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The past three decades have driven a purchasing evolution to a procurement revolution.
Procurement has witnessed dramatic change during the past several decades. A much simpler regionalized supply base has evolved into complex global supply chains. In the late 1970s, most purchases were from domestic, even relatively local sources. Companies had personal relationships with whom they were buying from, and as result, they were able to manage risk on a personal basis. Purchasers knew the character of their major suppliers and understood their financial health. It was easy to ensure that every purchase came from a select pool of suppliers. The biggest supply risks were of a much different nature, such as temporary labor strikes or mechanical breakdowns of shippers. It was easy to compensate for these and other basic supply risks by carrying extra inventory of in-process and finished goods. Most organizations had at most, dozens of suppliers, not the thousands of suppliers as most companies do today.
In 1977, I was a young laboratory technician for a manufacturer that made power-steering hoses for the automotive industry. That was the year that early personal computers were first mass-produced for consumer sales, including the Commodore PET (Personal Electronic Transactor) with either four or eight kilobytes of memory, Apple II, which became an instant success with its printed circuit motherboard, and Tandy Radio Shack's first desktop computer TRS-80 with four kilobytes of memory and an early microprocessor.
The year 1977 also was the beginning of the US prime interest rate ascent from 7.75% in September 1977 to an all-time high of 21.5% in December 1980. (Today, it is 3.25%.) It was a time of rapid technology growth and unpredictable financial stability. Both of these forces were key drivers of 35 years of procurement transformation.
My earliest memory of what was then called the purchasing department was that "they were the folks standing in between what I wanted to buy and the supplier I wanted to buy it from." But what a change we have witnessed since: purchasing to procurement, a highly tactical function to a valued strategic business partner.
Transformation in procurement
I have been lucky to have spent more than 20 years in procurement working for companies and leaders who were truly transformational, including in my role as vice-president of procurement, global systems and operations for GlaxoSmithKline (GSK). Working for GSK and other companies gave me a chance to be a part of tremendous change. Reflecting on the total experience, there are five areas that have driven the purchasing evolution to the procurement revolution: value to the organization, skills development, technology, best-practice adoption, and organizational design.
Value to the organization. Thirty-five years ago, the typical purchasing department reported low within the company's overall reporting structure. It was a tactical operation whose basic function was commonly known as "place and chase," that is, call in an order and expedite the delivery. Today, the function is known as the procurement organization and typically reports directly to the CFO, head of supply chain, or COO. We are even beginning to see a new trend where the chief procurement officer reports to the CEO and is a board member.
Skills development. In the late 1970s, the primary skills required of purchasing personnel was the ability to handle multiple tasks in a fast-paced environment. It also helped if one were a "leveraged buyer" and was good at haggling. Most supplier selections had already been made by engineers, facility managers, and other end users before purchasing was contacted. The common hand-off to purchasing ended with a comment, such as "see if you can get a few more dollars off." Now, companies actively recruit seasoned procurement professionals with impressive resumes and proven track records of taking significant cost out of third-party spend. Also recruited are new graduates from the ever-increasing colleges and universities that have undergraduate and graduate degree programs focused on the supply chain.
Technology. Three and a half decades ago, purchasing technology consisted of the three-ply traveling requisitions and a telephone for ordering. When doing a detailed purchasing analysis, we were armed with a sharp pencil, lined paper, and a basic calculator. Early manufacturing resource planning systems with purchasing modules that aided in planning and produced a printed requisition were soon implemented. By the mid- to late 1990s, the first P2P (procure-to-payment) systems were available that automated the full cycle of requisitioning, approvals, ordering, tracking, receipt, and payment. Next to arrive was technology that allowed procurement to do online bidding (i.e., reverse auctions). Today, procurement technology has evolved to significantly improve process efficiencies (less headcount required), automatically analyze spend (identifies more savings opportunities), drive incremental savings (bottom-line impact), and enable effective control and contracting of critical spends (risk management). New solutions now allow organizations to compete better by using a true marketplace approach that automatically does the bidding and negotiation for the buyer. Solutions that perform combinatorial optimization for complex global spends result in new levels of savings and end-user satisfaction.
Best-practice adoption. In the late 1970s, best purchasing practices were more associated with good inventory-management processes. The purchasing focus was on how to work with suppliers to receive goods just-in-time with suppliers owning the inventory until needed by the manufacturing line. I was associated with some of these early, difficult efforts that often were performed just-in-case because the risks were just too high to not keep adequate inventory on hand. By the mid 1990s, procurement began adopting a new best practice, strategic sourcing, a seven-step disciplined process that ensured well-defined specifications, requirements, supplier and market knowledge, and a competitive process used for bidding and negotiation. With each passing year, more procurement analytics and strategy have been used to continually make improvements to the acquisition process, overall cost benefits, and total value provided. Best practices also have been developed for supplier management and supplier relationship management that focuses on getting ever-increasing value from the supply base beyond simply savings.
Organizational design. When I was starting out, purchasing departments were fragmented, decentralized functions that primarily existed to ensure that goods and services were delivered on time. During the past 15 to 20 years, a new model evolved and perfected where a central procurement group establishes common policies, procedures, and technology that allow corporations to develop the appropriate local, regional, or global strategies to maximize savings and value from the supply base.
In closing, the past 35 years have witnessed a remarkable transformation for the organization tasked with managing a company's overall third-party expenditure. The evolution of purchasing to procurement has allowed corporations to enhance profitability in new ways. With a best-practice procurement organization in place, more dollars are dropped to the bottom line, and incremental value is elicited from the supply base on an ongoing basis.
Gregg Brandyberry is senior vice-president of FedBid, and formerly senior advisor for A.T. Kearney Procurement and Analytic Solutions, Gregg.Brandyberry@FedBid.com.