The cutting edge of buying power: Purchasing is thrusting its way to the top of the corporate agenda. Roger Trapp reports

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The Independent Online
A PURCHASING manager at a chemical company was in the middle of important negotiations with a supplier, when he left the room to find out just which flight the supplier intended to take. Armed with the news that it was the last departure on a Friday night, he delayed serious discussion of the deal until a few hours before - and so was able to encourage his adversary to make concessions that he might not have otherwise.

This tale is typical of the 'purchasing heroics' associated with an approach to the discipline that focuses on closing the deal. But in common with much similar behaviour, it is not as effective as it may appear to the protagonists.

According to Mark Keough, a principal in the London office of McKinsey & Co, the management consultants, tactics can play an important role, but the extent to which they influence the outcome is limited.

Mr Keough, who recounts the chemical company tale in an article in the latest issue of McKinsey Quarterly, believes 'the real leverage is upstream from the negotiating process'. Decisions about design and specification, whether to make or buy the material and such matters as size and frequency of shipment, can have an impact equivalent to 30 or 50 per cent - even more if the need for a material can be eliminated through an alternative product design.

The focus on negotiating tactics is just one of the factors that he feels has contributed to purchasing being commonly regarded as a 'management backwater'.

Among the others are a lack of proper information - most companies do not know what they really spend on outside goods and services - weak administration, which causes even senior personnel to spend considerable amounts of time dealing with crises; lack of good performance measures; and low status - purchasing is often low in the organisational hierarchy and reports to key departments such as operations, which can reduce its independence by challenging decisions.

But while purchasing managers are often still paid less than their counterparts in other functions and are rarely promoted into general management, things are apparently changing. 'Purchasing is thrusting its way to the top of management's agenda,' says Mr Keough.

He notes that the car industry, where Jose Ignacio Lopez de Arriortua, Volkswagen's controversial purchasing chief, is making waves, is taking a lead in demonstrating that it is one of the most powerful ways of improving economic performance.

Before his well-publicised and unconventional arrival at VW, Mr Lopez worked at General Motors, and it is this company that has placed increased emphasis on purchasing as one of the key parts of its turnaround programme.

But other industrial and service companies outside the motor industry are examining how they purchase.

'Many are reorganising to wring costs out of their operations; others, which do not face immediate cost pressure, to position themselves for such longer-term benefits as improvements in design, manufacturing, quality and customer service,' says Mr Keough, who refers to this new approach as 'strategic purchasing'.

Getting to this situation typically involves going through four stages:

Get the basics right. Even in relatively sophisticated companies, purchasing processes often do not work. So competitive bidding, responsiveness to user needs and tracking of spending need investigation.

Put money on the table. Using short-term teams that share experiences, drawn from different departments to develop purchasing strategies, generally leads to dramatic improvements at the bottom line.

Develop the supporting infrastucture. The saving produced by the teams often leads to organisational changes, such as the upgrading of the purchasing department's skills and the establishment of appropriate performance measures.

Build world-class suppliers. Even the most sophisticated corporations are some way off from this and need to develop a vision of what their supplier networks should look like, to compare current suppliers with the best and to help them match those standards.

These stages need to be addressed, says Mr Keough, because the fight is moving from world-class factories to world-class supplier networks.

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