Making the Transition to Strategic Purchasing

  • Horst-Henning Wolf
  • July 15, 2005

The purchasing function can go beyond mere cost cutting by rote. It can add value by driving innovation and superior long-term cost performance.

Most companies consider purchasing to be simplistic and merely a means to an end: The goal is to minimize costs while meeting functional requirements. Therefore, most major manufacturers play competing suppliers against one another, use their clout to squeeze suppliers or find other ways to force further price cuts through purchasing. And because senior managers in purchasing seldom stay in their positions for more than a few years, they rarely build good will among suppliers or create sustainable improvements in the overall purchasing function. As a result, the primary purchasing model in most companies rests on finding the best price for each isolated transaction through any means possible.

This approach misses a significant strategic potential to add value to a company through the purchasing function by driving innovation and superior long-term cost performance. Transforming purchasing into such a strategic function requires a long-term perspective aimed at building “networks of competence” — people who can cross boundaries and analyze the true costs of product and process proposals. It requires integrating purchasing into the beginning of a design or project rather than relegating it to the end of the process chain, where its role is viewed as simply buying the goods and services other departments need. It requires a fundamentally different approach to recruiting and training employees, as well as reorienting the entire company to a holistic view of purchasing that looks across many functions and entire supply chains.

Beyond its contributions to product quality and business performance, a systemically oriented purchasing department can foster knowledge sharing and innovation both companywide and across complex supply chains — a capability that is becoming a highly valuable strategic asset as manufacturers are increasingly held accountable for social and environmental impacts.

When I became the head of technical purchasing at Bayerische Motoren Werke AG in 1994, purchasing was essentially an administrative function, and morale in the department was low. Purchasing associates believed their knowledge was underutilized and their skills unrecognized. Many felt their work was not respected. It was clear that a new vision for the department was needed. If we could combine deep knowledge about markets and suppliers with strong relationship-building skills, we could influence what was bought, saving money and adding value from the beginning of the proposal process.