This article describes 2 Pitfalls In Purchasing Management, encouraging purchasing and supply management professionals to move these organizational functions toward 2 critical areas of excellence, which are often overlooked.
1. Not thinking strategically about how to add value.
This strategic area includes selling the importance of Purchasing, Procurement, and Supply Management to the C-level (CEO, COO, CFO) executives responsible for strategy involvement. If purchasing cannot prove it is adding value to the organization, the function may face outsourcing or elimination or downsizing. According to the Center for Advanced Purchasing Studies Report on CEOs’/Presidents’ Perceptions of the Purchasing Function, the problems that purchasing has to deal with are these:
- Many firms feel their purchasing and procurement function is not very effective.
- In the eyes of many CEO’s and presidents, purchasing is not a major contributor in most business decision making.
- It follows that there are two possible reasons why the purchasing and supply management profession today does not command higher, value-added respect by an organization’s C-level management:
- Purchasing is actually not adding much value to the bottom line.
- The purchasing department is indeed adding value, but it is not communicating it in a manner readily understood by senior management.
Without knowing what performance measures or metrics to use, how can you help C-level (CEO, COO, CFO) executives understand how the function is adding value? How do you know whether you are doing a good job if you don’t know where you began versus where you are now? Therefore, every purchasing executive should have a set of key metrics or Key Performance Indicators (KPIs) for their organization.
Each metric or KPI should have pre-established targets, which may be subject to change along with the performance evaluation needs of the department. Metric or KPI development is an ongoing process that should be improved continually. It depends heavily on the strategic information available on your computer system as well as data governance issues such as enterprise-wide data naming conventions and standards; data quality, availability, timeliness, latency; and spend management information.
Without KPIs or other established metrics, you will find it challenging to document the data and demonstrate to upper management the improvements purchasing has made-and can make-to the organization’s bottom line.
2. Not using cost-price analytics and techniques.
This requires an understanding of the global economy, such as marketplace infrastructures, supply chain requirements, logistical channels, and total landed costs. Specifically, this area emphasizes the following factors:
- The market determines the selling price.
- Prices fluctuate-both up and down.
- Prices have a tendency to react faster to upward pressures than to downward pressures.
- Downward pressures include lack of customers, vigorous competition, and insufficient total demand.
- The buyer needs to understand the difference between price and cost.
- The knowledge of prices and costs is a powerful tool in negotiations when determining what something “should cost.”
- The buyer must ensure that the prices offered are fair, reasonable, and affordable.
Purchasing management makes significant contributions to the control of vital organizational resources, and the quality of these contributions greatly impacts the organization’s financial condition. Therefore, there should be mutual objectives existing for both finance/accounting and purchasing/procurement, the goal of which is to optimize organizational operations by:
- Minimizing costs
- Maximizing profit or revenue
- Maximizing the value of the organization
Lindsay Chesar is the Editor of the Purchasing & Procurement Center, the leading website providing Purchasing Management resources. This article is part of a comprehensive Purchasing Report, which is the most downloaded Purchasing Report over the web by thousands of purchasing professionals in 27 countries – “7 Star Purchasing”. Get for Free this Purchasing Report here.
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