The Current State of Best Practices in Purchasing

Author(s):

Michael Stanly, C.P.M.
Michael Stanly, C.P.M., Purchasing and Supply Management Consultant, McKinsey Consulting, Minneapolis, MN 55402, 612/371-3167, Michael.Stanly@McKinsey.com
Lisa M. Ellram, Ph.D., C.P.M., CPA
Lisa M. Ellram, Ph.D., C.P.M., CPA, Assoc. Professor of Supply Chain Mgmt, Arizona State University, Tempe AZ 85287-4706, 480/965-3231, Lisa.Ellram@asu.edu

85th Annual International Conference Proceedings - 2000 

Abstract. Purchasing and Supply Management (PSM) has finally come of age to the point that it can be considered a true "profession." Any true profession has a set of skills, knowledge and best practices that distinguishes the successful, leading edge professionals from the crowd. Based on its work with hundreds or organizations around the globe, McKinsey has identified a set of "best" practices" in purchasing. This presentation will introduce these best practices. Based on a recent survey, the presentation will also explore how widely accepted these best practices are, how the practices fit together, and how participation in these best practices affect the status of PSM within the organization.

Objectives. Those who attend this presentation should be able to walk away with an understanding of:

  • What comprises the portfolio of PSM best practices?
  • Is there a linkage between PSM best practices and PSM status?
  • What are the emerging PSM best practices related to technology application to PSM?
  • How do your organization's PSM practices compare to the "best?"
  • What Best Practices are Identified? The best practices identified by McKinsey Consulting include:
  • PSM has high aspirations- PSM is not willing to settle for incremental price reductions, but focuses on total cost of ownership (TCO), continuous improvement
  • PSM gathers and uses facts in managing the suppliers and understanding market opportunities
  • PSM has a strategic rather than a tactical focus.
  • PSM employs "top talent" within the organization, and are respected members of cross-functional teams
  • PSM develops a world-class supplier network, utilizing value-added partnerships as appropriate
  • PSM strategically applies the latest technology tools to improve its knowledge base, application of TCO and enhanced supplier integration

Each of these best practices will be discussed in more depth at the presentation.

The Research. A survey was used to assess the prevalence of these best practices, and to understand how they are related to each other. In addition, the survey explored environmental purchasing, purchasing risk management practices and the way that the purchasing organization is structured. The survey was mailed to a sample of 1,000 NAPM members and seminar participants with a title of Director or higher. A response rate of 26.7% was received.

The Findings. The results of the survey show that there is, indeed, an interesting pattern of behavior in purchasing best practices. Several of the items mentioned above as purchasing best practices actually broke down into more than one distinct best practice. For example:

  • PSM develops a world-class supplier network, utilizing value-added partnerships as appropriate

    Is actually made up of two separate best practices: supplier alliances and supplier co-location.

  • PSM has high aspirations- PSM is not willing to settle for incremental price reductions, but focuses on total cost of ownership (TCO), continuous improvement Includes a number of separate, distinct elements, including the use or TCO, the use of target costing, and PSM's accountability for results.

Another extremely interesting finding is that there are certain best practice behaviors that are highly related, and some that contribute the most to the perceived status of PSM within the organization. It was found that all of those PSM organizations surveyed that were classified as "higher" in organizational status had significantly higher levels of participation in all of the best practices identified. However, the best practices with the greatest influence (key levers) on the status of purchasing within the organization are:

  • The use of target costing by PSM
  • A high level of strategic focus by PSM
  • A high level of accountability for results.

This relationship is logical, if one considers that target costing exposes PSM to other key functions of the organization by working in a team approach. Target costing allows PSM to participate in delivering important results to the organization. This type of participation in and understanding of organizational goals contributes to the strategic focus of PSM, as well as to the accountability of PSM.

Another area of increasing interest today is the area of technology and its influence on purchasing. This study found that the overall level of technology adoption is fairly low in purchasing to date. Again, those with a higher level of technology adoption and use were more likely to have higher levels of participation in other purchasing best practices. The best practices that have the greatest influence on the level of technological adoption by purchasing were:

  • PSM has a higher level of accountability for results
  • PSM engages in supplier co-location

One can easily see how higher levels of technology implementation, particularly information technology, can support PSM accountability through improved tracking and measurement. For the same reasons, technology is important to effectively support supplier co-location efforts, and the associated communications and monitoring.

The presentation will expand further on the trends associated with the use of technology in the PSM function, including the role of the Internet in facilitating purchasing activities. The presentation will also look at the relative level of implementation of various PSM best practices, allowing participants to benchmark their own activities with that of the PSM organizations studied.

Conclusion. PSM is an ever-changing profession, full of opportunities. By understanding the current levels of PSM best practice activities, and how various best practices are interrelated, PSM has an increased opportunity to improve its own practices and enhance its value to the organization.


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