Buying your way to the top

Too long the "forgotten" function, purchasing can -- with the right strategic approach -- powerfully enhance a company's economic performance EVEN AS RECENTLY as a couple of years ago, purchasing tended to be regarded as a managerial backwater. In some quarters, it still is: purchasing managers are paid less and are rarely promoted into general management; aspiring managers from other areas are reluctant to accept a stint in purchasing; and purchasing, for many companies, is simply not part of the senior management team. Things are changing. Purchasing is thrusting its way to the top of management's agenda, led perhaps by the automotive industry, as one of the most powerful ways to enhance economic performance. It's easy to understand why: * During the past 50 years, the average cost of production-related goods and services in US industrial companies has nearly tripled, from 20 percent of sales to 56 percent.(1) Indeed, in some industries, like consumer electronics, where companies source almost everything, the cost of purchased materials can be as high as 85 percent of sales. * Managers are beginning to realize that, while skillful contract negotiations could extract price discounts of between 1 and 5 percent from suppliers, today's cost pressures for 10 to 30 percent price reductions require a totally new set of purchasing skills: challenging materials specifications, questioning products and their package designs, and influencing "make" versus "buy" decisions. * Increased outsourcing, particularly in developed economies,(2) places a premium on the skills needed to identify and distinguish between strategic and non-strategic activities, to select and develop suppliers, to structure long-term supplier relationships, and to manage suppliers across a range of activities, from landscaping to manufacturing to customer service. * The renewed trend toward global sourcing creates a further challenge for the purchasing function: the management of geographically dispersed suppliers as a network, where quality and on-time delivery are as important as cost, if not more so. Little surprise, then, that what was once labeled as the "forgotten" function is today receiving much more attention from CEOs. General Motors' increased emphasis on purchasing as one of the key levers of its current turnaround program has attracted great interest. Less well known is that GM isn't alone. Several major industrial and service companies, even in such unlikely industries as banking, are also taking a hard look at their purchasing functions. Many are reorganizing to wring costs out of their operations; others, which do not face immediate cost pressure, to position themselves for such longer-term benefits as improvements in design, manufacturing, quality, and customer service. The starting point for the journey to strategic purchasing is to understand the current stage of evolution of the purchasing function. These evolutionary stages can be split into five parts, as shown in Exhibit 1. 1. "Serve the factory." In this initial stage, purchasing's job is to keep the factory running. Typically, the purchasing function exists only at site level, reporting to a materials manager or possibly the plant manager, and the buyer often has no relevant professional qualifications. The task focuses on clerical, logistical, and expediting duties. Purchasing of this kind can be found in the pharmaceutical and financial services industries, among others. 2. "Lowest unit cost." As purchased items increase in importance in a company's cost structure, purchasing is charged with minimizing materials costs. Cost analysis, competitive bidding, and negotiation become key skills. At this stage, purchasing begins to emerge as a separate function at the factory level, reporting to the plant manager. 3. "Coordinated purchasing." As purchased items become yet more important, the search continues for ways to lower materials costs, usually through some form of cooperative purchasing across sites and profit centers. …