Maximizing Your Purchases Resources

January 1, 2011
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How to get more with less after down sizing

In many companies today resources have been cut to a bare minimum. Companies that have survived the sudden down turn in the economy have taken drastic measures to reduce their overhead and expenses, often resulting in a reduction in purchasing staff. This article will address how you can increase the effectiveness and productivity of your purchasing staff and at the same time position your company to be ready to face future challenges.

Where we once saw purchasing organizations with one or two senior buyers, several commodity buyers and a clerical staff, today we often see only one or two buyers, and the purchasing manager who is doing much of the buying along with trying to manage the department and reduce material costs. In many organizations Purchasing is seen as a tactical function, performing transactional or clerical activities like preparing RFQ’s, entering and maintaining purchase orders, contracts management, doing follow-up and expediting, and document control. The real “value added” activities like sourcing and developing suppliers are often delegated to others outside of the department like Engineering, R&D, Designers, Quality, IT and even Finance. Purchasing is “too busy” with clerical tasks to get involved in supplier management, so they allow others to handle it.
The problem with this is that when buyers are not involved in the selection, development, and, management of suppliers, they have to deal with issues like incomplete specifications, late deliveries, poor quality, non-competitive pricing, and uncooperative suppliers, after the fact.

But, how can your buyers become more involved in the supply management process when they have so much clerical work to do?
The answer is twofold: First, eliminate your purchasing waste. And second, develop “supply management teams”.

Eliminating Waste:

The best way to identify and eliminate unnecessary or redundant effort is to perform a Kaizen event. Using proven Lean techniques: Start by mapping the “value stream” to show the flow of activities throughout the organization that are involved in acquiring needed goods and services. Next, identify all forms of waste in the process. Look for waste in the form of excess handling of paper, unnecessary movement of documents, waiting time, redundant activities, and underutilized people skills.

For example: how much time do buyers spend reconciling invoice discrepancies? How much time and money is lost in material review because buyers are not initially involved in the disposition process? What routine tasks could be better performed using state of the art information technology such as buying portals and outside buying services? How many purchase orders could be eliminated by using purchasing credit cards? In most companies a purchase order costs between $200 and $500 in overhead and expenses. 90% of this cost is because of the need for hard copy documents. Is it really necessary to print and file hard copies of a purchase order in several departments, when it is available in the system? Take a hard look at your approval processes. How long do P.O.s and requisitions normally wait to be approved? Often we see the same person approving both requisitions and purchase orders, and sometimes more than once. And the journey of discovery goes on and on.

Once you have identified the waste, develop a “future state map” showing what the process should look like after it is Leaned. Since Lean is an ongoing journey of improvement and elimination of waste, you should begin to look for opportunities outside of the company like redundant inspection points, excess material handling and shipping costs, excess inventory, and unnecessary documentation.

This brings us to the second phase in maximizing your Purchasing resources: Build supply teams.

Building a Supply Team:

In most companies today the purchasing process is allocated among various functions of the company. Engineering/Design develops specifications and even selects suppliers. Quality performs supplier audits and visits and approves suppliers solely on quality requirements. Major capital expenditures are made by Operations or IT and handed over to the buyer to place a purchase order. Finance or IT negotiate lease contracts and turn them over to Purchasing to manage. Forecasts and production plans are developed by Planning or Sales without regard to capacity constraints or technical capabilities of the suppliers. And, supplier selection is often dictated by low cost decision policies from Finance.

As a result of this division of duties, the relationship between Purchasing and others in the organization like Engineering, Finance, Marketing, and IT, is at best “arms length”. Purchasing is “an island” that others come to only when they need help. Often Purchasing does not even get involved until after a requisition, specifying the supplier, has been created. And, very seldom are suppliers brought in for their expertise until there is a problem.

The problem with this scenario is that by not involving buyers and the suppliers in the early stages of the design and development process, you often have to make changes later which add cost and time to the total cost of the product and impact delivery performance to the customer.

Taiichi Ohno of Toyota noted that the cost of an error or change increases by a factor of ten for each stage that it goes un-detected. A $1000 error at the concept or design stage of product development may cost a company $10,000,000 in warranties once it is in the customers’ hands.

ohno

The answer is to develop “supply teams”, with representatives from each of these critical functions along with purchasing and key suppliers. This way everyone brings their own expertise to the process from beginning to end. By involving Purchasing, suppliers and quality management in product design and development, costly errors can be avoided and cost reductions can be identified early.

Supplier selection should be a team effort based on input from everyone involved in the process. Marginal performance suppliers need to be identified and if possible not designated as sole source suppliers. Buyers should also be involved in make/lease vs. buy decisions, along with Operations, IT and Finance. Buying policies should be based on total cost, versus, low cost criteria. This requires input from everyone involved to identify the real costs associated with making a supplier and/or item selection. Marketing can also help in identifying potential suppliers and market opportunities. Often, outsourcing is better handled by Marketing than by Purchasing. The final decision to select one supplier over another should be a joint effort of the team after all critical factors have been considered.

Teams are also more effective than individuals for implementing corporate strategic initiatives like strategic sourcing, cost reduction, strategic alliances, JIT/Lean partnerships, inventory reduction, faster time-to- market, and supply chain development. Because a team brings together the expertise of all of its members, projects are accomplished faster, cheaper and more effectively. No one individual or functional department has all of the answers.

In conclusion:

None of the concepts or ideas presented in this article is new or unique. Lean is a proven journey for improving operations; and team based management is being implemented in more and more companies every day. What is documented here is an approach on how to utilize these two very different management principles in concert, as a way to improve the effectiveness and productivity of your company’s existing resources and, to achieve the same or better results as before the economic downturn; i.e. “getting more with less”. If you would like to explore this approach further, please contact the author as shown below.

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