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A
New Governance Role
for Purchasing
By Rob Handfield |
I
was recently asked by a team of people from one
of our partner companies the following question:
We are moving to a governance role from a service
role, with respect to the purchasing of materials
and services. What advice would you offer in making
that transition?
This is a very tough question to answer, particularly
when it comes to purchasing involvement in the
so-called “non-traditional” areas of
spending. However, the fact that non-traditional
purchasing spans areas which have been considered
the domain of other functions for many years means
that the process must be modified to include the
input of these stakeholders, so that ownership
of the process can be established across groups.
This is a key requirement for successful deployment
of this strategy.
In some organizations, an internal client department
such as Finance or Information systems initiates
the involvement of purchasing in non-traditional
spending decisions. organizations may also initiate
purchasing involvement via some form of control
system. For instance, an internal audit of payments
and matching purchasing orders may reveal a significant
amount of “backdoor buying” occurring
which bypasses the formal purchasing process.
Before any type of purchasing involvement can
occur in the non-traditional spend area, purchasing
must carry out a comprehensive spend analysis
across all strategic business units and functions,
that includes all forms of spending within the
cost of goods sold. While most organizations have
a good handle on their major commodity spends,
capturing non-traditional purchase volumes may
be difficult. Some organizations in the process
of implementing Enterprise Resource Planning Systems
(such as SAP, Oracle, and Bahn) are being forced
to identify these levels of spending. These systems
will aid in standardizing databases, and help
automate the process of analyzing all purchasing
data. However, before these systems can be used,
a consistent understanding across all of an organization’s
operating units is required to introduce value-added
purchasing in non-traditional areas. A key activity
at this stage should be to look for commonalities
of activities and materials among using sites
or sub-units to identify opportunities for leveraging.
This may require a commodity classification coding
scheme and an internal organization coding scheme
to aggregate this information.
Some of the different approaches identified by
benchmarked companies at this stage include the
following:
| • |
“Through
our accounting systems we can identify,
measure and monitor large volumes of procurement
spend based on general ledger account code,
supplier, customer and dollar volumes. We
identify this spend with various representatives
of each SBU and determine if Purchasing
can provide a value add to the current process.
Additionally, this allows us to identify
where the large spend is occurring and perhaps
combine it with other areas within the corporation
for greater discounts.”
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| • |
“We
utilize a bill payment database to identify
areas that we may potentially bring value
to. In addition we have identified through
company publications, areas that were being
outsourced and pursued those contract opportunities.”
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| • |
“We
have a summary database that shows our expenditures
by supplier, commodity, business unit. We
use that summary database to evaluate areas
of spend where commercial / procurement
might be able to provide improvement in
total cost. We also keep abreast of changes
in the business world to identify areas
where recent legal or policy changes may
allow us to leverage our business. Examples
include deregulation of electricity, natural
gas, etc.”
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| • |
“The
process followed to gather information on
potential non-traditional areas was to review
annual accounts payable data for each location
including Corporate offices. Several databases
were reviewed with suppliers and areas targeted
where the purchases exceeded $100,000. Accounts
payable data, which included location, supplier
ranking by total expenditure, supplier name
and annual expenditure, was sent to a Non-Traditional
Supply Management representative at each location.
The following information was requested: estimated
1996 expenditure type of purchase - non-traditional,
production (direct), non-production (indirect),
commodity department authorizing the expenditure
agreement - yes or no if an agreement, divisional,
regional, national, global expiration data
of agreement.” |
Once
the data on total spend is aggregated, a team
assembled from the relevant divisions perform
a strategic analysis of spend patterns in non-traditional
areas. The team may include key stakeholders from
the different groups, who can help in identifying
major areas of non-traditional spending which
have potential for savings through purchasing
involvement. It is important to note that this
stage of the process involves considerable research
on the part of purchasing and other functions,
to identify these areas. Commodity / services
groups should be “paretoed” according
to two major categories: volume / potential return,
and ease of attaining cost reductions / objectives.
The deliverable at this stage is a portfolio of
non-traditional purchases, with the objective
of targeting those purchases that have a high
potential for immediate savings (in the form of
leveraging, headcount reduction, simplification,
etc.) and which also have a high probability of
success.
It is important to note that in assessing the
different types of non-traditional purchases made
by the organization, not all forms will be classified
as “strategic”. Moreover, there may
exist certain types of purchases which are best
made by internal clients, as they are relatively
standard, and the client is utilizing sound purchasing
practices in awarding the business. In deciding
which types of commodity/service groups to address,
purchasing should target those purchases which
exceed an agreed-upon baseline level, and which
offer the potential for non-value-added reductions
with the potential for significant cost savings
and/or competitive advantage.
Sincerely,
Rob Handfield
Director, SCRC
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