Inside every purchasing department is a profit center just dying to get out, and it's time your company recognized it.
For years, many upper management teams have regarded purchasing departments as administrative areas rather than strategic profit centers. Tired of this designation, many purchasing departments and their executives are looking to evolve their role to that of cost manager, rather than just buyer. Purchasing departments successful in this endeavor have paved the way for a new breed of purchasing professional — the procurement information architect — whose influence extends beyond ensuring the routine flow of materials. What's more, these architects are increasingly viewed as part of executive management teams, especially in manufacturing, where they often weigh in on key decisions.
The question is: how did they get there?
The answer: By demonstrating their purchasing prowess and conveying it to those in upper management; maintaining a focus on the three key imperatives — people, processes and technology; and ultimately gaining access to the tools they need to do away with the mundane and focus on the strategic.
The results of this transition — when purchasing professionals are empowered to make truly strategic contributions — are far from miniscule. A Gartner report, estimating the profit impact of purchasing and other supplier relationship management (SRM) approaches, predicts Fortune 500 companies that fail to adopt cohesive SRM methodologies by 2005 will see profits shrink by close to two percent as the percentage of sales dedicated to purchasing materials rises. In order for organizations to retain the competitive edge, a strategic approach to purchasing is not a nice-to-have — it's a must, and the purchasing department is often the primary catalyst.
Purchasing departments that have succeeded in impacting their companies' bottom lines have not done so without advanced tools, executive-level support and cross-company commitment. By now you may be asking, How am I supposed to mirror that level of success when I have little to no buy-in or understanding from senior management, my technology budget has been stripped to the bone and I have virtually no means of building an ROI case?
The answer is to start small and look to best practices.
In today's budget-conscious environment virtually all companies are holding tightly onto purse strings, including manufacturers who are traditionally very risk-averse and have been hit hard by the recent economic downturn. Any purchasing department that proposes a massive overhaul of its technology infrastructure is almost certain to encounter strong resistance and this is especially true for purchasing departments serving manufacturing companies.
In order to demonstrate their purchasing prowess and, ultimately, gain executive-level buy-in, purchasing departments may start by pinpointing one or more drivers of excess cost and complexity within their organizations. For instance, a particular purchasing department may see that purchase order (PO) processing takes way too long, consumes an unnecessarily large percentage of spend and requires extensive manual processes. This results in increased paperwork and the likelihood of human error, as well as decreased time that purchasing professionals can spend on more strategic activities, like negotiating contracts with preferred suppliers.
To start, a purchasing department should consider looking toward what are commonly referred to as best practices. Simply defined, a best practice is a proven process that delivers measurable improvements in efficiency and/or effectiveness. At the risk of stating the obvious, a best practice is marked by the following attributes: drives a measurable change in performance, is proven in practice, applies to a broad spectrum of organizations, exploits proven technologies and minimizes risk through effective controls. Best practices are synonymous with well-controlled and well-managed processes.
In the example of PO processing, a purchasing department may look to its peers and identify that many have transitioned this task to the Web. The move, which is widely regarded as a best practice, has enabled organizations that distribute at least 60 percent of their purchase orders electronically to realize a 63 percent lower average transaction costs as a percent of spend (Source: The Hackett Group, Achieving World Class Source to Settlement Through Best Practices). Purchasing departments can point to this best practice and provide a predictable ROI range. Reliance on tested strategies tends to build confidence and minimize the perception of risk among executive management, especially in the early stages.
By looking to best practices, purchasing departments are in a substantially better position to make a business case for the tools they need, and once they get them they are well on their way to the first step in the administrative-to-strategic transition. They will be able to demonstrate what they're capable of with just one tool — an indicator of what they could ultimately accomplish with a more holistic approach — in a controllable, tested environment that builds executive-level confidence, comfort and interest. Purchasing departments need to merchandize their results as high up within the organization as they can — the chief financial officer and/or other high ranking financial executive level is ideal — to demonstrate their contributions and show how one relatively minor best practice can have positive and, in some cases, dramatic impact on the bottom line.
Holistic Approach: People, Processes and Technology
Executive-level support is a helpful foundation for the next steps that a purchasing department must take in order to bring a higher strategic element to their roles, which involve people, processes and technology, in this recommended order. A common pitfall, however, is for organizations to erroneously believe that technology alone can solve everything. The best technology overlay in the world cannot transform a purchasing department without accompanying changes at the people and process levels.
As each step in this process is considered, purchasing departments must constantly remind themselves to think holistically with regard to each step in and of itself, and in relation to each other. Significant changes in the ways that each of these areas are approached and contemplated will be required.
Through the years, a lack of cross-enterprise cooperation and the inability of purchasing departments to establish credibility and trust (both with peer purchasing groups in highly departmentalized organizations, as well as employee end-users at large organizations) have been key hindrances to purchasing departments. The reason being that people are, by nature, reluctant to change, and, comfortable with their own systems, simply don't like having to learn new ways to do their jobs. The reality is, however, that all employees and departments must be willing to adopt a fresh approach to solving old problems if the bottom line is to be touched at all. When it comes to purchasing, the whole is much bigger than the sum of its parts. A cross-enterprise approach is what drives purchasing leverage, negotiation of more favorable contracts and, ultimately, bottom-line impact.
People change is arguably the thorniest obstacle. No one will claim that realizing the business-altering potential of strategic purchasing is an easy task. But it is incumbent upon the purchasing department in question to remove physical and cultural barriers between purchasing departments, as well as those existing between purchasing departments and other functional areas, such as finance. In this regard, executive-level backing — ideally secured beforehand — can serve as a helpful buttress.
One approach to consider entails assigning ambassadors within the purchasing department in question to educate another purchasing department and/or functional area on what is trying to be accomplished. Ambassadors should emphasize how and why the adoption of best practices and process and technology changes will make purchasing as a whole a much more strategic function, and their jobs across the board easier and more productive. In doing so, ambassadors are in a much stronger position to secure buy-in from department heads and, consequently, to drive change at the individual employee level.
Individual applications of best practices can deliver significant one-time benefits — for instance, a major home appliance manufacturer recently ran an online auction for power cords and saved $3 million (or 30 percent) compared to a previous purchase of the exact same product. While offering initial returns such as this, however, many sourcing initiatives fall short of delivering sustainable improvements to the bottom line because they operate in isolation and are rarely linked into a holistic source to settle methodology and, furthermore, enterprise-wide transactional systems and backbone ERP applications.
A holistic source-to-settle methodology looks at and treats corporate purchasing as a complete business process. Consider, for example, the act of sourcing. Many organizations have achieved significant time and cost-savings through sourcing initiatives designed to make sourcing much more efficient. But, in the end, successful sourcing initiatives often culminate in the creation of a single agreement or contract that is not systematically tied to bottom-line results.
Sourcing is but one step in a long chain of processes comprising the corporate purchasing function. Other steps include upstream processes (planning) as well as downstream processes (procurement, supplier enablement, settlement, compliance monitoring and supplier management). In order to drive substantial, sustainable bottom-line benefits, purchasing departments need to shift their focus away from singling out individual functions for improvement, and instead focus on an integrated, complete workflow as the conduit for maximized savings. The key is to seek greater efficiencies throughout the entire workflow process.
A holistic focus on complete business processes may seem to contradict the notion of starting small, e.g. identifying and addressing one target area for improvement through best practices. But, in actual fact, they aren't contradictory; they're both about building. In the instance of starting small, the goal is to build confidence and interest on the part of senior executives. When purchasing departments show what they can achieve through significant improvements in one functional area, they're in a better position to show how even further efficiencies can be realized if similar improvements are made in other areas of the workflow process. Ultimately, the goal is to secure buy-in and support, one or a few steps at a time, until an entire chain is optimized.
Going a step further, purchasing departments should consider integrating all purchasing processes to enterprise-wide transactional systems. This is especially true for organizations with multiple purchasing departments, because the ability to identify spending trends — and thus identify and leverage cross-enterprise purchasing power — is contingent upon all purchasing processes being tied to enterprise-wide transactional systems. In this way, these systems provide an extremely rich store of information that can be used to identify spending trends, zero in on areas in need of improvement and, perhaps most importantly, negotiate more advantageous contracts.
Lastly, for ultimate efficiency improvements, purchasing departments should consider integrating purchasing processes with other backbone ERP processes, like financial management and supply chain planning, for example. When purchasing processes are tied to financial management, finance executives can better understand the impact of purchasing on the bottom line and work with purchasing departments to implement necessary initiative, like inventory reduction. When purchasing processes are tied to supply chain planning, purchasing professionals can gain better insight early on into material needs, and realize discounts through earlier orders, faster payment and/or bulk purchasing. Ultimately, when purchasing processes are tied to other business processes, the result is a more communicative, collaborative enterprise that drives profitability more holistically and effectively.
The right technology tools are critical in helping purchasing departments to increase strategic contributions. An important rule of thumb to bear in mind is that technology can only enhance people and processes behind the purchasing function, not replace it. For this reason, it's recommended that purchasing departments lay the groundwork with people and processes before and while technology implementations take place — not after.
The good news is that recent market developments have yielded a wealth of strong tools designed to help purchasing departments become more strategic. When evaluating tools, purchasing departments should consider several important criteria, namely: support for complete business processes; streamlined integration with enterprise-wide transactional systems, other purchasing tools and/or backbone ERP applications; and user-friendliness. As today's business grows increasingly global, some purchasing departments are also seeking solutions that extend easily and seamlessly to supply chain partners to allow for a higher degree of collaboration, communication and efficiency.
As is the case with business processes, gaining executive-level buy-in and support for technology tools is about starting small. When purchasing departments show what they can achieve with just one technology tool, senior executives are apt to become hungry for more, and it's not uncommon for purchasing departments to leverage one tool as the cornerstone for an expanded arsenal.
The currently tight economy presents an ideal opportunity for purchasing departments to showcase their prowess and ability to contribute directly to the bottom-line. Top executives are looking to cut costs and increase efficiencies throughout their enterprises, and purchasing departments can emerge as a primary impetus for a cross-enterprise initiative to cut costs and boost profitability. A more strategic approach to purchasing can yield very positive results in any economy, and by endeavoring to transition their roles now, purchasing departments may expect even greater ROI and executive-level enthusiasm as purchasing picks up along with the economy.
About the Author:Bob Shecterle is vice president, supplier relationship management strategy, at PeopleSoft.