CEOs to purchasing: No time to 'lighten up'

By James P. Morgan -- Purchasing, 2/22/2001

While giving purchasing professionals greater corporate responsibility, the nation's CEOs are stressing a need for "prudence."

A quick reading of PURCHASING Magazine's latest "hot buttons" survey seems to reflect a top management that is conservative, low key, and concerned about business conditions over the next 12 months or so. In fact, management's message to purchasing is one that emphasizes cost reduction, tight inventory control, greater attention to strategic purchasing/sourcing, greater use of leveraged buying power, and greater emphasis on improving supplier performance.

The survey, sent out to more than 500 purchasing operations-large and small-asked purchasing professionals to name top management's most urgent and persistent demands ("hot buttons") on them right now. What the survey (backed up by more than a score of telephone interviews) uncovered was a mental attitude that would do credit to Fed Chairman Alan Greenspan.

Cost reduction

As a result, even as CEOs are stressing the need to control costs (79% do), they also are emphasizing the need to exercise prudence in setting up cost-reduction targets. Where in the past the word was often to "bargain hard over the prices you pay," top management's message to purchasing this year seems to be closer to "find out why costs are so high and then look for solutions."

This is a message that many purchasing executives seem to be taking to heart. Many, like Bruce Lutel, divisional purchasing manager at Krupp Garlock Co., Danville, Ill., say they are "involving suppliers more in planning as well as cost-savings proposals" and involving them in formal cost-savings programs. Another popular method of achieving cost reduction is cited by Rex Beeney, buyer/material control at KONE Inc., Arkansas City, Kan., who stresses trading volume for better prices. Long term, Beeney appears to be moving toward some restructuring of the supplier base. Meanwhile, a senior buyer at an automobile systems supplier in Troy, Mich., puts his heaviest emphasis on getting established suppliers to take on additional responsibilities and setting higher goals. "For us the big cost reductions are no longer in prices, but the costs that involve design, manufacturing and supply chain decisions."

Sal Orteca, buyer, Invision Radiation Measurements, Solon, Ohio, sums up CEOs' new emphasis on cost reduction versus mandated price cuts by noting the need to change the way companies purchase materials. "We need to become more creative in reducing costs." In his estimation that means "working more closely with our suppliers for more value-added assemblies."

Inventory reduction

Top management's attitude toward inventory also appears to be changing, judging from its instructions to purchasing. Compared to the traditional draconian commands to cut inventory by X%, today's word from on high is closer to "keep them lean, but adequate for sales commitments."

Many in purchasing are reacting to management's inventory message with much greater attention to use of forecasting software and inventory control programs such as MRP. Nicole Kelley, buyer at EFTC , Ottawa, Kan., for instance, puts heavy emphasis on buying to forecasts, limiting schedule fluctuations, and buying only "what's required." On the other hand, Bobbie Kerr, manager, central purchasing, Wellman Thermal System Corp., Shelbyville, Ind., maintains a "constant review of on-hand inventories versus their usages," sourcing additional suppliers for cost effectiveness, and using substitutions of on-hand materials where appropriate.

A fair number of buyers like Bryant Miller of Terex Cranes, Olathe, Kan., are asking suppliers to maintain safety stock as a cushion for schedule changes and increases in production. And Michael Jaffe, quality systems manager at H & HSwiss Machine Products in Hillside, N.J., does an inventory balancing act to maintain an even flow of bar stock for his company "at reasonable pricing [in the face of] extending leadtimes from off-shore mills and reduced inventory at distributors."

Almost to a person, those commenting on the need to reduce inventories express the opinion that inventory decisions are too important to be made solely from an accounting/financial point of view. Many appear to follow the thinking of Kathy Dunlap, purchasing supervisor at Bremson Inc. She puts "heavy concentration on inventory turns," while also reducing reliance on materials forecasts. "Instead," she says, "we react to customer orders and push suppliers to deliver quicker, cheaper."

Development of supply strategies

Perhaps the most encouraging and daunting demand from top management is the strategies hot button. Until very recently, top management often treated purchasing/supply/sourcing as a sort of semi-function. It was the center of much activity, but had little linkage to the corporate operating plan.

This year's survey seems to trace a highly significant change in perspective on the part of many senior managers. Where in the past purchasers were at best considered as implementers of supply strategy, a growing segment of executive management appears to be looking for a degree of buying/sourcing/supply strategizing on the part of the purchasing organization. But while top management appears to be inclined to bestow greater responsibilities to purchasing organizations, it still isn't clear what the responsibility boundaries will look like. In other words, purchasing hasn't won complete authority over sourcing and supply-just a measure of responsibility for its direction.

In any case, many purchasing executives see an invitation from top management to play a more active role in supply chain matters. Some, like Jerry G. Arthur, VP global logistics and sourcing at Dade Behring, Deerfield, Ill., talk of how they have "implemented an aggressive strategic sourcing program" that supports leverage of scale and cost solutions. "This program is well-integrated into our business," says Arthur. Senior Buyer Raymond J. McCarthy at BFGoodrich Aerospace, Vergennes, Vt., talks about reducing his company's supply base in order to open up more dollars to single sources and "identifying expectations when we sign or renew our sub-tier, long-term agreements." Buyers at Boeing's Kent, Wash., facility note the rise in across-the-company meetings and increased efforts to solve business-unit conflicts over supply issues.

Leveraged buying power

If there is one purchasing issue that truly has management's attention these days it's the use of leveraged buying power. In many instances it appears to have replaced "big stick" negotiation as a favorite "hard-nosed buying strategy."

Unfortunately some purchasing executives may well come to rue the use of that "hard-nosed" moniker by top managers. While leveraging often connotes the use of tough tactical maneuvering and tough demands by major customers, most buyers responding to our questioning note that leveraging is considerably more civilized.

Bill Wolf, buyer at Swagelock in Solon, Ohio, for instance, notes leveraging by his company has more to do with greater use of long-term sources of supply. He indicates that a good part of his company's leveraging is accompanied by "closer attention to communicating needs, supplier reviews and measuring performance." The purchasing director for a large New Jersey pharmaceuticals producer notes that while his company has realized targeted savings of between 8% and 10% a year over the past three years through leveraging volume, it has not been at the expense of suppliers. "Many of these holders of long-term agreements aren't the largest in their field, but they usually are the best. And many have earnings statements that tower over their P & Ls of three years ago."

Improved supplier performance

One area where buyers and their bosses seem to be drawing closer is supplier power. Where in the past purchasing professionals often had to defend performance of key suppliers to upper management, a growing number of purchasers say it is becoming fashionable for senior managers to champion supplier power. "It's almost as if they just discovered gold," says a senior buyer for a Chicago electronics firm. "The brass have suddenly discovered that our suppliers can make or break our future."

Meeting top management's demands for improved supplier performance takes many forms. Gene Moravec, procurement specialist, Raytheon Aircraft Co., Wichita, Kan., for instance, runs a program aimed at raising his group's expectations of suppliers. Goals are raising expectations of suppliers in such areas as deliveries to point of use, maintaining stock, consolidating ordering, reducing prices.

Ron Brown, operations manager, ETCO Specialty Products, Girard, Kan., links corporate profitability directly to improved supplier performance. As Brown explains it, "Our company has experienced rapid/continued growth during the past 5-6 years. We expect the accelerated growth of 15%-20% annual growth to continue for at least the next 3-5 years. This growth will not be through acquisition, but greater demand for our products." To support this growth, Brown says he is constantly searching for suppliers "who share our philosophy of exceeding customers' expectations. They must not only share our philosophy, but also have the resources and capabilities to support our growth."

Another purchasing professional who has been busily working at improving supplier performance is Alan Hall, VP purchasing, Fruit of the Loom, Bowling Green, Ky. He has been developing partnership programs with key suppliers addressing cost savings; reducing the supplier base-developing partnerships with remaining suppliers; improving the supply chain by using third-party logistics groups; and early supplier involvement in new projects.

One result of the added attention to supplier performance has been the changing makeup of the supply base. Many purchasing executives, like Gerald R. McDermott, purchasing/operations manager at Durr Automation in Wixom, Mich., now are finding themselves moving further afield in their material buys. Where in the past the preference was to use regional suppliers, e-purchasing tools are making "us global in our purchasing."

How priorities have changed