Written by C.L. Good, Managing Director, Conway Mackenzie.
I began my professional career in engineering in the manufacturing sector. As an engineer, I worked with teams designing or redesigning products to meet certain specifications.
I spent a significant amount of time interpreting test results and many long hours at various production facilities supporting changes to products to improve manufacturability. I also invested countless hours with purchasing and suppliers to deliver the products on behalf of my employer.
I chose the word “invested” because now I truly see it as time invested. The time I spent with purchasing and suppliers paid a profit–in the long run–in my career. I can say that now, but when I was just starting as an engineer, I did not see the time spent with purchasing as valuable. On the contrary, purchasing only slowed me down. They always had a list of things I needed to do to get the materials required to do my job. They asked me so many questions about what I needed that, quite frankly, I was 100% certain I could do it better and faster myself.
Of course, in an odd twist of fate, my manager moved me from engineering to purchasing. This move provided me with a much better perspective on business and organizational dynamics, not to mention how to really buy products and services.
Fast forward to today, and currently I am employed as a consultant. In this role, I collaborate with many companies in various manufacturing and non-manufacturing sectors of the economy. As in my early years in manufacturing, I have visited hundreds of facilities and corporate offices. I have seen dozens of different organizational structures and the management philosophies and methods that created these structures.
In many instances I see elaborate purchasing organizations that are specialized and structured so as to provide very specific support. In some cases I find very simple but effective purchasing organizations staffed with only one manager and a few buyers. However, in many instances I find no meaningful purchasing organization outside of a scattered administrative professional processing orders and resolving supplier payment issues. This brings us to the point of the article: All organizations, regardless of size, can realize great value from dedicated buyers and a formal purchasing organization.
I have specifically addressed smaller, rather than all, organizations, because I generally see a lack of properly organized purchasing with professional buyers at companies of about $25 million to $75 million in annual revenue. With smaller organizations, it isn’t accurate to say that there isn’t a purchasing structure, because there is, but it isn’t typically staffed with individuals dedicated to just buying (professional buyers) or a dedicated purchasing manager. More often than not, I see a purchasing function that is function-based.
In the case of manufacturing, for example, the manufacturing materials would generally be “purchased” by a very experienced manufacturing manager; repair parts would be purchased by an experienced technician; etc. Typically, I see the employee with the technical knowledge performing the procurement function.
Based upon my earlier experiences as an engineer, this procurement structure makes sense. Who is the most knowledgeable about buying the proper replacement for the ½ HP motor that just burned out? Bob, the electrical maintenance manager who knows all about motors, of course. I would agree that Bob is most knowledgeable about the technical specs and is more than capable of checking a few prices on the motor. The real questions come down to time, value and skill. How much time does Bob have to look for the best price? What could he be doing that is of more value to the company? What technical issue could he be solving that only he has the skill to solve? Finally, does Bob have procurement skills? Does he like to negotiate? How often does he negotiate with suppliers given the limited amount of time he dedicates to procurement?
When I come upon smaller companies that lack a dedicated purchasing group, I try to understand why that is the case. I have come to the conclusion that there are three possibilities:
•Smaller companies are still in a “start-up” or entrepreneurial mindset;
•The size of the company limits head count to the absolutely lowest level possible, and a purchasing-only head count doesn’t appear to have enough value to justify its existence; and
•The individuals managing the company do not see the value: they believe purchasing organizations slow the process and only ask the same questions anyone would ask when purchasing an item.
It is my experience that even small organizations benefit from a dedicated purchasing function. It all comes down to value: A good buyer can pay for himself or herself many times over.
Let’s assume you have a $30 million business. Typically, at least 50% of that will be materials or “stuff” you need from suppliers to produce your product or service. So annually your organization spends approximately $15 million on stuff. Every organization I have ever worked for attempts to save at least 3% on what they buy every year. The math says the annual target for savings from better procurement would be $450,000. I can say with absolute certainty that a small-dedicated staff for purchasing will cost much less than that annually for a company of this size.
There is, of course, the case to be made that the non-dedicated purchasing staff can also achieve similar reductions, and perhaps they can in the short run. But one of the primary drivers of growth in a business or economy is specialization.
In the first chapter of The Wealth of Nations, Adam Smith explains his theory on the ideal way to organize a pin factory. Historically, pin makers could produce only a few dozen pins per day. However, when organized in a factory with each worker performing a limited operation, they could produce tens of thousands a day.
Adam Smith, born in Scotland in 1723, is often known as the father of economics and capitalism. He theorized that the key to economic efficiency is specialization, or the division of labor. The division of labor can make processes much more efficient and create greater value. He went on to propose three factors to explain the efficiency gains:
1.Increased skill which people gain when they do the same task over and over
2.Less time wasted moving from one task to another
3.Specialization allows the use of dedicated machinery (or skill set, in this case)
However, Adam Smith pointed out, the division of labor requires an advanced degree of cooperation between those involved.I can firmly attest to this item. A dedicated purchasing function requires coordination to function efficiently.
I have found that the greatest obstacle to implementing a dedicated purchasing function is, in fact, coordination. It takes time and planning to buy properly and many organizations don’t have the required discipline, and instead do what is quick and easy. They allow Bob to buy the motor because initially it requires more coordination or “work” to purchase it with a dedicated purchasing organization.
For the organization that wants to grow, the fuel for growth is more specialization: Professional buyers pay for themselves and allow people like Bob to concentrate on what they do best–which likely isn’t buying.