In my last article I pointed out possible downsides to consolidating control of original equipment manufacturer (OEM) purchasing into a corporate group. The message there wasn’t meant to be that setting up a centralized supply management function is a mistake. Rather, it was that in supply management there are few, if any, clear-cut issues and centralization of procurement authority is certainly not one of them. In this follow-up to that previous article I’ll give my take on how a corporate supply management group can best be positioned for the highest positive overall organizational impact.
I should start by pointing out that centralized corporate supply management functions are typically justified through a promise of significant “quick hit” savings. While such savings windfalls may be available, they usually represent significantly fewer dollars than most corporate officers would like to believe. Why? Because they are based on the presumption that most, if not all, product categories can be managed as commodities.
Hopefully through reading this column you’ve come to understand that the number of products appropriately labeled commodities is fairly limited and, while leveraging non-commodity products may yield lower piece prices (at least in the short run), it will also likely result in an overall higher total cost when factory operations are taken into account. Because of this, the only way across-the-board quick hit savings are generally available is if existing factory purchasing departments are incompetent. In my experience this is seldom the case.
Let’s assume for this discussion, then, that the OEM in question is comprised of multiple factories whose procurement functions have for the most part operated independently. Also, that if a corporate supply management group existed, it played a relatively minor role in overall procurement.
In my mind the first step to setting up an effective corporate supply management function is to call upon a valuable resource that exists in all companies but is seldom acknowledged or even recognized—namely factory materials managers. In particular, I’m talking about the old-timers whose career track included stints in areas like production, quality, systems, purchasing and even design. The most effective materials managers I’ve known have at one time or another been buyers. Why are these individuals so valuable? Because their broad hands-on experience gives them a gut-level appreciation of local factory nuances that contribute to factory operational effectiveness such that they understand the role purchasing-related factors other than piece price play in total cost.
So, to take advantage of this existing savvy the first thing I’d do is spend face-time with each material manager to gain an understanding of local challenges and how they have been managed. I’d also want to get their take on those areas where a corporate supply function could facilitate improved factory results. Why? Because factory competitiveness generally drives company financial success, meaning that the top priority of a corporate purchasing function should be to help factories operate more effectively. My discussions with the current materials managers would touch on several issues, including:
• Understanding the metrics each factory uses in evaluating procurement effectiveness. It should be a corporate function to help materials managers educate their factory management on how procurement’s impact can most accurately be measured. A goal of any corporate supply management function should be to identify a common set of performance metrics to allow comparison of purchasing performance between factories. At the same time it needs to be recognized that individual factories may need additional unique performance metrics based on differences in the products they produce or the markets they serve.
• Getting a handle on existing factory “spends” and supplier management strategies. This will facilitate establishment of a set of product categories that can legitimately be considered commodities, i.e., available for corporate leverage. It will also help define those non-commodity products used by multiple factories that present opportunities for economies of scale. Finally, it will provide a basis for determining which factories should assume positions of leadership in working with specific non-commodity suppliers. Bottom-line, factories must agree on what should be managed as enterprise commodities. Even with this agreement, however, local needs must be recognized, defined and accommodated.
• Identifying corporate best practices. In addition to savvy materials managers, factories are usually home to knowledgeable purchasing personnel who have developed and implemented high-performance procurement strategies, processes, procedures, etc., in managing the various product categories and/or suppliers. These should be identified as best practices and documented for use, at the discretion of individual factory material managers. In other words, corporate can judge, document and promote what it considers to be enterprise-wide best practices but, unless there is an overwhelming business case for doing so, adoption of these practices should not be mandated. On the other hand if, at some point, it becomes apparent that practices employed by specific individual factories are unable to produce similar results, this establishes such a business case.
An important point to recognize in contemplating corporate supply management roles and responsibilities is that in many organizations factories are considered profit centers, with the managers in charge responsible for the overall business above and beyond just managing factory output and costs. Such general managers are given broad responsibilities, including things like “profit/loss” and functional oversight. This means that even if a corporate supply management group is formed with the intent of tightly controlling enterprise procurement, factory supply materials managers typically continue to report to the factory. Why is this an important distinction?
The Bible says, “No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other.”
I’m reluctant to quote religious teachings in a business publication but did so because I’ve found this lesson to be especially true in the world of corporate politics! What it means relative to our topic here is that when disagreements come up between factories and corporate, materials managers will likely hold to their factory’s general manager. This has huge implications on the working relationship between the corporate supply management group and factory procurement.
To address this issue requires implementation of participatory management. After completing and documenting the survey of individual factory procurement practices, the next step in setting up an effective corporate supply management function is to establish and facilitate a Materials Manager Community-of-Practice. I know that this may go against the “command and control” grain of many people—especially those who have reached the executive level— but to address the “two masters” issue it’s a necessity to solicit factory input and reach consensus agreements when making enterprise supply management decisions. Mandating strategy, process or procedure might be seen by some as a “straighter line” to a desired outcome but it isn’t the only way to get there. Besides, while that perceived “straighter line” is often more of a mirage than a reality, participative management is generally recognized to consistently produce outcomes that are better from a total cost—if not a piece price—perspective.
While “top down” corporate mandates may need to occasionally be applied—for instance, in response to a severe business situation—they should in no way be seen as the path of least resistance. Why? Because instead of them “only” needing to get the agreement of materials managers, the onus is on corporate supply management to get general manager agreement—usually a more difficult task. Corporate mandates implemented without general manager agreement will put factory materials managers between the proverbial “rock and a hard place” where they’ll need to choose which master to serve. In my experience this usually ends up leading to some level of stonewalling and overall sub-optimal results. Bottom-line, the Materials Manager Community-of-Practice group should be seen as the preferred vehicle for enterprise supply management decision-making.
There’s a lot of work to be done in properly managing a Material’s Manager Community-of-Practice and admittedly, it can take a while before this type of group hits its stride in positively impacting supply management’s impact on corporate results. But when done right, it results in sustainable corporate competitive advantage. That being said there is one major risk that needs to be mentioned.
As I said earlier, many corporate supply management organizations are justified based on projected savings. The operating structure I’ve outlined above will deliver such savings. The issue then becomes who gets credit for them. The problem arises that the corporate group usually, if not always, has a sense of entitlement to take credit for savings. Just believe me on this! When this happens factory personnel feel slighted and are less eager to engage in future collaboration. So how should the issue of “booking” savings be resolved?
Let me relate this issue to a personal experience. I worked for a company that was undergoing a significant market downturn. Factories within the company were cutting costs in any way possible, including the laying off of employees. One day I was commiserating about potential manpower cuts with one of my corporate colleagues and asked, “How many corporate people do you think will be trimmed?” The answer I received was along these lines: “Why would you expect corporate to cut any jobs? After all, OUR schedules aren’t down.”
Say what?!? And he was entirely serious in his remark! Anyway, while my colleague’s perspective was a bit jaded (at least in the mind of someone who worked at a factory), it did make a valid point. Namely, factories manufacture and corporate does not. Consequently, what is purchased is the property of the factories, not corporate. This implies that if savings are recognized in the purchase of something required in the manufacture of a product, those savings should be applied at/claimed by the using factory. I know this can be a hard pill to swallow for someone working at corporate but since, as my colleague implied all those years ago, corporate doesn’t have schedules, they really can’t claim savings!
An important corollary to this is that it’s important to be careful in selecting the people to staff a corporate supply management group, particularly the leaders. They need to be the type of people who enjoy facilitating the success of others. In other words, they should be good managers! If you put people in a corporate group who are more interested in receiving personal credit than facilitating the success of others, it is not likely going to work out well for the overall procurement function. That being said, company officers then need to be sophisticated enough to recognize that improved factory purchasing results are indicative of a successful corporate function.
In the next article I will elaborate on a topic from this one—namely, meaningful supply management metrics.