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What You See Is What You Get

Mary Lu Harding, PrincipalHarding & Associates

802/453-5379; harding@sover.net

91th Annual International Supply Management Conference, May 2006

Abstract. How purchasing is viewed at the executive level of an organization determines notonly executive decisions, but also behavior on the front lines. Executive views can be explicitlystated or hidden assumptions. They have power in either form. This paper describes some ofthose visions and their consequences for the organization.

Employees at all levels of an organization understand quite well what the executives of theorganization value, and those views affect daily behavior in ways often poorly understood.

Each view of purchasing can be recognized by its affect on behavior, measurements, staffingand executive decisions.

1. Purchasing as an administrative support function. If a top procurement executiveconsiders the function to be an administrative support function, then policies, procedures,measurements and hiring practices will reflect that view. Purchasing will be considered acost center. Expense control will be a major measure of success, including departmentaloverhead expenses. Following procedures will be important, and a breech of procedure iscause for corrective action. Prompt processing of purchase requests will be a majormeasure of customer satisfaction. Staff will be selected and promoted on their ability tohandle multiple priorities and considerable pressure, process transactions speedily andaccurately, and expedite successfully.

This type of function is primarily reactive. Demand information comes to purchasing andthey react to procure whatever is needed. Consolidation and contracting are done withhistorical information and some forecasts but little interaction with internal customers.

If one were to ask internal customers about the purchasing function, they would probablydescribe it as a necessary evil - an administrative function that they have to go through toget what they need. They believe that they could do it as well or better. They may feel thatpurchasing's involvement lengthens the process, and sometimes they resent this delay.After-the-fact purchase orders may be a problem if users contact suppliers and make theirown purchases.

At the executive level, there are battles to justify budget and headcount. There is constantpressure on administrative costs and pressure to reduce purchase spending. It's all aboutmoney, and only hard dollar savings count. There may also be discussions aboutoutsourcing purchasing. Administrative functions are prime candidates for outsourcing, andthe less applied intelligence that is expected, the easier it is to outsource the job.

This type of organization is the least productive and the least fun to work within.

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2. Purchasing as a profit center. In a profit-centered organization emphasis shifts from costto contribution. Instead of focusing on cost savings, a key measure is contribution to profit.Staff know how their commodities affect the price of the product and how cost reductionsaffect profitability. There is little spot purchasing, except for MRO items. Routine items areplanned and contracted with a long view to both cost and availability. There may be effortsto reduce transactions by using auto-release mechanisms rather than purchase orders toschedule deliveries.

Staff are hired and educated with a financial analysis perspective. Performance ismeasured by contribution to profit, not on prompt response to user demand. Workloads arearranged to provide time for market analysis and supplier contracting. The magnitude andresults of those efforts are the primary measures of success and promotability.

At the executive level, there is less pressure on budgets and more emphasis onprofitability. As long as contribution to profit can be demonstrated, there are fewer battlesover budget and headcount.

This is a more advanced view of purchasing, but still has considerable bureaucracy.

3. Purchasing as a systems designer. This view of purchasing does not stop at receiving,but follows the flow of goods and services all the way through the organization. The jobinvolves working with internal customers to:

- define their needs as far forward as they have visibility- create an ideal system for management of the flow of goods or services- select the best supplier (by mutual agreement)- put the contract (with its system) in place- monitor supplier performance and customer satisfaction

The primary differences between this view of purchasing and those described earlier can be

seen by observing the daily activities of purchasing staff. They issue very few purchaseorders. They are rarely in their offices. They spend the majority of their time with theirprimary internal customers or suppliers. Their focus is partnership with their internalcustomers to jointly manage the flow of goods and services to meet organizationalobjectives.

In the hiring process, candidates are given the following job description: "Your job is towork with our internal customers to help them design a system and process by which goodsand services flow to where they are needed when they are needed in the easiest possiblemanner. You will take that plan and translate it into a contract with an appropriate supplier,and once it's in place, monitor system performance to make sure that both suppliers and

users are happy. You will be measured on both financial and operational results. If you dothis job well, it can be very rewarding." Candidates may come from other internal functionsor from outside but should be well-versed in all possible options for delivery and flow-management systems as well as contracting in general. Ability to work well with others isalso critical to this job.

Managers of systems-design-focused purchasing organizations allow both time andbudgets for travel. Staff are encouraged to get out to where they are needed. The

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emphasis is on partnership for successful business results. Success is measured by thebusiness results of their primary user-customers as well as profitability. Cost savingsinclude both hard-dollar savings and soft-dollar savings such as improved productivity.Validation is not a problem when the user community testifies that the improvements arereal.

Executives operating with this view of purchasing have little problems with their peers whoconsider them partners in getting their jobs done. No one even thinks about outsourcingthis type of organization. The liaison between purchasing and the user functions is tooimportant and too intimate to trust to an outside organization. Also, user functions wouldnot be willing to relinquish their services.

4. Migrating the organization. If you have inherited an organization that is not at the levelyou envision, there are some specific things that can be done to move an organizationtoward that vision.

- Step 1: Clarify your own vision. Work to develop it until you can see it so clearlythat you can describe it to others and they can see it too. It needs sufficient detailthat others can see the same picture and see what they will be doing in that picture.

- Step 2: Share that vision with others - first in purchasing, then in primary user

functions. Sharing is not a one-time event. It often takes people a while to digestthe vision and understand it, so keep repeating it.

- Step 3: Decide which measurements foster your vision and which arecounterproductive. Keep or institute those that foster your vision. Eliminate thosethat are counterproductive. Changing measurements is one of the most powerfulthings you can do to foster the changes you want.

- Step 4: Provide resources to help people get to where they need to be, such astraining in kanban or contracting processes.

- Step 5: Reward successes. Celebrate and recognize achievement or evensignificant effort. Positive recognition and energy builds on itself and provides an

example for others.- Step 6: Be patient. Migrating organizations is not done overnight, but there are few

things more rewarding than leaving such a legacy.