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- Managing domestic and global suppliers is the most influential strategic lever companies can use to reduce costs and compete more effectively on price.
- Purchasing leaders now determine the success of new-product launches.
Truisms? Not necessarily. According to a study of 236 large Canadian and U.S. manufacturing and service companies, purchasing has come a long way toward acting like the strategic function it truly is, but it still has a long way to go.
In a study called “Purchasing's Strategic Role and Team Usage,” researchers looked at what purchasing leaders regard as important strategic work — applying their knowledge about suppliers and technologies to help the company make decisions on outsourcing, new-product development and market planning — and compared it with what their organizations actually do. Their findings indicate a deep gap between good intentions and reality. The research was conducted by P. Fraser Johnson, Robert D. Klassen and Michiel R. Leenders, all of the University of Western Ontario, and Harold E. Fearon of the National Association of Purchasing Management's Center for Advanced Purchasing Studies.
To determine purchasing's role in strategy, the researchers asked chief purchasing officers to rate their function's involvement in 13 major corporate activities using a five-point Likert scale (a tool that has subjects express agreement or disagreement with statements and gives a numerical value to each level of agreement).
Even top-ranked outsourcing was rated at 3.46, only a moderately important level; the 13th parameter had a 2.01 standing, indicating that purchasing departments were only slightly involved in marketing planning. Clearly, the buzz about strategic purchasing is not supported by the data.
If the purchasing function controls so much corporate spending — more than 80% in the automotive industry — then why is it still stuck working on short-term problems such as processing paper and tracking orders? A number of factors contribute to the function's stalled progress toward playing a strategic role:
Centralized vs. decentralized organizational structures. Decentralized purchasing operations find it difficult to manage corporatewide supply activities strategically. Although corporate headquarters may express strong support of purchasing's financial objectives, many companies operate under a decentralized supply-organization structure that may keep the machines running but presents control, integration and even political challenges for purchasing executives.
Successful strategic supply-chain operations need not be centralized, but they do need access to the CEO and corporate expertise, and an ability to coordinate standards, says Fraser Johnson, one of the study's authors. “You do need a core group of individuals at the head office who can provide division support. You need at least a hybrid — part centralized, part decentralized — structure to support strategic purchasing initiatives.”
Upstream vs. downstream perspectives. The business of procurement is the management, development and control of suppliers. However, it is less clear among purchasing professionals how much impact supply pros can have on downstream operations such as mergers, acquisitions, strategic alliances and marketing planning. Certain manufacturers control the markets they sell to with aggressive new-product and price programs, areas that the best-practice supply managers have perfected. Yet with a few exceptions, such as DaimlerChrysler's new-product development teams, purchasing professionals don't attempt to control the markets from which they buy.
Moreover, downstream activities such as government relations and environmental planning, both of which exercise tremendous influence on product success, are seldom areas of expertise in most manufacturers. American Honda Motor Co. — which works hard at government relations and has attained market leadership in developing clean cars — is a visible exception. But when companies pay little attention to government relations or environmental concerns, their purchasing departments do not either.
The power purchasing professionals have over spending still provides them an opportunity to play a strategic role in their companies. R. David Nelson, head of Deere's worldwide supply-management team, and former chief of purchasing for American Honda Motor Co.'s manufacturing arm, Honda of America, believes that the answer lies in winning a seat in the corporate boardroom as a director. CEOs and CFOs want their purchasing executives to have a visible financial impact, and to create opportunity and profits through strategic sourcing. In his soon-to-be-released book, “The Purchasing Machine,” Nelson writes that if purchasing leaders want to take a boardroom seat, “They must speak the language of management, seek out visibility and become known as solution — not problem — providers.”