UK: Customer and supplier - partners in purchasing.

UK: Customer and supplier - partners in purchasing. - Let us list some trends: (1) Manufacturing companies produce for themselves fewer and fewer of the parts that go into their products. (2) The proportion of total cost that goes toward the wages bill i

Last Updated: 31 Aug 2010

Let us list some trends: (1) Manufacturing companies produce for themselves fewer and fewer of the parts that go into their products. (2) The proportion of total cost that goes toward the wages bill is gradually shrinking - and the proportion that goes towards buying externally sourced goods and services is slowly increasing. (3) Strategies increasingly call for businesses to stick to their core areas of expertise, and deflect them from trying to achieve excellence in peripheral technologies for themselves.

These are all ways of saying the same thing: that companies are making a gradual transition towards purchasing more and more of what is important to them, rather than making it themselves. Not that these trends are recent. They can be discerned quite clearly in patterns of company behaviour going back to the 1960s. But it is really the past decade that has seen the biggest transformation in purchasing. It used to be carried out by "purchasing officers" and was regarded as a clerical activity - one admittedly not without importance but not one to which high flyers were attracted.

The traditional buyer-seller relationship was almost entirely adversarial by nature. Buyers assumed that sellers were unreliable and out to cheat them and acted accordingly. Purchased items tended to be dual sourced. This not only promised continuing supplies in the event of disruption at one of the suppliers; it also acted to keep price pressure on both of them. Any implication of long-term commitment was avoided. So was collaboration on innovation or engineering. The supplier saw his quality commitment as providing the minimum that the specification allowed. The purchaser's approach to monitoring this obligation rested on inspection at Goods Inwards.

Things really began to change in the recession of the early 1980s. Orders dried up and prices fell. Companies destocked, only replenishing their shelves at the last minute, giving suppliers a fraction of the former lead times in which to deliver, and a take-it-or-leave-it on the price. Factories lurched from short time to overtime as orders were won on impossible delivery times and embattled managements struggled to meet them.

Then came consignment stocks. These meant that the company had something to make and could deliver it to the customer, but that it was only formally bought when the customer felt like using it - until then the goods were "in consignment". This admittedly was not very good news (even though "it's what they do in Japan, old boy").

Consignment stocks fell out of favour as managements realised that they were not the free lunch that they were supposed to be - someone had to pay for financing the stock. Nevertheless, they opened people's eyes to what might be achieved by moving away from traditional purchasing. So the 1980s saw companies moving away from adversarial purchasing and towards "partnership" purchasing. The shift was often associated with the concept of just-in-time (JIT) manufacturing - also "what they do in Japan".

Unfortunately, the roll of those that made the move listed companies of a certain type. They tended to be large companies, and ones with an extremely high purchased content to their products. The typical smaller company, however, was more "done to" than "doing". This was partly because big companies are more easily able to persuade their suppliers (do it or else) than vice versa; partly, also, because the approach was often viewed as part and parcel of JIT, which again tended to be done by larger companies.

The basic idea behind a purchasing partnership is to remove the barriers to communication and co-operation which come with the traditional "arm's length" approach. The goal is a seamless join between the supplier's factory and the customer's. It starts with the recognition that suppliers have an expertise in their own production processes that their customers do not have.

This is a common-sense notion embodied in not a little homespun wisdom: the cobbler should stick to his last, too many cooks spoil the broth, etc. The traditional approach to purchasing assumes that you can be a jack of all trades and master of them too. The traditional purchasing specification is in effect a how-to-make-it document, meant to describe exactly the part that is being procured. The problem is that it does so from the manufacturing viewpoint: it must be made from precisely this material, it must be exactly that shape, achieve these tolerances, and so on.

The alternative is to define as closely as possible what the part has to do, together with the performance criteria that it must satisfy, and leave it to the supplier to identify the best way to accomplish this at lowest cost. It is then up to the supplier to decide how the part should be made. There will probably be immediate cost savings. More important, innovations should be introduced more quickly. If the supplier buys a new machine, or introduces a new process, the benefits can be passed on without delay, rather than much later or not at all.

However, "minimal specifications" are not always initially popular with suppliers. When Kawasaki brought the approach to its first American assembly plant in the early '80s, suppliers looked askance at some of the specifications for component finishes, which stipulated only "an appropriate polymer coating". They wanted more detail.

"Value engineering" analyses are used in companies to provide detailed cost breakdowns of components in order to highlight possible savings through the elimination of over-engineering or over-specification. This is a technique that has been around a long time, but one that takes on a new lease of life when extended to suppliers' factories as well. Finding that the company was paying 40% more than its Japanese competitors for identical plastic parts, Xerox Corporation began looking at its suppliers' costings to find out why. It appeared that 50% of the difference was attributable to differences in design: the Xerox components weighed twice as much as their Japanese equivalents and used twice as much raw material. They also called for 23 separate types of material, as opposed to the Japanese six. A further 25% of the price difference was due to cheaper raw materials: Japanese companies pooled their requirements and bought in bulk.

But value engineering traditionally belongs within the walls of one's own factory. No supplier wants to let customers know how much its products cost to make, or how much profit it is making on them. The key to securing that degree of co-operation lies in developing a relationship based on long-term commitment and shared benefits. From the supplier's point of view, single sourcing is initially the most visible indication. For the buyer this is a rite of passage. Multiple sourcing has long been a profound comfort to buyers: it means "Heads I win, tails you lose"; it combined carrot and stick with belt and braces. However, a multiplicity of sources of the same component makes it difficult for suppliers to use their expertise to reduce costs through innovation, or to engaging in joint value engineering with buyers.

The problem is partly one of scale. Companies have neither the time nor resources to engage in extensive discussions with everyone. There is also the question of proliferation: multiple co-existent designs for the same part are simply not practical. But there is another, rather more philosophical issue here: why not always use the best supplier? Suppliers cannot all be equally good, so why deal with the inferior ones at all? The best supplier will almost certainly be a company that the buyer respects. This is important because mutual respect is the only possible basis for mutual dependency.

With more of a supplier's business going to a single customer, it is vital that quality is consistent and that deliveries are met. By the same token, when a company receives more of its components from a single supplier, it acquires a certain clout. But it also assumes a responsibility for managing its own planning and purchasing systems so as to avoid "own goals". If suppliers are to be, in effect, extensions of the buyer's own factory, then their needs will have to be planned just as carefully as the buyer's own. The old style of planning, in which poor decisions could be passed on to the supplier to sort out ("We need 500 more widgets by Friday - sorry about the lack of notice") will no longer do. Last-minute disruption incurs additional costs which will become additional costs for the buyer too.

Although not a prerequisite, JIT manufacture will certainly help buyers to generate consistent and predictable demands on their suppliers. But a way of achieving many of the same benefits is to place orders or schedules for capacity rather than actual components. The supplier gets the comfort of a steady ongoing commitment from the buyer, and in return allows the capacity reservation to be firmed up into actual orders at the last moment. Admittedly this works better in some industries than others: if the supplier has to procure sub-components or special materials from its own suppliers the system could break down. But in many cases it works perfectly well. The buyer "buys" so many hundred hours of work per week - or so many thousand castings or mouldings, or whatever - and stipulates the precise composition of the order as late as possible. It might seem that the production mix will vary enormously under such a system, but in practice this seldom happens. It is usually more a question of fine-tuning than of rewriting the order book.

An ability to fine-tune is vital if safety stocks and buffer stocks are to be eliminated. But companies do not hold safety stocks merely to protect themselves against variability in the order mix. They also want protection against variability in supply, including quality.

Variability of supply can be caused by transport problems. The easiest solution is not to have transport at all: Japanese JIT manufacturers like Toyota surround themselves with "next door" suppliers which ship direct to the assembly line every few minutes from dedicated mini-factories or transit warehouses. Japanese suppliers that have followed Nissan and Toyota to the UK can be seen doing the same thing in the North of England.

Smaller companies need a different approach. A simple way of achieving the same end is to use local suppliers. Transport delays can be further minimised by dedicated transport. Massey-Ferguson Tractors in Coventry has been operating a collection system since 1986, employing a firm of hauliers to visit 75 suppliers daily.

It is even possible to have dedicated transport when parts of the supplier base are not local. Companies in small towns or rural areas may not have specialist suppliers close at hand. But one of their aims, when shrinking the supplier base, could be to establish "clusters" of suppliers in particular cities. Transport could then be pooled, with a single vehicle making the trip to the buyer's factory.

IBM's Havant site has been using clustered suppliers since 1988. Like Massey-Ferguson, IBM employs a haulier, United Carriers, which tours each cluster daily, collecting that day's scheduled call-offs and delivering them to a regional centre. From there they are trunked overnight to Havant, to be ready at 6.00 am the next morning.

With many of the variabilities in transport and manufacture overcome, companies can move towards smaller and more frequent deliveries. This comes back to the concept of suppliers as extensions of the buyer's factory: dispensing with the need for finished goods at the supplier's end, and of component stocks at the buyer's.

Companies attempting frequent deliveries using a traditional purchase order system would drown in paperwork, for such a system is designed to procure a unit quantity of parts rather than a flow of them. Drawing on the greater commitment of buyer and supplier, partnership purchasing adopts a different approach. The purchase order becomes essentially a mechanism for turning the flow of parts on, stipulating price, specification and so on. Once the tap has been opened, simpler mechanisms can handle the actual transfer of goods.

Japanese-style "kanban" cards are the classic way of dealing with transfers under a JIT system. Simple rolling schedules, with weekly or daily call-offs, can perform just as well. So can conventional "blanket orders". These may be as informal as the parties choose, but often include a "frozen zone" to discourage last-minute chopping and changing, and give both sides a clear set of goalposts to aim at. Other companies prefer electronic data interchange (EDI), which retains the original purchase order concept but avoids the paper problem by doing the whole thing electronically, with the buyer's and supplier's computers passing digital transactions between them. This is the approach favoured by Ford, for one.

Perhaps the simplest mechanism of all is an extension of the supermarket "merchandising" idea: a small engineering company I know has a supplier who calls once a week to replenish its entire stock of fasteners. Whatever has been used in the previous week gets replaced; the supplier invoices for the fasteners that he has left at the company, and comes again next week. There is no wasteful consumption of management time in deciding how many of each product to buy, no purchase orders, no hassle. The company does not place orders for electricity, so why should it place orders for fasteners?

This one example neatly encapsulates the whole essence of partnership purchasing. At a stroke, the whole paraphernalia of stock control and purchase orders has been replaced by a simple relationship that both parties have a strong interest in keeping. Companies do not have to be the size of Ford, Kawasaki or IBM to start adopting ideas like these. They should start thinking about what they really want from the purchasing function, and look for suppliers that can deliver it.

(Malcolm Wheatley is a freelance writer.)

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