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Where Should Supply Management Report in a Manufacturing Organization’s Hierarchy?

Oct. 16, 2014
Supply management should not report to product engineering or to finance, so which department should they report to?

A previous blog, “Should Procurement Have a Seat at the Table?” is directly related to the question of organizational structure. Consequently, the issue presented in the title to this blog is one that is loaded with emotion. Perhaps the best way to both defuse this emotion and determine manufacturing’s optimal procurement function reporting structure is by identifying and eliminating those functional areas that should definitely be avoided. Even if this process does not result in a “last man standing” scenario, it will certainly reduce the options.

My blog on “The Piece-Price Trap” set the stage for discussion of the number 1 reporting structure relationship that should be avoided at all costs: supply management reporting to finance. Let’s face it, chief financial officers already have their tentacles into the conduct of virtually every functional area through the financial exhibits they impose, monitor and report on. This greatly limits the flexibility on both how these areas are managed and their resulting business impact.

You only need to think about how finance penalizes manufacturing for “reduced” lot sizes to understand what I’m getting at. These restrictions only get worse if your functional area actually has to report to the finance function.

I’d like to reference IW editor-in-chief Pat Panchak’s recent column, “Did Finance Gut Manufacturing?” That’s quite a thought-provoking title, which I’m sure raised the hackles of any financial people who read it. Panchak’s never been afraid of sticking her nose directly into important issues, controversial or not, and I praise her here once again for doing so (and I would also like to acknowledge that it was Pat who invited to write this blog in the first place).

That title could just as easily have been posed as, “Did Finance Gut Supply Management?” The primary financial exhibit finance uses to measure supply management productivity is material variance, which is essentially a stand-in measure for piece-price. As was laid out in “The Piece-Price Trap,” having an exclusive focus on piece-price will never land supply management a “seat at the table.” But this is exactly the strategy that finance would have on supply management pursue. Panchak’s column demonstrates this by quoting Marty Thomas, senior vice-president of operations & engineer services for Rockwell Automation:

“If you have strategic sourcing reporting to finance, what do you get? You get purchase price reduction. What else do you get? Nothing. You get purchase price [reduction] at all costs. You don’t get lead time; you don’t get order quantity; you don’t get on-time delivery, and; you don’t get quality. You get purchase price reduction. You get what you deserve.”

This quote hardly needs any elaboration. It is a classic description of the smothering impact that finance bias can impose on supply management practice. Recognize that Thomas isn’t even a purchasing professional, yet sees and remarks on this negative impact.

Panchak poses the question, “Has our focus on financial metrics held back manufacturing business success?” and goes on to cite two manufacturing authorities that answer that question with an empathetic “YES.”

I’ll piggyback on her words again by relating them to supply management, i.e., “Has our focus on financial metrics held back supply management contributions to business success?” Re-read “Should Procurement Have a Seat at the Table?” and you’ll be hard pressed to argue that it hasn’t. The bottom line is this: If you want to work for a supply management function with the freedom to have the maximum positive impact on your business, don’t hire on to one that reports to the finance function. So, I think we can all agree that supply management should not report to finance.

Another reporting relationship supply management should try to avoid like the plague is the one with procurement reporting to product engineering. Why? First, but (probably) not foremost is the bias that many engineering executives have regarding procurement being nothing more than glorified “shopping.” As an OEM engineering vice-president once said, “When you get down to it, all you really have to do if you are in purchasing is figure out where you can get the best price. That shouldn’t be so hard. My wife does that every time she goes shopping.”

In my experience this attitude is fairly prevalent among design executives and discounts virtually every other financial impact procurement can have outside of material variance. But it gets worse. When supply management reports through engineering, engineers tend to “rainbow” the procurement process by working directly with specific outside firms on development of new or revised products, essentially limiting any opportunity for negotiating leverage. This would be similar, I suppose, to the previously quoted engineering VP not only telling his wife to buy him some “wingtips” but also who to buy them from, i.e., “But dear, make sure you get a good deal.”

Of course, supply management impacts much more than piece-price and removing competition from the sourcing process not only diminishes the impact procurement can have on pricing but introduces all sorts of associated risks. For instance, is the firm that engineering has worked with financially viable? Further, does it have the manufacturing wherewithal to transition its prototyping capability to a production basis in support of forecast order fulfillment needs? Again, I think we can also all agree that supply management should not report to product engineering.

What about manufacturing? Should factory operations have oversight over the procurement function? Next Generation Supply Management views OEM and suppliers as all part of a single value stream. Consequently, an OEM’s manufacturing facility is seen as just another link in the order fulfillment chain. Granted, it is an important link, but it is a link nonetheless.

Many OEM organizations have supply management reporting up through the factory operations. This usually results in a focus on internal constraints. In other words, they look inside at what they would be able to produce and expect suppliers to jump through hoops—if that’s needed—to match it. Quite often the schedule “loaded” by the consuming factory is either not feasible or requires additional supplier expense to support. The issue then becomes what functional department has the best visibility to all bottlenecks—whether internal or external—and, correspondingly, can put together a schedule that can both maximize alignment with demand and minimize waste?

Supply management, of course, is best positioned to do just that since they have visibility to overall value stream constraints. It is important to understand that  today’s prevailing organizational structure—where supply management reports to factory operations—harkens back to the day when the largest portion of a company’s cost of goods sold was generated internally with purchasing costs being more of an afterthought. Think about how roles have reversed over the last 60 years. Purchased content today usually accounts for well over 50% of an OEM manufacturer’s cost of goods sold and internal manufacturing costs have become the afterthought.

In one of my past materials manager positions I convinced the general manager-—whom I reported to—that supply management should oversee factory scheduling. Because of this, during my tenure there were significantly fewer breaks in the loaded schedule than over any previous period and the factory did as good a job as was ever done in supporting customer fill rates. I’m a realist and doubt that you’ll find many general managers today that are willing to have their manufacturing operations report to their supply management function. But the role reversal and the order fulfillment risk exposure cited above create a bully pulpit for purchasing managers to propose that the supply management function report directly to the general manager, just as finance, engineering and factory operations do. And with that the function will be better positioned to earn a “seat at the table.”

Over the past six months that I’ve been writing this blog I’ve given you plenty to consider—probably to the point that I expect some may need some sort of a break. Over my career I’ve had literally hundreds of experiences that I think are educational from a supply management point of view. In the next blog I’ll start the process of sharing them.

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