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This whitepaper describes Seven-Star Purchasing: Beyond the World Class Paradigm, encouraging purchasing and supply management professionals to move these organizational functions toward seven critical areas of excellence. Though we recognize that some organizations, including public sector, governmental agencies, notforprofit institutions, and nongovernmental agencies, are bound by unique regulatory and legislative requirements, they nevertheless can profit by some of the approaches proposed here.
Don be fooled. You may be tempted to make the kind of mistake being made by so many t purchasing and supply management professionals today thinking that the more traditional purchasing skills they have honed in the past are no longer needed. Ironically, forgetting the basics can make them more vulnerable to purchasing cut-backs, job attrition, or downsizing efforts in organizations that increasingly rely on automated systems to do their thinking for them. Even more ironically, it is not a computerized system or a fancy buzzword but the wellgrounded purchasing professional who has the flexibility to be truly responsive to an everevolving supply management environment. So let get back to rediscovering and perfecting the basics, what we call the Seven-Star s Purchasing Areas of Excellence:
It follows that there are two possible reasons why the purchasing and supply management profession today does not command higher, value-added respect by an organization Cs level management: Purchasing is actually not adding much value to the bottom line. The purchasing department is indeed adding value, but it is not communicating it in a manner readily understood by senior management.
Without knowing what performance measures or metrics to use, how can you help C-level (CEO, COO, CFO) executives understand how the function is adding value? How do you know whether you are doing a good job if you don know where you began versus where t you are now? Therefore, every purchasing executive should have a set of key metrics or Key Performance Indicators (KPIs) for their organization. Each metric or KPI should have pre-established targets, which may be subject to change along with the performance evaluation needs of the department. Metric or KPI development is an ongoing process that should be improved continually. It depends heavily on the strategic information available on your computer system as well as data governance issues such as enterprise-wide data naming conventions and standards; data quality, availability, timeliness, latency; and spend management information. Without KPIs or other established metrics, you will find it challenging to document the data and demonstrate to upper management the improvements purchasing has made and can make to the organization bottom line. s
2. Encourage personnel.
training
and
development
of
purchasing
Purchasing executives must be a combination of talent scout and mentor, with a passion for seeking out raw talent and developing it into strong, qualified, well trained, functional personnel. Such development should cover core supply chain content knowledge and process skills as well as the interpersonal skills needed to operate in a cross-functional team environment. As the profession becomes more and more sophisticated and environmental change accelerates, the need for personal professional development becomes proportionally important. Training purchasing professionals, however, needs to be smart training the type of development that focuses first on making sure professionals are comfortable with the basics before tackling the esoteric. There are many avenues for acquiring essential skills: via public seminars offered through trade associations, universities, or professional seminar providers; through customized corporate in-house training; and/or through focused topics presented in webinars or elearning forums. Some of this training can even build toward certification in specific areas, which enhances your company profile and makes the purchasing professional more s indispensible to the organization. As a people-oriented function, purchasing professionals need development in these three primary skill sets:
Successful purchasing organizations are increasingly aware that they must put an end to silo buying and begin to form and utilize cross-functional teams. In order to increase coordination, internal linkages, communication, resource utilization, focus, efficiency, creativity, and overall effectiveness, cross-functional teams must be trained and developed to assist in guiding the purchasing process. Finally, with supply management becoming more complex daily, it also important for s professionals to go beyond the scope of their own functional areas to explore the complete supply chain and its interrelated components. Training provides a venue for such exploration.
Purchasing management makes significant contributions to the control of vital organizational resources, and the quality of these contributions greatly impacts the organization financial condition. Therefore, there should be mutual objectives existing for s both finance/accounting and purchasing/procurement, the goal of which is to optimize organizational operations by: Minimizing costs Maximizing profit or revenue Maximizing the value of the organization
Purchasing and procurement can significantly affect the organization ability to control s costs and thereby improve profitability much more so than you might expect. For example, let assume your organization makes a 5% net profit after taxes. To produce this s level of profitability, let compare what it would take for purchasing to produce such s results versus the equivalent profitability generated through marketing or sales:
Clearly, effective purchasing can have a profound effect on the bottom line. This often overlooked source of profitability is ripe for exploration by many companies who have long emphasized their sales as the primary vehicle for fiscal strength. With the current state of the economy and its negative ramifications in the marketplace, purchasing cost-price s analytics should be employed with even more fervor than ever to eke out elusive profitability.
Alliances Partners
Suppliers/Contractors Vendors
These tiers will formally define the level of your relationship with the supplier, determine types and frequency of formal communications, and outline the overall program management structure. Here is a description of the 4 tier-based system:
SUPPLIERS OR CONTRACTORS
Superior performance on quality and delivery Corporately contracted but nonexclusive Specific, available, off-the-shelf products or standard type services Multi-product/service offering ability Trust has to be earned Seeking longer term relationship; usually contracting for 6 months to a year
PARTNERS
Mutually advantageous to both parties Bounded relationship Focused interaction and significant valueadded Negotiated formula type pricing Established level of trust Sharing & exchange of abilities and ideas Multi-year contract in place of 1-3 years or evergreen contract
ALLIANCES
Mutual dependence beyond supply & technology Unbounded open relationship Broader business operating arena Total landed cost Unique commitments Joint long-term broadbased planning for the most complex of relationships Multi-year contract in place of 4-5+ years
To achieve excellence in this area effectively, most organizations have gone through a strategic sourcing program that allows them to focus on their most important structured supplier relationships. A good rule of thumb is that approximately 5-20% of your supplier base will account for 70-85% of your organization purchase spend, which accounts for 10s 25% of the materials and services that you procure on an annual basis. Strategic sourcing is itself a benchmark. It relates to getting the best products and services at the best value and lowest overall cost. It is designed to segment external spend and ensure that procurement resources are focused on the most important sourcing purchase categories. What sets strategic sourcing apart is its continuous attention to improving and re-evaluating the purchasing activities of a company, thus enabling organizations to adapt to changing market forces. The structuring of supplier relationships also depends on the sourcing group strategy chosen. The first step is to place your types of sourcing into strategic categories: Category 1 Non-critical: Usually, indirect materials and services, standard off-the-shelf items, and MRO-type items Category 2 Leverage: Usually, components, parts, and raw materials that enter into the composition of the end product Category 3 Bottleneck: Usually, a one-time purchase of fixed assets, capital equipment, facilities, or technology Category 4 Strategic: Usually, high spend-type services like security, travel, maintenance, transportation, engineering, etc.
Remember that supply market characteristics and commodity/service importance can drive your procurement strategies as well as being a strategic component used to drive maximum organizational competitive advantage. The following model can help you visualize what type of impact these purchasing categories can have on your business in relation to market complexity and can assist you in procuring specific goods and services:
HIGH
STRATEGIC CATEGORY 4
Strategic relationship Global sourcing
CATEGORY 2
Supplier consolidation Volume leveraging
NON-CRITICAL CATEGORY 1
Best price evaluation Volume leveraging
BOTTLENECK CATEGORY 3
Process improvement Process redesign
HIGH
LOW
For example, in this Purchase Category Assessment Positioning Grid, you can see, based on each category business impact and each category supply market complexity, that s s Category 4 Strategic should be your highest priority. Therefore, using the purchasing strategic relationships of alliance or partnering in conjunction with global sourcing, you will be most apt to achieve purchasing excellence for your organization. Applying this logic to the remainder of the grid should help you determine progressively those areas that demand your attention most.
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To function successfully in a variegated world reflecting multi-national, multi-ethnic, multi-environment, and multi-functional factors you should strive to be as comfortable doing business internationally with your global colleagues as you are at home. Even the most successful native negotiator will need to keep abreast of ever-evolving cultural influences as he inevitably ventures into the realm of foreign negotiations. The study of paralanguage (also known as paralinguistics), which focuses on the verbal aspect of communication, opens up the most direct avenue of understanding other cultures which may have been elusive to us in the past. Beyond paralanguage, studies also show that we are more comfortable with certain cultures and have an easier time establishing rapport there than we do in less familiar cultures. Those cultures that are more difficult will require the negotiator to work harder to establish rapport so that barriers disappear, trust grows, and an exchange of information flows freely. It is therefore essential to become aware of key cultural variables that can affect the communication process, thereby influencing perceptions during the negotiation process. Negotiation can be considered a very specialized form of communication. More specifically, it is: A specialized process of communication called bargaining A mutual discussion and arrangement of the terms of a transaction or agreement The use of argumentation and persuasion to resolve issues in a business arrangement An attempt to find a win-win solution which will maximize the interest of both parties The application of facts and logic supported by the strengths of a bargaining position to achieve valid and necessary business objectives A give-and-get situation, where the purpose is to exchange a material, item, product, or service for monies or value in order to reach agreement
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The successful negotiator deals most effectively when he/she has identified his/her strongest points and uses them strategically. Here is the essence of the negotiation process:
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The concept and design stage for your internal customer involves the introduction and specification design of a product or a service project SOW, or it can involve an improvement or modification made to an existing product or ongoing service. It is during this stage when purchasing has the most impact on reducing costs. There are plenty of acronyms to go around in the contracting process, and choosing the right tool for the task at hand often proves perplexing to even seasoned purchasing professionals. RFX, for example, is one of the most common acronyms in strategic sourcing and procurement. It is a fill-in-the-blank type of reference. The RF represents Request For and the X is just a placeholder for I, P, B, and/or Q. In other words, RFX is a term that captures all references to RFI, RFP, RFQ, or RFB. The RFX process, for example, includes Request for Information (RFI), Invitation for Bid (IFB), Invitation for Tender (IFT), Request for Bid (RFB), Request for Quote or Quotation (RFQ), and Request for Proposal (RFP). Their purpose is to provide a solicitation platform for a purchaser to gather information from suppliers in various manners that will allow them to make educated decisions on whom to purchase from, which products or services to buy, and under what terms. The goal of an effective RFX process is to deliver the greatest value to your organization through a course of action that provides a true and solid means of obtaining information from your supplier. It is a means of assembling all the information required to arrive at a well-grounded conclusion. Without the ability to select and apply the correct RFX tool at Contact Us for A Free 30 Mins Consultation at info@purchasing-procurement-center.com 14
the correct time, the solicitation process can suffer timing setbacks, miscommunicated terms, and even the need for complete redefinition all of which adversely affect the desired end result. Here is a snapshot way to determine what RFX formats to use in certain sourcing conditions:
R FI
Known and unknown
R FQ
Known off-theshelf goods and standard services Known, usually qualified supplier list
RFB/IFB/IFT
Known goods and services
R FP
Unknown detail, providing the what and why Known, if RFI has been used
Known & unknown; depends on preferred or approved supplier lists Encouraged by early purchasing involvement Encouraged by early supplier or vendor involvement No, but standard pricing acceptable Low potential
Known & unknown, depends on preferred or approved supplier lists Usually completed
Completed, off the shelf goods or standard type services Completed since it is commercially attractive
Required through early purchasing interaction Required through supplier and vendor value proposition analysis Yes or no, according to RFP format Very high, depending on spend category High risk
Yes, based on trade custom/practice Low potential, but possibly negotiable Low to medium risk
Yes, based on your bid/tender guidelines It depends if sealed bid or subject to BAFO Medium risk, more so if sole source
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Though each type of RFX has a unique function and place in the solicitation process, it is amazing how few purchasing professionals know when and how to apply them accurately. So one of the first challenges to achieving excellence is learning how to make the most of these tools in the appropriate context. Your sophisticated suppliers will know the difference, and so should you! In today litigious and competitive business world it is also important for contracts to s reflect accurately the rights and obligations of the parties. Increasingly, purchasing departments and purchasing professionals are being held responsible for assuring that appropriate language is included in contracts to ensure that the purchaser obtains the goods and services desired at a fair price and their interests are appropriately protected. Why have contracts? To obtain needed goods and services on schedule To create a meaningful relationship between parties Agreements define rights and obligations Breaches have legal consequences To create a lasting relationship between parties Contracts are documents that memorialize agreement about the relationship They enable separation of formation and performance Contracts are risk management tools
And let not forget that the primary purpose of a contract is to obtain goods or services on s schedule. As such, the most constructive way to resolve contractual difficulties is through the negotiation process. To create sound contracts, though, purchasing personnel have to go beyond the negotiation process. They cannot rely on busy legal staff to review all their actions; rather, they must understand the laws and business environments relating to the contract and know when to seek additional legal advice. Purchasing provides the most value when it anticipates events and mitigates loss and risk. When negotiating contracts, the parties try to anticipate likely and unlikely situations that may arise and provide for their solutions. When this fails, parties often resort to formal dispute resolution methods such as litigation or arbitration. It is therefore critical for purchasing personnel to become actively involved in avoiding contractual problems and resolving legal and business disagreements early in the process, limiting or eliminating the subsequent need to resort to formal dispute resolution or claims in a court of law. Essentially, as a purchasing professional, your role in creating contracts is twofold: 1. Make sure that what the internal customer or user wants is in the contract. 2. Make sure that the contract contains the necessary clauses for the type of purchase at hand.
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PURCHASING & PROCUREMENT CENTER
The Purchasing & Procurement Center provides comprehensive information for Purchasing & Procurement Professionals. Within its scope the Purchasing & Procurement Center ensures that you get all your needs covered through web based information, Reports & White Papers, and more importantly thru personal assignments of in-house trainings, consultations etc. You can contact us at info@purchasingprocurement-center.com for a Free 30 Minutes Consultation of your purchasing & procurement needs.
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