World Class Purchasing

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World Class Purchasing

Excellence in planning has frequently been measured by achieving MRPIIClass "A" certification. Achieving excellence in Materials Managementrequires integrating both "Class A" planning and purchasing functions.

Companies that are successful in doing this are the companies that willultimately be World Class. This paper will share the steps necessary toattain this status by development of a world class purchaorganization.

Purchasing's traditional role has been:

1. Cost reduction through negotiation, competitive bidding and buyinglarge lot sizes.2. Delivery improvements utilizing longer lead times versus reducedcycle times.3. Quality improvements through complaints, not quality improvementinitiatives.4. Relationships involving only the buyer and the salesman, excludingplanning and manufacturing.5. Finding success in negotiating downward requested price increases,not eliminating costs.

Those actions have typically led to a focus on the price of material, notthe actual value of the material. Selection of vendors can be a timeconsuming task in today's work environment. This activity is usuallycharacterized by:

Using current standbys, saves time and effort Using those designated by engineering, often leading to elimination oflooking for the best supplier. Using request for quote with contracts based on lowest price, not bestvalue. Selecting those who have the material available. Much of today's buyerstime is spent: Phoning in orders, not exploring better sources of su Processing individual orders including handling purchase requisitionsand getting them typed. (In many companies all purchase orders passthrough the buyer for sourcing/approval.) Expediting past due orders through phone calls and letters; non-value-adding efforts.Price negotiation has frequently been viewed as the key measure ofsuccess of a buyer. While certainly an important aspect, this methodseldom leads to the optimum value for their company. Today's focustends to be very short term in nature utilizing very tactical techniques

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such as: Playing one supplier off against the othe Negotiating prices down from quotes, not striving for value-addedconditions.

I am sure all of this sounds familiar in describing many of America'scurrent purchasing departments.

In the truly integrated materials management function there is a majoropportunity to transform buyers to the role of strategic managers ofmaterial cost (value). The keys to such a metamorphosis will be achievedthrough the following:

Training Commodity strategies Understanding the market

Benchmarking Supplier quality programs Managing suppliers who are not cost effective Managing the supplier selection process Understanding the difference between material price and total cost(value)As in most situations the best performers are also the best trained. Anaggressive training program for buyers should include the following broadbased programs. Negotiating skills including those that result in a "Win-Win" situation forboth the supplier and your company.

Accounting techniques that focus on cost of inventory, present networth, etc. Statistics that teach SPC, PCI, and CPK, as well as how to do Paretoanalysis and reading run charts. Value analysis that teaches buyers how to break down product prices tomaterial costs to see where greatest improvements are possible. Target costing that focuses on setting a price for an item and workingwith suppliers to meet or be less than that price while maintaining qualitystandards.

Another key to having successful buyers is their educational background.

World class purchasing organizations will need not just college educatedpersonnel, but more importantly individuals that: have skill sets in theareas they are responsible for. An example is chemical buyers shouldhave degrees in Chemistry or Chemical Engineering. There is a world ofdifference between being able to pronounce complex chemical names andunderstanding the production processes. Packaging buyers might well bethose who have a packaging engineering degree. In all cases an MBA

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should be expected to solidify the technical and business skills needed tobest manage the business.

Commodity strategies are table stakes for an effective purchasingorganization. These serve the purpose of providing a written

understanding of any commodity; they also are a key parameter inallowing a smooth transition as buyers change responsibilities. In someresearch I have conducted, I have found few companies have commoditystrategies. A good commodity strategy contains the following:

A summary of the current suppliers and the use(s) of the material. Other potential suppliers in the marketplace. Abreakdown of the raw materials used to manufacture the item and thecurrent price of raw materials. A contingency plan if the commodity is sole sourced. Energy source used at the supplier's plant to evaluate potential price

concerns if fuel costs escalate. Labor union and date of contract expiration if the manufacturer is aunion plant. Location of plant(s) and transportation sources from that area. Current specification for the commodity and process capability of thesuppliers manufacturing the item. Research and development budget of the supplier. Data on the current delivery and quality performance versusspecification. A breakdown of the current raw material, labor and burden prices thesupplier is paying.

Improvement initiatives at the supplier such as MRP II, ISO 9000,empowerment, etc. Financial status of the manufacturer including a balance sheet. Key management of their site and company. Other customers of the company to make sure development efforts youare engaged in with them are managed properly. Current lead times and lead time reduction efforts the supplier isengaged in. Capacity of the plant and what portion of the capacity your commodityrequires.

By compiling these key items, buyers will be able to manage theircommodities rather than being managed by others.

Armed with these basics the next key item for any buyer is to determinewhere their items fall in the overall market. This understanding will allowthe buyer to maximize the use of their time. Commodities can best beisolated into four quadrants. The strategic management is determined bythe sector the commodity falls in.

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Number of items per buyer, again workload related. The organization of the purchasing community and the relationship tothe planning arm of the materials management organization. Review of the information and process flow maps of their function. What expectations they set for their employees.

What they consider measures of a successful buyer or planner.

Having participated in a number of these ventures, I can assure you theycan by quite rewardingin showing the path to quantum improvement.

Most successful companies feature active quality programs with theirsuppliers. These are aimed at getting suppliers to, at a minimum, attainproduct control for their manufacturing processes. For key materials,process control with high CPK'S is a must. To avoid starting and stoppingof activities, this program should be focused on suppliers that you plan todo business with over the long haul. To maximize efforts they should

follow an ABC approach, working on the commodities most critical to youroperationthose with the most potential for cost reduction. The need toexpand the relationships well beyond the salesman and buyer is alsocritical. You need to include the planner and manufacturing personnelfrom both companies in order to gain maximum results. This will allow thesupplier to provide suggestions of improvement opportunities that maynot have been apparent to manufacturing. It will also allow the planner tomake sure they capture savings in inventory that are a result of bettersupplier quality and on time delivery reliability. As the quality improveswaste savings will be experienced; incoming inspection can be eliminated.A well run quality program should also mean savings for the supplier as

well as more business in addition to lower manufacturing costs.

Not all companies are in a position to drive such quality efforts withoutsignificant training. In many cases your company needs to be prepared toprovide the training to assure success. In some cases this might requiregoing into a plant and changing the layout of the manufacturing flow.Other times it might require assisting in eliminating setups to allowsmaller batch sizes. In still other cases efforts might be directed atteaching shop floor people how to create and read run charts to monitorthe process. Such assistance should be kept to a minimum; preferablythey will be reserved for sole source suppliers.

The last two topics on our list tie together. These are managing thesupplier selection process and achieving best value in the procurementfunction. This is truly where the integration of the planning andpurchasing function comes together. For years the purchase price of thematerial has been the measurement of a successful buyer. While not to beignored, this is only one part of the equation. In fact there are numerousothers that should be included:

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The impact on inventories of large lot sizes, poor quality andundependable delivery significantly erodesthe benefit of low prices when they are included in the overall valuemeasurement. These also drive up warehousing costs and prevent savings

from KANBAN or JIT programs that are not possible. The absenceof highquality may mean retaining incoming inspection as an additional cost. Often freight costs and terms of payment are not reflected in unit costsand again can change what appears on the surface to be a low price into amore expensive situation. Defective material that gets into the manufacturing operation will meanreduced efficiency and higher waste cost. Worse yet, material that getsinto finished goods and is shipped to customers will drive higher costs andmay result in loss of business. Finally, suppliers that cause your staff added efforts to reconcile bills orunsnarl improperly marked orders, resulting in delays and phone calls,

only increase non-value-added work and increase operating costs.

These are not "soft costs"; they are measurable and should be included inyour selection of suppliers to make sure you are really getting the bestvalue for your company.

The world class companies will be successful only when they are able tointegrate the functions of planning and purchasing. This will culminate in atruly world class materials management operation. Remember, "If you arenot the lead dog in the race, the scenery will always be the same."

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World Class Purchasing

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