Gene Richter: How to be a leader

By Kathryn Belyea -- Purchasing, 9/7/2000

In Purchasing's August 10 issue, Gene Richter, who retired in March as IBM's vice president of global procurement and chief procurement officer, was asked to discuss "leadership" as defined within the purchasing discipline. In that issue, he especially focused on the importance of developing technical know-how as part of the basics of the purchasing function. Here he further elaborates on what it takes for a purchasing professional to grow into a leader.

Purchasing: Last time you focused on the need to grow technical expertise as part of the basics. In order to go beyond the basics and move into a leadership role, what does a purchasing professional need to aspire to?

Richter: I think in terms of what separates leaders from just doggone good buyers is a consistent, constant insistence on taking a long-term viewpoint in all the decisions that you make and not be tempted to grab a short-term advantage if it's going to put your company at a long-term disadvantage. And sometimes that's very hard to do in the hustle and bustle of modern business and the pressure on each quarter's profit report. But it's really critical. It's very important to maintain a long-term relationship with the supplier and not do some short-term aggressive action that's going to spoil that long-term relationship. Hopefully, every supplier's in it for the long term, and hopefully every buyer and consumer is in it for the long term. People who are going to make it to leadership in procurement will be the ones that insist on that long-term viewpoint. They insist that suppliers do the things necessary to have long-term success with their company, meaning there should be R & D investment. Buyers should insist on that. There should be modern, up-to-date facilities, and buyers should insist on that. If a buyer's company is becoming more global, then he or she needs to get suppliers to start putting plants offshore and become more global as well. If the technology is going in some new direction, your supplier needs to invest in going in that new direction. Don't let the supplier do short-term things that will create long-term disadvantages, and don't let your company do it either.

Purchasing: Could you give an example of the short-term view?

Richter: Say you placed a part with a supplier last year or nine months ago. You might think, "I bet I can get this price lowered if I go do a market test and get some quotes from some low-cost producers somewhere in the world. I know I shook hands and agreed to this price nine months ago, but I can go seize the moment here. I haven't done anything to relax the specification or improve the yield or increase the volume or do any other thing that would legitimately cause a lower price, but I can just go do it." Well, any buyer worth his salt can do that, but you either build an unprofitable situation for the supplier because the only avenue that supplier has to reduce his price is to take it out of profit. This means he can't invest in new plant, new equipment, new technologies, new materials, and so forth. Or, perhaps you've alienated that supplier so that he just has no enthusiasm for doing business with your company in the future. Or you've done both. So, you've grabbed the short-term advantage because you've got 10 cents out of the piece price, but you really have mortgaged your company's future.

Purchasing: Some purchasing pros say it's better to reduce your supply base, build long-term relationships with your suppliers based on trust. Others say it's better to have a lot of suppliers because then you build competition into the procurement process and bring the price down.

Richter: The wise solution is the medium between those two extremes. Having 15 suppliers for something and constantly quoting and requoting and changing suppliers and splintering your volume among a whole bunch of suppliers is a very shortsighted view.

Purchasing: If paring down your supply base is the best approach, what about reverse auctions? Is there a place for them in the procurement process?

Richter: I'm death on all auctions as they might be used in professional buying. I can't think of any product or service so unimportant to your company that you would want open bidding by almost any self-proclaimed supplier. Price becomes critical only after a select group of suppliers have become qualified for quality, delivery and technology.

Purchasing: What if the suppliers have been pre-qualified?

Richter: I guess a reverse auction done only between fully qualified-and almost equal-suppliers would be OK, but I don't think that's what most people mean when they use the term "reverse auction." Also, suppliers are almost never equal in every aspect, and an auction sends a dangerous message that the buyer only cares about price. I think buyers can get as good a price by picking the best potential source from the first set of quotations-based on price, quality, delivery and technology-and then negotiating a better price from that best source before that supplier is officially awarded the business.

And in terms of choosing the right number of suppliers, there's also the other extreme. I know some large corporations use it, but I've always been opposed to it. And that is to find out what supplier is the best in the world of left-handed widgets and put 100% of your business with that supplier. You assume that this supplier is going to respond appropriately without any threat of competition. You assume the supplier is going to keep productivity up and keep up delivery and cost reductions and quality improvements and added capacity when volume spikes up and all the things a good supplier does, with no incentive with regard to competition. Just for being a nice guy. And the supplier probably will do that for a year or two. But by the time you get into year four, five or 10, the guy you made that deal with is long gone. Some new CEO or CFO has come in and says, "This is crazy. I've got the business locked up at company A. Why am I spending all these resources to keep lowering their cost and improving quality? Why am I maintaining this extra capacity in case they have an emergency spike in volume? I'll redeploy those assets to customer B, C or D because I have to win my business there. I'm in constant threat of competition, and if I don't deliver extraordinary performance, I'm not going to keep the business with customer B, C or D. So, although I really like supplier A, and I'll try to take them to dinner once a quarter, I'm really not going to put all these technical and physical assets to work on their business. It's not at risk any more. I'm locked in there, and I'll have a year or two's notice before they do any resourcing because it's such a close relationship."

So I think what you want to do is pare your business down to a very few suppliers. It varies by commodity, but typically you ought to have business split among two to four suppliers so that there's always some competition and an opportunity to bring in a new supplier. Fewer, better, longer-that's a great mantra for a buyer.

And the long-view theme not only applies to the relationship you have with your suppliers. It also applies to the relationship between procurement and the other functions in the company. I mean you should really have a long view toward your relationship with engineering, manufacturing and finance, for example. You should be doing things that build bridges of cooperation between those functions. Some fall into a one upmanship that wins the day, but this creates ill will or animosity that comes back and either haunts you or your successor later on.

It takes two to tango, of course, as the saying goes, and sometimes you're going to run into a person in another function or department that doesn't care about the long view and is doing some very shortsighted things. But if you truly believe in the long view and the long view is the right thing for your company, there are ways to sit down and reason with other departments. In some cases you might have to go to their bosses. But as you get higher in a company or corporation, you tend to have management people that do have a longer viewpoint. So, you can get a good hearing of your grievance if somebody is seizing a short-term advantage and doing something that you feel is going to make life difficult for procurement or make life difficult for the suppliers long term. You have to reason with those people or go to their bosses and reason with their bosses. Sometimes you can find some people that agree with you and temper whatever action has taken place. But the number-one thing is to not do it yourself. Nothing's going to breed short-term one upmanship or a gamesmanship attitude more than if you have it yourself. You're going to get it back in kind. So, don't do it yourself.

And it's sometimes true that at the end of the day you find that you can't work it out, and you've gone to management and you still can't work it out. You're stuck in a company that doesn't care about anything except the next quarter's bottom line. In this case maybe you need to get your resume out there and go somewhere else. Find a place where your business philosophy and their business philosophy are more compatible. That's an absolute last resort, but sometimes people are stuck in that position. Don't be the first to light the match though. We had a saying at IBM-actually a set of principles-and one of those principles was to treat your suppliers and your functional partners in your company with respect until the day they absolutely prove that they don't deserve it. If you treat them with respect, the chances are you'll get respect in return.