The combination of credit crunch, economic downturn and indicators of approaching recession has led many companies to focus anew upon cutting costs. If it is not happening already, now is a good time to review purchasing strategy. Far too many purchasing teams focus on short-term issues and do not contribute to the formulation of corporate strategy, building customer value or the development of new products. They fail to strike up and sustain relationships with external suppliers that might both help them to control costs and improve the quality of their offerings.

Many purchasing professionals also fail to secure senior management appointments because they struggle to demonstrate the value they are adding. They are sometimes perceived by business owners as paper processors rather than creative entrepreneurs. The attitudes, competences and approaches of many purchasing professionals need to change. What should entrepreneurs be looking for?

One of the ‘winning companies: winning people’ research teams led by the author found that for almost 70% of 296 companies surveyed purchases of external products or services amounted to over a half of their total costs, while all companies reported that their purchasing achievements were falling short of their aspirations. Clearly more effective purchasing can have a very significant impact upon the bottom line.

The ‘effective purchasing’ study of European purchasing was undertaken with the cooperation of the European Institute of Purchasing Management. The resulting ‘Effective Purchasing, the Critical Success Factors’ report* revealed significant differences between the approaches of winners and losers, the companies that succeed and fail respectively at achieving the benefits of effective purchasing.

Losers tend to view purchasing as an administrative activity of relatively low status that is sometimes a source of both management and quality problems. Purchasing arrangements are often fragmented, and attempts to consolidate them are viewed as empire building by cynical business colleagues. Targets tend to focus upon year on year savings, yet often ignore price movements over business cycles.

Purchases by losers are often ad hoc. Losers like to shop around. They avoid ‘getting involved’ with particular suppliers. They look for ‘deals’ and opportunities to make quick savings. They also fail to recognize differences of capabilities among different suppliers, and that one’s approach to purchasing may need to vary according to factors such as degree of commoditization, volume, storage, transportation, quality and item importance, value or visibility to end customers.

Compared with effective purchasers losers are less successful at all of the considerations relating to choosing suppliers that were examined by the research team. Sometimes they have so many relationships with different suppliers to maintain that finding the time to assess individual providers and properly distinguish between alternative suppliers becomes difficult, if not impossible.

When negotiating losers play win-loose games. They keep their various suppliers at arms length and endeavour to play one supplier off against another. They tend to be oblivious to the longer-term consequences of their relentless drive to cut costs. The benefits of consolidation, bulk-buying and cooperation elude them.

Some losers are lazy when it comes to tracking external developments and looking for alternative and better sources of supply. They follow traditional paths and are less concerned with the interests of end users or customers. They fail to acquire and share useful intelligence on technological developments and to uncover new options that might deliver greater value to customers.

Losers give a low priority to the ethical employment, environmental and safety records of suppliers. They also seek to avoid the scrutiny of their colleagues, and are slow to assess their own performance. Winners are different. They measure and report their achievements, and demonstrate their contributions to colleagues. Their greater openness encourages others to have more confidence in them.

For winners purchasing is a source of competitive advantage. They work with their suppliers to reduce costs, innovate, and improve quality or speed up deliveries. Involving purchasing and preferred suppliers earlier in the new product development process can often reduce the time required to bring new products to market by a quarter or more.

Winners are more likely to be involved in boardroom discussions of business strategy, customer value and new product development. Integrated systems are also more likely, that provide group-wide information and monitoring capability. Winners are able to show they are in control and achieving purchasing objectives. Their targets are more likely to include the building of longer-term and partnering relationships with strategic suppliers, and integrating purchasing into group strategy.

In comparison with their less successful peers, winners are also more likely to pursue win-win approaches to negotiations. They recognize that building value can be as important as controlling costs, and that working with certain suppliers might enable the delivery of improvements and innovations that lead to more competitive offerings and benefits for both parties.

Canny winners recognize it is usually in their best interests that strategically important suppliers do well. Squeeze them too hard and they may lack the margins needed to fund the investments that would enable them to stay at the top of their game. Collaboration to find new ways of working together can lead to opportunities to save both sales costs for the supplier and purchasing costs for the customer.

Winners prefer longer-term contracts with reviews, and framework contracts with local call-offs. They are more interested in establishing and building collaborative relationships with a smaller number of strategic suppliers, and monitoring the quality of what is procured. They are also ahead when it comes to using IT and e-business technologies to automate aspects of purchasing, and facilitate methods of purchasing such as ‘internet auctions’. Losers play catch up where the winners pioneer.

While valuing existing relationships, winners are also alert to trends in the marketplace and technological and other developments that might benefit end customers. They are more open-minded and can be relentless in their search for new and better alternatives. They actively seek out sources of competitive advantage and greater customer value and provide colleagues with useful intelligence on new possibilities, challenges and opportunities.

When assessing suppliers, winners look for a willingness to enter into a partnership, flexibility and senior management commitment. Other considerations when selecting key suppliers are product quality, low cost and delivery track-record, while for building a successful relationship responsiveness, technical support, technical leadership and – once again – flexibility are especially important.

Certain companies use support tools that make it quicker and easier for suppliers to meet their quality and procurement standards. This greatly speeds up responses to their changing requirements. It also enables new suppliers to be more quickly taken on board, for example where a technological breakthrough occurs, to enable a bespoke response or to deliver greater customer value.

In recent years purchasing has been transitioning from a regional to national and from national to multi-national model. In larger companies it is becoming increasingly continental or global in scope. Winners favour smaller but more able teams, made up of purchasing professional who endeavour to keep their skills up to date.

Losers appeared to be some way behind the winners in relation to longer term trends. Thus many of them were still centralizing, while their more successful peers who bought more centrally were devolving responsibilities to operating units within a framework of approved suppliers and group standards. Winners are more willing than losers to trust colleagues to make higher value purchases.

While losers buy a smaller proportion of a wider range of goods, winners are more likely to spend over half their total costs on bought in items. In particular, they enter into more partnership arrangements and are more willing to outsource. While the purchasing costs of losers are sometimes hidden, winners are both more aware of such costs and more likely to allocate them either to benefiting business units or central overheads.

In the past few companies appeared to have had an integrated approach to checking the quality of purchased supplies. Winners were more likely to get the quality checking basics right, while losers tended to ‘hope for the best’. Some losers played Russian roulette with quality, neither requiring supplier liability for faults, nor carrying out supplier audits.

Benefits of effective purchasing secured by purchasing winners include control of product quality, the integration of purchasing into group strategy and product plans, minimum costs of goods purchased, the use of standardized components/materials specifications, minimum work in progress stocks, security of supplies, partnerships with key suppliers, and retrospective discounts.

Losers tend to operate in isolation, while winners are more alert to what is happening in the corporate context and the external marketplace. Effective purchasing teams aim to beat market prices by continually monitoring what others are buying, and taking immediate action to remedy any divergences of prices paid by competitors. Winners also embrace just-in-time or lean purchasing and benchmark their performance.

Companies with successful purchasing departments are more likely to be engaged in international trade. International sourcing is spreading and more activities are being outsourced, including the purchasing function itself. By adopting a more strategic approach, and acquiring the skills and experience to manage and monitor collaborative relationships, winners are more able to safeguard the intellectual capital and know-how needed for knowledge-based competitiveness.

It is important that you understand where your purchasing functions and colleagues are in relation to the differing approaches of winners and losers. The ‘effective purchasing’ database has been constructed to allow companies to benchmark their approaches against their peers in the survey sample and the winners who derive the most benefits from their purchasing functions. The fifteen page bespoke report* that is produced covers 137 purchasing issues and enables those who complete a questionnaire to identify the areas they most need to improve.

Key messages for entrepreneurs are that areas of deficiency in purchasing practice can be both identified and addressed. It is often possible for the winning ways of the more successful purchasing teams to be adopted relatively quickly once they have been recognised. Effective purchasing can deliver greater customer value and competitive advantage and increasing its strategic contribution should be high on the agenda.




Further information

* ‘Effective Purchasing, the critical success factors’ and related bespoke benchmarking reports that compare corporate performance with the average for both all companies and those companies that win most benefits from their purchasing functions is published by Policy Publications and available from http://www.policypublications.com .

The findings of the ‘winning companies: winning people’ research programme are summarized in ‘Winning Companies; Winning People’ by Colin Coulson-Thomas which is also published by Policy Publications and available from http://www.policypublications.com.

The Author

Dr Colin Coulson-Thomas, an experienced consultant, company chairman and Professor of Direction and Leadership at the University of Lincoln, has advised over 100 boards on director, board and corporate development, reviewed the processes and practices of over 100 companies and spoken at over 200 national or international conferences or corporate events in over 35 countries. Formerly the world’s first Professor of Corporate Transformation and Process Vision Holder of major change and transformation projects, he can be contacted by Tel: 00 44 (0) 1733 361 149; email: colinct@tiscali.co.uk and via http://www.colincoulson-thomas.com.



© C J Coulson-Thomas, 2008