Question: What are some good metrics to measure the effectiveness and performance of the purchasing department?
Answer: This is a great question that I plan to answer in what will likely become a three-part series on the purchasing function. So please bear with me. Let’s start by understanding the mindset that is required by all who work in the purchasing function.
1. Purchasing people have an enormous responsibility. The cost of raw materials varies by industry but may be as high as 70% of the cost of goods produced. Whatever the number is, purchasing has a major role in making sure manufacturing stays competitive.
2. The mindset of continuous improvement is necessary. It requires relentless process improvement work by the entire purchasing staff, most of whom are expected to interact proactively with suppliers to make process improvements. (This presupposes that the leadership is fully committed to CI and ensures all are properly trained with the skills necessary to solve problems.)
3. Leadership, of course, should expect material pricing to be adjusted consistent with the value of the improvements; but be sure to share the year #1 savings on all projects with your supplier partners. I’ve often seen organizations that have chosen not to. This is a huge disincentive for suppliers when you approach them next time to help. Keep in mind that these projects consume their scarce resources just as it does for your company. It must be a win-win. As leaders it’s important that you do the right thing. It’s a basic part of seeking a long-term, trusting relationship with your suppliers. The mutual objective with key suppliers should be to have a long-term strategic partnership that benefits both companies. Improvement ideas should seamlessly flow from both sides of the table.
4. Purchasing professionals are expected to push for price reductions, which too often is their entire focus. In nearly all the operations I’ve been in over the years, these people are trained to be cordial but heavy-handed in negotiations--betting that their business is important enough to the supplier that they’ll cave on price. This old school behavior should not be rewarded. Retrain the team and expect a more professional approach like that suggested above. Good faith bargaining is always the better path. Over the long haul, creating an antagonistic relationship, or worse, putting your good suppliers out of business or causing them to move your business to a more reasonable company, is a lose-lose proposition. Having been a part of transforming two such organizations during my career, I can vouch for the tsunami of cash and earnings and improved service that result when the number of suppliers is reduced by 70% to 80% and the focus is shifted to building these strategic relationships.
5. Culturally, in the case to modify existing materials or developing entirely new material needs, the purchasing staff must understand the extraordinary level of collaboration that is necessary starting with the design, materials and manufacturing engineering groups working with the supplier -- but always include the manufacturing team in this process. After all, they will be the users of the material. Their involvement will provide hands-on insight and get them onboard to help make any changes successful on the machine. All proposed changes to existing raw material specifications, or any new materials, must be vetted fully, tested in the lab and/or proven with a pilot run in the shop. Make certain that the CTP (critical to process) characteristics of your customers’ specs are being fully met. Once all parties have signed off, then set the date when specifications are changed, and mass production commences with the new material.
Important reminder: Be sure to consume or return all remaining materials of the old spec to the supplier before converting to the newly specified material.
6. For next time, let’s remember that the purchasing staff wears two distinctly different hats.
a. As the “customer” to the supplier base, purchasing must establish the metrics necessary to measure supplier performance. A good way to start thinking about this process is to benchmark your own sales service organization and find out how the company’s customers measure your company’s performance. For example, how is on-time delivery performance measured? What lead times are expected by product type? Etc.
b. As the group responsible for supplying the factories, your manufacturing organization is by far your largest customer! What are manufacturing’s expectations? For example, what is the optimum level of cash to be tied up in raw material inventories to ensure flow and schedule execution? What are the end-to-end cycle times that are required to satisfy the customers’ expectations? What are the expectations for supplier quality? What reporting needs to be in place to enable the necessary actions by purchasing and manufacturing? Are you knowledgeable enough to represent manufacturing’s needs to the supplier base? Do you have all the necessary metrics in place to do so?
Hopefully, these kinds of questions will get your wheels turning and thinking about what metrics you have versus what metrics you need. Collect the inputs of your staff and your manufacturing customers. Next time I’ll share a few of my experiences creating world-class purchasing teams at two companies, and will follow that with recommendations for purchasing and supplier metrics.
In the mid-1980s, Ken Stork of Motorola Inc. was a global thought leader on the purchasing/supplier relationship. My company invited him in for counsel and I was very fortunate to learn from him. Ken’s wisdom is just as valid today as it was then. He taught that new thinking would change the face of purchasing and take the profession to a new level of excellence. I certainly recognize that there are great companies out there thinking and behaving in a progressive team culture with their suppliers. However, I must say that most businesses I’ve consulted with over the last 11 years still are doing purchasing’s business the old school way.
Ken had three specific observations that have stayed with me for over three decades:
- A vendor is not equal to a supplier.
- Companies should reduce their supplier base to the minimum number necessary.
- Optimizing the supplier base will provide mutual long-term benefits for all.
“Never call your suppliers 'vendors.' Vendors sell peanuts at the ballgame. Your suppliers are professionals and should be respected as business partners.” -- Larry E. Fast
Larry Fast is founder and president of Pathways to Manufacturing Excellence and a veteran of 35 years in the wire and cable industry. He is the author of The 12 Principles of Manufacturing Excellence, A Lean Leader's Guide to Achieving and Sustaining Excellence, 2nd. Edition.