Supply Management: How are You Really Doing? (2)
-- Supply Chain Management Review, 12/1/2005
Page 2 of 4
2. Do you know who your chief purchasing professional is?
On the surface, this seems like a ridiculous question. But first-hand experience tells us it pertains. In some Fortune 500 companies, it is even hard to identify who the chief purchasing officer is because purchasing is so fragmented. Some business units may have a fairly strong purchasing leader, but there is no central leader. Amazingly, we have found some business unit presidents—of extremely large divisions—who have no clue who their head buyer is. Typically, those units were making money hand over fist and paid virtually no attention to costs. Even if you are making a ton of money, you are failing your fiduciary responsibility to your shareholders if you are not reaching your full potential. And if you know absolutely nothing about the supply side of your company, you are missing out on an opportunity to influence one of the most important drivers of top-line and bottom-line growth.
3. What is the reporting relationship of the chief procurement officer to you? Does he or she have consistent access to you and other senior-level executives? Does he or she make presentations to the board of directors?
Some purchasing leaders feel that the chief procurement officer should report directly to the chief executive officer and even be considered for board status. We don’t agree. The important issue is to make sure that the chief procurement officer is no more than one level removed from the CEO and has regular access to him or her. In a well-run company, you would expect the chief procurement officer also to make presentations to the board. You should have scheduled meetings with your chief procurement officer at least quarterly and on-demand access either way as needed.
4. Does your procurement team have top- and bottom-line objectives?
How do you set “stretch” objectives? Are procurement’s objectives shared by other functions in the company? The correct answer is that procurement has both top-line and bottom-line objectives, and these objectives are shared with other functions in the company. You, as CEO, know what the objectives are and have input to those objectives, and there is an independent internal scorekeeper (e.g., finance). The opposite end of the spectrum is that procurement has limited “savings” objectives, nobody knows what the heck constitutes procurement’s definition (and calculation) of “savings,” and those limited objectives are procurement’s alone.
5. What percentage of the external spend at your company is supervised by purchasing and covered by a written strategic sourcing plan?
The correct answer: 100 percent. There is no excuse for anything less. Best-in-class companies have already achieved this. Most companies do a pretty good job on money spent for production products (called “direct” in purchasing talk), such as steel, electronic components, and plastics. Their impact on corporate performance is well known. Many organizations do a poor job on services, information technology, office products, temporary labor, and a host of other areas that are increasingly important. Best-in-class organizations are tackling costs for legal and consulting services. Best-in-class organizations are taking aim at health care and marketing costs. Buyers at P&G supervise the company’s $5.4 billion marketing buy. Everything at P&G must be covered by a sourcing plan. It is a metric that is followed. Attacking marketing expenses, such as promotional items, is a way to show big results fast. For example, one major company took a fresh look at both “standard” off-the-shelf promotional items and “specials” (involving the creative juices of marketing personnel), pooled that total spend, and found one vendor that could orchestrate the whole category—for a considerable reduction in costs. Of course, you set your priorities here. If the real estate people are already doing a good job, make it your chief procurement officer’s last project.
6. What percentage of spend is leveraged through internal spend pools?
That is, is each plant or business unit buying its own office supplies or is that spend aggregated through a corporate “pool”? This is tougher to answer, but the percentage should be as high as is reasonable. Many companies have struggled with this issue. Certainly, non-critical products, such as office or repair and operating supplies, should be covered by an enterprise wide spend pool. At the other end of the spectrum are highly engineered, big-ticket components that are critical to the future of a given business unit. Not a good candidate for aggregation. Packaging and freight are good candidates. This is an important area in which to set goals and demand answers that make sense. Another issue: Most companies have highly fragmented product specifications that serve no useful purpose and are roadblocks to supply chain goals, especially aggregation for leverage, lean inventories, flexibility for reuse or resale, and even testing costs. For example, John Deere launched a major strategic sourcing program in 1999. One of the keystones was reducing the supply base and building partnerships with critical suppliers. Deere bought 46 grades of a plastic resin called polypropylene. As engineers designed products such as tractor steering wheels, they selected grades of resin without concern for supply chain goals, such as the ability to move inventory of materials across the enterprise if demand slowed for a given product. Engineers often chose specifications well above those required for the application. Deere had a proliferation of polypropylene grades. That meant tests were required for weathering and durability for multiple grades or colors. A cross-functional team, headed by a buyer and composed mostly of engineers, was launched with the goal of reducing the number of grades to around eight. Deere planned to reduce the supply base for polypropylene from 20 to less than six. Around the same time, Deere also tried to standardize industrial gloves used by factory workers; 424 different types of gloves were used. Annual expense: $1.4 million. There was strong worker resistance, and it took a senior management mandate to improve the glove buy. Continued...
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