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Purchasing Strategy Steps Forward

Initiative #6: Purchasing Strategy Development
Take the Initiative: Continuing coverage of the trends shaping the profession

By Roberta J. Duffy, writer for Purchasing Today®.
December 1999 Purchasing Today®, page 41.

Developed in conjunction with total organizational strategies and supply partner objectives, effective purchasing strategies can become the means to a competitive chain.

I'm purchasing the corporate jet. Years ago, that would've been a job for the board of directors. Now that responsibility goes to us in the purchasing and supply management department. Our organization recognizes the value we can bring to the total corporate spend and purchasing decisions." This example, given by one organization's chief purchasing officer, illustrates the progress of purchasing strategies and their increasing importance within the organization. Evolving from an era after World War II, when many organizations were purely sales-volume driven, to more recent years when the supply chain was identified as a means to reduce costs and add value to the entire buying process, purchasing strategies have had to change with the times. Just how that type of strategy is developed and what key elements must be included is one of the initiatives in the NAPM and Center for Advanced Purchasing Studies report, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast." The 1998 study says that in the coming years, successful purchasing strategies will be directly linked to organizational and supply chain goals, will be more formalized, and will result in a purchasing contribution that gives an organization competitive advantage.

Linking to Organizational Objectives

The first step to successful purchasing strategy development is linking strategy to organizational objectives. To accomplish this, strategy development must be a formalized process, according to Robert J. Trent, Ph.D., associate professor of management at Lehigh University in Bethlehem, Pennsylvania. Trent suggests a formal steering committee can identify specific steps, such as market analysis, milestones, and deliverables. The result will be a strategy with well-defined goals. An example is negotiating a single-source, three-year agreement that lowers total cost by 20 percent.

Trent also explains that a major step will be educating individuals internally about the strategy and its effects. This typically consists of showing internal business units the benefits that the entire organization will realize as a result of the strategy. For example, if the strategy is to reduce the supply base or use preferred suppliers, purchasing and supply management professionals must be prepared to demonstrate how fewer suppliers, or the preferred supplier, will reduce costs, provide better quality, lead to improved processes, or otherwise add value.

Connecting total organizational objectives into a complementary plan is difficult because often the different functions are measured on different factors. For example, if the sales organization is measured on volume of new business, it may be promising deliverables that the production side can't realistically support. Or, if a customer support function is measured on customer satisfaction and expedites materials to customers through the quickest possible means, this might conflict with operation's goals to lower costs of shipping. There is no right or wrong answer as to what the priorities should be; the key is that each function understands the overall goals and develops its strategy to support them, in concert with every other group in the organization.

Through a cross-functional review all the business units can learn how the strategies will work together. The groups will be able to see how, for example, an organizational strategy of "gaining early access to technology" will be achieved by developing long-term strategic relationships with specified suppliers.

Hurdles exist in developing a comprehensive strategy that links organizational goals, including information systems for various functions that don't communicate well, conflicting priorities of other business units, and lack of executive support.

At IBM Global Services in Raleigh, North Carolina, William S. Schaefer, vice president of procurement services, says that compliance is a major - yet manageable - hurdle. Even though years ago the company's highest executive made it clear that all buying would be handled by the procurement department, the function still found it had to sell itself. Traditionally, advertising at IBM was thought to be an area where purchasing and supply management could add little value. "To be honest, they were right; procurement didn't have experience in that area," says Schaefer, "but we hired advertising experts into procurement and analyzed the advertising value chain." The procurement group went to those purchasing the advertising and asked for one year. Once they became educated and learned the industry, they were able to add value to the process and deliver significant savings. In the past, 30 to 40 percent of the corporate spend took place outside of purchasing; now it's less than 2 percent. They didn't have to rely on a mandate for compliance - they were able to sell themselves.

Linking to Supply Chain Objectives

Developing purchasing and supply management strategies that are directly linked to overall organizational goals is a first and necessary step, but it doesn't stop there. The next evolution is to ensure those strategies are designed to support total supply chain objectives.

Schaefer offers another example of how IBM is involving supply chain partners in strategy development. "If you look at how we approach business equipment, such as copiers and fax machines, the only way we were able to successfully drive a new strategy was to put purchasing people on a team with internal stakeholders and suppliers to devise a set of technological standards that defined a 'future' office," he says. This way, suppliers can give IBM insight into what technology is available and what might be available soon. At the same time, internal business units are voicing what is attractive to them. "It becomes clear that alone, the purchasing organization can not provide all the answers - you need to involve other members of the supply chain," says Schaefer.

Success Factors

What steps can purchasing and supply managers take to ensure their success in developing an effective strategy? As mentioned previously, the first step is to make the process cross-functional. This should happen both internally with other business units as well as externally with suppliers. Rather than a purchasing organization only interacting with a supplier's sales department, engage the supplier's purchasing function as well, as this will create a link to the second- and third-tier suppliers.

Ensure that the focus of the organization is not on price standards, but on total cost concepts. To today's purchasing and supply management professionals, this may be routine, but for future success, these concepts must be communicated and thoroughly understood by others in the organization. For example, be prepared to explain how a shift to automated systems - an expensive venture initially - will provide return on investment for the total organization.

Lehigh's Trent also identifies four key areas in which the purchasing organization must be well developed for purchasing strategies to be successful:

• Human resources, to aid in the recruitment and training of (a) top purchasing professionals who will need specific skills as commodity experts and financial analysts, and (b) highly skilled individuals for other functions within the organization as well
• Information systems, to not only automate tactical purchasing activities, but also leverage information from various functions and other organizations
• Organizational structure, to facilitate purchasing processes that complement the development strategy
• Measurement systems, so that purchasing processes and strategies that affect other functions can be tied to overall organizational strategies and proven valuable

How Far Will It Go?

Looking forward, purchasing and supply management strategies will evolve even further, both in their content and in the manner in which they are developed.

Suppliers will be brought in early in the strategy development process. This is different from bringing them in early on a particular project or product to leverage their knowledge. The future trend implies developing a purchasing strategy - essentially a supply chain strategy - jointly with them. For example, by developing a joint strategy, suppliers will be able to commit specific capacity levels to the purchasing organization and, conversely, purchasing organizations will be able to make plans based on upcoming technology or supplier capabilities that are still being developed.

Purchasing and supply management will become more process-focused, rather than activity-focused. Automating tactical activities is imperative to this shift, but once it happens, "purchasing activities" become "commodity management" or "strategy development" processes. To best accomplish this, supply managers work side-by-side with engineers and other groups in their environment, and vice versa. Collectively, the unit manages - and purchases - the supply.

IBM's Schaefer says that an isolated procurement strategy will be obsolete. "Procurement and traditional supply chains merge together and essentially become an 'e-business network.' Procurement strategy must encompass how we derive value from integrating the complex and multi-tiered relationships between purchasers and suppliers in the network," he says.

Keep in mind that the specifics of the purchasing strategy will vary greatly depending on what industry is being considered, since each industry's goals are different. For example, in the electronics industry, the objectives often revolve around gaining competitive advantage by being first to market with a specific technology. The supply chain goals - and purchasing strategy - will reflect that. However, a less dynamic industry, such as furniture-making, might focus on supply chain goals related to delivery, quality issues, and internal process automation.

Regardless of the specifics, purchasing strategy development is becoming a process that reaches far beyond a purchasing and supply department; it encompasses the total organization and supply partners. The result is a strategy that functions as a vehicle for their progress.

Initiative #6: Purchasing Strategy Development

"Box page 42"

The 1998 study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," by NAPM, the Center for Advanced Purchasing Studies, A.T. Kearney, Arizona State University, and Michigan State University, details 18 initiatives that will shape the purchasing and supply management function in coming years. This month, Purchasing Today® provides commentary on one aspect of the study: Initiative #6, Purchasing Strategy Development. The study offers the following predictions:

• Purchasing performance evaluation will be linked to supply chain performance.
• Purchasing strategy, organization strategy, and supply chain strategy will be increasingly linked, as supply chains look for innovative sources of competitive advantage.
• Total supply chain strategies will become more formalized.
• Cost, technology, quality, and time drivers will be better identified.
• To facilitate integration of cross-enterprise supply chains, strategic purchasing personnel will be required to further develop strategic alliances with suppliers and customers.
• Insourcing/outsourcing decisions will be part of the strategic process; a cross-functional executive group will make these decisions.
• Especially in manufacturing firms, time spent in purchasing will be viewed as a positive source of experience for future CEOs.

Are You Poised for Strategy Development?

"Box page 44"

Purchasing strategy development is cited in "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" as a trend facing purchasing and supply management professionals. Ask yourself the following questions to help determine if the foundational building blocks are in place to successfully address purchasing strategy development.

• Is the purchasing and supply management function in your organization deemed as a strategic group in order to gain acceptance and compliance from other business units?
• Are the purchasing and supply management professionals in your organization properly trained in commodity and sourcing areas, so that they can make educated decisions about the purchasing strategy as it relates to the supply market?
• Does senior management actively support implementing a new purchasing strategy? This will be essential in introducing new processes to other internal business units.
• Because the strategy stretches across functions, does the organization possess common goals and measures which the strategy will clearly support?
• Are tactical activities automated or handled by internal users so that purchasing and supply management professionals can devote the necessary time to strategic initiatives?

Related Resources: Purchasing Portfolio Models: A Critique and Update Training for Success The Future of Purchasing and Supply: Purchasing Strategy Steps Forward Training Supply Managers for Effective Internal and External Relationships Managing Conflict of Interest Issues in Purchasing

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