By now, the supply-chain metaphor is a familiar one. It helps us visualize the coordinated flow of goods and information, from raw materials through to the end user.
The supply-chain metaphor also signifies interdependence. If any single link is missing or weak, the supply-chain effort becomes ineffective or may even fail. From a conceptual viewpoint, therefore, it’s hard to say that any one function or link is more important than another. In practice, however, certain functions have an exceptionally strong impact on the success of a company’s supply-chain program.
One of those areas is purchasing. Purchasing professionals are on the “front lines” of supply-chain management. Their position at the top of the chain – linking manufacturer and supplier – is crucial to the success of the manufacturer’s relationship with its customers down the line.
“If you look at supply-chain management from a holistic point of view, purchasing is where the rubber hits the road;’ says Greg Cudahy, associate partner in Andersen Consulting’s Supply Chain Strategy Practice. Not only is purchasing one of the supply chain’s crucial links, he explains, but it also plays a role in achieving one of supply-chain management’s main goals: better cost containment.
Purchasing’s contributions in that area are vital, Cudahy says. He cites the example of the commodity-driven food-processing industry, which has very high materials costs. For most food processors, a 1-to 3-percent reduction in the cost of inbound materials greatly outweighs a 10-percent reduction in logistics costs, he reports.
Reducing costs is right up purchasing’s alley, of course. But the traditional approach of simply negotiating the lowest price for raw materials or components doesn’t fit well with the supply-chain philosophy. That’s because supply-chain efforts always look toward the ultimate customer – something few purchasing professionals are rained to do, says Dr. Larry C. Giunipero, professor of purchasing and marketing at Florida State University in Tallahassee. “Typically, they think of themselves as
just acquiring goods and services,” he says. “They feel they’re too far removed from the customer.”
Giunipero and former colleague Dr. Richard Brand last year surveyed 52 members of the National Association of Purchasing Management (NAPM) about their views on supply-chain management. The researchers found that most respondents defined supply-chain management as either “good relationships with suppliers” or “partnership arrangements with select suppliers.” Giunipero and Brand note that, although these phrases accurately describe some of the respondents’ primary responsibilities, they are far from reflecting the real meaning of supply-chain management. A smaller group saw supply-chain management as optimizing the flow of goods and information from suppliers to the final customer – a view that matches the one held by many logistics professionals.
Respondents also revealed their narrow focus on the supplier-buyer relationship when they rated their suppliers as the most important party in the supply chain. On a scale of 1 to 7, with 7 being very important, they rated suppliers as 6.48. Next in line are final customers, with a ranking of 5.87.
Giunipero finds that last figure to be encouraging, since it seems to indicate a growing awareness of the customer as the ultimate focus of supply-chain management. In the future, it will be critical that purchasing professionals become more customer-focused, he says. “At least right now, they see their contributions to their organizations very narrowly. I hope that will change.” Cooperative Venture
The way to achieve that kind of change is by increasing purchasing’s cooperation with other links in the supply chain, both upstream and down. Progressive companies are discovering several ways they can put that theory into practice.
Perhaps the greatest contribution purchasing can make to a supply-chain management program is in the area of vendor relations. Andersen Consulting, for one, recommends that companies use the purchasing function to strategically manage suppliers in order to reduce the total cost of owning materials and services. By this, the consultants mean that buyers and suppliers should develop cooperative relationships that reduce costs and improve efficiency with the aim of lowering prices and enhancing margins for both parties.
Some companies – including Bose Corp., IBM Corp., Honeywell Inc., and Allied Signal – are making this a reality by actually bringing carefully selected vendors into their plants or warehouses. This approach is known as JIT II[TM], a concept that originally was developed by former Bose Corp. Director of Purchasing and Logistics Lance Dixon. Under JIT II, vendors have access to production schedules. Based on that and other information, they order raw materials, parts, or components and get
them to the Just-In-Time manufacturing line on time. The benefits for the buyer are significantly lower costs and reduced administrative burdens. The vendor gets higher sales volumes, lower cost of sale, reduced administrative costs, and long-term contracts. Both parties, of course, also benefit from the close relationship that is required to make this joint effort work.
Some buyers and suppliers are taking an even more radical step by jointly examining the supplier’s manufacturing processes and the buyer’s internal administrative processes to identify and root out duplications, inefficiencies, and other problems that add cost. Giunipero cites the example of the auto manufacturers. Several are working with their first-tier (direct) suppliers and their second-tier suppliers (the suppliers’ suppliers) to redesign not just products but also the vendors’ manufacturing processes. By doing so, they are finding ways to reduce vendors’ production costs on the condition that both buyer and supplier share in the savings.
Clearly, that’s not a job purchasing professionals can do on their own, and that is leading some companies to develop cross-functional procurement teams, Cudahy notes.
“In the last five to seven years, we’re seeing the idea of cross-functional customer-service teams being applied back up the chain… Procurement teams now are
utilizing that same concept.” One company that has created procurement teams is Union Camp Corp. The company disbanded its corporate purchasing department and replaced it with eight “supplier management teams.” These multi-functional groups plan purchasing strategies, develop specifications, select suppliers, and negotiate price and service levels.
In addition to purchasing, procurement teams often include representatives of engineering, research and development, manufacturing, marketing, and customer service. Cudahy suggests that purchasing professionals, with their existing close relationships with vendors, are in a good position to lead such a team – provided they can leave their bias toward cost control behind.
That’s not to say that cost control is not important, but the procurement team has bigger fish to fry. Joint process re-engineering efforts, Giunipero says, offer such potential benefits as cutting order-cycle times, getting new products to market faster, reducing inventory costs, improving product quality, and increasing reliability of product delivery.
The key to achieving such wide-ranging goals is maintaining a focus on the ultimate customer, he emphasizes.”If your company’s biggest customer is focused on product quality, then you have to get that into your suppliers’ processes,” he asserts. “If your customer wants timely delivery, then your purchasing system ought to be
focused on that, too. It falls on purchasing to communicate to the suppliers what their customers want.”