Strategic Purchasing: Not for Near-Sighted People

Author(s):

William L. Michels
William L. Michels, CEO, ADR North America LLC, Ann Arbor, MI 48106-0366, 734/930-5070, bill.michels@adrna.com
Traci J. Eckardt, C.P.M.
Traci J. Eckardt, C.P.M., Senior Consultant, ADR North America LLC, Ann Arbor, MI 48106-0366, 734/930-5070, traci.eckardt@adrna.com

86th Annual International Conference Proceedings - 2001 

Abstract. Many organizations do not develop a Strategic Plan for purchasing. This lack of planning often leads to inadequate focus, underdeveloped teams and a tactical approach to managing suppliers, the supply chain and the value chain. Without an appropriate map, it is difficult for the best purchasing departments to make a transformation to a well-organized, future-sighted purchasing group with sustainable performance.

Many leaders of purchasing do not address their organizations as if they are a micro business with profit and loss accountability. Yet many Directors and Vice Presidents of Purchasing have more profit and loss responsibility than many CEO's of smaller companies. To deliver the needed results, it is necessary for the purchasing leader to develop a business plan which outlines the strategies and return on investment and shows bottom line improvement with impact to shareholder value. The keys to success in the development of such a plan revolve around four key areas:

  1. Organization
  2. Systems
  3. Processes
  4. People

This session will highlight the need for strategic planning, provide a process for developing a good plan, and detail the development of commodity strategies required to support the plan. The session will also discuss the need for developing the cross-functional organization to successfully meet the plan requirements.

While the session is geared to stimulate the Senior Purchasing Executive, it will be informative for anyone in purchasing who aspires to achieve the executive management position.

Introduction. While nearly all organizations have a long term strategic business plan, only a few companies adopt a strategic planning approach to purchasing and supply chain management. Faced with overwhelming competitive pressures, many organizations fail to consider managing expenditures strategically to achieve significant competitive advantage.

Purchasing accounts for 40% - 60% of the cost of goods sold in many manufacturing companies. In many cases, the expenditure represents a sizeable Profit and Loss impact, which affects shareholder value. Since this is true, why is it nearly impossible to find a detailed strategy when visiting Fortune 500 companies? Have buyers prepared their organizations for large scale industry consolidation, globalization, access to markets through technology and supply chain integration?

In many cases, the purchasing teams of these companies have been reactive to change. In the future, there will be no place for these transactional, reactive buyers; to survive, buyers must become business men and women who can collaborate, create alliances, forecast, manage and have "technology savvy".

Industries like pharmaceuticals or aerospace, where the change approval cycle is two years, force buyers to plan on a four year horizon. Cost improvements for 2001 and 2002 are now being tested and approved. Savvy purchasers in those industries are focused on opportunities for 2003 and 2004. While this may seem like mission impossible, it can be accomplished through effective source planning.

Key Elements of Strategy Development. The first step in the strategy development process is to integrate the business plan and supply chain strategy. This is an essential process, which involves the purchasing executive in the business planning cycle. Such factors as new products, acquisitions, divestitures, consolidations and expansions must be considered in the planning process.

The graphic below shows the relationship of the business drivers to the purchasing strategy.

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The business strategy is driven by the customer/consumer. It usually specifies growth, innovation, R&D, marketplace opportunities and delivery systems.

Operational Effectiveness. Operational effectiveness is another element that must be considered. Every plan focuses on operational effectiveness, which is key to improvement.

Examples of operational effectiveness as it relates to purchasing are found in the following graphic.

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The purchasing strategy must support the operational effectiveness goals.

Financial Goals. Every organization develops short and long range financial objectives. Examples are given below.

(Graphic not available in text-only format of this document.)

Financial metrics for performance of suppliers and purchasing are essential elements of any strategic plan.

Sales and Share Growth. Providing customer-valued products and services are essential elements of a business plan. The purchasing strategy must support these strategies.

(Graphic not available in text-only format of this document.)

Organization and People. Successful organizations are staffed by empowered people working in teams with the power act regionally, but think globally.

(Graphics not available in text-only format of this document.)

Once the business drivers are identified, the purchasing intent must be defined. Strategies for internal and external considerations should be developed. The map above is an example of how purchasing can begin the identification of key areas for development of strategies. A three to five year vision must be considered.

Developing the Internal Plan. When developing the plan, the internal plan should be focused around these areas:

  • Organization
  • Systems
  • Processes
  • People

Organization
Organizational considerations in a strategic plan are creating an organization to support the business drivers. Is the organization capable of managing strategic, tactical and transactional purchasing? Key considerations should be given to the responsibility, authority and accountability for global, regional and local expenditures. A separate operationally focused transactional group should be structured to manage day to day activities.

Systems
Systems to distribute purchasing/supply chain management on a global/regional/local basis should be developed. Focus, vision and e-procurement strategies should be part of the system strategy.

Processes
A plan to review and reengineer business processes to meet the business strategy must be included.

People
Strategies to develop new skill sets and tool kits must be developed in line with the business drivers.

Developing the External Plan. When developing an external strategic plan, a strategic source plan process should be used. The essential elements of a good source plan are described below.

(Graphic not available in text-only format of this document.)

Conclusion. There are eight keys to world class purchasing:

  1. Driven by customer
  2. Business as usual is not enough
  3. Stretch the boundaries
  4. Manage at the right level
  5. Differentiate with value
  6. Price down, cost out
  7. Turn inventory into cash
  8. Drive out complexity

To achieve these eight keys to success, a Purchasing Director must have the right vision, values, capabilities and a strong strategic plan to pull it together. In conclusion, strategic purchasing is not for near-sighted people.


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