Professional Documents
Culture Documents
Matt McKenna
mckenna_matthew@bah.com
Harriet Engel
engel_harriet@bah.com
Evolution of Procurement
For many years, the purchasing department served
largely as clerical support for the business units.
Its primary function was to send suppliers purchase
orders based on requisitions received from other
departments, which, in many cases, had already
selected the supplier and negotiated the price.
Purchasing would also follow up on the orders and
make sure that the proper paperwork was completed.
In addition, the purchasing department was occasionally involved in administering contracts, and it kept
track of supplier contact information.
In the 1980s, many companies began to recognize the
importance of the purchasing function as they reduced
their vertically integrated structures and began to look
Exhibit 1
Strategic Purchasing Agenda
Balanced Sourcing
Tim Laseter wrote the book Balanced Sourcing: Cooperation and Competition in Supplier Relationships
(Jossey-Bass) in 1998 while a Vice President at Booz Allen Hamilton to establish a framework and
methodology for developing cooperative relationships with suppliers and simultaneously achieving needed
cost savings. Based on the firms experience and research, the book discusses the development of a broader
set of organizational purchasing capabilities:
1. Modeling Total Cost
2. Creating Sourcing Strategies
3. Building and Sustaining Relationships
The first three capabilities are the core processes for defining and developing the supply base; as such, they
are universally applicable to any type of company. The second three highlight different ways to leverage the
supply base for competitive advantage. Most companies focus on one of these latter capabilities at most;
only the largest and most sophisticated companies can afford to pursue all three.
1. Modeling Total Cost
Understanding the economics and the cost drivers of purchased goods and services through cost modeling
is the most fundamental capability. It provides focus to cooperative efforts and ensures that prices reflect
underlying economics.
2. Creating Sourcing Strategies
A sourcing strategy is analogous to a business strategy. Done well, both can create a competitive advantage
that will deliver superior returns. Just like a business plan, a well thought-out sourcing strategy reflects a
deep understanding of industry economics and dynamics and, by quantifying the potential returns, presents a
compelling case for investment.
3. Building and Sustaining Relationships
How a company approaches the challenge of building and sustaining supplier relationships sets the tone
for long-term cooperation. Setting improvement targets, structuring incentives, and investing in supplier
development all play a role in finding the right balance.
4. Integrating the Supply Web
As companies relationships with suppliers grow ever more complex, the supply chain increasingly resembles
a web. Managing such a complex network becomes even more critical because the cost of an inefficient
supply web can be dramatic. Opportunities for improving the supply web have been a focal point for many
years, but are far from tapped out.
5. Leveraging Supplier Innovation
Companies employ a variety of techniques to manage technology development with suppliers. Setting
aggressive but valid supplier cost targets, for example, drives cost improvement without ruining a cooperative
relationship. In recent years, many companies have shifted their attention from cost reduction to growth,
enhancing their ability to innovate.
6. Evolving a Global Supply Base
Expansion of the supply base outside a home market may be prompted by a desire to find low-cost suppliers
or to support global expansion of the companys operations. Whatever the motivation, the challenges of
purchasing materials and parts from a distant location, currency exposure, and cross-cultural communication
mandate a substantial upgrade in capabilities for most organizations.
These six capabilities still resonate today. However, in addition to the development of procurement
processes and relationships with key suppliers, businesses also need to think about organizational
attributes, technology, and performance management. And the procurement agenda should include the
development of a vision to achieve results that can be measured in the form of profitable operations and
competitive advantage.
Exhibit 2
Best Practice Procurement Process Framework
1. Processes
Procurement process development needs to span the
strategic, tactical, and executional (see Exhibit 2).
Well-defined processes should be driven by the overall company strategy and should bridge the extended
enterprise by connecting customers needs (via the
business units) to the supply base. Strategic processes should be defined by the overall procurement
policy. These processes establish which commodities
will be needed and from whom they should be procured. Tactical processes address product and service
specifications, as well as how much of each commodity will be needed and when. In addition, companies
must determine the types of supplier relationships that
they require and design a plan to achieve those relationships. Executional processes set up the procureto-pay system: how requisitions, purchase orders, and
Exhibit 3
Purchasing Organizational Options
Spend Segmentation: How should commodities be prioritized to reflect the companys strategic priorities?
Roles and Responsibilities: What role should purchasing play for the various commodities (e.g.,
managing the program, driving the agenda)? How and
when should the business units be included in the
sourcing process?
Organizational Alignment: Will a centralized, decentralized, or hybrid structure best meet the organizations
needs? Should any purchasing be outsourced? What
positions should be internal to purchasing and which
functions in other parts of the organization need to
have dotted-line reporting relationships to purchasing? Should purchasing employees be organized by
commodity or by business unit?
Organizational Skill Matrix: What skills does the purchasing organization need to have? What skills are
currently in place? What is the training plan to ramp
up the necessary skills?
Incentive Plans: What incentives does the organization
need to have in place to ensure that the company is
motivated to support the purchasing strategy? How
can employees be rewarded for their contributions?
Exhibit 4
Procurement Performance Management Framework
3. Technology
Companies have multiple tools at their disposal to
enable a successful purchasing strategy. Tools can
help with strategic, tactical, and executional processes
(EDI, electronic auctions, electronic RFPs, online catalogs, e-Sourcing, contract databases); performance
management (supplier scorecards, compliance management); and strategy development (expenditure
analysis, cost modeling). Individual tools might be right
or wrong for any given company. The key is for technology investments to be made as integral components of
the purchasing strategythey cannot be bolted on
as an afterthought. In addition, the company needs to
have a realistic view of how these systems fit into the
overall systems architecture, how much training will be
made available, and what the expected benefits will be,
as well as a realistic view of the extent to which users
will actually employ the technology.
4. Performance Management
To ensure that the processes and organization are
functioning at the highest level, companies should
design performance metrics that provide ownership,
visibility, transparency, and accountability (see Exhibit
4). Metrics need to be robust and explore the management of both internal stakeholders and suppliers. It
is critical that information be timely so that the organization can react to problems quickly before they go
too far. It is also important to understand the drivers
behind performance so that appropriate corrective
action can be taken. For example, a supplier who is
failing to meet stated lead times could be doing so
either because of its own poor performance or because
it chronically receives last-minute orders from the company. These two scenarios would lead to vastly different corrective actions.
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