In my previous article, we kicked off a series on the purchasing function by addressing the mindset it takes to achieve excellence in purchasing. Of course, it’s the same mindset that continuous improvement initiatives require in all corners of the business. Sadly, CI often starts and stops on the shop floor and doesn’t make it into staff areas—a key contributor to why CI too often ends up in the side ditch in less than five years.
Complicating things further in the case of purchasing, this is a function that is often done offsite, e.g., in a division or corporate office far removed from the factories. The job as a purchasing leader is to get trained up, be proactive with manufacturing and production planning, and become a partner in the quest for end-to-end CI [See Why a Robust S&OP Process is Critical to Delivery Performance – and Key Factory Metrics]. The leader must demonstrate the new mindset, take the point and demolish the paradigms of traditional purchasing/supplier relationships.
In this article let’s consider some examples of how new thinking, new priorities and new behaviors will blow traditional purchasing paradigms to smithereens. And business results will soar over a three- to five-year period and be sustainable. If you have your mind in the right place, here’s the approach:
1. Commit to a strategy of buying to the criteria of lowest total cost, not lowest price. End-to-end supply chain cost is what’s important. One experience during my career unfortunately played out like this. The purchasing, product managers and finance folks got together and decided certain coaxial cables were commoditizing and should be sourced from China due to the significantly lower costs from China. For product costs alone, that was true. (I argued the point and lost.) The decision was based on a lower manufacturing standard cost for each item. However, few of these considerations were part of the calculation: freight costs from halfway around the world; 90-day cycle time just to deliver a sea container; high finished-goods inventories (90 days plus safety stock) had to be maintained in the U.S. to service customers; quality issues were found 90 days too late with possibly more defective product already on the water to the states; enormous time commitments for staff members to stay on top of the logistics. It took years to unwind this arrangement and resume production in the U.S. after having lost market share due to the chaos. It’s taken many years for U.S. companies to begin reversing course and bring manufacturing jobs back from Asia. Fortunately, supply chains are much better understood and managed now.
2. Commit to reducing your supplier base by 70% to 75% in a three- to five-year time frame, and sooner if you can. To create a world-class purchasing function, there simply isn’t time or the need to maintain thousands of supplier accounts. Set up some easy sorts. For example, if there has been no activity for a year delete the suppliers. Record maintenance is typically poor, and you can likely eliminate about 10% to 15% of the supplier list just by removing the ones with little or no activity. Consider all the waste that is inherent, not just in purchasing, but also in payables, inventory management, et al, just to keep track of suppliers that simply are not necessary. Buyers get overwhelmed keeping up with so many suppliers that there is no time to think, get into a CI mode and lead change. If this isn’t compelling enough, then we need to understand why the company can afford not to change. By maintaining the status quo, how can you possibly deliver results like those shown in the chart below?
3. Starting with your A-items, do a Pareto analysis of the supplier list by commodity and ranked by dollar value of annual purchases. Let the data lead you to some obvious conclusions about suppliers that can be eliminated with zero impact on the business. For those suppliers that account for 70% to 80% of the total raw material spend, rank them based on their current scores to existing metrics. Set the goal to award about 70% of the A-item business to the best supplier and the remainder to the No. 2 supplier of each commodity group.
Make a special note of critical materials that are not produced by your original list. These items must be produced by the incumbent until they can be integrated into one of the “winners,” i.e., with equal-or-better products that meet the specification. Gradually phase out the rest of the unnecessary suppliers. In wire and cable there was one exception to this: metals (copper and aluminum) that at times were in scarce supply due to strikes, market demand volatility, long supply chains. For metals there were three suppliers.
4. Create the process you will use to accomplish the changes without disrupting the business. For example, a purchasing leader created a handbook that described the process for becoming/staying a supplier partner. The new process was tabbed “Partners in Progress.” The handbook included topics such as purchasing policy, the supplier qualification process, the certification process, the commitment agreement, the new metrics set, supplier education/training in our training room, adding new suppliers, supplier disqualifications, evaluations, quarterly performance and annual reviews, technology/product reviews, the free exchange of ideas and helping the purchasing group become world-class customers to all approved world-class suppliers.
This last topic is important because it’s where the suppliers have a voice in articulating what they expect from their customer partners as well. For example, why are there so many “emergency” orders?
5. Plan a meeting and prepare the list of suppliers and the people who will be invited for a formal presentation followed by Q & A. The meeting should be at the same location as the purchasing leadership. There are several purposes for this gathering: educate the key leaders of your suppliers; announce the new supplier management process; explain why the changes are being made; detail how your business will be earned going forward with certified and qualified designations. It’s important to explain in some detail why your CI mindset and your war on both waste and complexity requires this kind of change.
Typically, for the larger companies, we’d invite the top purchasing executive and one other, perhaps the vice president of operations or vice president of supply chain. In small companies, many privately held, we’d invite the CEO along with the top manager in purchasing. We brought in 200-plus people at a time into the company auditorium for the presentation, which was repeated until all significant raw material suppliers had heard the presentation. Word travels fast so compress the schedule as much as possible. The atmosphere for the meetings are cordial, but also very honest.
For those suppliers who are not invited, their purchasing agent will call them and indicate an approximate timeframe by which they will be phased out and why. Typically, these will be your smallest suppliers of materials that are easily transferable to your No. 1 and No. 2 suppliers, or they might be your worst suppliers and you just want to respectfully wrap up their business in a professional, timely and kind way.
6. Be well prepared for questions. It’ll put a lump in your throat when you stand up in front of a group of great people--who have been loyal suppliers for years-- and tell them why the assembled group is going to get a lot smaller within the next couple of years. They’ll want reassurances that you won’t pull the rug out from under them, that you will work closely with those to be phased out so they have time to try to replace the lost business. Give them approximate time frames if you can. If that isn’t yet known, promise to give them notice just as soon as you can determine it. Make sure the buyers stay on top of this. Also remember how critical it is to ensure your best suppliers have the time they need to ramp up additional products and volumes. There may also be a few items they don’t currently make and will need time to spec them in, perhaps run trials, before the volume can be transferred over. Keep the process moving, but be smart about it.
a. Keep in mind that even your best suppliers will need time to prepare for and execute the improvements necessary and to take on additional volume. Delivering to the new strategic expectations and new metrics will require some patience. Have a follow-up discussion with key suppliers and work out a plan to meet the higher expectations within a time frame both companies can live with. Help them improve along the path to supplier qualification and certification.
b. This is not a sprint, it’s a 5K. Some low-hanging fruit may be harvested the first year but not much else. The first year your best suppliers will be consumed with getting their organizations engaged in learning how to execute to the higher expectations. Your purchasing people will be overwhelmed calling in key suppliers one by one to firm the plans. A higher rate of progress can be expected in year two, and by year three you’ll be harvesting big gains.
7. Do a similar analysis later for inventory B and C items, MRO items, etc., after harvesting huge improvements on the volume raw material runners. These items are important but far less impactful. For now, put them in the “parking lot” for attention later.
There’s a lot to think about here, and I hope you’re sharing these first two articles on the purchasing function with your own teams. Next time, as promised, I’ll share the key metrics structure we used to manage the new expectations and to firmly establish CI within the purchasing and supplier teams.
“If you need a new process and don’t install it, you pay for it without getting it.” -- Ken Stork
“One half of knowing what you want is knowing what you must give up before you get it.” -- Sidney Howard