity of the service dimensions.

Exhibit 4 - RELATIVE IMPORTANCE OF SERVICE DIMENSIONS

SERVICE DIMENSIONS
CUSTOMER RESPONSES
MANAGEMENT RESPONSES
PREVIOUS RESEARCH STUDIES
Tangible
8.3
7.0
11.0
Reliability
34.7
33.4
32.0
Responsiveness
22.9
23.4
22.0
Assurance
20.3
22.4
19.0
Empathy
13.8
13.8
16.0
Total
100.0
100.0
100.0

The replies of both internal customers and management are pretty similar. All research performed using SERVQUAL over the years has tended to have the dimensions ranked in the order found in this paper. Service shortcomings that are related to reliability should require the most attention, while those that are based on tangible factors should have the least attention paid to them.

The Weighted Gap Scores Tell The Service Quality Tale. One of the true indicators of how well any service provider does in satisfying customers, according to the SERVQUAL concept, is the size of the expectations-perceptions gap. This gap is the result of asking customers to first establish desired service levels (or expectations) and then comparing these measurements with that of actual service results (or perceptions). The difference, when applied to the relative importance of the service dimensions, creates a shortfall in the eyes of their customers, as perceptions rarely match expectations. The objective generally is for service entities to initially strive to achieve a zero gap (where expectations match perceptions), and then work on having perception scores exceed those of expectation grades.

Exhibit 5 has an analysis of the weighted gap scores of the participants by service level and type of industry (service or manufacturing).

Exhibit 5- Weighted Gap Analysis

Service Levels
Gap Ranges
Service Entities
Mfg. Entities
Excellent
<-.50
3
0
Good
-.51 to -1.00
3
6
Fair
-1.01 to -1.50
3
5
Poor
>-1.50
5
0
Total

14
11

A review of this analysis shows that service entities make up the only entries in both the "excellent' and 'poor" service levels. There is no apparent easily identifiable reason for this statistical anomaly.

Service Statements Speak Out. While all 25 weighted gap scores were in fact negative there were some of the 22 service statements that, on a consensus basis, ended up with positive raw service gap scores. In fact, there were three service statements in which the internal customers thought that their Purchasing Departments were exceeding their expectations. These service statements included:

  • The Purchasing Department's staff is well dressed and appears neat.
  • The appearance of the physical facilities of Purchasing is in keeping with the type of services provided.
  • Purchasing's physical facilities are visually appealing.

It should be noted that all three of these service statements fall into the "tangible, service dimension, which is the least important from the customers' point of view.

On the other side of the popularity charts were five service statements rated by the customers as having the poorest raw negative service gap scores. The service statement with the worst gap score was, "Purchasing has up-to-date systems support." What is unusual about this service statement is the fact that it is a tangible" service dimension. It is the belief of this paper's research that the increasing importance of systems support in Purchasing, as well as business in general, should necessitate the shift of this service statement into the "reliability" dimension category. After the systems support service statement, the next four statements with the poorest raw service gaps were all in the "reliability" dimension category. Overall, the survey indicated the service statements with the lowest customer satisfaction levels all were in the service dimension, and reliability" is the most important to the customers. Much work is needed here by Purchasing Departments.

Lessons Learned. As part of the research for this project discussions were held with many of the participating Purchasing Departments to review survey results and to gain a better understanding of the operations of these units. This feedback, along with the statistics provided by the survey, allowed for some common characteristics to be identified of those Purchasing Departments, that appear to be more effective from their customers, viewpoint. Some of these reoccurring traits found in the more successful Purchasing Departments include the following:

  • A staff that is customer-driven.
  • The existence of a professional development program.
  • The continuous use of customer feedback vehicles, such as surveys and focus groups.
  • An active quality program.
  • Involved 75t or more of their firm's buying.
  • Championing numerous proactive activities, such as EDI and the procurement card.
  • Electronic ordering system either in use or being developed.
  • Participation in their customers' strategic planning processes.

Surprisingly the ensuing factors, while generally important, did not have much influence in determining the performance levels of Purchasing Departments:

  • Degree of CEO or senior management support.
  • Reducing the number of suppliers.
  • Organizational format (centralized or decentralized).

For the most part those Purchasing Departments with overall performance scores and weighted gap scores in the lower two quadrants did not actively pursue their customers. The lack of any kind of direct communications with these internal customers certainly contributed greatly to the associated Purchasing Departments receiving low grades.

Concluding Observations. The research conducted in this study attempted to look at feedback from a relatively small number of internal customers being serviced by many Purchasing Departments. As such there are limitations associated with this method of analysis. However, a major premise of the research was proven in that internal customers are an excellent source of measuring the effectiveness of Purchasing Departments. While much of today's studies of customers tend to focus on external customers, it is often the ability, or lack there of, to achieve some semblance of internal customers, satisfaction that determines the success of service providers. For if internal customers are being short changed, it is really difficult for service organizations, such as Purchasing Departments, to be successful in contributing to their firms, overall competitive advantage.


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