Techniques, tips and rules for professional buyers, purchasing and supplies management - a strategic approach to buying
Effective purchasing management and professional buying works better
when a good strategic framework exists. Commonly, relationships between
suppliers and customers are driven by personalities, or the needs of the
moment, whereas relationships and purchasing strategy should ideally be based
on a combination of factors reflecting the nature of each purchasing area,
including: risk, complexity, value, the market and basic matters of supply and
demand. This simple article explains some of the principles, techniques and
guidelines for buying, and is provided by Christopher Barrat, a writer on the
subject of professional buying, whose contribution is gratefully
acknowledged.
Bear in mind also that when buying anything you should be aware of
the principles and techniques of effective
negotiation. It is likely that the person selling to you will be using
them, so even if you do not wish to adopt the approach and methods concerned,
it's as well that you be able to recognise the tactics.
1. check you know where your purchase is
positioned
Every buyer wants the maximum choice of compliant suppliers. This is
a rare occurrence. Buying is often involved late, given specifications that are
too tight, or not enough information to allow flexibility. The classic 'power
matrix' always helps to assess how to engage suppliers:
buying relationships matrix
|
low item value, product complexity, buyer
strength |
high item value, product complexity, buyer
strength |
high
market complexity, risk, supplier strength |
Critical yet infrequent
contract negotiations, which is the challenge.
Can be
difficult to attract and maintain priority and attention from suppliers, so
buyers need to find ways to maximise the appeal and interest for
the supplier.
Buyers therefore need to be creative,
pragmatic and adaptable, so as to find ways of increasing the appeal and
priority for the supplier.
The likelihood is that contracts will
be more important than relationships, due to the difficulty in sustaining
senior level interest from the supplier. |
Develop and maintain strategic
alliances or partnerships with sustainable high-quality strategic
suppliers.
Ongoing collaboration and review
are essential.
Relationships are likely to be more
important than contracts.
Multiple relationships between buyer
and seller organizations are likely to be very beneficial, and should be
encouraged and enabled between as many counterpart levels and functions as
necessary to attain mutual understanding of operational issues and
implications for both sides.
Investment in 'coaching' suppliers
to improve their strategic partnering capabilities can be worthwhile. |
low
market complexity, risk, supplier strength |
Often involves 'commoditised'
products and services.
Generally try to automate
arrangements and processes, so as to reduce transaction costs,
variability and amount of time and effort required to maintain supply and
renegotiations.
Establish efficient processes. Minimise
time and activity for both sides. |
Buyers have extensive choice
because of the number of suppliers available and the competition between
them.
Buyers can exercise volume leverage to get the best deals.
More aggressive buying tactics are acceptable and you should
swap between the many undifferentiated yet adequate suppliers. |
The important step is to remember that even if you have little
information, it doesn't actually effect where the real market pressures are. In
other words let the market decide their position, not your lack of knowledge.
2. get involved with your sales people
Buying is a critical function. Despite this for many years it has
been regarded somewhat as a second class citizen in the commercial rankings.
If, as a buyer, you can get involved with your own sales people this will make
a difference. Firstly you could consider running training courses for them.
Secondly see if they can get you to one of their key customers to talk to their
buyers - it establishes good relations and can facilitate product development.
3. segment your
staff
Buying covers a very wide spectrum. Strategic sourcing at one end,
and invoice entering at the other. This is a broad skill set, and not all
buyers can do both. If you want to develop your buyers skills then start by
really checking who is capable, and or willing. Some of your best staff may not
actually want to be developed into strategic relationship managers. If you need
to sell your department better internally - then pick your best presenter to do
this, not simply the buyer who deals with that group.
4. repetition is the key to supplier
measurement
There are probably more supplier measurement processes than there
are suppliers. Everyone is constantly inventing and re-inventing some set of
magic criteria that will measure supplier performance, and now of course the
trend is to make it all 'e-capable' and self managing. Don't get tempted down
this path. All of the processes do basically the same thing - ie., get a series
of aspects of supply and give you some sort of rating on a scale between 'hero'
and 'plonker'. The key to success is to stick with the same simple measure -
and do it over time. It is by definition going to be a relative movement that
you want to see, not an absolute one. Only if you repeat the same process time
and time again is this possible.
5. supplier rationalization -
an ends or a means?
Any self respecting buyer has gone through some sort of supplier
rationalization programme. It probably makes up one of your objectives and
probably has a firm number - eg 'reduce supplier base to 300 suppliers'. Beware
these sorts of targets - why 300? Why not 307 or 289? The issues is that this
target loses sight of the reason for reduction - ie., you want to simplify
processes, increase supplier dependency and therefore reduce costs. However
everyone also knows that if you reduce too far you become locked into certain
suppliers and prices can rise. What is more if you are going to go down an
'e-auction' route your first step may well be to increase the amount of
suppliers. Rather than set an arbitrary number for suppliers, focus on the
outcome - reducing costs - and see if this one particular tool is useful or
not.
6. price versus cost - understanding and calculating actual total
cost
Price is different from cost. The terms are often
interchanged in business, which can lead to confusion in negotiations, and
wrong decisions based on 'false economy'. The key rule is that 'price' is only
one of the elements that makes up 'cost'. There are many other factors to
consider and factor into the overall value judgement, and whether one
proposition or supply arrangement is truly better than another.
actual total cost
price = basic cost of product or
service |
£/$ |
value = cost of quality (including
maintenance, disposal, and costs relating to environmental and corporate social
responsibility factors) |
£/$ |
transaction = cost of acquisition (including
buying resources, effort, time, payment terms, change management, training
related to implementation) |
£/$ |
actual total cost |
£/$ |
The price is the label on the packet, or the basic
price of the product or service, but it is no indication of true value or cost.
For example, a chair has a price tag on it of £10 or $20. The
value however, is related to useable benefits that the chair gives, and
the cost implications of using it for its intended purpose. It may be a very
cheaply-made chair, in which case if its role is just to last one season in a
rented holiday flat and then be thrown away, then that is fine. If however the
chair is required for visitors in the reception of high quality business, then
its style, comfort and durability are important required features, and
therefore form a real part of its value (or not as the case may be). So in this
instance a chair is likely to warrant a relatively high 'price' in order to
provide the necessary value and benefits, which ultimately produce a
significantly lower 'actual total cost' than paying a low price for an inferior
product which fails to perform, endure, give a suitable impression, etc. The
CEO of a potential $20m client who sits in a $20 reception chair might decide
after all that he doesn't want to place his business with a company who put
such a low value on its visitors. What's the actual total cost of the $20 chair
then?...
NB the term 'added value' is used a lot in business
today. Often it is just a smokescreen for a price increase so be aware. To
really add value any feature should have some real and tangible effect
on the longer term use/replacement value/cost of transaction/reputation for the
buyer's business. When confronted with claims of added value, ask, 'exactly
what is the the added value?' By the same token, if you use the term 'added
value' when selling to a buyer, make sure you can demonstrate it.
The cost of the transaction is what it actually
costs your organization to do the deal (and also to review it and renegotiate
it in months and years to come). Costs of transaction are regularly overlooked
- by buyers and sellers alike, and everyone else who thinks that selling and
buying are all about price. For example professional buyers often receive
suggestions from users or staff who say they can buy cheaper copier paper from
their local discount store. They ignore the cost of the transaction -
that to purchase the cheaper paper from a local store involves someone spending
time to go there, with cost of travel, the time to complete and fulfil an
expense claim - all of which mean the cost of the transaction far outweighs any
initially apparent 'price' savings.
Consider also the cost of change, implementation and
training. These are also costs of the transaction, and can be enormous - in
some cases greater than the basic price of the product or service. IT hardware
and software are notable examples where the costs of executing the transaction
through to implementation can produce frightening implications for costs, and
also for process integrity and continuity.
An increasingly relevant factor is 'total cost of
ownership' (TOC or TCO). Total cost of ownership includes all of the
factors above, but will also consider costs of disposal, and
increasingly for all industries, the cost of reputation - for example
the effect that sourcing low priced third-world goods can have on an
organization's reputation - notably its reputation for Corporate Social
Responsibility (CSR).
In summary, whether buying or selling, price is
only a part of the actual total cost. Costs of quality including
maintenance, disposal, CSR (corporate social responsibility) and environmental
factors, and costs of the transaction including buying resources, effort, time,
payment terms, and renegotiations (all largely dictated by the sellers
relationship capabilities) must all be be considered when assessing or
comparing the actual total costs of propositions, products or services.
By Christopher Barrat.