The Future of Purchasing and Supply: Process Uncoupling

#10 Take the Initiative: Continuing coverage of the trends shaping the profession

By Roberta J. Duffy, writer for Purchasing Today®.

March 2000 Purchasing Today®, page 41.

What do you do well? Who could do it better? Those are the questions organizations must answer to analyze core competencies and the best-suited suppliers.

Think of it as the All-Star game for your favorite sport. Each position is analyzed and the league's best players are selected for the job. The top candidates - the ones who give the competitive edge to each position - combine to make the best team. Optimizing the cream of the crop is the philosophy behind process uncoupling.

Process uncoupling is featured in "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," as a major trend affecting the profession. This study, by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University, defines it as the process of examining every facet of an organization's operation to determine if each process is best accomplished in-house as it is, in-house but perhaps through a different function, or through outsourcing. The objective of process uncoupling is to always have processes and functions performed by those who can do them best. Organizations are recognizing that to gain or retain the most competitive advantage, all functions of an operation must be executed to bring maximum value and, in some cases, someone outside the organization can do that. "Of all the trends identified, this is one of the most provocative," says Phillip L. Carter, D.B.A., director of CAPS. "It's futuristic and encompasses purchasing's most strategic role within an organization."

Think of all the processes that take place within a typical purchasing department, such as sourcing, supplier evaluation, supplier selection, negotiations, contract writing, supplier management, and intelligence gathering. If each of these were analyzed, a purchasing organization could determine if any parts could be done better by an outsider, which could also be the user or another internal group. However, process uncoupling moves beyond the purchasing and supply function and requires purchasing professionals to evaluate, source, and manage across business units. Imagine all of the components that go into an organization's operation, including research, design, communication, marketing, distribution, and training. All of these processes - and sub-processes - are candidates for outsourcing when an organization considers process uncoupling.

Out is In

Many organizations have recognized the value gained through outsourcing and uncoupling, including Oracle Corporation. The software supplier, headquartered in Redwood Shores, California, has been focusing on improvements which allow process owners to identify strategic opportunities that bring in value-adding third parties. "Purchasing's value is that we understand our internal customers' expectations and we know how to manage supplier relationships," says Greg P. Tennyson, director of purchasing for Oracle. His group is responsible for approximately $1 billion of indirect spend, of the company's $9.3 billion in annual revenue. Oracle has outsourced components of marketing, manufacturing and distribution, legal services, consulting services, administrative functions, and more.

"In our case, identifying competencies involves an assessment, through activity-based costing, which identifies process flows," says Tennyson. He adds that this means even understanding the white space between processes - in other words, who is responsible for, what are the costs of, and what is the value of the space between the processes. For example, Oracle has outsourced the printing of documentation that accompanies its software. Oracle provides the electronic text, and the outsourcer prints it, but also drop-ships it to the customer. That distribution alleviates white space in the process.

What organizations must be wary of is outsourcing core competencies that give them a competitive edge. Perhaps there is a research firm that excels at innovation. Its technology might be desired, but can an outsourced party respond to changes in business strategy as quickly as the internal research department? Another caution is that core competencies can change. An organization that grew from a small design house might always consider design as its bread and butter. But a critical look at the competition might reveal that others are doing design better and the organization has come to see that production is the function in which it is truly adding value.

In addition to those processes which must remain flexible, a core competency is also defined as one which gives an organization a competitive advantage because of its uniqueness. For example, a computer manufacturer's core competencies might be in its products, but if its customer service department has created a unique niche, that niche might be lost if outsourced.

Keeping Identity

While the idea of combining the core competencies of several organizations to culminate in a single successful effort is attractive, it does present some challenges: how can the "uncoupled" organization present a seamless front to customers? At Oracle, the key is remembering that its success and the success of the supplier are mutually dependent.

"It's very project-based," says Tennyson. "You have the supplier, purchasing, and the process owner. There has to be constant recognition that these three parties are working together for common goals - in our case, shareholder value and market share." In order for third parties to satisfy the requirements of the purchasing organization, it's also important that their requirements are met. Tennyson says Oracle uses its own electronic procurement tools to automate the purchase-order creation process, thereby freeing up the purchaser to perform more strategic, project-oriented tasks.

In terms of interface with the customer, the purchasing organization must always maintain some oversight responsibility for the relationship; it should never outsource that role. That continuity is what holds the purchasing organization's worth in the eyes of the customer. To do this, it can be helpful for the purchasing organization to incorporate smaller suites of projects or milestones within the scope of a larger requirement. For example, an outsourced marketing department and purchasing organization representatives might interface on interim deadlines.

Keep in mind that "uncoupling" does not necessarily mean outsourcing. In some instances, a function or process may be uncoupled from its current position and handled by a different part of the organization. In Oracle's case, it identified where some redundant operations were occurring and combined them into a common data center, or shared services center. Now, many of the back-office functions that were taking place all over Latin America are uncoupled from those individual locations and administered by the shared services center. This includes order entry, collections, accounts receivable, accounts payable, and purchasing.

At Its Extremes

When this situation is taken to its most extreme - with organizations uncoupling and outsourcing every activity - what is left is a virtual organization. Customers may call upon the organization, but they're really speaking to a third-party customer service center. Service functions are performed by independent contractors or the products are manufactured by a production house. Logistics providers probably play a role in assembly, warehousing, or distribution. One must only look as far as the nearest computer to find unconventional organization models; many Internet organizations have no "brick and mortar" structure to call home, but do have outsourced partners holding inventory or providing services.

There's always the possibility that the strategy will change after outsourcing to an extreme. "Firms will evaluate their insourcing/outsourcing decisions through systematic decision processes," says the NAPM/CAPS study. However, the insourcing of activities (deciding to manage or perform functions in-house when they were previously outsourced) will probably not occur as rapidly. A resource strain is created when insourcing because new people, equipment, and finances are usually required and there will be a learning curve to reach an accepted level of performance. The objective behind insourcing is that the organization believes a process is now a core competency, but reaching that level will not be immediate.

On a broad scale, if processes and activities are going to be uncoupled and outsourced to the best providers, does that mean that those third parties will be handling functions from competing organizations? Yes, it's a possibility, but it's more probable that supply chains will align, creating larger supply chains that compete against other supply chains. With more links in the supply chain and more complex relationships, the opportunity exists for the sum of the parts to be greater than the whole. The trend of process uncoupling will call upon the strongest strategic abilities of today's purchasers, but if successful, the very best players will be at bat.

Initiative #10: Process Uncoupling

"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 future initiatives. For a complete list of the previous articles in this series and upcoming topics, see page 32 of the February issue of Purchasing Today®. This month, Purchasing Today® provides commentary on one aspect of the study: Initiative #10, Process Uncoupling. The study offers the following predictions:

  • Firms will evaluate their insourcing/outsourcing decisions through systematic decision processes.
  • Organizations will be required to determine core competencies in all stages of technology, product design, process design, service, manufacturing, operations, and logistics. All sub-processes will be included in the evaluation.
  • Processes will be decoupled when it's demonstrated that competing organizations possess superior capabilities that leave no chance of "catching up."
  • Firms will be required to outsource processes when competitors are achieving superior performance.
  • Process uncoupling will result in increasing the number of organizations in some supply chains.
  • Industries with changing technologies - such as high-tech industries - are likely to uncouple the technology aspect from final customer order fulfillment to enhance flexibility.