During a walk to one of our many daily meetings (at a company where I was serving as interim chief purchasing officer) our CFO asked me how we could improve our financials in the procurement area. The budget was under pressure and the forecast needed added upside to make up for recent problems and the real probability of more issues to come — a not uncommon issue for any company faced with constant external, internal, and competitive pressures.
Like many companies, a large percentage of costs at this one was related to purchased goods and services. Typically, about 60% of costs go toward purchased components, with the remainder going to value add, overhead, and other items necessary to run a successful enterprise. Reducing the costs of purchased components provides dollar for dollar improvement to any company’s financials.
That effect, combined with purchased components as the largest single element of overall costs, is why fine-tuning purchasing should always be at the top of the list for examination when financials need a boost.
After our brief conversation in the hall, I spent some time examining the ins and outs of the company’s purchasing division. My entire focus at that time was on purchasing, and I was always on the lookout for ways to reduce costs. This time, however, I looked beyond the Purchase Price Variance (PPV) report, cost reduction performance, and material cost percentages. Instead, I started to really look at the daily activities of the purchasing department. What was purchasing actually doing during their eight-to-12 hours per day in the office? They were always very busy with purchase orders, attending meetings, making phone calls, and a host of other purchasing tasks essential to properly supporting an organization. Then it occurred to me: It wasn’t what they were doing when they were in the office. Rather, it was, what are they doing in the office?
The next day I walked into the CFO’s office and said, “We need to show some of our buyers the door!” He looked up and said, “Really? So, how many buyers do we let go and what type of SG&A savings can we expect?”
I paused and then restated my original assertion. “Let me rephrase that: We need all of our buyers to travel to see their suppliers and our other locations. Put simply, we need them to literally hit the road.” As such, I explained, we would also need to spend a little more money on travel in order to save much more in the long run on purchased products.
The CFO was, initially, less than impressed. But I implored him to think about what informational resources our buyers currently possessed. They had at their disposal supplier quotes; information provided by suppliers over the phone; internal production data; and product-demand forecasts. Yet besides comparing data sets and metrics, on what were they basing final purchasing decisions? Most importantly, from where were we generating potential cost saving ideas?
If our buyers were never going out to see products being made first-hand, a number of very important questions could not be answered: How could they accurately assess the amount of labor the supplier was quoting? How could they possibly work to develop product lines and methods aimed at significantly reducing labor costs? How could they know whether one supplier was better in quality than another? How could they know all there was to know about the goods or services they were purchasing?
Most CFOs assume their buyers are conducting business in a manner which provides value to the company. But my own due diligence – including many conversations I’ve had with buyers who routinely visited their suppliers – told me the status quo was not the way to go. Rather, regular purchasing visits with suppliers, when managed and handled properly, drove true value.
As I next contemplated how best to improve our purchasing methods, I discovered three basic roadblocks to buyers spending more face-to-face time with their suppliers:
- Management must recognize and appreciate the potential benefits and be willing to mobilize buyers to visit their suppliers. If there is not buy-in at the top, it simply will not happen.
- Many buyers do not have significant technical or manufacturing backgrounds. As such, they often don’t feel adequately equipped or qualified to go out to see a supplier. Many organizations also employ processes which support visits from quality or production personnel but not from purchasing. Such issues must be resolved. One simple solution is to have the buyer hit the field along with a more technical colleague.
- Buyers often have little to no time to leave the office and visit suppliers. There is entirely too much work to be done. This, in fact, is a significant roadblock for virtually every purchasing department I have ever worked within. The root cause of the lack of time is that purchasing is entirely too reactive. They spend most of their days reacting to issues. There is always a fire to put out; a last-minute purchase order that needs to be issued or expedited; or some other crisis to be handled.
Managing Time Management
Let’s examine time management more closely. In every purchasing management position I have ever held, I begin the engagement by asking the buyers how reactive vs. proactive they are during their daily activities. Typically, buyers spend roughly 70% of their day reacting. So, how do we go about changing that dynamic? We can start by acknowledging that the job is not entirely under their control and, from there, gradually work toward decreasing the reactive posture of the buyers, moving instead to a more proactive stance.
Yet how, exactly, do we shift from a dominantly short-term, problem-solving posture to a long-term, money-saving modus operandi?
The move from reactive to proactive starts with a simple list. At the end of each day, ask your buyers to write down five things they want to get done the next day that do not constitute putting out fires. Then monitor how many of the items on their lists are actually accomplished.
Some days it will be zero, and other days they will be able to check items off of their list. The key to success with this method isn’t the actual list. The success lies in the buyers proactively planning some of their actions in advance and then feeling – and experiencing – that they have at least some control over their day.
This control provides a powerful motivation to further decrease the reactive nature of the department, as team members see the time benefits of employing more active control. By controlling a portion of their day, buyers start to find time for other things: time they can use to get on the road to see suppliers, accomplish their jobs more completely, and save their company money. To be sure, minutes saved can translate into many pennies earned.
Christopher Good is a managing director with Conway MacKenzie, a financial and operational management consulting firm based in Birmingham, Mich.