Purchasing Best Practices were important to two supply chain optimization projects we recently completed for a University and a $400M manufacturer of consumer products. All companies purchase goods and services and have various organization structures, business processes and technology backbones for handling it. In both projects, these were significantly different from each other. Irrespective
of how an organization structures itself, the following best practices should be followed:
1. Governing purchasing council
Every company should have a governing purchasing council that is responsible for overseeing the processes of purchasing. That council should have senior leadership representation from every function and should be responsible for setting cost reduction objectives and overseeing supply chain related projects. They are also responsible for setting policy, vendor strategies, vendor management, procurement, quality standards, make vs. buy decisions and inventory goals and objectives.
2. Leverage and evolve with technology
Technology continues to play more important role in the purchasing function. Companies should look at leveraging technology every chance it gets. Technology is changing at pace faster than companies can absorb, so it is important that technology strategies be flexible and scalable. The technologies include but are not limited to utilizing purchasing portals, E-Procurement portals, PCards, MRP, risk assessment, Analytics and other technologies that simplify and optimize purchasing processes.
3. Total Cost of Ownership
It isn’t always the lowest price that should be considered when making purchasing decisions. A Total Cost of Ownership analysis should be done with every purchasing option. Things to be considered include but are not limited to acquisition cost, shipping, cost of inventory, quality, life cycle and vendor performance
4. Build strong relationships with suppliers and keep updated preferred suppliers lists
It is important to establish strong relationships with suppliers who are in it for the long haul and who can provide design, process and packaging support. The company should have contractual relationships with appropriate SLA’s, clearly spelling out the required performance requirements such as delivery, quality, cost reductions, etc. and how the relationship will be managed
5. Collaborative strategic sourcing
The purchasing process is complex and time consuming. It needs to involve other departments in the business who contribute to design and performance requirements. There needs to be a clear understanding by purchasing of the specific company strategy and the needs for components, products and services. Companies should endeavor to implement routine make vs. buy analysis and conduct reviews of emerging suppliers and their technologies.
6. Utilize vendors to review and quote for bundled products and services
Given the rate of change in technology, suppliers and products, vendors play an important role in your evolution as a business. They have resources that can help envision the optimal products and services as well as programs for the supply those goods and services. Too many companies do not leverage these resources to support today’s lean organization structures
7. Sync strategic objectives with your vendors
Every company has a strategy and it is critical that the strategy of your company and that of the supplier are in sync, e.g. If your strategy is to reduce working capital via lower inventories and your vendor has the same strategy, it is unlikely that they will be agree to a vendor managed inventory program or to stock long lead time parts. Other strategic objectives to consider are geopolitical, scalability, regulatory, sustainability, power alleys and quality.
8. Develop a robust vendor management program
Vendors like everyone else, need to be managed. A robust vendor management program will include scorecards that are reviewed every quarter and yearly strategy meetings with functional members from each company focused on setting objectives (cost reduction, inventory reduction, quality, etc.) for the following year. A robust vendor management program provides routine communications with your vendors, reduces cost, improves performance and reduces supply chain risk
9. Leverage buying power
As time goes on, companies get comfortable with vendors who perform well, and the list of vendors continues to grow. As the list grows overlaps develop with multiple vendors. As part of the yearly purchasing strategy, there should be a review of these overlaps and discussions about ways to leverage buying power through new vendors, portals, purchasing co-ops, etc.
10. Clear and concise policies and procedures with routine reviews
As business strategies and needs change, companies need to routinely review the policies and procedures that govern the supply chain and procurement functions. We often find that policies are outdated, and business processes are not properly documented. This usually leads to shadow systems (work arounds) and variations to how people responsible for the supply chain manage the processes they are responsible for. Stay on top of your business processes and procedures.
11. Routine training of all people who purchase goods and services
Technology and processes change, coupled with the rotation of personnel purchase products, it is imperative that companies have the discipline to document those changes and to routinely train personnel on those changes. It is important to review the company’s purchasing Learning Maps. Change management strategies are important here.
12. Clearly define yearly cost reduction and improvement targets that are part of the objectives for both the company and its vendors
What gets measured gets managed. If the company doesn’t set both internal and vendor benchmarks for performance (KPI’s), the company and their vendors will embark on something we call Anti-Strategy: Well intentioned plans to optimize a function without guidance from strategies, goals and objectives.
In every company we have worked with, 1 or more of these critical best practices were missing and the performance of the supply chain, purchasing and vendors were negatively impacted. While these best practices seem simple, a holistic approach to purchasing is a challenge because of the myriad of competing interests. In our work, we found that companies tend to move from centralized purchasing to decentralized and beck every few years. We have seen both designs work and no matter how the company is structured, these best practices apply.
About the Author: Jim Gitney is the CEO of Group50 Consulting. Founded in 2004, Group50 Consultants are subject matter experts in operations and global supply chains. We understand how to leverage technology, process, organization and vendors to optimize a company’s supply chain, and we bring best practices learned from well know middle and Fortune 500 companies. Group50 works with middle market companies to significantly improve their supply chain performance from raw materials to delivered finished goods and quote to cash.
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