The Purchasing Fitness Review

Author(s):

Robi Bendorf, C.P.M.
Robi Bendorf, C.P.M., Consultant, Bendorf & Associates, (www.bendorf.com), Monroeville, PA 15146-4735, Voice: 412-856-4453 Fax: 412-856-1226 Email:robi@bendorf.com

85th Annual International Conference Proceedings - 2000 

Abstract. Most purchasing operations have the objective of becoming or maintaining world-class status. World-class purchasing operations provide significant annual cost improvement, bringing significant strategic value to their companies and strong recognition to the function and those in it. Yet according to the Center of Advanced Purchasing Studies "most organizations have not changed significantly their purchasing process over the last 20 to 30 years." Where is your organization located on the road to World-Class performance? A Purchasing Fitness Review is a good way to find out. This paper's objective is to assist the purchasing professional in determining where they are now and the direction they need to go by providing a summary of the review process and identifying some of the best practices generally viewed as leading to world-class performance in purchasing.

The Fitness Review Process. The first step in the fitness review is to determine the major categories that will be covered. Although there may be some variations, the following categories are common for most organizations:

Purchasing Fitness Review Categories
Organization
Purchasing Performance Measurements
Information Systems
Planning and Specifying
Procurement Process
Advancing Supplier Relations
Supplier Performance

After deciding the categories, determine the major elements that will be review under each category. For example under Procurement Process the following are some of the elements that could be listed:

Fitness Review Elements for Procurement Process

  • Commodity plans
  • Make or Buy process
  • Target costs
  • Understanding of commodity market
  • Supplier Base Information
  • RFQ's
  • Global Sourcing
  • Purchasing Manual
  • Transportation Inbound & Outbound
  • Price justification
  • Reasons for price increases
  • Long term contracts
  • Inventory Reduction
  • Evidence of negotiations
  • Cost reduction program
  • T&C's for varies types of purchases
  • Global Sourcing

The next step in the fitness review process is to determine the best practices for each element defined for each category. Best practices can be identified from purchasing trade magazines, purchasing textbooks, seminars, conferences, university courses, consultants, NAPM National Conventions, benchmarking, CAPS studies, NAPM's InfoEdge and The Journal of Suppy Chain Management, and the extensive article database at the NAPM and Purchasing Magazine Web sites. The real challenge in this phase of the process is to objectively identify the best practices for a particular element without regard to the situation currently existing in organization being evaluated. This is very difficult for a lot of purchasing professionals and managers because they attempt to justify the current practice as being the best possible under the circumstances. For example one of the best practices for the Training Element in the Organization Category is that purchasing professionals receive 80 to 100 hours of formal training per year. Even though a particular organization is willing to support only a maximum of 35 hours of annual training per purchasing professional (The CAPS Average of Averages for Winter 1998) the best practice is still 80 to 100 hours and this should be the strategic direction to achieve world-class.

Fitness Review

Following is a representative list of best practices for a few of the elements under each of the categories listed above. The objective is to critically evaluate the organizations current performance against the best practice. Once this is done, develop a strategic plan and begin the implementation that will move the organization in the direction of the best practice.

Organization

Who makes purchasing decisions?

  • Purchasing accountability and authority is clearly defined
  • Purchasing or those with strong purchasing skill sets are involved in at least 95% of the total spend profile for goods and services
  • The purchasing authority delegates responsibility by formal process to others in the organization depending on total annual spend for each commodity as follows:

Small Values--The user.

Medium Values--The user & purchasing professional

Large values--Cross-functional commodity teams with members who possess necessary skill sets empowered by the purchasing authority to make purchasing decisions

Purchasing Accountability

  • Objectives for commodity management with total cost responsibility
  • Objectives directed toward purchasing best practices and performance
  • Purchasing has a formal strategic plan supported by senior management

Training received

  • Formal Training Program in place
  • Greater than 80 hours/year/purchasing professional or manager
  • At least 1/2 of the training should be beyond basic purchasing and in areas related to transforming the procurement function, comprehending and supporting overall corporate strategy, applying advanced supply chain  management techniques, team building, leadership, problem solving, project management, strategic cost analysis, activity based costing, integration of corporate information systems

Buyer skill levels

  • Purchasing professionals and managers have C.P.M
  • Minimum Bachelor's degree
  • Demonstrated skills and knowledge of basic purchasing practices
  • Demonstrated commodity expertise in assigned commodities
  • Team leadership skills
  • Analytical & strategic abilities
  • Training & experience in negotiations
  • Capable of communicating with and developing relationships with supplier's management
  • Bottom line and big picture focus
  • Purchasing staff is trained in and utilizes internet, spreadsheet, word processing, presentation, and communication software

Purchasing Mission

  • The entire organization recognizes the strategic importance of  implementing and maintaining best practices in purchasing activities
  • The Purchasing Department helps to identify, negotiate with, establish agreements with, and monitor suppliers
  • Purchasing provides supplier relationships, process and systems that allows order launching and day to day administration to be as close to the end user as possible
  • The Purchasing Department has strategic bottom line orientation and focuses on providing value added activities that both reduce material and services cost and improves the productivity of all company functions
  • Total cost is the basis for assessing the performance of purchasing activities

Purchasing Performance Measurements

How does executive management measure Purchasing performance?

  • Clearly defined measurements established between purchasing

management and executive management. Periodic meetings with top management to review performance and strategies

Purchasing measurement systems

  • Purchasing has developed and regularly reports measurements that relate to the company objectives and that can trace progress towards continuous improvement

Price Index

  • Price Index tracking major commodities and comparing them to acceptable standards

Information Systems

Degree of automation

  • Common corporate wide purchasing system with shared databases
  • Commodity planning, requisitioning, purchasing, receiving, accounting, inventory tasks and reports are automated with the latest generation of supply chain software
  • Commodity codes are assigned and reported throughout the purchasing and financial systems
  • Purchasing systems provide for direct end user order launching with no procurement involvement on a per transaction basis. (Purchasing  establishes suppliers and process to allow end user ordering)
  • Use of EDI and/or electronic catalogs, procurement cards, Internet, Intranet, automatic ordering results in less than 10 % of the requisitions and orders being produced manually
  • All processes are mapped and reviewed annually for reengineering
  • Purchasing personnel have access to and use internet

Planning & Specifying

Forecast Process

  • Forecast process performance is tracked, reported, and improvements made to improve accuracy
  • Fully integrated with on-line access to demand requirements by supplier

Purchasing Involvement in Design

  • Purchasing involved in concept and design phase >80%

Lead-time accuracy

  • Data is current and accurate
  • Lead-time forecasts are provided on regular basis to company personnel

Quality of RFQ packages

  • Formal RFQ Packages issued which include:
  • Internally developed Specification if for non of-the-shelf items
  • Company model contract or Terms & Conditions developed for particular commodity or service
  • Instructions for submitting bid electronically for multiple item packages

Supplier involvement in design

  • Suppliers involved in early design phase greater than 90% of time

Spend Profile

  • Spend Profiles of all direct and indirect goods and services are developed and maintained to drive continuous improvement programs

Procurement Process

Commodity plans

  • Spend Profile is regularly reviewed with senior management to drive strategies for continuous improvement
  • Formal commodity review process in place with Strategic Sourcing Plans established for "A" category spending segments.
  • Cross-functional commodity teams are utilized for developing and implementing commodity plans

Make or Buy process

  • Aggressively reviewing the cost of completing tasks internally versus buying from the outside

Purchasing Manual

  • A set of up-to-date guidelines understood and used by the entire organization
  • Guidelines are customer and bottom line focused

Understanding of commodity market

  • Buyers possess detailed knowledge of major supply markets, cost drivers, production process, market strategies and short and long range outlooks
  • Buyers perform or have available cost/price analysis and "should costs" for "A" category items
  • Purchasing provides lead-time, price forecasts and other market information to cognizant personnel at company on regular basis

Price justification -Cost/Price analysis

  • Price justification by cost or price analysis is performed and documented
  • Clearly documented efforts to resist price increases

Eliminating low value added processes

  • All processes are flow charted
  • Program in place to reduce "low value added" tactical activities so that more resources can be devoted to strategic

Long term contracts

  • Long-term agreements with term greater than one year exist for over 70% of high activity commodities
  • Cost/productivity improvements, quality targets and improvement initiatives, delivery, reliability, lead time, penalties and incentives  are spelled out in long-term agreements

Evidence of negotiations

  • Negotiation plan and strategies defined & documented before meeting with suppliers
  • Clear understanding of the total cost value to company and supplier of the various elements to be discussed
  • Clear understanding of supplier cost drivers, the industry and the suppliers position in the industry, as well as the supplier's objectives and determination to be a company supplier
  • Person negotiating for company has thorough training and experience in negotiations

Inventory Reduction Programs

  • Inventory reduction programs in place that reflect an understanding that inventory reduction is not the process, but the result of applying best practices across the entire supply chain
  • Pull systems in place for "A" category items

Cost reduction initiatives & reporting

  • Total cost of ownership programs in place for major commodities
  • Cross-functional commodity teams continuously analyzing:
  •  Are we buying things right?
  •  Are we buying the right things?
  • Cost reduction targets of 3 to 5 % per year being met
  • Value analysis and reengineering of processes programs in place
  • Cost reduction programs are company wide and recognize benefits of cost
  • reduction, cost avoidance, and process improvements

Global Sourcing

  • Professionals have knowledge of world markets, currency exchange rates, and the global sourcing process

Advancing Supplier Relationships

Supplier Relations

  • Program for maintaining improved supplier relations in place, communicated and implemented
  • Category "A" suppliers visited periodically even if there is no problem
  • Supplier Welcome data developed
  • Senior Management of Category "A" suppliers introduced to and meet with company senior management
  • Annual Supplier Survey to rate buying organization as a customer

Supplier Reduction Program

  • Disciplined and formal approach to adding suppliers
  • Optimal number of suppliers for each commodity category is determined by risk assessment and technology considerations
  • Specific targets set for reducing the total number of suppliers to the optimal number

Strategic Supplier Alliances

  • A program for identifying and developing strategic supplier alliances is in place and implemented

Supplier Performance

Supplier qualification methods

  • A formal Supplier Qualification Program is in place
  • An Approved Supplier List is maintained by the Purchasing Department and communicated to the organization

Supplier certification

  • A formal process for supplier certification exists and is used
  • Supplier Certification of parts (no incoming inspection) on 70% of parts

Supplier Performance System

  • A formal Supplier Performance Measurement Program is in place with clear objectives for the program
  • Performance targets are established and clearly understood internally and by the suppliers
  • Suppliers are notified monthly of their performance
  • A company rapid response Corrective Action Team exists for dealing with poor performance

Good suppliers recognized

  • Good performing suppliers are recognized as part of Supplier Relations Program
  • Supplier Appreciation event for best performing suppliers held once a year
  • Training programs to benefit supplier continuous improvement efforts are in place

Summary. The Purchasing Fitness Review tells you where you are now and the best practices tell you where you need to go. Initiating knowledgeable implementing of these best practices provides a clear strategic direction and puts the organization on the road to world- class. In the words of David Nelson, C.P.M., 1999-2000 NAPM President, "Too often we focus on the day-to-day job instead of reaching out to become best in class. It is so much more rewarding to be part of a continuous improvement effort. A better approach is always possible, the best idea is always down the road. The journey is exciting." Good luck on the road to world-class.

References.

Fearon, Harold, "Competitive Directions in Purchasing." "Purchasing and Supply Management: Future Directions and Trends." CAPS, 1995, 87.

"Cross-Industry Comparison of Standard Benchmarks." CAPS, Spring 1998.

Nelson, David R., "World-Class Professionalism." Purchasing Today, July 1999, 2.


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