How Purchasing Can Reduce Supply Chain Costs

Author(s):

Mark S. Miller C.P.M., C.I.R.M.
Mark S. Miller C.P.M., C.I.R.M. Purchasing Manager, Case Corporation, Racine, WI 53405, 414/636-6565, mmiller@casecorp.com
Thomas M. Graddy C.P.M, C.I.R.M.
Thomas M. Graddy C.P.M, C.I.R.M., Manager Logistics and Supply Chain, Case Corporation, Racine, WI 53405, 414/636-6565, mmiller@casecorp.com

84th Annual International Conference Proceedings - 1999 

Purchasing can play a major role in reducing supply chain costs. Our company has made the pursuit of improving our supply chain one of its top priorities. Supply chain management (SCM) is a composite of all the processes required to flow products from the supplier to the ultimate customer. To reduce costs in the supply chain requires the cooperation of many functional areas, including purchasing, to work together to improve the flow of materials and reduce the investment in inventory throughout the supply chain. Some of the actions that can be taken by a buyer to reduce the costs to flow product from the supplier to the ultimate customer are: 1) improve SCM information flow, 2) supplier arrangement to reduce assets, 3) reduce cycle times, 4) outsourcing non-core functions, 5)improve customer service and 6) supplier selection based on supply chain capability. Below we will discuss further these six cost reduction action items and the role purchasing plays in improving them.

Action #1 - Improve SCM information flow. A key to improving the management of products in the supply chain is working with timely and accurate information. Purchasing typically is concerned with the flow of information from the customer to the supplier. The challenge is to expand the information flow throughout the supply chain, from customer to manufacturing to supplier. There are two areas that Purchasing can take lead roles to improve the information flow:

1. Expand EDI links with suppliers - Electronic Data Interchange is a tool that allows current information to be passed quickly up the chain. Supply chain management requires the electronic links be built with customers, dealers, warehouses, transportation, manufacturing and suppliers. Purchasing needs to work with suppliers to expand the use of
   
   

   EDI. Traditional EDI involves communication to the supplier and often EDI is not compatible with current retail systems. SCM requires communications from the customer back to the supplier. Purchasing needs to work with the suppliers, retail stores, and systems to develop retail tracking. Purchasing needs to work with the supplier to react quickly to retail demand and ship directly to the dealers when stock is needed. Wall Mart and other large retailers have been very successful in using retail demand to reduce supply chain costs.

2. Supplier personnel in the chain - Another way purchasing can help improve communication in the supply chain is to locate supplier personnel at different levels in your supply chain. To make these strategies effective, the supplier needs to be involved in non-traditional ways with your supply chain. The supplier should have:
   
   
   • Personnel in-house personnel in your office to expedite and manage schedules
   • Supplier systems personnel working with your retail locations to capture retail sales
   • Sales helping to train and promote products to increase sales.

Purchasing's challenge is to persuade the suppliers to furnish resources at different levels of your supply chain to reduce supply chain costs.

Action #2 - Supplier arrangements to reduce assets. Once the supply chain is analyzed it is usually found that there are duplicate assets at different levels in the supply chain. The goal of SCM is to identify duplicate inventory and reduce it by reducing cycle times and improving the flow of information. Safety stock or just in case inventory is often being carried by: the supplier, the manufacturer, the warehouse, the dealer and the customer. Each entity is unaware of the level of inventory carried by the other. The challenge for purchasing is to work with the supplier to establish new methods to reduce the inventory, without jeopardizing customer service.

The goal is not to push the inventory to the supplier, but to reduce the redundant assets in the supply chain. There have been many supplier arrangements that have been established to reduce inventory including:

• Just in Time,
• Consignment supplier stocking
• Vendor managed inventory
• Quick response.

The key is to recruit the supplier as part of your team to reduce the inventory in the supply chain.

Action #3 - Reduce cycle times. The shorter the cycle time, the more responsive the supply chain will be and the less backup inventory that needs to be carried. Purchasing plays a key role in reducing supplier lead times that are a part of the SCM cycle times. The following are four key steps purchasing can take to reduce supplier lead times:

1. Track and measure supplier lead times - Do you measure and track supplier lead times? This is the first step in reducing supplier lead times. Recognize which suppliers and which commodities have the longest lead times and start with these. Set a goal with each buyer to reduce negotiate lower lead times. This concept holds for each level in the supply chain, not just supplier lead times. Measure how long it takes for:
   
   
   • Inbound transportation
   • Transport time to customer
   • Manufacturing lead times
   • Distribution cycle time

   If you do not measure it, you will not improve it.

2. Negotiate lower lead times - The buyer should challenge supplier lead times. Ask for a break down of the components of supplier lead times. Compare one supplier leadtime to others. When the leadtime components are reviewed it is often found that most of the leadtime is "waiting time" and little of the leadtime is actual "processing" time. Challenge the supplier to reduce the waiting time. Other options to reduce supplier lead times include:
   
   
   • Utilizing distributors,
   • Guaranteed volume commitments
   • Investing in new tooling.
   
   
   
3. Understand the tradeoffs - Inventory costs are reduced when supplier lead times are reduced. Be aware of the tradeoffs between lead-time and inventory carrying costs and give buyers cost reduction credits for reducing lead times. We credit buyers with 11% of the value of the inventory reduced as cost savings.

There are many other pieces of cycle time in the supply change that purchasing can help to reduce. Included in these are:

• Reduce transportation cycle times,
• Reduce manufacturing cycle times by reducing the bottleneck areas
• Receive product quicker through the use of bar codes.

Action #4 - Outsource non-current functions. Another tactic to improve the supply chain is to outsource non-core functions and services. Outsourcing can reduce cycle times, reduce costs, plus give you more flexibility in managing changes in demand. We have outsourced many components and service functions in the past few years: machining, warehousing, cabs, hydraulic cylinders, packaging and printing, just to name a few. These are the major responsibilities that purchasing have in the outsourcing of non-core functions.

1. Select and negotiate with suppliers - Purchasing needs to find, select, establish and manage the relationship with suppliers who will perform the outsourced function. Most buyers are more experienced in outsourcing direct material. Many of the items we have outsourced have been services such as:
   
   
   • Transportation services,
   • Warehousing
   • Incoming inspection
   • Mail room
   • Security

   When establishing the outsourcing agreement for service items these are two key items to include:

   - Performance and quality measurements. It is difficult to establish performance and quality measurements for services , but these are needed to effectively measure the outsourced supplier performance. Several of our early, service outsourcing agreements did not define well our performance expectations and we learned quickly that was a mistake.

   - Clear definition of charges. It is also important to establish what the charges are for performing the service. Is the billing rate based on hours worked, services performed, or each job completed.

2. Manage the transfer process. I have witnessed many disasters in the past few years that were caused by poor execution of outsourcing. Purchasing needs to help with the planning and implementation of the outsource to avoid a problem. You should negotiate so the old supplier builds a bridge quantity to protect the customer during the transition. The buyer also must arrange to transfer all the knowledge possible to the new supplier (tooling, specifications, quality requirements, forecasts).

Action #5 - Improve customer service. We need to re-focus our organizations on the customer. There is a tendency to concentrate on re-engineering the processes and forgetting the needs of the customer. The test of the effectiveness of the new process should be gauged by the impact to the customer. Purchasing should ask each day: How can we get the product to the customer on time? How can we reduce transport time? How can we improve communications with our customer? Establish objectives for the supply chain targeted on serving the customer better. Some measurements we have used include:

• Backorders
• Lost sales
• Fill levels
• Late shipments

Action #6 - Select a supplier based on supply chain capability. Another key action needed to improve the supply chain is to establish a closer link with the suppliers who can help reduce supply chain costs. Purchasing should take the lead in establishing a sourcing strategy project for each purchased commodity. In the past at our company, we have had purchasing and engineering at each plant selecting suppliers focusing on low quotations and supplier reduction. The goal of our new project (which we are calling "strategic sourcing") is to establish corporate wide preferred suppliers for each commodity that will reduce cost throughout the entire supply chain. The traits that will be critical to being designated a preferred supplier are also the factors that will improve supply chain management including:

• Communicate electronically to the entire supply
• Reduce lead-times,
• Help reduce cycle times,
• Help reduce assets
• Improve customer service

Summary. Purchasing has a major role to play in reducing costs in the supply chain. Make sure you understand your role in SCM and prepare yourself so you can help make it more effective. These are some actions you should consider taking to reduce supply chain costs:

• Work on process improvement teams.
• Measure supply chain performance.
• Expand EDI with suppliers in the entire supply chain.
• Locate supplier personnel throughout the supply chain.
• Work to reduce supplier lead times.
• Help reduce the total supply chain cycle times.
• Understand the trade-off between inventory and lead times.
• Make the supplier a member of your process team to reduce inventory.
• Claim inventory reductions as cost savings.
• Select, manage relationships with outsourced suppliers
• Include performance and quality measurements in outsourcing agreements.
• Manage the transfer process to outsourced suppliers
• Make sure you keep the customer as the focus of the supply chain.
• Strategically select suppliers who can help reduce supply chain costs.

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