Warren E. Norquist, C.P.M.
Warren E. Norquist, C.P.M., V.P. Purchasing, Polaroid Corp. ret. Executive Fellow, Univ. of Mass. at Dartmouth.
Non-Use of Purchasing Cost Company over $100,000,000 per year:
A few years ago two large oil companies combined to form a much larger oil company. Their purchasing organizations were also reorganized into one. (The buying of crude oil was not done by the purchasing function in either company.)
The new VP of the combined purchasing organization decided to compare the prices paid for items such as: tires, batteries, fan belts, wipers, and brake fluid, which were resold though each company's gas stations. On a weighted basis, he found Company B was paying 20% more than Company A.
Company A had purchasing people buy all the items that were resold though its gas stations. At Company B, this buying was done by marketing, NOT by Purchasing.
The difference was over $100,000,000 in potential profit that didn't get to the bottom.
The poor performance of Company B's marketing group as buyers verses the professional purchasing people in Company A is not surprising. You and I know many managers that buy things without getting the essential skills.
Purchasing Skills That Many in Management Don't Have
Purchasing professionals have skills that many in other areas of management do not have or have never developed. The five important purchasing skills I have repeatedly seen lacking in many non-purchasing managers who do buying are:
The Ability to Comfortably Talk About Price
The ability to talk price is not a common skill. Many in management are very uncomfortable with the subject. They may bring it up but will drop it at the slightest resistance. Or, their words may sound effective but their body language says otherwise. I have often heard salesmen aren't good at buying. Why? Sales people are trained to worry customers that a lower price means lower quality. They are trained to imply to customers that haggling should be beneath their dignity. As buyers, they often don't question prices.
Some of the situations I have encountered are:
Knowledge of Product, Services, Suppliers, Market and Economy
Non-purchasing people pay more because they do not have the detailed knowledge that marks the purchasing pro.
Non-purchasing buyers seldom have the ability or patience to get fully prepared on delivery and specification requirement or make cost estimates. The patience to negotiate is almost totally absent. Examples:
Know and Do The Details
The non-purchasing manager often settles for either a vague description of requirements or adopts a contract written by the supplier with terms in the supplier's favor. Statements on price are often a starting point with later definition setting a higher price. Examples:
Understanding The Need For Security
There is a need to teach non-purchasing managers and other professionals on the information that a supplier could use to get a negotiating advantage and the information that would help Purchasing get an advantage. For example:
Other functions often comment to a competitor on a recent quality problem of another supplier and it gives the impression that supplier is out of the running. The next day the problem might be solved but it is hard to retract the impression the comment made.
Purchasing Often Gets Left Out When Services Are Bought
Since Professional Pros have skills not usually seen in most managers, why is purchasing strong in buying product used in production but not in buying services. Because:
A study by CAPS reinforces my view that Purchasing should be sure it has the knowledge and the respect to negotiate for the services the company requires. It can then make the case for Purchasing involvement based on the other skills Purchasing can bring to buying services.
A CAPS Study On How Purchasing is Perceived by CEOs
The study CEOs'/Presidents' Perceptions and Expectations of the Purchasing Function by William Bales and Harold Fearon report "There appears to be a large gap between what CEOs want and what they think their organizations are receiving".
The authors concluded:
Purchasing Should Get Involved in Service Areas
Purchasing has a lot to contribute and too many managers settle for concentrating on production/operations. A lot of functional areas would have more respect for Purchasing and the company higher profits if they got help from Purchasing in obtaining the services they need.
How Purchasing Can Sell Involvement In Services
First, Purchasing must study an area and learn from the literature and the trade organization of that service area. This is a time to network with others in NAPM.
Sell that involvement of purchasing can allow your customer to separate his/her professional relationship from the pricing and billing one. Point out that a doctor lets his staff talk about price and that the user of the service would gain by letting you talk price. Since most managers don't like to talk price, this is a major selling point. I sold a marketing manager that we could cut his advertising, printing, print ad production, television production, and network advertising costs and the savings could buy more advertising. The amount saved far surpassed his expectation.
Hiring consultants is a major area where purchasing is left out. The literature in the field, both books and monthly publications can bring one up to speed in a few months. The checklist from the book Zero Base Pricing can help you get started. A similar checklist can be customized for each service area. There are trade associations in each service area. Getting their literature and attending their conferences will bring a purchasing pro up to speed very fast.
If Purchasing makes the effort to have #2 - The Knowledge Skill in a service area, the strength in Skills 1, 3, 4, and 5 will provide an overwhelming case for managers using a service to get Purchasing's assistance in getting what they need. If your people don't have the level of skill you see as necessary in any of these five skills, I recommend you get them the training and experience. Only by being strong in these areas (especially the specific knowledge area for each service are) can purchasing deserve the respect and use by management that the profession desires.
A Checklist For Consulting Contracts
Taken from Zero Base Pricing by Burt, Norquist, & Anklesaria.