Is your purchasing department stripping value?

If purchasing is making vital supplier decisions for your company, it's quite possible. The following principles should drive your decisions.

by Jeff Thull

SwitchCrafter makes electronic switches that are installed in the dashboards of semis. For years, its biggest customer has been TruckMaster, who bought these vital little parts for $6 each.  One day, the purchasing powers-that-be at TruckMaster decided that $6 was too much. So the head purchasing guru -- let's call him Joe -- decided to shop around. He found that CopyCat Corp. sold a switch for $4. So he called up Fred, his loyal SwitchCrafter sales rep, and gave him the opportunity to match the price.

Not surprisingly, Fred hesitated.

"I'm familiar with CopyCat's switch," he said. "It's a fine part, but the lower price is due to the type of plastic used in the switch. It is not designed to withstand the cold temperatures your trucks operate in, which will lead to a higher failure rate."

But Joe dismissed his advice with a curt: "That may be, but my job is to reduce the cost of all our parts, and your competitor can save us $2 a pop. Are you willing to match his price or not?"

Fred could not.

TruckMaster switched switch providers and the new components started to fail in the field. TruckMaster found itself sending out heavy-duty tow trucks, to the tune of $350 each time, to replace a $4 part. It doesn't take a math genius to realize that the $2 cost savings was getting eaten up quickly.

So TruckMaster's service/warranty repair people started voicing complaints and SwitchCrafter started looking good again. Before long, Fred was back in business.

Shortsighted decisions by commodity-minded purchasing departments are not uncommon. So what can companies do to ensure that purchasing is not undermining other departments by diluting value and ultimately bringing down profits?

Here are some tips.

Make sure procurement incentives do not overpower other functional interests. In other words, purchasing should not be making complex buying decisions. Period. It should operate in an administrative capacity, orchestrating a quality decision process that ensures a complete value impact is reviewed.

A purchasing department with too much power will gravitate to the lowest common denominator: price. Worse, it will generally not be held accountable for the value a solution delivers in business performance terms.

A department that has to live with the outcome of a purchasing decision will almost always have a better grasp on the big picture and an eye on revenue as well as the bottom line.

Don't approach buying complex solutions like raw materials. It strips value from solutions. If you are buying raw materials -- for example, a truckload of sand -- the purchasing function may make sense. Sand is sand is sand. It would make sense to have vendors place bids and then go with the cheapest one.

But as soon as you buy something for which there is a variant in quality or capability, that same process begins to lose effectiveness and to impinge on the value purchased from the supplier. It's always a mistake to apply commodity purchasing processes to a value-added service, especially when support given by the vendor is a critical ingredient to success.

End the "five bids" charade. It may lower price but it also dilutes value. Somewhere along the line, companies came to believe that in order to purchase properly they must get a certain number of bids and pit multiple vendors against each other.

Many corporations do this even when they already know which vendor they want to use. By forcing their preferred vendor to compete with others, they believe they can drive the price downward. Sometimes it works. Usually, it backfires.

If a vendor relationship isn't broken, don't fix it. If you have a superb relationship with a vendor who understands your business, is well equipped to do the job, and has a successful track record with you, hang on tight. Don't bid out your next project to someone who might be a few dollars cheaper, or worse, ask your vendor to match a competitor's price.

Not only do you risk losing a valuable business partner, you end up delaying projects and squandering your own time and resources, or force your valuable business resource to take out some of the value you require.

Give your vendors the access they require. Strong business relationships and the value-laden solutions that come from them don't happen magically. They develop over time. And they cannot develop until you allow suppliers to diagnose your problems and work closely with your team to develop solutions.

That means you must allow vendors access to the inner workings of your company and to knowledgeable people in the appropriate departments.

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