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Purchasing As A Business

Author(s):

David Hewitt
David Hewitt, Joint Managing Director, Procurement Services Limited, Fareham PO16 7UY, UK, +44 1329 231699, dhewitt@purchco.co.uk

86th Annual International Conference Proceedings - 2001 

Abstract. Is Purchasing a process or a business? Is it the gatekeeper for transactional Purchase Orders, or is it winning influence with expertise in vendor relationships, negotiation and entrepreneurialism? This paper makes the case for treating Purchasing as a Business operating in an internal market with real products, customers and service levels.

Introduction. This is not theory. Nor is it told by marketing experts. It is the experience of a buyer who has had to sell real services in a real market. It is essentially the story of PSL. The author's background is more than twenty years experience with IBM in a variety of international roles. As a consultant I have successfully sold my services to clients such as American Express, Eli Lilly and Hertz. Maybe that makes me a gamekeeper turned poacher. In any event, the drive behind the paper — and the associated workshop — is a passionate belief in making Purchasing an equal partner with other business disciplines.

Objective. With an objective to explore how Purchasing's role can be enhanced and marketed to internal customers, we will explore four elements: the case for change, users or customers?, the marketing mix and tracking success.

The Case for Change. What are the challenges of business as we kick off a new century? Time to market, relentless and global competition, the concept of the customer as 'king', buying services and losing people and so concentrating on the core and 'green, lean and mean' seem to be the watchwords. How has Purchasing responded to these challenges? Earlier involvement, integrated supply chains, delegation/empowerment, resource dispersal, make-or-buy and of course e-commerce technology are some of the actions already taken. But with much more to do, there is not just an increasing, but an essential role for better buying.

Purchasing's traditional role of safeguarding supply, keeping the business competitive, managing the supplier base and ensuring the organisation buys value has not diminished. But now we must also contribute to product innovation and increasingly to the management of risk. It seems to me that we can only do this by getting close to our customers' business.

The trouble is that some of those customers still see Purchasing negatively; often seeing the function as having an obsession with procedures, a desire to protect the company from scheming vendors, a passion for control, an urge to squeeze suppliers and a mania for hierarchies. Here is the Operations Director of a Contract Services company: "Purchasing has failed to keep pace with other functions in my organisation". Or listen to the voice of the Treasurer in an IT company: "When I ask them to show me the money, they say it's been spent on other things".

But armed with a vision for the future that encompasses fewer people, more vendor consolidation, customer-driven buying processes and virtual supply chains set within a context of no mandates from above yet rising expectations, then we can describe a response built on higher skilled people working within innovative fulfilment models.

Charles Handy talks about the sources of power. For instance, power can be exercised through physical force, essentially a military response. Or through personal charisma or the negative, roadblock mentality. Traditionally most Purchasing people have probably exercised bureaucratic power, that is through the strict application of rules and procedures. There may be a place for some or even all of these, but in the long run Purchasing must position itself as the expert and power will accrue from delivering the advice, persuasion and judgement that the customer values.

Users or Customers? This concept is rooted in the old adage that the customer is sometimes right and sometimes wrong, but always the customer. How do users and customers differ?

Users have little input to choice of supplier, low expectations and no power yet probably know how to get where they need to. In other words the minutiae of the process. On the other hand customers generally feel empowered, have high expectations, own (at least their part of) the process and know where they want to get to — even if they don't appreciate the finer details. The key to understanding the difference lies not only in our own experience as customers, but how we perceive the 'sellers' we encounter every day of the week.

Sometimes, old prejudices can get in the way: Users want Purchasing just to process the paperwork; Purchasing wants the whole business. Users blame Purchasing when things go wrong; Purchasing hammer the vendors. We should look instead at the big picture. Jan Carlzon says "Once you determine who your customers are, you can decide what business you're in."

Purchasing must engage with these customers as though their business depended upon it. Find out who and where they are. Segment them according to spend, category or maybe (improvement) opportunity. Discover what they think of Purchasing and then go on to assess their needs and wants. However, segmentation is not the only tool. Other techniques include service issues, expressed in an SLA and/or the expression or negotiation of targeted value-add to the bottom-line. And there is reciprocal training, in which both 'sides' share knowledge and experience. Purchasing unlocks some of the secrets of better buying whilst (say) HR opens the kimono on retention strategy. The objective is to understand more about each other's business. All successful marketing is rooted in empathy. And that is only done by asking. Asking the customer will determine not only a view of Purchasing's role, but also of it's output. A rating high on both counts creates a reference sell for other more sceptical departments, whereas low on output but high on role suggests a concentration on the quality of deliverables is required.

A rather interesting segmentation model was applied by a leading, multinational travel company which placed their customers in one of four priority 'areas' according to their propensity to develop. Their customers were described (amongst themselves) as either crawlers, walkers, joggers or sprinters. The analogy is pretty self-explanatory!

Of course, the customer is not just a theoretical concept, but a living person. The smart Purchasing marketeer will therefore want to borrow from the professionals. This model assesses the degree to which the subject is dominant, submissive, hostile or warm.

Here's their attributes and how to deal with them:

M1 DOMINANT HOSTILE
Loud, assertive, forceful, difficult to relate to, sometimes offensive and distrusts being sold to.
Win respect by positive eye contact and posture, active listening and direct answers until you draw level.
M2 SUBMISSIVE HOSTILE
Cold, aloof and uncommunicative, tending to be a loner, working in jobs that require concentration, e.g., IT. Avoids being sold to, but if unavoidable takes on a passive, detached role.
Don't attempt to dominate but gradually build trust. Ask open questions, maintain soft composure and keep the head and eyes at the same level as the prospect.
M3 SUBMISSIVE WARM
Extrovert, friendly, talkative and mainly positive but not a natural leader. Accepts the sales approach but likes to postpone decisions until advice has been taken.
Satisfy customer's social needs by being warm and friendly. Share social experiences and guide the process towards a favourable conclusion.
M4 DOMINANT WARM
Adaptable, open-minded, talkative and opinionated. Demands proof of a sales argument but ready to be convinced by a good story.
On balance, respect is more important than being liked. Must match the customer's dominance and be ready to provide convincing answers and arguments to support claims of benefits.

The marketing mix comprises the four Ps: product, price, promotion and place.

Firstly, product issues. What is it that Purchasing is selling? Does it sell products or expertise? Here are some examples, though the list is neither exhaustive nor in any particular order...

EXPERTISE
PRODUCTS
ITT Process
Purchasing cards
Price negotiating
Call-off orders
Market research
Acquisition due-diligence
Terms and conditions
'Blue team' leader for outsourcing
Expediting
Training sales people (in your organisation)
Supplier management
 

It will often be a bit of both, once potential output is matched to customer need. Such a matching model looks at complexity (or rapidity of technological change), spend, order volume and vendor base (or price elasticity in the market). At its simplest, low complexity will be led by the customer and could entail use of purchasing cards for instance. The midrange output is likely to be led jointly and will involve a degree of supplier consolidation. And the highly complex areas should be led by purchasing involving as they are likely to, aspects of consultancy on acquisition terms or dispute resolution.

Another p associated with product is people. What makes an industrial buyer different to a domestic buyer? What separates the professional from the amateur even in an industrial context? Of course, you don't need to be professional buyer to buy professionally, but identifying differentiators helps define the product and could include the degree of complexity associated with better buying, the rational decision making involved in creating often long-term relationships, and perhaps most significantly the fact that the professional acts as an agent for others.

In the notional marketplace we have described, the issue of price is somewhat artificial. However, pricing fundamentals should aim to minimise bureaucracy and barriers to use whilst maximising the transition from the past. Above all they must reflect the culture of the organisation and be simple to use, understand and implement. There are several pricing options to choose from....

Option Advantages Disadvantages
General administrative overhead
  • Easy to collect
  • No discipline on Purchasing to improve process efficiency
Fixed/variable service charge (perhaps based on invoice values)
  • Simple to calculate and collect
  • Under/over recovery possible
  • Value may not be related to complexity of purchase
Supplier rebates
  • Service appears to be cost-neutral to customer
  • Business goes to supplier with biggest rebate
  • Danger of cross-subsidy between customers
  • No incentive on purchasing to improve
Daily/project-based rates
  • Simplicity
  • Mismatched recovery

According to classic marketing definitions, the aim of promotion is to raise awareness and stimulate interest, emphasising the benefits to the target audience. The avenues open to Purchasing include brochures, an intranet, roadshows and the judicious use of champions and sponsors — not always top management.

Prospecting is as much part of the promotion strategy, with some rich seams to plunder by working through the general ledger account, exploring make or lease versus buy models. Value analysis remains a strong contender here, as does vendor consolidation or the use of consortia techniques. Borrowing from Sales rather than Marketing allows Purchasing to use the call model to help close the deal. Differentiated from stimulus response and formula sell, the needs satisfaction call model is interactive, designed to find undisclosed problems through probing and creating dissatisfaction with the existing supplier. It is a proven model that identifies the customer's needs through open questions, active listening and skilful objections handling.

Finally, place where the question usually boils down to whether to centralise or decentralise. Advantages of centralisation include the development and application of a common strategy, tighter control and compliance to chosen policies and more innovation. Many of the attributes of a mandated culture. On the other hand, decentralisation (often used by customer-lead functions) delivers responsiveness to individual needs, faster turnaround and probably more innovation and flexibility.

Tracking Success. There is a changing culture in Purchasing's approach that should not only be applied downstream to vendors, but also upstream to customers. It moves from price dominance to total cost; from constant negotiation to shared resource; from short term thinking to team working and from win:lose to win:win.

But let's finish by going back to square one! Ask yourself these questions:

  • As Purchasing, what percentage of your organisation's spend do you directly manage?
  • Name three significant categories that Purchasing does NOT manage?
  • To what extent is Purchasing able to influence major decisions in your organisation?
  • In your view, how is Purchasing seen by top management? And by your key customers.
  • List in order of importance to your customers the following services: negotiating contracts, managing suppliers, managing bids, sourcing advice, supply-chain consultancy, placing orders, resolving supplier disputes, paying suppliers, training in best practice.

Recent surveys suggest that only one in five of top management are aware of Purchasing's potential to improve the bottom-line. Dream big and dare to fail.

Bibliography:
  • Carlzon, Jan. Moments of Truth. Cambridge, Mass: Ballinger Pub. Co., c1987.
  • Handy, Charles. The Empty Raincoat. London: Random House 1994.

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