World-Class Procurement

Dec. 21, 2004
Strategic procurement requires a view beyond functional excellence.

In recent years many manufacturing companies have achieved substantial cost and efficiency gains by streamlining their procurement activities. Investments in process reengineering, ERP implementation, strategic sourcing, and electronic commerce have allowed companies to capture measurable cost and cycle-time improvements across the traditional procurement activities of requisitioning, releasing, receiving, and settlement. Breakthrough performance improvement, however, requires companies to think beyond functional procurement excellence. It demands a bold view of procurement that is both broader and more strategic than effective management of discrete operational and transactional activities. Managing procurement as a tightly integrated cycle within the supply chain offers the opportunity to extend the enterprise, develop powerful new alignments, and achieve sustainable competitive advantage. From this perspective, procurement can affect a variety of shareholder value drivers including revenue growth, operating margin, working capital investment, fixed capital investment, and cost of capital. Manufacturing companies have made steady progress in pushing the efficiency frontier. Many exhibit considerable discipline and efficiency in managing purchase orders, payables, and inventory. A few show evidence of moving to the next level. These few recognize that procurement is not about buying "stuff" or turning requisitions into purchase orders. Rather, they have explicitly linked procurement to the rest of the supply chain, providing it with a direct line of sight to business decisions. Survey Implications The Second Annual IndustryWeek Census of Manufacturers examined a number of metrics to identify key differences between world-class manufacturing organizations and all manufacturing organizations. [The IW Census questionnaire asked survey respondents to identify their organizations' progress toward world-class status -- either "fully achieved," "significant progress," "some progress," or "no progress."] A number of the findings are revealing from a procurement perspective: Activity-based costing. There has been a marked increase in the number of companies employing activity-based costing practices. The corporate-level survey reported a 32% increase, from 34% in the inaugural IW Census to 45% in the Second Annual IW Census. While activity-based costing is typically employed across all financial and operational processes, procurement is uniquely positioned to benefit from and act upon the results. A clear and detailed view of a company's business processes provides a window on how goods and services are used. The resulting analysis reveals opportunities to improve the efficiency of core procurement processes and maps expenditures to the operations on which they are used. Supplier relationships. Self-assessed world-class plants are far more likely to select and manage suppliers on the basis of total cost (26.2% of plants that have "fully achieved" world-class status reported "extensive implementation") than plants that had made "no progress" (5.1% reported "extensive implementation") or plants that had made "some progress" (10.3% with "extensive implementation") toward world-class status. Traditionally, suppliers were assessed almost exclusively on lowest unit price. By adopting a broader view of the cost equation, the best performers include inventory and transactional costs in the total cost of ownership. Accordingly, they have achieved cost efficiencies that exceed incremental improvements in acquisition cost. Some plants have recognized the distinctive strengths of their key suppliers and have leveraged their expertise into a strategic advantage. World-class organizations are more likely to have a collaborative, managed relationship with their suppliers rather than the traditional, adversarial model. "Fully achieved" world-class plants are three times more likely than the total plant survey to require suppliers to commit to annual cost reductions (based on "extensive implementation" data); almost twice as likely to involve suppliers early in new-product development; and are more likely to request suppliers handle inventory in such nontraditional ways as just-in-time (42% reported "extensive implementation" compared with 20% of the total plant sample) and vendor-managed inventory (17% reported "extensive implementation" compared with 8% of the total plant sample). The opportunity to identify and execute improvement opportunities of mutual benefit is a strong impetus for suppliers to commit their best resources. Technology. World-class organizations have embraced technology as a critical enabler of procurement productivity. Harnessing electronic-commerce functionality such as e-catalogs, electronic fund transfers, evaluated receipt settlement, and electronic data interchange (EDI) has further reduced cycle times; streamlined approvals; reduced transaction volume and errors; and provided decision-support information. "Fully achieved" world-class plants are more likely than non-world-class plants to have EDI links to their customers and suppliers and have online ordering capabilities. Perhaps more important, technology has allowed valuable commercial expertise to be deployed in more strategic, value-adding activities such as market analysis, negotiations, and supplier performance management. Future Directions Procurement has emerged only recently as a dynamic contributor to corporate performance. As more manufacturers reach the efficient frontier and exhaust opportunities to improve procurement process efficiency and exploit buying power, the pressure to increase shareholder value and achieve sustainable competitive advantage will require procurement to plot a new course. Manufacturers will find that other improvement efforts, such as cycle-time reduction, agile manufacturing systems, and supply-chain optimization, are increasingly dependent on the capacity and willingness of key suppliers to participate. Managing alignment and integration with key suppliers will become procurement's primary mandate. The ability to aggressively identify emerging supply market opportunities, negotiate winning outcomes, and manage supplier performance will increasingly distinguish world-class organizations from their peers. Graham Collins is a principal consultant with PricewaterhouseCoopers, Houston; and Tom Dougless, is a principal consultant with PricewaterhouseCoopers, Phoenix.

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