Purchasing leaders do not have a seat at the table at many large companies

Many CEOs view purchasing as a function that does not create value. They’re wrong

Are purchasing people at your customers’ businesses sitting in silos? A recent survey by Advanced Purchasing Dynamics (ADP; Plymouth, MI) revealed that, while corporate leadership might include the vice presidents of human resources, product engineering and quality, purchasing is rarely at the table.

ADP wonders how this is possible, given that most companies spend nearly 70% of their annual revenue on purchased materials and services. “It seems obvious that maximizing the value achieved from the investment in third-party products and services while mitigating the associated risks is vital to the health of a company,” noted ADP in the survey summary. “But is that really how company leaders view the contribution of the purchasing organization?”

Business meeting
Image courtesy Castillo Dominici/
freedigitalphotos.net.

ADP surveyed presidents and CEOs of more than 25 companies. The survey revealed that their foremost thoughts on purchasing teams were that it doesn’t create value that drops to the bottom line and that it is not aligned with the demands customers place on the business. More than half of the executives ADP surveyed cited these as top concerns, making it obvious that the C suite perceives purchasing as a necessary function, rather than a valuable source of action and strategic benefit. In fact, the ADP survey noted that 58% of CEOs believe that purchasing does not create value that drops to the bottom line.

So what do CEOs look for in their purchasing departments? Over the years, it’s been pretty obvious that they look for big savings in supply-chain activities, meaning that the goal of many purchasing professionals is to increase savings on the goods and services the company buys. In many companies, purchasing personnel receive end-of-year bonuses based on the amount of savings realized for the company.

APD noted that it interviewed a Chief Procurement Officer (CPO) who is committing to $30 million in savings in the next three years (big enough to get the CEO’s attention in just about any size company). The CPO’s major proof-of-concept project for strategic commodity management achieved a 20% savings while reducing defects by more than 99%.

“The CPO understands that competitive advantage is more than just squeezing suppliers for cost reductions (which just weakens your supplier relationship when done unilaterally),” said ADP. “Purchasing becomes a source of competitive advantage when it can show a contribution to corporate profits while reducing supply-base risks.”

While that scenario seemed to work out for both the OEM and its suppliers, often it’s not just cost savings that OEMs require but price reductions that are meant to squeeze suppliers when costs of manufacturing have been reduced as far as the supplier can go and still make a profit.

Additionally, when purchasing works in a silo—remote from the engineering and new product development teams—to purchase an injection mold, for example, it often results in what every moldmaker and molder hates: A project given to the lowest bidder without regard for the moldmaker’s expertise, capabilities and innovation. If the purchasing person gets a low bid and can realize big savings for the company, whether or not the mold runs good parts and lasts the required number of months or years, is of secondary concern, or of no concern at all, because engineering changes, repair and maintenance costs come from a different budget.

In recent years, purchasing personnel have begun to work directly or very closely with engineering and product development teams to ensure that the best mold is designed and built for the job at a reasonable price in an optimal lead time. In some cases, engineering is put in charge of obtaining the mold and working with the moldmaker to ensure good productivity and quality parts at a reasonable price.

APD offers six characteristics that differentiate companies where purchasing is a competitive advantage. One of those is aligning purchasing strategies with the CEO’s vision for the company, not in a vacuum, so that purchasing can obtain productive supply agreements.

To me this says that there must be a larger strategy in place than just picking the low bidder or beating up the supplier on price, neither of which are strategies.

Another characteristic is collaboration, which involves “effective knowledge-based supply chain strategies” that “are only possible when there are collaborative, trust-based relationships with the supply base.”

From what I’ve seen and heard over the years, trust is a huge issue. Molders and moldmakers generally do not like dealing strictly with purchasing people, because they do not believe there is a positive level of trust. As ADP points out, “Building collaborative relationships does not happen overnight. It requires a long-term commitment from the executive leadership teams within purchasing, key internal business owner groups and the supplier.”

Too often, suppliers of molds and molded parts believe that the purchasing person is just out to reduce the price and add money to the bottom line, so that at the end of the year there’s a bigger bonus. In many cases this may be true.

APD noted in yet another characteristic, “actionable cost and supply market intelligence is the fuel that compounds the value that high performing purchasing teams are able to generate. With actionable data, purchasing specialists are able to make fact-based decisions when developing supplier strategies and securing sources of supply; from there they are able to validate cost and price data provided by suppliers.”

When it comes to choosing a supplier for a mold that will make critical molded parts, however, many purchasing personnel do not have the knowledge basis for making a choice. Too often that leads to making the choice for this critical supplier based on price. That works for office supplies but not complex tooling. An involvement with the engineering team will lead purchasing to making a better decision on a mold/molded parts supplier.

Moldmakers and molders need to ask their customers and potential customers a few questions: First, who chooses the mold/molded parts suppliers? If the answer is purchasing, then the next question should be: Does purchasing have a seat at the table where supply chain and other corporate strategies are formulated? Also, does the engineering team work closely with the purchasing team to help make the best selection based on factors other than the lowest bid?

Asking these questions can help develop long-term collaborative relationships between the moldmaker, molder and OEM. That will ultimately result in a successful program for everyone involved.

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