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Successful Purchasing Strategies Consider More than Price

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Jack Welch is credited with saying, “Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”

Every manufacturer has the need to procure something from somebody or some company. Therefore, every manufacturer has suppliers and most have staff responsible for procurement.

Building on Welch’s thoughts, the role of purchasing can be explained as follows: Good purchasing organizations understand the vision for the business; they develop and manage supply chains capable of relentlessly driving that vision to completion.

Strategic supplier management, or strategic sourcing, is the process of developing and managing a supply chain capable of supporting a company’s vision and strategy.

However, achieving this alignment is not easy.
   •   Corporate visions can provide conflicting messages for purchasing. A company may strive to be a technology leader while
        simultaneously experiencing pressures from low-cost producers.
   •   Economics and competitive pressures change significantly. While company visions should be rather static, plans to achieve
        them need to be flexible.
   •   Suppliers will have visions for their businesses that are not 100 percent in alignment with your company’s vision.

The Benefits of Building a Supply Base that can Support the Corporate Vision
A strategically aligned supply base efficiently leverages the resources of suppliers that can best help your company achieve its vision, and provides extended benefits to those suppliers. A strategically aligned supply base can also help lower the cost of products and reduce investments required to develop new products or expand into geographic regions.

Here are two examples:

•   A component manufacturer had a vision of expanding into Asia, with manufacturing locations dedicated to support Asian manufacturers with whom they did not have business.

A traditional first step would have been to establish a sales office to develop and sell to potential Asian customers. Instead, they led with purchasing. Export sources were developed to support the North American business units, which produced the product they were targeting to sell to Asian customers.

This effort resulted in immediate savings for the company and helped demonstrate its commitment to the region and their capabilities to the Asian customers.

Five years later, the company won a business award and built an Asian facility. Since the supply base for the new facility had already been developed, minimal supply issues arose during launch of the new facility, which quickly became the company’s most profitable and fastest growing facility.

•   Using a traditional and price focused sourcing process, buyers in a $3 billion company always waited on engineering to finalize prints before they could market test. Since engineering had already completed most of the design and testing, optimizing the design for the selected suppliers’ manufacturing processes was always difficult.

The company implemented a strategic commodity management process designed to: 1) reduce the number of suppliers within the commodity from seven to three, and 2) implement an open book costing process that would enable purchasing to include actual cost to manufacture in the selection of the chosen three suppliers.

Understanding the chosen three’s manufacturing cost now enabled the buyer to appoint a supplier to work with engineering on new products before design work began. Thus, costs were optimized in the design process and prices were established using open book cost models once the designs were finalized.

The Steps to Strategic Commodity Management
The first two steps of strategic commodity management are designed to identify strategic commodities.

Step 1: Understand Company Strategy
The reactive leader of a purchasing organization waits on his manager or the CEO to faithfully articulate the company vision. Unfortunately, not all corporate leaders are Jack Welch. When we combine the inarticulate vision with the reactive purchasing leader, strategic supply base management will not occur.

The proactive purchasing leader will seek to understand the priorities/visions of the company, even if it is not effectively communicated by its leadership. For example, the inarticulate CEO states, “We are going to build a plant in India. Get the supply base in line.” The reactive manager hears these words and goes off to implement. The proactive leader finds ways to ask, “What are we trying to do in India: support the local market; develop an export hub, or both? Has a growth plan been developed? What products will we focus on?”

The proactive leader makes sure he understands the corporate visions at the detail level required to plan and execute strategic alignment.