Robert B. Ackerman, C.P.M., CPIM
Robert B. Ackerman, C.P.M., CPIM, Senior Consultant, Gemini Consulting, Morristown, NJ 07960 (201) 285-9000.
THE ISSUE. Purchasing professionals are coming under real pressure from management to respond to key business issues. Most firms have been looking to reengineering for salvation, but typical reengineering is not enough. Once we have reduced our fixed costs, restructured our staff, reduced our work process cycle times to their all-time low, and stopped the loss of market share, we are only competitive with the best in our market. Eventually, all competitors end up with the same equipment, the same service levels, and the same costs.
But there is an alternative to traditional business process reengineering: Business Transformation. Transformation means REFRAMING corporate issues, RESTRUCTURING the company, REVITALIZING the organization, and RENEWING the organization and its people. These "Four Rs" are the essential tools for balancing short-term and long-term strategic needs and for assessing the total impact of all the programs of guided change that a company has under way. Going far beyond process improvement, streamlining, and downsizing, transformation penetrates more deeply and broadly than traditional reengineering programs. Its seamless, integrated approach provides therapy for the whole organization, aligning processes, people, and purposes to produce continually renewable competitive advantage.
REENGINEERING AT WORK. To understand these transformational issues, it's worthwhile to examine a case of purchasing reengineering and then to look at it in light of these "Four Rs." In the early 1990's, the president of a large defense prime contractor was worried. Having become accustomed to sole source contracts during the defense build-up of the 1980's, he was jarred when he received a request for proposal requiring him to bid on a large multi-year competitive contract for military vehicles. In this newly competitive environment, he knew he had to produce a better product at lower cost than his competitors.
After careful consideration, the president initiated a vigorous reengineering of the department. In the initial phase of the program, the leader:
The Sourcing Teams worked with suppliers to lower supplier costs, resulting in significant changes in the purchasing process as well as in the manufacturing process. With only four months from the beginning of the effort to the deadline for bidding on the government contract for military vehicles, the company and its suppliers adhered to a timeline that incorporated supplier rationalization, supplier visits, RFQ requirements, and the best-and-final-offer process.
Purchasing was now acting as a strategic arm of the business. The material cost per vehicle in the final proposal had been reduced by 28%. The purchasing function had been reengineered, a reduction in the material cost had been achieved that exceeded all expectations, and the company won the contract. In addition, reengineering had:
From a reengineering perspective, the effort was a success. It reorganized work, produced real value for the customer, drove out cost from the supplier base, and achieved better focus within purchasing and better alignment between purchasing and manufacturing. The company redesigned a process that obviously needed work, achieved benchmark goals against competitors, and put purchasing to work strategically.
THE DARK SIDE OF REENGINEERING. Despite such impressive gains, however, reengineering will not produce a sustainable competitive advantage for the company. Competitors can easily replicate every step of the defense contractor's improvement. In fact, companies in every industry are undertaking similar programs every day, as reengineering itself becomes a commodity. These identical and easily imitated change programs not only level playing fields, they flatten markets, and the downward spiral of commoditization soon sets in.
In failing to pursue differentiation from competitors, the defense contractor fell victim to a common error in reengineering. He focused on benchmarking industry leaders on how to lower costs through supplier management and selection.
When the initial euphoria fades, he will likely find himself casting about for a way to eke out another increment of advantage for his already reengineered company. This is the dark side of reengineering; it occurs when companies concentrate on cutting 'things' - costs, people, products, or processes - instead of building a sustainable competitive advantage. Today 80% of reengineering efforts are of the dark side variety.
"FOUR R" FRAMEWORK OF BUSINESS TRANSFORMATION. How does the defense contractor fare when measured against the "Four R" Framework of Business Transformation - reframing, restructuring, revitalizing, and renewing?
REFRAMING means looking at the purchasing function as it is and reformulating it in terms of what it can be. Reframing requires the aggressive mobilization of the entire organization along the transformation path to achieve the future state. The contractor did properly assess the importance of purchasing. Because his products had increasingly come to incorporate many proprietary supplier items, his fate was intertwined with that of his suppliers, and he saw that the best way to guide it was through purchasing. He also successfully mobilized the people in his organization to work toward a more strategic vision for purchasing, but he failed to reframe that role in terms larger than the ability to match the competition.
RESTRUCTURING is the preparation to achieve a competitive level of performance. Differing dramatically from the cost-cutting focus of reengineering, restructuring means becoming lean and fit for the task at hand without assuming that leanness is an end in itself. The contractor was only partially successful in restructuring. The defense contractor used purchasing to solidify creative partnerships with his suppliers while simultaneously using the leverage of bringing more of the manufacturing in house to ensure top performance from all parties. Deploying multi-functional teams and reengineered business processes as the vehicle for this restructuring, he achieved immediate gains in competitiveness through the purchasing function and he was better able to serve his customers for the short term. However, he failed to widen his lens to include the larger market - not just his present customers, but potential ones as well. Had he taken the more integrated approach of BUSINESS TRANSFORMATION, his restructuring would have been yoked to long-term strategic goals, not short-term and unsustainable incremental advantages.
REVITALIZING means growing existing businesses and inventing new ones. Because purchasing plays a key role in linking suppliers, the company, and customers, it is uniquely positioned to uncover new business opportunities. RENEWING addresses the people issues in purchasing. It is concerned with leveraging core competencies through the creation of a learning organization in which knowledge, creativity, and adaptability are rapidly disseminated and quickly assimilated. Though subtle and difficult, renewal is potentially the most powerful dimension of transformation.
The contractor's approach failed to address revitalization and renewal entirely. While reframing and restructuring, like reengineering, often entail cutting and downsizing, revitalization and renewal mean growing the business and its people. The reactive and defensive stance of reengineering, geared toward minimizing losses, often sacrifices the future for the sake of the present. In an integrated, transformational approach, purchasing moves beyond restructuring to claim new competitive space, simultaneously identifying new products from suppliers and linking them with new markets and, ultimately, new businesses for the company.
Reframe, restructure, revitalize, and renew - that is the route to the world beyond reengineering in purchasing. Unlike the proverbial journey of a thousand miles that begins with the smallest step, transformation means taking big steps and making correspondingly greater strides toward the destination: a purchasing organization capable of continually transforming itself. It begins with reframing.
MOBILIZE. The first step toward reframing purchasing is the mobilization of the mental energy and commitment required to sustain the transformation process. Unlike simple change, effective transformation of purchasing is the result of organization-wide motivation and commitment to a common set of objectives.
CREATE A VISION. Reframing also requires the creation of a vision that challenges current paradigms. That means developing a strategic intent that includes a picture of purchasing's ultimate purpose and a measurement system that tracks progress toward its fulfillment.
DESIGN THE TRANSFORMATION PATH THROUGH MEASURES. Purchasing leadership prepares the organization for action by building the connection between achieving the purchasing operation goals and favorable financial results for the corporation. If measures and targets are to be relevant at all levels in the purchasing organization, they need to be reflected in a set of key performance indicators (KPI's). These KPI's should be identified with specific purchasing processes with a link to higher strategic measures.
REDESIGN WORK ARCHITECTURE. In purchasing, work gets done through a complex network of processes, referred to as the work architecture. Because a change in one of the work processes may affect them all, the work architecture must be redesigned so that all the processes are aligned to continuously adapt to the demands placed on them. They must be integrated with a set of goals and measures so that process boundaries are almost invisible.
ALIGN THE PHYSICAL INFRASTRUCTURE. The physical infrastructure of a purchasing department will vary depending on the nature of the business, the physical assets required, and the way in which the company is organized. This infrastructure is the most visible measure of the strategic direction of the purchasing department. Restructuring purchasing looks primarily at the alignment of its work processes, and, if significant physical assets are a part of those processes, the possible disposition of those assets. For example, if the activity includes the purchase of transportation services, then terminals or vehicles may be candidates for disposition.
INVENT NEW BUSINESSES. Growth also comes by starting new businesses from scratch. This requires cross-fertilizing capabilities that are frequently scattered throughout a company's supplier base and assembling them creatively to develop new ideas or technology. Purchasing is in the front line of product and technology information in the marketplace and plays a key role in recommending new businesses, products, and services to the corporation. The purchasing leadership role, therefore, is to foster an organization-wide understanding of the growth opportunities and to maintain an environment that encourages and rewards experimental probes into the realm of new businesses.
CHANGE THE RULES THROUGH INFORMATION TECHNOLOGY. Information technology can redefine the rules of the game in purchasing. Technology connects purchasing with all the parts of the corporation, allowing it to respond quickly and pro-actively to changing conditions. It allows purchasing to build direct, electronic links with partners and suppliers, thus providing a conduit to extend the reach of purchasing's core competencies. When information feeds active learning, technology becomes a competitive weapon in the marketplace.
BUILD INDIVIDUAL LEARNING. Individual learning represents a more advanced stage of renewal. With individual learning, people take responsibility for their own development and shape the contours of the firm to allow learning to occur.
CREATE A REWARD STRUCTURE. Compensation systems should reward risk-takers and encourage people to link their own futures to the transformation of purchasing. When people change, it is recognized in their actions. But it is really the objects of their actions that change - the benefits or rewards they expect to reap as a direct consequence of what they do. If we seek to change actions, we must first change the perceptions of rewards; or change the actions, and the perception of reward might follow.
DEVELOP THE ORGANIZATION. Instead of matching an organizational chart with a description of each employee's skills, the new purchasing leader now deals with a rapidly accumulating set of capabilities, looking for optimum use inside the organization. The definitions of a job and a project become blurred. The skill boundaries of the organization expand, allowing the organization and the individuals who make it up to reach previously unattainable goals and achieve continuous self-renewal.
CONCLUSION. Reframing, Restructuring, Revitalizing, Renewing - this is the "Four R" framework for developing a purchasing organization capable of continuous transformation. Its integrated, seamless approach to change and its orientation to future growth can carry purchasing far beyond the rapidly diminishing returns derived from traditional reengineering and help the function claim new competitive space. For a transformed and self-renewing purchasing organization will not only add value, but find it; not only gain competitive advantage, but sustain it; and not only survive in an uncertain present, but thrive in a future it shapes for itself.
Aldrich, Stan and Michael Tey, "Beyond Reegineering: Transformation Seen As Next Step For Companies," Oil & Gas Journal, November 7, 1994, pp. 65-68.
Clough, Thomas G., "Purchasing: Beyond Reengineering," unpublished paper, 1994.
Gouillart, Francis J. and James N. Kelly, Transforming the Organization, New York: McGraw-Hill, 1995.
* This article is missing charts. Call the NAPM Information Center for a hard copy of the article with charts.