Purchasing Leader or Laggard?

Purchasing Leader or Laggard? – A guide for CEO’s, CFO’s and purchasing leaders to assess how well their purchasing organization, strategies & processes have adapted to changes in the competitive environment?

Many readers will be in the fortunate position of working in businesses that are growing strongly; others will be part of businesses that are in a dynamic rapidly changing market place whilst others are fighting for their very survival. In all these situations those organizations will be focused on the objectives of delivering sustained growth, customer and shareholder value and achieving improved profitability.

At Purchasing Practice we believe our experience places us in a unique position to provide thoughtful strategies on how purchasing can make a powerful contributions to these objectives. Through our experience we see companies whose purchasing organization, processes and competencies have fallen significantly behind that necessary to survive in today’s competitive environment. The resulting outcome in these organizations is that at best, purchasing is failing to maximize its contribution to key business objectives and at worst, it is actually inhibiting the organization’s growth and ability to compete.

Such organizations are commonly referred to as “Laggards”, when compared against their counterparts the “Leaders”. In purchasing, these laggard situations arise when:

management is focused and devoted to meeting other business priorities
insufficient understanding and expertise exist within the business of modern purchasing techniques to recognize and articulate its importance to the business
simple organizational inertia

Symptoms:

Whatever the cause, the symptoms are typically the same; in these laggard organizations, key purchasing activities are functionally aligned, the purchasing department is relegated to the status of a service function, purchasing staff report at a low level within the business, staff skill levels have large capability gaps and management expectation of them is either non-existent or very tactical in nature. The focus of planning typically involves time horizons of less than 3 months and will almost certainly be purely reactive to internal stakeholders and outside circumstances.

Those within the organization including purchasing will see procurement as:

support function only
RFP administration
processing requisitions and purchase orders
expediting &processing receipts
managing inventories
processing invoices
releasing blanket orders

Furthermore, if at least 50% of your Buyers time is not spent reviewing requirements and performance issues with their stakeholders, visiting suppliers, researching supply markets, and developing longer term sourcing strategies that are aligned to your organizations objectives then the diagnosis is certain, but by no means terminal.

Why should this situation have developed and what can organizations do about it?

As businesses grow and develop the organization starts to segment and specialist departments are formed. In far too many businesses, however, purchasing remains un- segmented and functionally aligned. Specifically, this means that the transactional task of placing orders and expediting deliveries is not effectively separated from those activities involved in planning for cost and value improvement from supply markets. Since the transactional purchasing is focused on the day to day urgent priorities driven by its internal stakeholders, it is logical to recognize that buyers trying to combine both functions will always focus on those current urgent and important maintenance task to ensure tomorrow’s delivery is on time or a critical purchase order is placed. Consequently, this will eat away any time they have for concentrating on the equally important but not as urgent development task of devising and executing proactive strategies to extract value from supply markets.Fig 1Also because senior management see most purchasing work involving transactional tasks, performance metrics become focused on:

the number of orders placed or
lead time to turn a requisition into an order

Whilst these are important to ensure operational efficiency they create no expectation of purchasing effectiveness regarding cost reduction or continuous improvement from suppliers.

In summary, a functional alignment and the failure to segment activity effectively is the key reason that organizations become trapped in the laggard state, and that this area must be addressed if purchasing is to evolve its performance to advanced levels (see Fig. 1).

Unfortunately, this is not as simple as splitting your purchasing team in two. Most of the additional complexity comes from the need to develop appropriate reporting structures, competencies, and match individuals to the new skills needed for effective implementation of a strategic approach to purchasing. These skills are shown in table 1.

Often in our experience many businesses will have people in their organization capable of undertaking a strategic purchasing role. These people may or may not be found in the purchasing function. By bringing these people together under a suitable reporting structure, equipping them with appropriate skills, and implementing robust processes and metrics that place the focus on cost and value performance, organizations can successfully implement strategic purchasing.

How then do purchasing leader organizations differ from their laggard counterpart?

Procurement is recognized as a primary business process
The purchasing mandate covers all areas of expenditure
Purchasing is involved in new product & service development from the onset of projects.
Purchasing is able to facilitate extended enterprise alliances.
Purchases are segmented into logical spend categories
Written 3-5 year category plans are available on major areas of spend.
Multi cross functional teams are enabled to attack sourcing opportunities.
Business analysis exists on all major categories of expenditure.
Modern e-procurement tools are utilized to extract value
Appropriate performance measures are in place.
Benefits tracking is in place

Does being a “Purchasing Leader” matter?

For organizations with less than 40 – 50 people the opportunities lost are relatively small. Once organizations grow beyond this point however, procurement and supply chain failure almost guarantees reduced performance.

Research has shown that leadership does not cost more, in fact it shows that purchasing leaders cost as a percentage of total spend is 25% lower than their median performing counterparts. Furthermore the return on this investment is 133% greater when measuring savings as a percentage of purchasing cost.

Hopefully the insight provided in this month’s Transform will prove thought provoking enough for you to consider what actions your organization needs to take to advance on the purchasing evolutionary scale. If not executives should consider that, if your purchasing profile represent 65% of total turnover, then the impact of a 5% improvement on the cost of goods sold (COGS) can yield a 36% improvement in net income and market value per share.

The risk of upgrading your procurement capability is low and the benefits can come in months not years. The question is “what kind of purchasing organisation will deliver the 5% reduction in COGS?” Certainly not one focused on transactional activities. More specifically, how does the purchasing practice’s being applied by your purchasing organization align to the real corporate goals and objectives towards which you are working?

The Opportunity:

Purchasing Practice can assess purchasing competencies in key areas of your organization. An independent assessment of your companies purchasing and a gap analysis to Best Practice will provide the road map to continuous improvement. If your company misses the opportunity to lead in procurement, it could place itself at a serious competitive disadvantage. Conversely if your organization grasps the opportunity to lead then significant benefits in terms of lower cost and improved service delivery will lead to powerful shareholder value improvements.

Nuff said …