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Purchasing works with logistics to improve cost, quality and supply.
By David Hannon -- Purchasing, 7/15/2004 2:00:00 AM
Current trends in purchasing and supply chain management strategy are driving logistics and purchasing organizations to collaborate much more closely in many industries and companies. Issues such as streamlined inventory models, overseas manufacturing and sourcing, higher freight costs and tighter capacity in many markets are driving buyers and logistics managers to work together on calculating the most cost-efficient supply decisions.
Dennis Gawlik, a supply chain industry veteran and managing director of procurement at Alaska Air Lines in Seattle, says the trend of increased collaboration between purchasing and logistics started with the deregulation of the transportation industry in the 1980s, but took off as cost pressures increased in recent years.
"The basic nature of the industry changed and cost pressures increased, driving the system to be more efficient," Gawlik says. "So instead of having silos in the organization for purchasing and logistics, there is a need for increased cooperation and a systematic viewpoint."
A recent Purchasing magazine survey found that two-thirds of purchasing professionals polled are collaborating more closely with their logistics organizations on a daily basis. Sandra Ruit, purchasing supervisor at Boston Scientific in Wayne, N.J., says she is working more closely with logistics to set up more efficient inventory management systems to reduce inventory levels at the medical device maker.
A similar percentage (66%) of survey respondents say their purchasing organization is taking more control of logistics decisions within their companies by sourcing more of the freight spend, evaluating logistics services providers and evaluating new material suppliers based on logistics costs.
Jennifer Hendricks, purchasing specialist at Watchguard Technologies in Seattle, has been working closely with the logistics organization at her company on preparing a bid for freight forwarding services. She says the company's warehouse manager used to handle these duties until last year when more of its production moved off-shore and shipment times needed to be more consistent.
"I've been working with logistics on interviewing freight forwarders and getting bids together," says Hendricks. "But when a problem arises with our current freight forwarder, the warehouse manager still handles the problem and contacts the freight forwarder directly."
Customs clearance and shipment visibility are also areas where buyers report closer interaction with logistics counterparts. "Purchasing and logistics are working together on new systems to provide more efficient visibility of material in transit," reports a buyer at a medical device maker.
Purchasing professionals say collaboration between the two organizations is being driven both by top-down corporate directives as well as from ground-level initiatives (or a combination of the two). Gawlik says the collaboration usually starts with a high-level mandate to reduce costs and/or increase efficiency, which gets passed down to a senior operations person like a COO and then comes to the logistics or purchasing organization.
Jeff Kriegel, a purchasing manager at Daymark Food Safety Systems in Bowling Green, Ohio says the efforts to collaborate in his company were "ground-level at first, but corporate has seen what we can do and they are pushing our efforts even further."
Rates drive cooperation
Spiraling freight rates are resulting in a more watchful eye over freight spending decisions, which brings purchasing into the logistics fray more often. Larry Gabbei, a purchasing manager at Indianapolis-based Deflecto Corp., says for the past two years his company—like many companies—has been increasing its overseas supply base. To better coordinate these moves, there is a weekly meeting between purchasing and logistics to discuss the status of inbound containers and current lead times for inbound materials from overseas. "Logistics now has to be involved in these decisions due to the increased cost of shipping from the Far East," says Gabbei.
John Dalling, a senior supplier administrator for Fresenius Medical Care in Ogden, Utah says the trend of increased collaboration between purchasing and logistics is a new one at his company and that until about a year ago, there was very little interface between the two groups. Logistics had done things their own way without any purchasing input or recommendation for many years, using a carrier base developed more out of habit than strategy. But with a new emphasis on supplier management within purchasing, logistics began to evaluate its carriers with a new eye.
"[The strategy] changed because of two main reasons: the increasing cost of transportation, and a change to personnel who believed in a more synergistic approach to the issues," Dalling says. "Today, both groups discuss the best options rather than taking independent courses. Logistics and purchasing began working together, instead of ignoring each other. [Potential carriers] are not reviewed on price alone, but on their ability to communicate issues and be proactive in resolving problems, with more of a total cost approach."
John Delgrosso, director of materials management at Cornerstone Nutritional Labs in Utah, says an initiative to gain better understanding of both inbound and outbound freight expenses brought the logistics and purchasing organizations together. "It originally began as a ground-level initiative but has grown to receive the support of corporate executives," he says.
The logistics processes at packaging maker Cello-Foil Products in Battle Creek, Mich. changed when it leased its first off-site warehouse, which required more collaboration between purchasing and logistics. Since then, the move to more offshore suppliers has led to even closer interaction between the organizations.
"More of our raw materials are coming from offshore, and with limited warehouse space we need to work together to maintain a continuous flow of materials and keep inventories down," says Rick Blanchard, purchasing manager at Cello-Foil. "We drafted a new purchasing agreement with all production material suppliers to include advance shipping notices. We also required all inbound shipments to have dock appointments which had not been necessary except for outbound shipping prior to our off-site warehouse."
An even bigger issue came with offshore suppliers that did not have U.S.-based warehouses. Blanchard says an even greater communication between purchasing and logistics was required to track those inbound shipments and evaluate suppliers based on transit times and their ability to meet the requirements of the purchasing expectations agreement.
"Without the continuous communication and tracking of these expectations we would be constantly fighting for information and dealing with the dissatisfaction of our internal customers," says Blanchard.
Proactive vision
Quaker Chemical of Conshohocken, Pa., has an initiative in place called "Proactive Purchasing" that focuses on evaluating and reducing the total cost of getting raw materials into its manufacturing facilities when evaluating suppliers. The initiative targets three key areas: piece price (which includes any savings or costs associated with the supply), carrying cost of inventories, and any freight savings associated with the supply source, such as consolidating LTL to truckload, gaining inventory credits or deductions based on carrying more or less inventory.
To drive the new initiative, Quaker created an entirely new nine-person organization called Supply Chain Development (SCD), which was organized and headed up by Chip Purcell, director of global purchasing and supply chain at Quaker. The SCD organization is a cross-disciplinary team of operations professionals with backgrounds in supply chain, traffic, global raw material vendor management, finance, local purchasing and manufacturing. Together, these professionals can provide a much broader perspective on the plusses and minuses of specific supply decisions.
In establishing the new cross-disciplinary organization, Purcell says he tried to benchmark against companies in other industries, but had trouble finding any that were this closely integrated, proving how recent the trend is.
"Five years ago these two organizations were just meeting each other," Purcell says. "Purchasing was done at the plant or regional level. We moved it all to regional, then globalized it. Then we standardized things and got faster information access and started to make some global contracts. We started to see opportunities in logistics as we moved things back and forth and made currency decisions. That was one of the reasons for the creation of this group."
Purcell says what he quickly learned in undertaking this project was how much he didn't know about transportation. The second lesson was that every purchased item has its own story and there isn't a single overall strategy.
To start off, the first major initiative of the new organization is the streamlining of in-bound supply, which started with a detailed review of the advantages of modal shifts for cost savings. "We ask if we can buy the things we now buy in truck in rail quantities?" says Purcell. "And we ask if there is any rail we can move to barge? Or can we cross-dock for savings in certain geographies?"
There is also a review of consolidation possibilities for packed goods both at the supplier level or the regional level. For example, with a high percentage of its raw materials coming out of South Carolina and North Carolina and another zone in the New York, New Jersey and Connecticut region, Quaker's new organization is looking into coordinating regional purchasing to consolidate purchases in those areas to create full truckloads and eliminate more costly LTL shipments.
"We can do that at the supplier level too," says Purcell. "We have one supplier that has warehouses in Detroit, Ohio and in South Carolina. We're trying to figure out how to buy best to eliminate some of the double or triple handling that goes on in those situations. By buying with fewer orders and larger quantities, we may take a penalty on our inventory but we'll overcome that with savings on the freight. So as long as the net result shows an advantage, we'll pursue these kind of options."
The last piece that has proven to be the most difficult for SCD is the "bulk match," where Quaker tries to marry inbound and outbound bulk loads for more efficient use of carriers. But the strategy is more than just trying to make round-trips within a certain mode—it again means evaluating different modes where practical for net savings because there may be a shipment going the other direction in that lane in the same mode.
"We might consider taking a shipment off rail and putting it onto truck if it makes sense in that lane because we have a purchased shipment going the other direction in that lane on a truck. So the greater savings will outweigh the increased cost on the inbound move from rail to truck."
The SCD group still works closely with Quaker's existing purchasing and logistics organizations, which Purcell considers his peers. For example, global sourcing is another major focus area for SCD but with a strong Euro and weak dollar, Quaker is getting hit hard on its European production that is sent to China. To minimize the impact, the company is looking to offload more into China and researching sources of materials in China. Purcell's group works collaboratively with the existing purchasing and logistics organization to find new solutions to these issues.
New old world
The cooperation between purchasing and logistics is growing within some supply chains, but it has been essential within others for many years. The two organizations have worked closely (both operationally and physically) at Welch's of Concord, Mass. for a number of years.
William Coyne, director of purchasing and logistics at Welch's, says one example of that cooperation comes in the form of its purchasing transaction summary sheet, which helps the company ensure that it has competitive bids that compare price as well as fully landed costs on every purchase.
"One of the reviews that's done on each purchase is a logistics review to determine if we should be using our outbound carriers to haul the inbound load we're buying," says Coyne. "That kind of cooperation is so routine here, it is almost invisible to me. We're all sitting in the same area and working together so if a supplier has trouble making on-time deliveries of a purchased item, our buyers and planners just naturally talk to the logistics people in the next office about it."
Another reason that purchasing and logistics have worked together within Welch's over the years has been the company's materials flow philosophy. Coyne says Welch's was using JIT inventory "before it was ever called JIT" by having suppliers dropping off packaging supplies daily for the next day's use.
"That's a longstanding tradition within Welch's," he says. "Most of our suppliers are located close to our plants and we have strong relationships between suppliers and plant production. And there's not a lot of space in our plants so it is a natural idea to have the suppliers hold more inventory close."
Welch's is now working on developing a more precise method of evaluating supplier performance and plans to use its existing program for logistics carrier report cards as a model. Welch's logistics organization holds a carrier conference every year to discuss performance and business awards. Carriers are measured for on-time delivery and other objective measures as well as two subjective metrics to gauge their cooperation and flexibility.
"We review their performance and tell them that as we grow, we'll be awarding more business to the carriers at the top of the list and those at the bottom will see their business declining," Coyne says.
Future visions
The future of the supply chain organization may rest in the level of collaboration between purchasing and logistics. Currently, there are few companies combining the two organizations. Only 9% of survey respondents said they see new positions being created with overall responsibility for both purchasing and logistics today. But Gawlik sees two scenarios emerging in the future. First, the movement away from a vice president of logistics towards a "chief supply chain officer" in an organization looks imminent.
"I believe that position will be more strategic in its approach, be more software-intensive and head a highly flexible operation that will adapt better to daily events," says Gawlik. He also says buyers can expect to see a separate group dedicated to evaluating the carriers and providers in the logistics marketplace.
"We've had carrier changes with more 3PLs/4PLs, and we've seen more customs brokers and the providers are changing what they are and what they do," he says. "You need an organization that knows who offers what and how it can help your company. By doing that, you can become more proactive and less reactive to industry trends."
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