During the period of extraordinary economic growth following World War II, national markets became global markets, and companies were challenged by fierce competition to substantially improve the quality of their products while becoming more price competitive. In the ensuing decades, businesses have tried to meet this challenge in three principal ways: (1) by improving quality and streamlining manufacturing and other operations, (2) by reducing the cost of the raw materials and other goods and services they purchase through pressure on suppliers to reduce their prices, and (3) by using supply chain management techniques to drive costs down throughout the supply chain. One important consequence of these movements has been the professionalizing of the purchasing function. Once the backwater of organizations, populated by administrators who, in some cases, had washed out of other functional areas, purchasing in most large companies today has become a strategic business function led by highly educated specialists in supply chain management. For businesses trying to sell to this new breed of purchasing agent, the implications of this evolution are profound.
There are some old school people out there who have traditional thinking about how you have to go there and sell, sell, sell, and get the deal signed. That doesn’t work today, but there are people out there still doing that.—Joan Selleck, Associate Director of Materials, Nikon Precision
The quality movement, which was born in the 1950s and grew rapidly into adolescence in the 1960s, was the initial business response to increasing competition, fueled by a rapidly expanding consumer base that demanded higher-quality products. For the next three decades, businesses tried to improve both quality and the efficiency of their manufacturing operations through tools like quality circles, statistical process control, process mapping, total quality management, benchmarking, just-in-time manufacturing, continuous process improvement, and other such programs. In the late 1980s, this intense focus on quality improvement resulted in the first Malcolm Baldrige National Quality Awards. Today, these kinds of programs have evolved to Lean Six Sigma, the latest approach to using statistical methods to improve business processes, quality, and efficiency. Across the country, legions of Six Sigma Black Belts continue to measure, analyze, dissect, and scrutinize business processes, but there is only so much you can do with process improvement. Quality and efficiency gains significantly beyond Lean Six Sigma may come at too high a price.
So businesses also tried to drive costs out of their systems by beating up on their suppliers—demanding free services, expecting suppliers to assume a disproportionate share of the risk, commoditizing markets through ruthless price competitions and reverse auctions, leveling the playing field by sharing each supplier’s technical innovations with other suppliers, and using the purchasing process as a way to build their knowledge (cynical sellers argue that some customers use the process to get free consulting). A few well-known companies are famous for these practices, but to some extent every company large enough to wield marketplace power has tried to drive costs down by pressuring suppliers to reduce their prices or risk losing their company’s business. However, this approach, too, can gain only so much, as one survey respondent explained:
Historically, we were a really bad partner. We had a lot of buying power and did not treat our suppliers very well. For instance, we have carriers who haul materials from point A to point B. We drove their rates down so low that the carriers had to run illegally to make a buck. We would shop volume out of our shipping stations every day. If someone could haul the material at eight cents a ton cheaper than the other guys, we would go with him. Ultimately, the carriers couldn’t afford insurance or new tires, so they would try to get more out of their equipment, and that caused us numerous problems. So when I started here, I raised the rates, which caused some concerns internally. But it’s a better solution. The carriers have to win for us to win. If they’re running illegally, that’s bad for us.¹
Today, most companies appreciate that beating the tar out of their suppliers is ultimately as harmful to them as it is to the suppliers and can net only so much in savings before quality and reliability—and the supplier’s goodwill—are degraded. However, significant cost savings are still possible in purchasing and supplier management, and the leading-edge purchasing and supply management companies, like Pepsico, McDonalds, Waste Management, and Wal-Mart, to name a few, use supply chain management to reduce their cost of goods and services and improve their relationships with partner suppliers.* According to Dr. Lisa Ellram, professor of supply chain management at Arizona State University, when companies began examining costs throughout their supply chains, they learned that some costs associated with logistics, ordering, and inventory management resulted from their own purchasing policies and that they could drive costs out of the system by being more thoughtful and efficient in how they managed purchasing. They also learned that if they worked more collaboratively with suppliers, they could jointly find ways to reduce their suppliers’ costs.
To be a truly great company today, you have to continually drive costs out of the total supply chain, while you aggressively innovate to drive new revenue. If you don’t do that, your competitors will pass you by.—Jim Kozlowski, Director of Purchasing, Pepsico
Finally, most concluded that they needed to work with fewer suppliers—to reduce transaction and relationship costs—and build better, more partner-like relationships with the suppliers who remained.²To achieve these gains, however, companies also learned that they had to upgrade their purchasing function and the quality of the people managing the supply chain and important supplier relationships. According to Bob Douglass, vice president of commercial production and planning for Triangle Pharmaceuticals, “Historically, the personnel rejects were sent to the purchasing departments. If a corporation had someone they didn’t want to fire for some reason yet they weren’t living up to the standards elsewhere, they’d send them down to work in the purchasing office. The climate has changed. Now purchasing people need to be much more business savvy rather than transactional (strategic sourcing/buying instead of clerical duties).”³ Furthermore, the purchasing function is gaining more visibility in buying organizations. At SBC Communications, for instance, the senior purchasing executive has a “president” title and reports to the CEO. In many companies today, the senior purchasing executive reports to either the CEO or one of the CEO’s direct reports and plays a critical role in strategic and business planning.
Some companies are demanding that their purchasing professionals have advanced degrees in supply chain management (one of the hot new business Ph.D.s) and/or have a Certified Purchasing Manager certification from the Institute of Supply Management.* Given the importance today of strategic sourcing and its role in helping businesses be more competitive, it’s not surprising that companies are now staffing their purchasing functions with executives and professionals who are experts in supply chain management. The implication for sellers is significant. In this selling environment, buyers are more sophisticated, knowledgeable, and demanding than ever before, and they are trying to make B2B buying and selling a far more rational, analytical, and objective process. Sellers who cannot meet them on that sophisticated playing field will soon no longer be in the game. Furthermore, in the winnowing process that’s taking place as large B2B customers reduce the number of suppliers they work with, if you are not one of the preferred suppliers, you may find yourself locked out of many customer organizations and purchasing processes and, once out, face steeper entry barriers as you try to penetrate new or former buying organizations that have created a satisfactory set of preferred supplier relationships.