By Paul Ericksen | Industry Week
In my last article I pointed out possible downsides to consolidating control of original equipment manufacturer (OEM) purchasing into a corporate group. The message there wasn’t meant to be that setting up a centralized supply management function is a mistake. Rather, it was that in supply management there are few, if any, clear-cut issues and centralization of procurement authority is certainly not one of them. In this follow-up to that previous article I’ll give my take on how a corporate supply management group can best be positioned for the highest positive overall organizational impact.
I should start by pointing out that centralized corporate supply management functions are typically justified through a promise of significant “quick hit” savings. While such savings windfalls may be available, they usually represent significantly fewer dollars than most corporate officers would like to believe. Why? Because they are based on the presumption that most, if not all, product categories can be managed as commodities.
Hopefully through reading this column you’ve come to understand that the number of products appropriately labeled commodities is fairly limited and, while leveraging non-commodity products may yield lower piece prices (at least in the short run), it will also likely result in an overall higher total cost when factory operations are taken into account. Because of this, the only way across-the-board quick hit savings are generally available is if existing factory purchasing departments are incompetent. In my experience this is seldom the case.
Let’s assume for this discussion, then, that the OEM in question is comprised of multiple factories whose procurement functions have for the most part operated independently. Also, that if a corporate supply management group existed, it played a relatively minor role in overall procurement.
In my mind the first step to setting up an effective corporate supply management function is to call upon a valuable resource that exists in all companies but is seldom acknowledged or even recognized—namely factory materials managers. In particular, I’m talking about the old-timers whose career track included stints in areas like production, quality, systems, purchasing and even design. The most effective materials managers I’ve known have at one time or another been buyers. Why are these individuals so valuable? Because their broad hands-on experience gives them a gut-level appreciation of local factory nuances that contribute to factory operational effectiveness such that they understand the role purchasing-related factors other than piece price play in total cost.
So, to take advantage of this existing savvy the first thing I’d do is spend face-time with each material manager to gain an understanding of local challenges and how they have been managed. I’d also want to get their take on those areas where a corporate supply function could facilitate improved factory results. Why? Because factory competitiveness generally drives company financial success, meaning that the top priority of a corporate purchasing function should be to help factories operate more effectively. My discussions with the current materials managers would touch on several issues, including:
Understanding the metrics each factory uses in evaluating procurement effectiveness.
It should be a corporate function to help materials managers educate their factory management on how procurement’s impact can most accurately be measured. A goal of any corporate supply management function should be to identify a common set of performance metrics to allow comparison of purchasing performance between factories. At the same time it needs to be recognized that individual factories may need additional unique performance metrics based on differences in the products they produce or the markets they serve.
Getting a handle on existing factory “spends” and supplier management strategies.
This will facilitate establishment of a set of product categories that can legitimately be considered commodities, i.e., available for corporate leverage. It will also help define those non-commodity products used by multiple factories that present opportunities for economies of scale. Finally, it will provide a basis for determining which factories should assume positions of leadership in working with specific non-commodity suppliers. Bottom-line, factories must agree on what should be managed as enterprise commodities. Even with this agreement, however, local needs must be recognized, defined and accommodated.