Inventing the 21st-century Purchasing Organization
To get the most out of the purchasing function, top-performing companies redefine its role and ensure that its goals align with corporate strategy.
November 2007 | by Jack Kuhlman
A decade of globalization-fueled competition has opened the eyes of executives everywhere to the strategic benefits that can be achieved through the intelligent use of purchasing and supply management. These include more competitive supply chains, improved product development, and faster times to market—in addition to the significant cost advantages associated with sourcing from low-cost countries. Often, however, evolution in the way executives think about purchasing hasn’t translated into results. A dearth of talent derails the improvement efforts of many companies, while others suffer from a misalignment between purchasing and the broader company strategy or from low or misguided aspirations.
Our global survey of chief procurement officers (CPOs) suggests that the role of purchasing at many companies hasn’t evolved much beyond the function’s narrow, transactional roots as a buyer of materials, components, and services. But some purchasing and supply-management organizations are attracting the attention of CEOs by taking the function to the next level. By integrating their activities more closely with those of their internal customers, some purchasing units have gained sustainable cost reductions in nontraditional areas (marketing or health benefits, for example) where previous optimization efforts have fizzled. Others go further still, using their insights to challenge and enhance manufacturing or administration activities. Finally, some use purchasing as a springboard for innovation, leveraging a broader supply base of tangible and intangible goods to enhance product-development efforts.
While no single company we’ve studied has reached its full potential in purchasing and supply management, a look at the practices of high performers can shed light on what it will take to get there. First, top purchasers adopt a more rigorous approach to talent by simultaneously upgrading their procurement skills and exploring clever ways to connect employees across the organization in a common purpose. Second, these companies set high aspirations and establish goals that balance their vision of the future with a clear-eyed focus on how to achieve it. Finally, top purchasers place a special emphasis on aligning their sourcing efforts more closely with corporate strategic goals, making more of today’s cost-savings opportunities while positioning themselves for greater gains as globalization intensifies. These pioneering organizations are laying the foundation for a better approach to procurement—an approach that average performers shouldn’t ignore.
Align Purchasing with Strategy
As the mobile-telecom company’s experience suggests, once high-performing sourcing groups establish a track record of value creation and become collaborative peers within an organization, they can begin to realize their broader strategic potential. This new role must be codified by the CPO and other senior managers and communicated throughout the company so that the responsibilities and decision rights of the group are understood and embraced by the business units. Of course, the details of the sourcing unit’s new responsibilities will vary with the company’s strategic aims—for instance, is the company pursuing innovation-led growth or outsourcing its manufacturing to compete with low-cost competitors? The answer to such questions will determine how purchasers identify, manage, and interact with suppliers.
Once the sourcing group’s mandate is clear, CPOs can actively engage with other senior executives in the early stages of strategic-planning activities to properly align purchasing with company strategy—and begin applying sourcing expertise in a variety of circumstances.
Finally, given a high-performing sourcing unit’s role as a bridge connecting different groups within the company, it can even support organizational change. A few companies are making major strides in creating a better approach to procurement. By emulating these practices, other companies might begin the process of transforming their purchasing organizations from mere corporate buyers into a powerful, competitive weapon, which adds value far beyond cost savings.