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Transforming The Purchasing Organization - Beyond Reengineering

Author(s):

Philip D. Stang, C.P.M., CPIM
Philip D. Stang, C.P.M., CPIM, Senior Consultant, Gemini Consulting, Morristown, NJ 07960, 201-285-9000.

80th Annual International Conference Proceedings - 1995 - Anaheim, California

INTRODUCTION.
Continuous transformation is the new business challenge and, therefore, of preeminent concern for the purchasing organization of the future. Most proactive firms, today, are awash in initiatives. Major efforts are underway to enhance customer focus and to embed quality thought and approach through TQM. Value analysis and reengineering are feverishly attacking costs, and revamped software infrastructures are envisioning linkage with the information superhighway. Although these are enviable endeavors, they lack the cohesive impact of an orchestrated transformation approach.

We have all heard the old story regarding the differing viewpoints about a glass of water. The pessimist views the glass as being half empty, while the optimist views it as being half full. The latest twist to the story adds a third point of view, that of the reengineering consultant, who says, "The glass is too big.". This story illustrates the level to which reengineering has permeated the current approach to business revitalization. Unfortunately, too often this approach cuts too deeply into the muscle of the organization and destroys its ability to compete. Therefore, we must expand our horizons and look toward transformation with its enhanced reliance on growth and people to gain the ability to compete in the 90's and beyond.

This highly interactive presentation will focus on the four R's of transformation: reframing corporate issues, restructuring the company, revitalizing the organization, and renewing the organization and its people. The key success factors to moving the purchasing organization simultaneously through the four transformation dimensions will be presented and discussed.

APPLICATION OF THE TRANSFORMATION APPROACH TO PURCHASING.
The approach outlined is based upon the 4R Transformation model:

  • REFRAMING revolves around the formulation of a vision of where the organization should and/or needs "to be". It involves the aggressive mobilization of the entire organization along the transformation path to achieve the "to be" state/environment.
  • RESTRUCTURING involves the commitment of the organization to market-focused reengineering (MFR) and structured portfolio moves. Market-focused reengineering differs dramatically from the "slash and burn" downsizing and cost cutting approaches of traditional reengineering. The MFR approach attempts to be future oriented by focusing the marketplace, anticipating forward trends and actions. MFR drives toward more integrated, sophisticated solutions through an expanded approach and scope, technology and measurements.
  • RENEWAL is centered in development of the organization's core competencies and enhancing the abilities of its people through the creation and growth of a "learning organization", with primary focus on creativity and adaptability.
  • REVITALIZATION is primarily focused upon new revenue and profit generation opportunities through growth in existing businesses and/or investing in new businesses.

The approach looks at the components of a purchasing transformation from a rather high level. It will be quite clear from this viewpoint, however, that significantly more than transitional reengineering is required for purchasing to attain its strategic value to the organization, and, more importantly, the customer.

REFRAMING purchasing is critical to generating a vision and subsequent mobilization of the organization. Reframing requires an understanding of the major cause and effect relationships within purchasing and how value is generated to the customer. Defined cause and effect relationships should be evaluated by two principles: (1) start with the customer, and (2) top-down direction setting. Questions used to understand and define cause and effect relationships include:

  • What business is the customer in and who is the end user?
  • What are the customer needs and are they being met?
  • How does the customer's strategy relate to the supplier's purchasing strategy?
  • How does Purchasing impact value to the customer?
  • What is the material cost position in the marketplace?
  • What portion of the customer's cost does this product(s) represent and how does it compare to competitors?
  • Is the supplier viewed as an extension of the customer's operation?
  • What is the delivery, quality and cost performance to the customer?
  • What is the customer doing to improve their competitive positioning and how can Purchasing help?
  • How does the customer specify material requirements and specifications?

The answers to these questions will help to formulate a vision in which purchasing will deliver a differentiated value added product to the customer. Top down direction setting entails creating a vision of what "should be", determining how purchasing can add value to the customer, and developing an action strategy.

RESTRUCTURING within purchasing begins with the customer. It is critical that purchasing begin with aggressive determination and evaluation of customer needs prior to looking inward. Optimal benefits are not achieved if the changes undertaken do not create significant additional value for the customer, and unless the value is something competitors can not easily deliver. Questions used to determine customer needs include:

  • Who is the customer?
  • Who is our target?
  • Is it the right customer?
  • How is the customer asked about their needs?
  • How is satisfaction of customer needs measured?
  • Are customer needs "performance defined"?
  • What is company policy towards customers service?
  • What is the customer market positioning and strategy?
  • What are the customer growth objectives and new business initiatives?
  • Does the customer pose a threat of backward integration?
  • Is standardization a threat?
  • How does satisfaction affect supplier selection?
  • Does the customer evaluate total cost?

The restructuring process then can switch to internal issues. It begins with a mapping of the "as is" environment. The first step is to evaluate the current purchasing environment against key performance areas. The following table presents several key performance areas in the first column and presents hypothetical evaluations depicted as (1) Business As Usual Purchasing, (2) Competitive Purchasing and (3) Strategic Sourcing.

Key Performance
Area
Business As Usual
Purchasing
Competitive
Purchasing
Strategic
Sourcing
Supplier Base Large for safety Rationalized for
leverage and
quality
Optimized by
process
Supplier Selection Driven by
constraints and
history
Identifying and
opening
opportunities
Driven by business
strategy
Contracting Both annual and by
contract
Multi-year with
limited teaming
agreements
Long term business
relationship
Supplier
Interaction
Primarily
purchasing but
anyone - little
focus
Driven and
focused by
procurement
Multi-functional
and parallel
efforts
Design Process Series effort -
design and then
purchase
More proactive,
but still limited
Parallel carrying
the strategic
sourcing plan for
the business
Supplier
Information
Receives order and
then issues RFQ
Advantageous
deliveries with
multi-year out-look
Sharing forecast
data
QA Incoming inspec-
tion
Incoming inspec-
tion
Supplier
certification and
inspection
Pricing "Steel toe"
negotiations
Cost reductions
by processes
using competition,
not pricing
Price modeling
with cost targets
and CPI
Planning Short term by
contract
Long term or
multi-year
Long term driving
investment
Business Action Reactive to
business
Proactive on
business issues
Business leader
maximizing bottom-
line contribution
Problem Solving Reactive and ask-
ing for help
Marketing multi-
functional team
approach
Multi-functional
team ownership
Make Or Buy Driven by
production needs
Driven by
production needs
Carrying business
vision for lowest
total cost
Business
Objective
Minimize price Minimize program
cost
Minimize business
cost

There are several additional evaluation concerns including: determination of strategies and philosophies regarding suppliers and current relationships with suppliers, overall supplier structure, future supplier base strategies and plans, specific suppliers and volumes, supplier evaluations, segmentation and selection, accountability for overall supplier performance, current supplier initiatives/issues, and communication and technology sharing processes.

Once customer needs and the "as is" purchasing environment have been determined, the focus in the restructuring process moves to creating the "to be" environment, or determining where the purchasing organization should be heading. At this juncture a new set of issues and questions arise, including:

  • What are the purchasing best practices and industry standards?
  • How many suppliers are required and what are the selection criteria?
  • How will we evaluate and monitor suppliers?
  • What are the potential linkages between the customer and suppliers?
  • What communication channels and levels are needed with suppliers?
  • What are the types and levels of confidential information needs?
  • What methods will be used for utilizing purchasing leverage, process, and inventory management?
  • If we spend a day in the lives of our suppliers and customers, how can this information help us add value?
  • What will be effects of renewing and revitalizing efforts have on the "to be"?
  • What level of integration will the company accept?
  • What are the financial commitments associated with the supplier base and does do they fit with our strategic initiatives?
  • What investments are needed to utilize suppliers?
  • What are the costs and risks associated with selection and deselection of suppliers?
  • Do the purchasing costs of a particular material accurately reflect the value of acquisition activities?
  • Is the total cost (acquisition, service and supplier support) incorporated in the supplier evaluation process?
  • Are costs captured for the purchasing process, directly on a product or as overhead?
  • Is the strategic value of developing purchasing people evaluated?

Reframing and restructuring drive the organization into motion and implement change that will deliver near term benefits.

RENEWING takes the next quantum step to develop people and the organization, to bring lasting, long term benefits. Purchasing must develop people with business expertise and vision to develop an organization that is adaptive and able to exploit technology as a competitive advantage. True transformation will not take place without developing individuals and the organization on a continual basis. Issues to address for renewing individuals include:

  • What are specific roles for individuals in the purchasing organization and what skills are needed?
  • What are the affects of restructuring changes on the individual and what skill set changes are required?
  • What are the possible career paths in purchasing and do they provide growth for individual contributors as well as managers?
  • What methods are used for individual evaluation and promotion?
  • Do individuals receive coaching?
  • Are purchasing personnel expected to work in other functions and increase their breadth?
  • What are education opportunities and what is the system for accessing these opportunities?
  • Are sourcing teams formed and what skill sets are required?
  • What learning systems will be needed to ensure skills match process changes on an ongoing basis?
  • Is compensation merit-based and is it tied to the appraisal system?

Other issues that need to be addressed include: does the organization thrive on diversity; do barriers exist between purchasing and other functions; are team building skills required; does the organization allow company vision and values to flourish; does the organization support the supplier and is the level acceptable; are systems in place to continually review the organization design and effectiveness; how do the changes within restructuring affect the organization; and does the purchasing organization learn and what is the relative rate.

Reframing, restructuring and renewing changes will lead to short term success unless efforts are made to grow revenue.

REVITALIZING the purchasing organization completes the integrated transformation process. Purchasing has a vital role in revitalizing the business through growing the existing businesses and inventing new ones. Engaging both suppliers and customers will open avenues to new business opportunities. The purchasing organization can creatively meet the dynamic needs of the customer by linking the supplier base directly to the customer. Issues to address in expanding business growth and revenue include:

  • Can purchasing integrate the entire supplier base providing the benefit of synergy to the customer?
  • What types of vertical integration do the customers desire and can the supplier base absorb the customers' outsourcing?
  • Can purchasing leverage capability in the supplier base to provide unique service offerings?
  • What are the dynamic needs of my customers and can my supplier base meet them?
  • Do sales and marketing understand the purchasing strategy?
  • Are communication systems needed to inform sales and marketing of purchasing's initiatives?
  • Does the sales force explain to the customer the value added nature of purchasing?
  • Are supplier based technologies needed to pursue inventing new businesses?
  • Can purchasing help support corporate strategy by leveraging the supplier base?
  • Can supplier alliances enable the company to invent new businesses?
  • Are there synergies available through potential mergers and acquisitions to better position the company?
  • Does the core competence of purchasing provide strategic advantage to the organization?
  • Can purchasing's core competence be capitalized upon to increase revenue?

CONCLUSION.
Understanding the four dimensions of transformation and how these dimensions can be applied to the purchasing organization is essential for growth and success in the 90's and beyond.


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