Seven-Star Purchasing-- Beyond the World Class Paradigm--CATTAN Whitepaper

8/3/2019 Seven-Star Purchasing-- Beyond the World Class Paradigm--CATTAN Whitepaper

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SEVEN-STAR PURCHASING

BEYOND THE

WORLDCLASS

PARADIGM

By Thomas L. Tanel, C.P.M., CTL ,CCA, CISCM, President & CEO

and Loran K. Boenig, CIPME, COO & Treasurer

2009 CATTAN Services Group, Inc.


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INTRODUCTION

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 someorganizations, 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.

BEYOND THEBUZZWORDS ANDBACK TO THEBASICS

We have observed a fairly disturbing trend: Many organizations are heavily engaged in

reengineering or change management efforts that are focused on best practices, benchmarking,

balanced scorecards, metrics and KPIs, etc. in order to become agile, customer-relationship-

centered, world class entities. Additionally, many young professionals are learning purchasing

based primarily on the use of their organizations resident computer systems and software

rather than learning the basics of the purchase process itself. While these may be useful tools,

they are no substitutes for the logical processes and foundational principles they execute.

Without knowing how and why these tools work, the purchasing professional is reduced to

wooden puppetry, unable to respond with the intelligence and self-directed agility needed to

cope with todays challenging purchasing environment.

Such fad-oriented tools and techniques may be based on good intentions, but they are

undoubtedly of more benefit to the self-labeled gurus, evangelists, masters, and thought leaders

who generate and publicize them. We need to get beyond the buzzwords and back to thebasics. In reality, the purchasing profession, which we call ours, is not a simplistic craft or a job,

nor is it grounded on the latest techno-babble. It is a blend of both art and science. At its best, it

is based on fundamental facts, application of the basics, and good practices rather than on

elusive jargon, formulaic processes, or canned computer software magic. While never losing

sight of its foundation, sound purchasing keeps a skeptical eye on the latest fad, hype, trend, or

new practice before implementing it.

In truth, the concepts of structuring supplier relationships, vendor managed inventory, conflict

resolution, risk management, SOW and specification development, teamwork, total cost of

ownership, and cost targeting are not new ideas. Rather than representing a new paradigm,

they are tried-and-true areas of excellence that have long been driving forces in the purchasing

and supply management field . Sometimes, its easy to get lost in the intricacies of aiming while

losing sight of the target. In an attempt to move to a world class mode, many companies

focus on the technicalities of achieving the paradigm in lieu of achieving the true goal: to master

the basic processes that will produce excellence in the end result.


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Dont be fooled. You may be tempted to make the kind of mistake being made by so many

purchasing and supply management professionals todaythinking 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 forthem. Even more ironically, it is not a computerized system or a fancy buzzword but the well-

grounded purchasing professional who has the flexibility to be truly responsive to an ever-

evolving supply management environment.

So lets get back to rediscovering and perfecting the basics, what we call the Seven-Star

Purchasing Areas of Excellence:

SEVEN-STAR PURCHASINGAREAS OF EXCELLENCE

1. Think strategically about how to add value.2. Encourage training and development of purchasing personnel.3. Use cost-price analytics and techniques.4. Develop structured supplier relationships for your commodity/service group.

5. Advance your communication and negotiation skills.6. Cultivate inbound freight control opportunities.7. Focus on enhancing the contracting process.


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1. Think strategically about how to add value.This strategicarea includes selling the importance of Purchasing, Procurement, and Supply

Management to the C-level (CEO, COO, CFO) executives responsible for strategy

involvement. If purchasing cannot prove it is adding value to the organization, the functionmy face outsourcing or elimination or downsizing. According to the Center for Advanced

Purchasing Studies Report on CEOs/Presidents Perceptions of the Purchasing Function, the

problems that purchasing has to deal with are these:

Many firms feel their purchasing and procurement function is not very effective. In the eyes of many CEOs and presidents, purchasing is not a major contributor in most

business decision making.

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 organizations C-

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 dont know where you began versus where

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 madeand can

maketo the organizations bottom line.

2. Encourage training and development of purchasing personnel.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.


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3. Use cost-price analytics and techniques.This requires an understanding of the global economy, such as marketplace infrastructures,

supply chain requirements, logistical channels, and total landed costs. Specifically, this area

emphasizes the following factors:

The market determines the selling price. Prices fluctuateboth up and down. Prices have a tendency to react faster to upward pressures than to downward pressures. Downward pressures include lack of customers, vigorous competition, and insufficient

total demand.

The buyer needs to understand the difference between price and cost. The knowledge of prices and costs is a powerful tool in negotiations when determining

what something should cost.

The buyer must ensure that the prices offered are fair, reasonable, and affordable.Purchasing management makes significant contributions to the control of vital

organizational resources, and the quality of these contributions greatly impacts theorganizations financial condition. Therefore, there should be mutual objectives existing for

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 organizationPurchasing and procurement can significantly affect the organizations ability to control

costs and thereby improve profitabilitymuch more so than you might expect. For

example, lets assume your organization makes a 5% net profit after taxes. To produce this

level of profitability, lets compare what it would take for purchasing to produce such

results versus the equivalent profitability generated through marketing or sales:

SSAAVVIINNGGSS TTHHRROOUUGGHHPPUURRCCHHAASSIINNGG EEQQUUAALLSSSSAALLEESS OOFF::

$10,000 $200,000

$100,000 $2,000,000

$1,000,000 $20,000,000

Clearly, effective purchasing can have a profound effect on the bottom line. This oftenoverlooked 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, purchasings cost-price

analytics should be employed with even more fervor than ever to eke out elusive

profitability.


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Alliances

Partners

Suppliers/Contractors

Vendors

4. Develop structured supplier relationships for your commodity/service group.Suppliers play a critical role in the success of an

organizations operations. However, different suppliers

require different management techniques. A

stratification of the supply base not only identifiesthe depth of your relationship with the supplier

but assists purchasing and supply management

in utilizing its resources effectively during its

management of the supply base.

Normally, most organizations will

categorize the supply base

relationship into four tiers:

These tiers will formally define the level of your relationship with the supplier, determinetypes and frequency of formal communications, and outline the overall program

management structure. Here is a description of the 4 tier-based system:

VVEENNDDOORRSSSSUUPPPPLLIIEERRSS OORR

CCOONNTTRRAACCTTOORRSSPPAARRTTNNEERRSS AALLLLIIAANNCCEESS

Little or nodifferentiation inproducts or

services

Focus on lowestprice

Transactionalbusiness

relationship

No contractterm commitment

As needed

Spot-typepurchases

Superiorperformance onquality and delivery

Corporatelycontracted but non-

exclusive

Specific, available,off-the-shelf products

or standard type

services

Multi-product/service

offering ability

Trust has to beearned

Seeking longerterm relationship;

usually contracting

for 6 months to a year

Mutuallyadvantageous to bothparties

Boundedrelationship

Focused interactionand significant value-

added

Negotiated formulatype pricing

Established level oftrust

Sharing &exchange of abilities

and ideas

Multi-year contractin place of 1-3 years

or evergreen contract

Mutual dependencebeyond supply &technology

Unboundedopenrelationship

Broader businessoperating arena

Total landed cost Unique

commitments

Joint long-termbroad-based planningfor the most complex of

relationships

Multi-year contractin place of 4-5+ years

SUPPLYBASERELATIONSHIPCRITERIA


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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 organizations purchase spend, which accounts for 10-

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 1Non-critical:Usually, indirect materials and services, standard off-the-shelf items, and MRO-type

items

Category 2Leverage:Usually, components, parts, and raw materials that enter into the composition of the end

product

Category 3Bottleneck:Usually, a one-time purchase of fixed assets, capital equipment, facilities, or technology

Category 4Strategic: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:


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For example, in this Purchase Category Assessment Positioning Grid, you can see, based on

each categorys business impact and each categorys supply market complexity, that

Category 4Strategic 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.

PURCHASECATEGORYASSESSMENT

PPUURRCCHHAASSEECCAATTEEGGOORRYYAASSSSEESSSSMMEENNTTPPOOSSIITTIIOONNIINNGGGGRRIIDD

LEVERAGE

CATEGORY 2

Supplier consolidation

Volume leveraging

STRATEGIC

CATEGORY 4

Strategic relationship

Global sourcing

NON-CRITICAL

CATEGORY 1

Best price evaluation

Volume leveraging

BOTTLENECK

CATEGORY 3

Process improvement

Process redesign

HHIIGGHHCategorys Supply Market Complexity

CategorysBusinessImpact

HHIIGGHH

LLOOWW


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5. Advance your communication and negotiation skills.With so much procurement taking place on a global level, one needs to hone the ability to

negotiate effectively, especially across international boundaries. In short, a cross-cultural

negotiator has to be a good communicator. It may sound obvious, but communicationimpacts everyone and has a profound influence on how we act and respond. It is the way

people create, send, process, and interpret information.

Once negotiators establish cross cultural rapport, barriers disappear, trust grows, and an

exchange of information follows. This means negotiators must be aware of:

Their own culture The recipients culture The expectations surrounding the situation at handTo function successfully in a variegated worldreflecting multi-national, multi-ethnic,

multi-environment, and multi-functional factorsyou should strive to be as comfortabledoing 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 toachieve 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:

THENEGOTIATION PROCESS

6. Cultivate inbound freight control opportunities.Management of the inbound freight function is one of the most overlooked areas for

significant cost reduction. Some estimates rate inbound freight costs as high as 35% of the

total logistics cost for many companies. Remember that any savings in inbound freight

costs can go directly to the bottom line. Most successful organizations who have paid

attention to inbound freight view inbound freight management as controlling their

inventory in transit.

Since your inventory is, in many cases, your largest asset, the management of this asset is

critical to your business success. The proper management of this function plays a key role

in achieving supply management inventory, productivity, and service goals. Inbound

freight involves the management and control of freight from domestic and offshoresuppliers, consolidation of vendor shipments, direct (drop) shipments to customers,

multiple shipping points, and warehouse cross dock opportunities for replenishment and

backorder processing.

Effectively controlling the inbound flow of materials/product to your organization is a

complicated process, and it is becoming more complex as customer demands increase in

terms of their expectations of service levels. As you begin to analyze your inbound freight

practices, you should establish objectives that will help guide your decision making process.

Objectives can be established in the following areas; among others:

Reduced freight costs and improved bottom line Improvement in on-time deliveries Reduction in purchasing lead times Fewer handlings and less damage Lower inventory levels and reduced carrying costs Providing maximum visibility into the receiving process Improvement in warehouse productivity Increased customer service


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7. Focus on enhancing the contracting process.Sometimes the most difficult part of the contracting process is knowing when you truly

have a contract and when you do not. There are a number of quasi-contractual situations

that have caught many purchasing professionals off guard and cost their organizations

dearly. Conducting the contracting process across international boundaries can complicatematters further.

For example, the UN Convention for International Sale of Goods (CISG) permits all types of

evidence, including that developed prior to, during, and subsequent to the formation of the

contract. Sometimes, international parties in a negotiation may be motivated to take your

discussions as offers. Under the CISG, there is no provision for preventing assertions that

contracts have been concluded solely on the basis of oral statements. The message to

purchasers is to maintain more copious records of all negotiations with international

suppliers in order to be able to come forth with complete evidence if called upon to interpret

a contract under the CISG. To avoid committing yourself, especially in international

settings, follow these guidelines:

Document your conversations. Conclude conversations with, You, of course, recognize that we do not have a contract

until .

Send a follow-up letter, facsimile, or e-mail that sets forth the precise status of yournegotiations.

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 topurchase 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

the correct time, the solicitation process can suffer timing setbacks, miscommunicated terms,


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and even the need for complete redefinitionall of which adversely affect the desired end

result.

Here is a snapshot way to determine what RFX formats to use in certain sourcing

conditions:

RFXFORMATS&SOURCING FACTORSCONDITIONS

SOURCING FACTOR

CONDITIONSRRFFII RRFFQQ RRFFBB//IIFFBB//IIFFTT RRFFPP

DEFINABLE OR

AVAILABLE

SPECIFICATIONS

ORREQUIREMENTS

Known and

unknown

Known off-the-

shelf goods and

standard services

Known goods and

services

Unknown detail,

providing the

what and why

AVAILABILITY OF

SUPPLIER

CAPABILITY OR

COMPETITIVE

SUPPLIERBASE

Known &

unknown;depends on

preferred or

approved supplier

lists

Known, usually

qualified supplierlist

Known &

unknown,depends on

preferred or

approved supplier

lists

Known, if RFI has

been used

USER OR INTERNAL

CUSTOMER

COLLABORATION

Encouraged by

early purchasing

involvement

Completed, off the

shelf goods or

standard type

services

Usually completed Required through

early purchasing

interaction

LEVEL OF SUPPLIER

COLLABORATION

OR

COMMERCIALLY

ATTRACTIVE

Encouraged by

early supplier orvendor

involvement

Completed since it

is commerciallyattractive

Completed since it

is commerciallyattractive

Required through

supplier andvendor value

proposition

analysis

NEED FOR

DETAILED PRICING

INFORMATION

No, but standard

pricing acceptable

Yes, based on

trade

custom/practice

Yes, based on your

bid/tender

guidelines

Yes or no,

according to RFP

format

POTENTIAL

SAVINGS

OPPORTUNITIES

Low potential Low potential, but

possibly

negotiable

It depends if

sealed bid or

subject to BAFO

Very high,

depending on

spend category

INHERENT

SOURCING RISKLow risk Low to medium

riskMedium risk,more so if sole

source

High risk


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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 todays litigious and competitive business world it is also important for contracts to

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 toolsAnd lets not forget that the primary purpose of a contract is to obtain goods or serviceson

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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WHYSEVEN-STARPURCHASINGMAKES SENSE FORYOURIGHTNOW

CPO Priorities, a report by Aberdeen Research Group, shows a marked acceleration in the

significance of procurement's current role. Although it remains the extreme exception for

procurement to be considered the leading competency of an enterprise, 89% of the surveyrespondents indicated that the procurement function has grown more strategic over the past

three years. Procurement's continued stride forward is also evidenced by the fact that nearly a

fifth of all Chief Purchasing/Procurement Officers (CPOs) now report directly to the president

or CEO of their organization. More than ever before, purchasing managers are seen as needing

an increasing array of tools and best practices that can be leveraged to reduce costs and

increase procurement effectiveness.

According to another new study sponsored by KPMG International,Beyond Purchasing: Next

Steps for the Procurement Profession, procurement management has taken on an increasingly

strategic and important role at many companies, but in many respects still has a long way to go

to reach maximum performance. The report, based on surveys of nearly 600 companyexecutives from across the globe, was conducted by the Economist Intelligence Unit. A full 74%

of respondents consider purchasing/procurement performance to be either high or very

high on the corporate priority listperhaps not surprising in a period of rapidly rising

commodity-related costs, but also undoubtedly reflective of a growing appreciation for the role

that purchasing/procurement can play in improving the supply chain and bottom line.

Why is this important to you? As we move into a new era of great expectations for the

purchasing and supply management executive, each of the Seven-Star Purchasing Areas of

Excellence will represent areas that need to be handledand handled wellby tomorrow's

purchasing and supply management functions. Keeping up with the fads simply wont keep

you competitive: Perfecting the basics will.

Please note that the Seven-Star Purchasing Areas of Excellence presented in this whitepaper

are prescriptive rather than diagnostic. Our goal is to provide you with a catalyst for ongoing

discussion about identifying your top improvement opportunities. With a plethora of

distracting tips, techniques, and technologies competing for your attention, its all too easy to

overlook the less glamorous fundamentals, those that may be considered pass but will

nevertheless provide you with the surest foundation for achieving purchasing excellence and

corporate profitability. Amid the critical challenges, talent shortages, tightening constraints,

cloudy strategies, and ever-increasing pace of todays purchasing environment, we urge you to

focus first on what is vital. Acquiring skills relating to the Seven-Star Purchasing Areas of

Excellenceand being able to use them with agilitywill ultimately yield the greatest possibleROI for you and your organization.


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ABOUTUS

CATTANSERVICESGROUP,INC.

CATTAN is a consulting and training firm specializing in

supply chain management. Our success is based primarily on

the high level functional expertise of our staff. We offer our

clients value through a very unique combination of advanced

degrees and certifications as well as line, staff, and consulting

experience, thereby providing a unique blend of theoretical

values mixed with firing line, hands-on experience to ensure

bottom-line results. We are also dedicated to bringing you

the highest quality executive management and professional

development educational programs available, staying abreast

of leading edge trends and best practices for those processes,

systems, methodologies, and technologies that can have aprofound impact on the supply and demand chain as it

applies to your operation. Simply put, we practice what we

teach. To find out more about how we can be of assistance,

contact us at www.cattan.com.

Seven-Star Purchasing-- Beyond the World Class Paradigm--CATTAN Whitepaper

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