Five Steps to Effective ProcurementAuthor(s):
George L. HarrisGeorge L. Harris, President, Harris Consulting,
Inc., Lexington, MA 01824, 781-674-0041, [email protected]
Annual International Conference Proceedings - 1998Abstract.Many
companies today are searching for the combination of objectives and
initiatives to ensure that their procurement operations are
effective. These objectives are meant to satisfy both present and
future requirements. Oftentimes, the objectives are constructed
simply by considering what was successful during the previous
period or as a result of considering a few best practices from the
public domain.What is needed is a focused list of objectives for
any procurement function which will result in improved efficiency.
This list must be chosen from a plethora of options, including
those which are covered in procurement publications. Some of the
items to be considered, however come from outside the procurement
literature, and in fact, can be determined from applying a
successful application in other functions to the procurement
field.Based on hands-on applications, and over ten years in the
consulting world where observations can be made, the list contains
five key elements:1. Customer Service2. Supplier Performance3.
People Capabilities4. Cost Performance5. Future Direction SettingAs
I see it, all of these elements must be present for a given
procurement operation to be successful. All of the elements can
apply to procurement departments in any industry, and can fit
successfully in any type of corporate structure and size of
company. These elements can be described using a pyramid which
logically starts with people capabilities and culminates in
establishing future directions for the organization. The pyramid is
indicated below:(graphic is not available in text-only format of
this paper)In sum, any procurement department manager can succeed
if he/she applies these five elements to their operations.The
balance of the paper will address the specific aspects of each of
the five elements, including successful applications and best
practices.People Capabilities.Without the right skill sets and
competencies, procurement departments will be unable to participate
in the key activities of the organization and satisfy the needs of
users. The quality of the people resources, then, will greatly
impact whether the procurement operation is effective over the long
term.The assessment of people capabilities start with the
definition of the types of resources needed to satisfy the
business. What type of management is needed? Will the operation be
decentralized? Where in the organization will decisions be made?
What types of purchases will be made and what are the key
initiatives to be completed? What skills are needed to complete the
expectations of the users?The assessment can be accomplished by
employing a matrix defining the position and the skills required,
such as the one used by Bose Corporation. This matrix is used to
define training and development requirements.This information can
be used for defining the job descriptions, making hiring or
promotion decisions, or developing appropriate training. A key
follow-up activity is to use the matrix to assess the current
organization and people. Shortfalls can be identified and action
plans, whether organizationally or training-wise, can be put in
place.This information is ideal for other uses Developing annual
budgets Establishing new hire plans Describing the requirements for
promotability Advising management of constraints and
status.Customer Service.No matter how you perceive the value of
procurement, it is still s service function. Without sales, nothing
would be bought form outside suppliers. Further, without design,
products or services could not reach the marketplace. Finally,
without equipment downtime, the expedited part would not be needed
to be sourced. But what I have seen exist is the lack of customer
service mentality, both from an internal and external
perspective.In training classes, I have heard buyers complain about
rush requirements from external customers and the special
requirements of internal customers..the endless complaints about
engineering desiring a special supplier or part which are difficult
to source. This is not an acceptable way to approach the
procurement task. In fact, one of procurement's core competency is
customer service orientation. Appropriate measures, then, should be
put in place to measure not only procurement's overall performance
but also the performance of staff.These measures might include:
Requisition turnaround time Supplier Performance Responsiveness of
Buying personnel Supplier turnaround time Administrative
improvementSince procurement clearly provides a service, the needs
and expectations of each internal user must be identified and
evaluated. Firm descriptions of requirements must be developed and
the user should acknowledge the completeness of those requirements.
Potential areas of concerns include: Cycle time for processing
Ability to substitute Compliance with budget Information and
feedback Tracking mechanism Policies and Procedures to be
FollowedIn the process of developing customer needs, it would be
extremely beneficial to evaluate the key processes used to complete
purchase transactions. This would mean some level of continuous
improvement and flowcharting of the procurement flow, perhaps with
user assistance.The supplier is also a customer of procurement as
they receive specifications, RFQs, policies, and ongoing direction.
They also provide ideas and suggestions for improvement. One of the
ways to determine the extent to which customer needs are satisfied
is to conduct a user and supplier satisfaction survey on a periodic
basis. Honda, Pratt & Whitney, and Foxboro receive excellent
feedback when they ask for supplier feedback. Otis and Carrier even
ask the supplier to provide comments on completed supplier
assessments and audits.The use of these type of feedback mechanisms
provide an independent and regular way to receive customer input so
that improvement can occur. For example, Honda evaluates its
service to suppliers by reviewing answers to the following
questions:Customer Survey FormPurpose: To identify areas of concern
that, with improvement, can strengthen a supplier customer
relationship1. Do you trust the following contact points of this
company?2. Is communication in general clear and timely?3. How well
are quality expectations communicated?4. How well does the company
collaborate in continuous improvement?5. How well are agreed
payment terms met?6. How well do prices and terms reflect total
costs to the customer, services provided, mutual improvement goals,
and sharing of prosperity?7. How well does the company collaborate
on advanced product or process technology?8. How does the company
compare overall with all other customers?9. Please comment on your
overall experience with this customer in the past year or two. Are
they improving? At what rate?10. What one or two changes would you
most like to see this customer make that would enable increased
benefits to the two of you? In what areas would the greatest
benefits be achieved (such as quality, cost, technical progress,
dedicating of capacity to them, etc.)?Leading companies ask their
users and customers to participate in solving service problems and
measuring the results of action plans. An efficient method of
resolving conflicts should also be put in place to handle conflicts
such as when an engineer desires a part to use in new product
design and must utilize the procurement process or comply with
purchasing policies and procedures.Supplier Performance.A
procurement department, at some level, can be only as effective as
the suppliers that it manages. After all, procurement ultimately
makes the buying decision on selected suppliers and they must
ensure that the suppliers meet the user requirements.One of the
initial steps to accomplish in ensuring that supplier performance
meets user requirements is to align the actual measures with those
requirements. In this way, procurement can evaluate the cause and
effect of customer satisfaction. For example, the number of
suppliers certified, thereby allowing the supplier to ship directly
into stock, can specifically address a requirement form the quality
area that incoming inspection must be eliminated and supplier
quality must improve. Another example could be supplier lead time
or cycle time from time of order when the user is expecting quick
or Just-in-Time deliveries.Once these measures have been
established, perhaps with user participation, procurement can then
ensure that supplier improvement occurs in the key measures. There
are a number of excellent examples of procurement practices in this
area. Some of these include: Motorola's supplier performance of
200ppm Dupont's measure of procurement and suppliers Allied
Signal's supplier improvement processDupont's measures are
extremely comprehensive and track one or one with their customer's
needs. An example of those measures are as follows:Product
Qualitya. Conformance to Materials Requirementsb. Evidence of SPCc.
Continual Improvementd. Planning for QualityValue in Usea. Price
Behaviorb. Price Competitivenessc. Inventory Managementd.
Suitability for UseServicea. Measures of Participationb. Order
Handling and Invoicingc. Delivery vs. Scheduled. Packaginge. Safety
and EnvironmentalSupplier Capability and Technologya.
Sales/Technical Serviceb. R&D Resource Applicationc. Delivery
vs. Scheduled. PackagingAllied Signal has a process to improve
supplier performance as part of its cross-functional effort to
improve overall divisional performance. The process is reflected as
follows:(graphic is not available in text-only format of this
paper)Procurement should ensure that sufficient resources are
applied to the task of supplier improvement. Without expending
resources, procurement will not achieve the level of supplier
performance needed to support the business' objectives.Cost
Performance.In some respects, the results of the efforts in the
lower part of the pyramid will drive cost performance, however they
are measures and described. Again, cost performance should be
tracked and measures in a meaningful way. For instance, standard
cost measures, although a response to the financial community, has
long been viewed as a poor measure of purchasing cost performance
yet many organizations use some form of this measure to establish
product cost, price, and profitability.Many procurement departments
are evaluating a more extensive way to track cost performance, such
as total costs. These procurement organizations have found that
although total cost measures are difficult to establish and
maintain, they are a true measure of overall supplier and
procurement performance taking into consideration items such as:
Supplier quality and delivery performance Payment terms Freight and
packaging Tooling Warranty costs CurrencyThese total costs measures
can be used in the following aspects of the procurement process
to:Qualify - Select - Award - Measure - ReportAllen -Bradley has
established a balanced cost scorecard for its suppliers. Every
month, suppliers receive a report which describes how much their
poor performance has cost the company based on a measure of $1000
of purchases. This information is used to identify gaps in each
supplier's performance and to establish improvement plans.Digital
and Pratt&Whitney also use a balanced measure to select
suppliers and measure procurement effectiveness using a weighted
scale based on supplier delivery and quality performance. As
mentioned earlier, these systems are difficult to establish and
maintain but they do provide a more accurate of true procurement
performance and can be used for supplier improvement
activities.Future Direction.Once the data in the first four areas
have been identified, the future direction of the procurement
department can be established. As has been previously presented,
the procurement strategy should be based upon and aligned with the
organization's overall strategy taking into consideration the
strengths and weaknesses of the procurement areas as well as
suppliers.A division of Honeywell involved their suppliers using a
Supplier Alliance process which tracked with the company's goals.
Over 44 suppliers were involved in this initiative, and the key
elements were JIT deliveries, supplier in-plants, and early
supplier involvement in the product development process.Sony has
developed a supply management approach designed around the process
of selecting suppliers. They look for supplier long term
capability, ability to meet or exceed quality expectations,
maintenance of quality when volume increases, and a commitment to
reduce total costs of goods and services.Another example is the
supplier strategy used by Gilbarco. They are attempting to move to
world-class suppliers by establishing partnerships with
single-source suppliers and achieving the lowest total costs.The
selection of a future direction will govern the organization, the
competencies, the measures, and the performance of the
organization. Some procurement departments can develop the
direction from the ground-up using the data garnered from the lower
parts of the pyramid. Others can use their organization to set up
the future direction, but you definitely need both elements to
achieve success.In Summary.Procurement can be effective if it uses
a systematic approach to improvement. One of the tools they can use
is the five steps indicated in the identified matrix. Each of the
elements of incrementally useful in achieving procurement success.
By following each of the elements identified, procurement can
develop action plans for improvement, communicate current and
future goals to the organization, measure their performance, and
satisfy the goals of their users. This methodology is borne out of
world-class performance and can be used in any industry or
organization.
