MEASURES QUESTION!

PRACTICES

PROCUREMENT
PITFALLS By Dave Nelson, Patricia E. Moody, and Jonathan R. Stegner
Is your supply chain running on all

eight cylinders? If the answer is no,
maybe the problem lies in your
procurement practices. There are
ten common supply management
mistakes companies make that
hinder growth and diminish
profitability. Here's some good
advice on how avoid them.
T
here are ten clear pitfalls tbat limit a
supply chain's contribution to profits and
growth. These problem areas also mark
the difference hetween mature organiza-
tions tbat are working on all the right
issues and bringing along the best
resources and tbose operations that are
stuck in a tactical day-to-day grind.
Before jumping into fixing each of these ten problem areas,
however, we recommend that managers perform a quick sur\ey
of their operation's capabilities and become familiar with key
work areas: understand where procurement people are really
spending their time and vvbere tbere ma\ be gaps. Gene
Richter, the former chief procurement officer of IBM, used a
13-question checklist (see sidebar on page 42^ to evaluate pur-
chasing performance and to understand wbat areas are impor-
tant to the group. This checklist helps to highlight questionable

3 8 SLPPI V CMVIV MvN\(;rMrvT Rrvirw • 200'!

 solid contributions, if the expectations for purchasings role in
and problem areas and serves as a great starting point for fur-
ther gap analysis and spend foeus. The checklist raises more the business are low. chances are the results will be the
questions when suppfy management is reviewed, and it same. High expectations produce high results in sports as
should highlight strengths as well as obvious weaknesses. Use well as husiness: the best athletes in sports sucb as tennis
it as a starting point to examine exactly what your company and golf live with their own internal high expectations as well
does In tbe supply chain: where the emphasis is and where as tbe daily responsibility to stay tops in the rankings, and
tbe big dollars are. If your primary area ol responsibility isthey know the effect a bad crowd has on the game. When
engineering or manufacturing, this checklist will he a perfectJimmy Connors and John McEnroe played home matches at
jumping-off place for reviewing supply chain operations. tbe U.S. Open in New York, for example, tbey both raised
These questions are also useful for customer/supplier or engi-tbeir level of game to unexpected heights because the home
neering/procurement teams to use if they want to streamline crowd expected tbem to play hetter than ever—and no one
their processes and if they want to identify and focus on a was disappointed- But when the U.S. Davis Cup team played
few important tasks. hometown favorites like Coran Ivanesevic in Zagreb, Croatia,
they suffered painful losses as the crowd cheered tbeir
Building on Your Strengths missed hits and booed winners. It made the hill that mticb
No purchasing group covers all areas equally well. Harley- steeper and higher to climb. In tennis and goU. mental atti-
Davidson. for instance, works very hard on strategic planning tude counts for more than 90 percent of tbe game; and in
and supplier relationships. .Although Honda's ptirchasing was new and innovative areas like suppiv management, attitude
not strong on computer systems integration, purchasing peo- and respect count just as much.
ple worked well with manual data that was accurate and Low expectations can be especially damaging out in tbe
available. We are sure tbat ever\ group that perlorms a good supjily base. Many suppliers work hard to deliver pertect
management review will find one or two ol the most common quality and on-time performance, hut because of their size or
mistakes made in every supply chain organization. There is clout, they often do not get the respect and appreciation they
not one company that can demonstrate excellent perfor- deserve. It is ironic tbat as outsottrcing places higher and
mance in all areas, and very few companies rank above aver- higher proportions of product value in the hands of small-
age all around. However, if your group has a few and medium-size suppliers, many first-tier operations still
strengths...that are important in your industry, we urge you undervalue second- and third-tier contribtitions.
to build on tbese strengths and see what happens. Tbe ten Second-tier suppliers are often the source of innovation
common mistakes (discussed below) are problem areas that and growth. For first-tier producers in the United States, 80
we sec hlocking the progress of far too many good organiza- percent of the anntial new products are developed and pro-
tions. We think tbat some, if not all ten, of tbem can be duced by second-tier companies. Although these suppliers
addressed immediately in ways tbat will actually change cur- may not represent the largest portion of a corporate spend.
rent performance. Before the cure, however, comes diagnosis their unique conlribtitions make the supply cbain more glob-
and treatment. ally competitive, and tbat value is beyond measure.
Internally, procurement groups can also suffer from low-
1. Low Expectations
Coauthor Nelson calls this mistake "operating at kindergarten
level in a grad school environment," hut the practice of allow- Dave Nelson is vice presidcnl of global supply chuin management
ing purchasing to be an undcrachiever is an expensive at Delphi Corp. Palricia E. Moody is cm author and lonsiilltinl.
approach to global supply management because it underpow- Jonalliun /{. r i.s gen-
ers a vital contributor to corporate profits and growtb. Innovative Sourcing eral director of global supply

HE
Unf^jrtunately, examples of lov\' expectations (and low results) tinindm'mcnt ti( Delphi. This
Solutions That Deliver
in procurement are common. When board of director's repre- article is excerpted irom
sentation, for instance, does not include supply chain man-
Extfaofdinary Results
iheir book Tlte Ittcrettihle

NCREDIBLE
agement at high levels, performance suffers. Decisions tent! Payback: Soiutiotts llnil
to overlook procurement's contributions to profit, and bud- Dvliver ILxiraorilhuiry
gets for staffing and resources in supply management are lim- Hfsutts. Cop\'righ( 2005.

AYBACK
ited. Or when procurement planners' and managers' compen- Published by .\M\C()M
sation is lower than that of managers in other areas, the Iktoks, a dhision o/
message is clear: Procurement is an administrative process Amertt'an Alanagemenf
that makes the wheels turn and keeps the paperwork flowing, .•Vssotiatidfi. ,\euVr>rli, iN'.Y.
but it somehow isnt as professional or important as finance DAVE NELSON L'sed with pemiissiim. .Ail
or marketing. PATRICIA E. MOODY rights reserved. For more
Low expectations make the challenge even more difficult JONATHAN R.STEGNER in/omiation visit www.atna-
because no matter how good an organization is. no matter combooks.org.
bow eager its employees are to do their best and to make

SUPPLY CHAIN MANAGEMENT REVIEW • APRU, 2005 39

 Pitfalls.

ered expectations or unclear objectives. We will talk later competition paid $1.50 and then cleaned and reused the
about what metrics work best to measure sup|)lv chain per- gloves, the iacts hit home—decentralized spend decisions not
Inrniatice, f here is great power in numbers; and continued only encouraged maverick buying but also increased the cost!
high-level purchasing performance and good press through- By switching to a more-sensible buying strategy that included
out the suiipiy base are the fuel for raising low expectations. a single supplier, iewcr varieties of gloves, and better prices,
planners realized immediate savings of 35 percent, or
2. Decentralized Purchasing $490,000. almost hall a million dollars in gloves alone! Even
Decontrali/ed procurement organizational structures were Deere suppliers knew that lack of control hred inefficiencies!
originallv designed to guarantee eontinuotis delivery of plant- ii that type of variance existed for one simple production
speciHc pr{)ducts directly into iactories in order to kvv\i the item, how mtich craziness would Deere find with bigger
lines running at all costs, I lowcver, they are now our biggest items like tires and engine components?
barrier to imfiroved spend management, wbich is a tremen- The isstie ol cost effectiveness is key in anv decentralized
tlous problem in stipply management today. A decentralized operation, but tbere are other problems as well. For suppliers
purchasing structure is one in which [nirchasing offices and tbat may be shipping materials to customers at more than
decision making are not coordinated, su|)plier strategies are one plant, at dilferent prices or specifications, the custoTiier
not linked, volume is not leveraged, relationships exist at low is not showing what Honda calls "same face," which is a tini-
organizational levels, and there are local incentive schemes. form approach to buying and communicating that minimizes
Althiuigh purchasing oiTices arc maintained at the piants or conlusion and saves time. Quality specifications may difier
at divisions, there may be a central procurement iunction as from one ]>lant to another, even from one engineer to anoth-
er. And when the purchasing system
allows product or design prolifera-
High expectations produce high results. tion, or when there is not an integrat-
IF the expectations for purchasing's role in the husiness ed central database to tell the storv\
no one is the wiser. In a growth com-
are low, chances are the results will he the same. pany launching many new products
each year, this is a problem; but in a
wcil that pcriorms a few limited procurement functions. mature industi") that earns predictable revenues on a known
Commodity and cost analysis, quality and material specifica- set of products, it is inexcusably expensive.
tions, negotiations, buying, strategic planning, and expediting
may be conducted at any and all levels and at manv different Curious Incentives to Stay Decentralized
locations in a decentralized organization—and that is the ihe centralization/decentralization decision, however, is
problem, Tbis approach to managing material ilows is a lega- more than a simple choice based on good analysis of the
cy oi the vertical integration model. Although some elements spend, cost benciits, and production demands. There is
oi that model have shifted as outsourcing and other supply strong emotion surrounding the question of whether to
chain flows have moved out, the basic decentralized founda- decentralize^—and how much or how fast—and where there
tion imjirint remains in place in so many corporations that we is emotion, there is usually power or money. These two issues
knov\ it still needs to be addressed at verv' high levels. must be addressed when companies consider hov\' to best
Decentralized operations have a tendency also to put one structure tbe supply management area: cost allocation for a
plant in competition with another for the same suppliers central procurement department and the division or plant
work. J-^ manager's incentive to retain purchasing power.
First, it costs money to maintain a central purchasing
Maverick Buying operation, especially when it is staffed b>- planners who are
What happens to the spend, for instance, in a billion-dollar paid more at central planning than if they were working at
corporation, wben everv' plant maintains its own team of buy- the plant level. Central procurement operations require good
ers tbat orders maintenance and repair operations (MHO) data frorn an integrated purchasing system, and this system
materials independently? Because MRO parts and supplies will probably cost more than smaller plant-level operations,
are ungiamorous. they are usually overlooked when compa- Tbe funding to operate a central system comes from alloca-
nies Iirst attempt cost reductions. However. MRO is one of tions [jlaced on the plants or the division, in essence, the
the easiest opportunity areas starting out. As John Deere dis- plants pay ior planning, negotiating, and buying by a central
covered when a planner studied the company's MRO spend, group that leverages tbe combined size of all the smaller
the result was $1.4 million for 424 difi'crent varieties of plants and divisions, while making buys that ideally should
gloves, all intended t{) be used on the production floor ior work to the advantage of al! parties involved. Therefore, there
basically the same purpose, before being Jiscardcd, When may be a trade-off between the central group's ability to
the glove supplier mentioned to one Deere analyst that i^eere leverage the buy and tbe plant's contribution to the cost of
was paying $7,50 lor a single-use pair of gloves while the the central group,.,.

4 0 S i r p t i C'ir\i\ \ 1 v \ \ G i v i r M M i v \IM1II JOOS .scnir.coiii

"But We're Special, We're Different" material for tbe next one. If purchasing bas the ability to cnn-
A second issue tbat is raised as a quiet objection is often solidate and review bill of material tlata. including supplier
veiled in the "but we're different" argument. When plants are preferenees, specifications, and pricing, tbey will of coiuse
staffed to expedite or pull in materials and to coordinate ship- inevitably catcb redundant parts. Tbey also ma\ see parts
ping scbedules with suppliers—not to negotiate spend agree- tbat bave been "over-spec-ed" (especially if procurement
ments and buy—tbe plant manager or division bead will have engineers get involved), components tbat may be requested
fewer higb-paid professionals reporting to bim or ber. Would at bigber or tigbter tecbnical specifications iban truly
you ratber be in cbarge of production supported by a few required for acceptance price and feature perlornuince.
planners for $80,000 a year or an entire operation staffed at The second organization fallout problem comes when pur-
tbe plant level with buyers, planners, negotiators, expeditors. chasing reports to production or operations. Companies tbat
and purchasing engineers at SI50,000 a year plus manage- still live with tbis model neglect spend management and
ment perks? It's easy to see wby plant and division managers strategle procurement planning in favor of expedites and
will fight a central procurement approach if it means tbeir other tactical short-term activities, A test of tbat trend is to
jobs are narrowed to simply produetion and expediting! review premium freight charges; if tbey are frequent and
Tbe trade-offs between a central and a decentralized bigb, production is using purchasing as a big expedilor rather
structure become clear, bowever, when companies look at tban as a partner in profit creation,
tbe incredible payback opportunities tbat appear wben pur- Wben nonpurcbasing professionals make purcbasing deci-
cbasing is centralized or centrally managed and controlled. It sions—for example, wbetbcr to outsource a critical
is interesting to note tbat Honda is centralized in Nortb part—supply cbain spend or tecbnologv objcclives arc often
America but decentralized globally. It's reasonable to leave overlooked, Tbe grovvtb of the outsourced electronics indus-
expediting and daily material flov^' in the hands of the plants try illustrates this point. Initially, companies like IBM sought
and tbe divisions who are responsible for just-in-time perlor- to outsource difficult or expensive \v'ork to board shops that
manee. But like al! other key functions of the bad gatbered tbe rigbt equipment and expertise to make pro-
business—finance, marketing, and buman resources—pro- duction managers' lives n little easier. Outsourcing made
curement needs to be centralized to le\erage tbe buy. Wben sense because it simplified the lives of manufacturing execu-
just-in-time and excellent supplier quality and delivery per- tives. The decision to outsource was usually made bv' manu-
formance guarantee predictable material flows, it makes even faeturing managers wbo worried less about tbe cost of materi-
more sense to move procurement planning, negotiating, and als and more about tbe availability of supply. Tbe make/buy
buying operations out of the processing plants.... decision was simple because electronics suppliers always
priced their products lower tban wbat original ccjuipment
3. Production Reporting into manufacturers (OEMs) could do tbcmscKcs, and they guar-
Operations or Marketing anteed delivery\ But gradually, tbe financiais started to ttirn
wben significant percentages of corporate spend are out- the otber way as contract suppliers learned more about com-
sourced—in the automotive industry the outsourced percent- ponent prices than tbeir customers. C'ustomcrs lost visibility
age can easily reacb 85 percent of tbe total, in the computer to parts prices. As contract manufacturers took more control
industr)' it is even bigber—it makes good financial sense for of component specifications or deliveries, many of them
all material production and flow functions (in-bouse and out- found ways to make more money on component prices tban
sourced) to report into one responsibility center managed by processing, and tbeir OEM customers lost the ability to man-
procurement. Tbat is where costs and supplier performance age component suppliers well or profitably. A simple decision
can be compared and consolidated, . to outsource production bcadacbcs grew into a blind spot, a
For most companies, tbe idea of manufacturing reporting casb drain that procurement managers find difficult to
to supply management is a radical concept, the very opposite reverse.
of traditional practice. In tbe old prodtiction model, purchas-
ing reports to eitber operations or product marketing: pro- 4. Lack of Good Analytical Tools
curement under this model has limited reacb and limited Even when traditional enterprise resource planning (ERP)
responsibility as a cost center tbat serves production or prod- and other procurement software solutions do not oiler the
uct divisions. This traditional operating structure automati- kind of simple analytics required to identify and realize bigh
cally creates waste in several ways. payback solutions, it is essential for spend management to
First, wben procurement reports into marketing and serves find otber solutions tbat allow good analysis. There arc many
product-marketing divisions, there is a tendency to grow tbe creative solutions, clever ways to get around the lack ol good
parts lists and create overlap and redundancy—a problem data: some solutions are sbort-tenrt, one-time data-gathering
tbat builds complexity. Wben introduction and management and analv'sis projects, while otbers can be tacked on to tbe
of a product portfolio takes precedence over carelu! revievv' of larger procurement or aecounting software. Wbat is essential
the parts lists, it's easy to accumulate obsolete components for profitable spend management is the ability to gather, con-
that were speeified for one product but left out of tbe bill of solidate, manipulate, and analyze procurement information

,sciTir,c'om SUPPLY C n . ^ mM A N . A G H M E M RLVIIIW • APIIII 2("IOS 4 1

 Purchasing Performance Checklist from many sources. The frequency of analysis at
1 . How is procurement organized currently? inininuini should bt' once per quarter.
A. Logistics? Many large organizations with multiple data-
buses find it difficult to consolidate key bill of
B. Production planning and control?
material data. Deere's 'one intern and n spread-
C. Incoming material and component quality? sheet" story offers one solution to the prohlem of
D. Inventory management? missing analytics: Deere wanted to understand
2. What performance metrics are available currently? Are they used bow much steel, vvbat types, and Jt what prices
directly in performance reviews? the eompany was buying all over the world.
3. Who really selects the sources? Management sensed that tbere were opportuni-
ties to leverage the buy and achieve multimillion
A. Procurement? (Central? Regional? Plant?)
dollar savings in steel, as well as in other com-
B. Engineering? modities. Hov\ever. it was impossihic to gather
C. Top management? accurate information from all of Deere's steel
D. It depends on the commodity (cite some examples)? plants around the world. Different Deere huyers
4. Who negotiates the price and other contract terms? operated under different decentralized policies,
so it was hard to obtain the correct information
5. How are make/huy decisions made for:
from each one. The solution was to hire a central
A. Components?
purchasing intern who, over a period of two to
B. Finished products? three months, was able to retrieve accounts
6. What are the major outside sourced part categories, hased on dollars payable data that filled in the gaps. The best
spent? source for actual payment history was, of course,
7. What part categories are most critical from a quality, technology, accounts payable for tracking purcbase orders
and/or delivery standpoint? back to negotiated contract prices, wbicb is
8. Who are the ten most important suppliers? For each, identify:
another checkpoint v\here potential savings usu-
ally lie hidden. Purchasers can review individual
A. The primary country oi manufacturing origin.
contracts or release paperwork, or, as a last
B. The country of headquarters. resort, they may ask the supplier! For a single
C. How often they are visited by procurement people. high-value commodity like steel, data digging to
9. Can your MRP system requirements be: find cost variance or errors is a worthwhile exer-
A. Cross-communicated within the company? cise; trying to capture savings on all commodi-
ties, all the time, however, requires consistent
B. Consolidated into one demand on the supplier?
and fully, centrally integrated data.
C. Consolidated nationally? Globally?
10. What are company policies regarding:
A. Ethics?
5. Supplier Proliferation
Let s think ahout the image of a lean supply
B. Buyer behavior?
base. In [he old manufacturing days, a factory of
C. Supplier behavior? 5,000 to 10,000 workers was a good thing—big-
1 1 . Are there regular, formal processes for communicating with suppliers ger was better. Today, optimum factory size is a
and getting their input? few hundred personnel. And its the same with
A. Periodic surveys? suppliers. In the past, more was better, while
B. Advisory councils? today, lean—in the factory and in the supply
chain—is better.
C. Ombudsman?
Customers cannot effectively manage more
12. What are the averages for the procurement people for: than itOO to 400 key suppliers. Supplier prolifera-
A. Years of education? tion dilutes an organization s focus and elimi-
B. Predominate discipline? nates tbe type of in-depth technology and com-
C. Years with the company? modity intelligence development that is required
D. Years in procurement?
to meet bigh levels of quality and price perfor-
mance. A surplus of suppliers also limits the
13. What delegation of financial authority do the various levels of
number of high-level partnerships that good rela-
procurement have? Does any other function have procurement
tionship btiilders can develop, and it makes sup-
delegation authority?
plier development too expensive to undertake on
Source: R. Gene Richter, former chief procurement officer, IBM Corp., copyright 2001. tJsed by permission.
a large scale. However, we are not recommend-
ing single soureing all commodities—an

42 SLI'I'M tMVIN .\1 W . A C E M t M R I V I F VV • .A I* H 11 2()0S w.scmr.cum

approach that carries great risk, particularly for North continue to obscure bigher level objectives. In a tactical oper-
American operations with global networks. But we do find, in ation, it is difficult to achieve payback without beating up
fact, tbat purcbasing groups that have deliberately reviewed suppliers, which is an aj^proach that cannot be successlully
and narrowed down their supply base to a manageable num- sustained. Suppliers will run lor the nearest exit plan! A tacti-
ber will be able to gather and apply best practices and spend cal focus tends to eat up resources at the plant level, and it
management initiatives much more successfully because tbey sometimes has an impact on central procurement as well, A
are starting from a good position. reasonable approach to the strategic vs, tactical locus is to
Decentralized procurement unfortunately builds supplier escalate emergency or chronic plant procttrement
proliferation, and when organizations want to bring all buying issues—such as bad quality or poor deliveries—to central
and negotiation activities into one cen-
tral point, tbey will need a method to
review and reduce, or rationalize, the
Many suppliers work hard to deliver
supply base at tbe same time. perfect quality and on-time performance,
Sometimes, the supplier historical data
vvill show slightly better performance hut hecause of their size or clout, thev often do not
for one supplier whose price is higher get the respect and appreciation they deserve.
than the others. The value of good per-
formance data is that perlormance/cost trade-of(s will be clear- purchasing where a supplier's overall performance can he
er and easier to see. In terms of payback, focusing develop- reviewed at the contract level. However, when an organiza-
ment resources on a fevi- selected and clearly high-potential tion is mired in daily problems and planning horizons that
suppliers makes more financial sense than scattering attention barely stretch through ieadtime, it is nearly impossible to
over several hundred suppliers of unknown potential. impose strategic work on top of the daily grind.
We think far too many companies still expend dedicated
6. Short-Term, Low-Level Tactical Focus resources on short-term fire fighting, and that imbalance signals
If supply management visibility is high oniy when a hot order either bad supplier selection, poor communications, or very
appears, production is in jeopardy, or the floor screams for unpredictable plant production schedules. All these issues are
premium expedites, then the department's tactical focus will solvable, but they must be addressed at the proper level.

OVERSTOCKED?
OR UNDER-MANAGED?

.scmr.com Hi \ i M 43
Pitfalls

7. Bad Press
We need to learn a lesson from marketing and then use it
everyday. Strategic sourcing needs to speak the language of
management—financiais such as profit and loss (P&L),
expenses, and contributions are ihe buz/words that top man-
agement wants to hear about, the ones tbat purchasing profes-
sionals need to emphasize in all their communications. When
procurement executives do nol make (he clear and direct con-
ruction betv\t'en their contribution to profitability and re\-
enue growth, they relegate themselves to cost areas that
always cr\ for cuts. It's a tough, reactive position to be in.
lo re\erse this bad reputation, procurement professionals
must turn their image around to reflect a positive one of profit
and value creation. Reliance on savings and cost cutting to the
exclusion of growth and Improvement, as botb CiM and
Chrysler learned in the 1990s, creates bad press and loses good
suppliers, which is a difficult trcntl to reverse. Remember tbat
your work is known to both inside press (your peers, top man-
agement, and your people) as well as to outside press
{Purchasing magazine. Supply Mnuigemeiit. Fortune magazine.
and Vie New Ynrk Times). Remember that bad press is difficult
to re\erse. bul no press is a great opportunity to mine. The
information system (MIS) would provide the design and price
information tbat both departments needed. Nearly 20 years
later, bis dream remains unrealized, and one solution has
been to physically co-locate supply management with new-
product engineers.
Botb Honda and Delphi have found tbat establisbing
stronger links between purcbasing and engineering or R&D
earlier in the cycle are critical to optimizing this upfront area
of the supply chain.
Another key systems issue that helps to achieve functional
integration is having a bill-of-materials database accessible to
both areas offering the kind of information tbat engineers as
well as planners and buyers require. Previously, engineering
did Tiot sec contract information, such as pricing, that pur-
chasing worked with. In a robust system environment, how-
ever, all design and pricing information, as well as supplier
performance history, is readily available to all authorized
users. Although new-product development engineers may be
based in Detroit, Tokyo. Berlin, or where\er, planners and
buyers can be located in Hungary or Indonesia. China, or
Mexico—and tbe information still bangs together well,
I

T\lenol jn)isoning case in which President James Burke com- 10. No Supplier Development
municated a strong message that told the vvorld that McNeil (a Perfect perlormancc—zero rejects and perfect on-time deliv-
Johnson & Johnson company) itself had also been hurt and that ery for every part—is achievable at all levels of the supply
the company planned to refill tbe jiipeline with tamper-proof cbain. but it is unusual. Each spring. Honda of America fetes
products sa\ed tbe companj' and established a benchmark For its excellent suppliers witb recognition awards tbat prove
bow to deliver had news well. Burkes good press position put error-free performance is possible. Hut, for every
Jobnson & Johnson in a better recovery position as well, Nippondenso, a multiple award winner, and Jobnson
Controls with its excellent track record, there are dozens of
8. Product Variety and Complexity suppliers who need teehnolog\ and management assistance
Chr\sler discovered in tbe 1980s tbat a Focus on product to reach higher levels. Usually supplier-development engi-
variety carried down to the level of piece parts, nuts and neers are a resource that customers can more easily provide
bolts, and screws could bankrupt the company. than small- and medium-size suppliers, at least to gel started.
Unfortunately, many procurement groups inherit a long line I be range of assists needed by suppliers to aebieve bigb lev-
oF unnecessar\' parts selected generations earlier by indi\ idual els ot quality and performance is long, from quality circles
buyers and engineers. Although these buyers had little idea of and supplier seminars, where new ideas are explored, to
the exact financial impact of their selections, today most SWAT-team rapid-response assistance in emergencies.
planners are aware that eomplexity costs. Supply cbain organizations tbat do not include people who
John Deere's glove story illustrates the pitfalls of unlimited can work with suppliers at tbe plant le\el are missing big sav-
parts proliferation, Theresa Metty. chief procurement officer ings and performance opportunities, Tbe proven payback for
at Motorola, believes tbat parts proliferation and cotTiple.xity is supplier-development personnel is tbree to four times their
one of sourcings biggest challenges. She has launched a "War eost, and this investment is one that is quickly paid back but
on Complexity" tbat emphasizes elimination oF excess parts to most frequently overlooked.
tbe tune of several million dollars. Simplifying, or rationaliz-
ing, the parts list is a long-term solution that has immediate The Fear Factor
payback. If producers want to find immediate cost relief and AH of these ten items require significant change: new poli-
change the Wiiy buyers and engineers work together, reduction cies, new measurements, and new strategies for ever\' com-
oi variety and eomplexity is a great place to start. modity. It seems that even tackling one or two obstacles
hrings up new problems to solve. Tbere are many reasons
9. Purehasing Separate From wby companies naturally encounter resistance to change,
New-Product Development such as fear of job loss, fear of having to learn new proeesses,
When Gent- Ricbter headed up Hewlett-Packard's purcbas- or Fear of having to move to another area. Fear is a powerful
ing group, bis dream was to ba\e "a buyer at ever\' engineer's inhibitor tbat can sometimes serve a useful purpose, but
elbow," and his bope was tbat an integrated management when good companies are attempting to make reasonable

44 SciM'Lv C H A I N MANACEMEM Rtvitvv • APRIL 2005 www.scmr,com

changes using proven methods, fear just gets in the way.
Amazingly, when we describe the "before" and "after"
views of improved supply management operations, espe-
cially in spend management dollars, everyone is energized.
When we relate case examples of real companies, like
Honda, Delphi, and their suppliers, which bave instilled a
culture of continuous improvement and cbange, people
beeome believers.
Yet, despite the promise of better work and bigger oppor-
tunities to come, fear remains. Some statistics from a book by
David Ropeik, director of risk communication at the Harvard
Center for Risk Analysis, highlight the apparent craziness of
acting in fear of change. The list of things we fear is long and
growing—-spiders, snakes, smallpox, anthrax, airplane crash-
es, terrorism, credit card debt. However, tbe odds of dying
before the average age of 80 from unnatural causes are not as
high as we fear. The risk of dying in a plane crash is one in 9
million: being killed by lightning is one in 3 million; dying in
a flood, one in almost 7 million. Our fear of events over
which we have no control, such as airplane crashes, is
stronger tban our fear of problems we ean prevent. One of
the most common and preventable killers, heart disease, has
earned a probability of one in three hundred, yet Americans
are notorious for bad diet and sedentarv lifestvles that
wwu.scmr.com
inevitably cause health problems.'
Fear is a strange motivator. The immediate threat can be
more important thtm tbe imagined and less probable ones.
The lesson for companies and teams contemplating change is
to understand and expect that fear will accompany change.
The best approach is to recognize and acknowledge the resis-
tance and move quickly into realistic and profitable chal-
lenges at hand. Once the first prohlem has been resolved,
team members can move more quiekly to the next one.
Sense of Adventure jp
If you want to pick up big savings fast and more later on. if you
are not satisfied with traditional procurement s predlctahle
yearly price increases of 3 to 7 percent and you are willing to
take on tbe work of major organizational change, then you are
ready to begin The Incredible Payback. If your heroes are pur-
chasing giants like Honda. Delphi, and Toyota—market mak-
ers that return profits through procurement—then you are
ready to begin. You know the old ways won't get you lhere, so
are you ready to make some money? CJGO
Footnotes
^ David Ropeik, Risk: A Practical Guide for Deciding What's Really
Safe and What's Really Dangerous in the World Around You
(Boston: Houghton Miffiin, 2002).
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