Strategic purchasing will turn buyer-
supplier confrontation into cooperation
By Karl-Heinz Sebastian and Ralph Niederdrenk
Karl Heinz Sebastian is a partner and Ralph Niederdrenk is a consultant with Simon-Kucher & Partners Strategy and Marketing Consultants, Bonn, Germany, and Cambridge, Mass.
As production becomes streamlined and marketing reaches new levels of intensity, purchasing has becoming more important as source of earnings. But today it's not enough to concentrate on the suppliers with the lowest prices.
Simon-Kucher conducted an international investigation of purchasing management to shed light on developments resulting from continued pressure to cut product costs, and ist effect on cooperation between mangagers and suppliers. Several trends are emerging:
New roles for buyers and sellers. Purchasing and selling are undergoing a transition. Traditionally, sellers emphasized the advantages of a product or service to obtain a higher price, while buyers - armed with comparitive price lists - tried to keep the purchase prices as low as possible. A competitor's lower price often forced the seller to lower the price of his or her product.
In order to improve earnings protential for both sides, cooperation and mutual dependence will be key. The future roles of buyers and sellers will be communications specialist, project manager, team leader, and consultant, according to the National Association of Purchsing Managers.
Single-sourcing. Convinced that a smaller number of suppliers pays off in productivity and cost advantages, companies will try to work with fewer suppliers. For example, Swedish appliance company Electrolux implemented the ''Minus 50 %'' program to achieve lower costs, quality assurance, and shorter processing times by trimming ist number of suppliers by half.
A reduction like this does not mean that half of the companies suppliers will simply disappear, but rather that their positions along the supply chain will change. Suppliers will deliver to bigger ''system suppliers'' who will pool various products and services and then deliver them to the largest companies.
Suppliers that offer customers comprehensive volume, price, and technology guarantees will come out ahead. The customer in a single-sourcing arrangement, however, will have difficulty switching suppliers, leading to a reduction of price pressures during negotiations.
Decision-making teams A working relationship between customers and suppliers will be less of a bilateral arrangement and more of a multifunctional process.
Teams of decision-makers will determine technical, logistical, and commercial requirements for the working relationship. In the team context, existing and conflicting goals of procurement (costs), production (availability), and development (quality), should be clear for everyone.
Selection of key suppliers in this process is critical. A supplier must enter resolutely into the new working relationship and be willing to embark on new forms of cooperation thay may demand upfront, but ultimately will be more efficient.
Global-sourcing Global-sourcing is the worldwide integration of suppliers into system partnerships, when a majority of purchases occur in areas that share a language or culture.
In our investigation, we found that companies would like to optimize costs and quality via worldwide bidding and supplier evaluations, consolidation of purchasing volumes, global price agreements, and an ability to fall back on worldwide logistic and service systems.
There were also concerned with the inherent risks of global-sourcing, such as meeting deadlines, currency fluctuations, and varying standards of quality. A global information system that tracks the availability of price, volume, and logistical information is essential for coordinating efforts between customer and supplier. This is why most companies are only starting to use global sourcing.
Strengthening earnings power through productivity. Duplication of effort is costly; lasting cost reductionsare achieved by optimizing business process between supplier and customer. Customers should expect a predetermined, annual productivity gain from their suppliers. ''We don't look for the cheapest supplier'', said Chrysler's Bob Lutz. ''Instead, we work together with selected parts producers to find joint savings opportunities. This increases supplier motivation and guarantees quality."
Strategic purchasing tips
- Identify and select strategic customers for integration. This step requires the further development of the age-old categorization of customers into A, B, and C. Customers volumes, prices, and willingness to integrate are not the only factors which play a role. The critical factor is the capability and willingness of both sides to adopt a single-sourcing strategy.
- Replace prevailing bilateral technical and economic agreements with team decisions. All parties must understand their new roles and tasks within the team framework. Resulting reorientation and training requirements will be extensive, but they are critical to the effort's successes.
- Reorganize the sales function. Under this reorganization, the team approach takes the place of key account management. Sales-people need to become process managers with a thorough understanding of the technical and economic interrelationships of markets and products.
- Develop a global information and communications system that lives up to the demands of automated business relationships.
- Work out long-term business agreements that ensure mutual guarantees, obligations, and accountability. Built-in flexibility based on a system of indicators that guide pricing is a particulary important part of such agreements.
- by Karl-Heinz Sebastian and Ralph Niederdrenk
Reprinted with permission from the AMERICAN MARKETING ASSOCIATION (http://www.ama.org).
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