Purchasing managers are sure to be challenged by a number oI diIIerent problems over the next

couple oI years, but according to consulting Iirm Ernst & Young, pricing pressures and attracting
the right talent will rank right at the top oI the list. Following close behind is a widespread
concern with the procurement Iunction's ability to manage change eIIectively in the current
economic environment.

The Iirm recently asked 257 senior executives around the world to discuss what Iactors they Ieel
will have the biggest impact on the procurement Iunction in their organizations. A "downward
pressure on prices" was cited by 33 oI respondents, while 26 agree that "price Iluctuations oI
critical commodities and services" is among the top issues likely to impact their business. Also
Iinishing high on the list oI concerns is the "requirement to change existing operating models"
(28) and the "growing complexity oI global supply chains" (27).

But while downward pressure on prices is viewed as critical, it comes at a time when there is
consistent and accelerating upward pressure on input costs, says Adrian Edwards, the Iirm's
global head oI supply chain and procurement. "Collectively, these issues create a signiIicant
barrier to companies achieving sustainable high perIormance," Edwards explains. "To respond to
these challenges, companies must be able to manage complex transIormation programs."

The ability to deliver against the major issues Iacing the organizations is severely constrained,
with 20 oI organizations not conIident that their sourcing Iunction has the ability to eIIectively
manage change arising Irom price Iluctuations, and the same, too, Ior downward pressures on
prices.

Despite the low conIidence in dealing with pricing pressures, "controlling and containing costs"
(52 oI respondents) and "driving EBITDA growth" (37) are the top two initiatives that will
be a priority Ior the sourcing Iunction over the next two years. In Iact, 77 oI respondents
believe in its ability to deliver shareholder value in terms oI bottom-line cost reduction.

"There is a clear paradox here. However, the scope oI the |procurement| Iunction is expected to
grow considerably... playing a Iar more signiIicant role across the whole organization," Edwards
adds. "The barrier to tackling these issues lies in the complexity oI the current operating models,
which only 49 oI respondents are conIident they will be able to manage eIIectively."

Attracting and retaining talent is the second-biggest issue, cited by 30 oI respondents, to
impact sourcing Iunctions in the next two years. In Iact, it is also the second biggest barrier to
managing change, cited by 39 oI respondents, just behind the complexity oI the operating
models (40). Only 11 oI respondents are conIident in being able to attract and retain the
required talent.
"The high demand Ior skilled procurement experts and the challenges they will Iace are only
likely to increase with the growth oI globalization and cost pressures," says Edwards. "Securing
this talent with diIIerentiated compensation packages and a clear development strategy will be
crucial."

The return on investment Irom the procurement Iunction can be considerable, and it can be an
opportunity to create real diIIerentiation, according to Edwards. But success in the current
economic environment will depend on an organization's ability to complete a Iew
straightIorward, albeit increasingly diIIicult tasks.

"|Success| relies on the redeIinition oI global operating models and optimizing business
processes," he says. "And those that are successIul |will| have the ability to create a wider
perIormance gap against their peers, helping to achieve competitive advantage in the process."
Solutions for Common Purchasing Challenges
By Katrina C. Arabe
Suggestions on handling the shared purchasing problems oI supplier relationship management,
pricing issues and product quality.
Purchasing departments across industry experience similar dilemmas oI establishing and
maintaining proIitable supplier relationships, conIronting the problem oI price increases, and
ensuring supply quality. What Iollows is a review oI the most common purchasing concerns
along with strategies some companies have employed to lessen their impact.
Managers oIten voice the concern that their supplier relationships seem "unbalanced" and
involve too much emotional attachment. There can be too much end-user resistance to changes in
supplier selection or there can simply be too much oI a proximity between the purchaser and
supplier. Purchasers should establish strong objectives and hold suppliers accountable Ior
perIormance and delivery levels. They should also apply the same objectives to the supplier
selection process, and shouldn't be aIraid to maintain a proIessional, saIe distance Irom their
suppliers. Alliance perIormance should be periodically measured to determine whether or not the
supplier relationship is beneIicial Irom both a cost and time perspective.
Another reoccurring concern is how to best handle price Iluctuation in the supply base. One
solution is to initiate earlier supplier involvement in product development. Keeping suppliers in
the loop Irom the beginning, and leveraging their expertise will help purchasers Iorecast price
increases with greater accuracy. Buyers are recommended to bring suppliers on-site Iull time.
This opens up the opportunity Ior deeper levels oI collaboration with suppliers that can result in
cost deductions, better service and less downtime.
ikewise, buyers should communicate demand Iorecasts to the supplier, which helps reduce
lead-time. In addition, it is a good idea to track lead times and request acknowledgements within
a speciIied time Irame. Purchasers should demand veriIication oI all acknowledgements within
48 hours.
Purchasers also need to pressure suppliers to keep prices low when the cost oI raw materials
decreases. Purchasers can better do this by keeping their own tabs on the raw materials market.
PerIorming a cost-analysis oI materials, labor, overhead and proIit is also highly recommended.
The inIormation acquired through this analysis is a useIul tool in leveraging Iuture costs with
suppliers, oItentimes resulting in savings oI up to 15 on goods sold.
It can be expected that suppliers will pass on any increased cost oI raw materials in the Iorm oI
higher prices to the purchasers. Purchasers can ready themselves Ior these increases by
establishing long-term supply agreements, especially Ior products that are purchased Irequently.
Buyers should also seek to leverage purchases across the corporation by developing agreements
Ior commonly purchased parts. They can do this by using commodity teams to centralize
supplier selection. It is also a recommended practice to separate purchasing contracts Ior service
parts.
Another area oI concern is how to best ensure the quality oI a supplier's products. By issuing test
certiIicates Ior raw materials, purchasing departments are provided with a means oI leveraging
supplier accountability, since buyers put exactly what they expect in writing. II suppliers don't
comply, disciplinary measures should be taken. II a lack oI standards remains a consistent
problem, the purchasing department should consider Iinding a new supplier.
Other practices that have proven eIIective Ior purchasers include, setting up e-procurement
systems, implementing strategic sourcing, and conducting comprehensive reviews oI the supply
chain process. Today's e-procurement technology helps purchasing departments order, track and
manage supply purchases over the Internet. Strategic sourcing reduces the total cost oI purchases
through a structural approach that leverages the combined purchasing power and practices oI all
business units in the company. Reviewing the supply chain means Iorming cross-Iunctional
teams to determine business needs and creating a supply wish list that can be pursued in unison
with the suppliers.
Another dilemma arises when purchasers know they must trim their supplier pool but need to be
sure that they're keeping the right one. In these cases purchasers should begin an extensive
review as soon as they know their supplier base must be reduced. By measuring supplier
perIormance over a period oI time, they can get a better handle on the suppliers who are worth
keeping. A slightly less common scenario is how to handle suppliers that know they're the
purchaser's sole source. This potentially costly situation can be deIused by keeping the supplier
close at hand. A close working relationship entails advising the sole source supplier oI
production schedules and Iorecasts and providing them with blanket orders with the intent oI
avoiding Iuture shortages.
For almost every purchasing dilemma there is a plan that can be employed to solve the problem.
At the very least, there is an optimum way oI approaching the situation. When enacted correctly
the strategies mentioned here give purchasing departments a proIound advantage in getting
control oI their supplier relationships, leveraging supply costs and ensuring the quality oI the
products they purchase. In today's economy where only streamlined and eIIicient companies
survive, purchasing departments should settle Ior nothing less.
Sources: Three Major Problems that Plague Purchasers and How to Rid Them Supplier Selection
& Management Report, January 2001