Purchasing: No Time for Lone Rangers (1997)

The objective must shift from cost to competitive advantage Half your purchasing group may need to be replaced Operating at the hub of a supplier network Purchased goods and services can account for 50 to 80 percent of a company's expenditure. It is hardly surprising, therefore, that after pricing, reducing purchasing costs is the most powerful way to improve shareholder returns, and that most companies have at some point embarked on a purchasing cost reduction program [ILLUSTRATION FOR EXHIBITS 1 AND 2 OMITTED]. What is surprising, however, is that many executives still believe the benefits of better purchasing and supply management (PSM) begin and end with a one-off cost reduction, essentially achieved by telling their purchasing departments to lean on suppliers to cut prices. Those executives would do well to think again. For, properly managed, PSM can give companies a network of suppliers capable of delivering the technology, knowledge, products, or service quality that will beat competitors, at the same time as securing ongoing cost reductions. There are many examples. A leading fast-food company cut the number of its suppliers so that it could work closely with the remainder to improve their performance. The result has been not only annual cost reductions of 4 to 5 percent over several years, but faster product development and innovative packaging that sees the company now selling its food in unique environment-friendly containers. An automotive manufacturer integrated PSM personnel into its product development teams so that sourcing is considered during, not after, development. This integration means development teams constantly consider the cost and manufacturing implications of their decisions, and usually enables suppliers to be brought into the development process, lending their own knowledge and skills to improve design and speed up development. One development team that collaborated with a supplier to redesign an instrument panel was able to cut the part count by 30 percent, halve the number of assembly steps and materials specifications, and shrink development time from years to months. Similar efforts in other areas have enabled the manufacturer to produce two vehicles in the time it takes competitors to turn out one. A leading clothing retailer formed close relationships with a small number of suppliers to redesign its supply chain. Shipments now arrive at lower cost and up to seven days earlier - a significant advantage over rivals in the fast-moving fashion business. And sound PSM management helped a defense company discover that many of its engineers had for years duplicated suppliers' work in areas such as R&D, parts-engineering support, and quality audits. The duplication, inevitably costed into the final product, amounted to an unnecessary 7 percent tax which, once discovered, was easy to eliminate. The company's engineers now take on higher value-added tasks such as value engineering, giving it an edge over competitors that have yet to look for similar overlaps. These examples, and our experience of working on PSM improvement programs with more than 250 companies in a range of industries and services, reveal the same simple message: companies must define PSM more broadly if they are to use it to the full as a strategic weapon. Indeed, PSM lies at the heart of any successful continuous-improvement program, helping best-practice companies constantly to upgrade their performance at the same time as reducing costs. In other words, PSM helps them improve their spend productivity (that is, year-on-year cost reductions on goods and services) faster than competitors do. Beyond cost reduction The key to successful PSM is to configure and manage supplier networks to emphasize the purchaser's competitive strengths. Technical innovation, for example, is vital in information technology. Therefore, computer manufacturers must use suppliers to speed up the rate at which they introduce new products. …