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This chapter is from the book

Why Is Purchasing Important?

Historically, purchasing has played a key role in “getting the lowest possible price.” This was often at the expense of a positive relationship with the supplier and usually a trade-off with quality. However, over time, the role of purchasing evolved into a cost-saving function in which supplier relationships and contracts were developed with cost-savings in mind. These cost-savings often came through process improvements, product improvements, or supplier development efforts.

Today, purchasing is recognized as having an overwhelming impact on the bottom line of the organization. It has a direct impact on the two forces that drive the bottom line: sales and costs. Purchasing is becoming a core competency of the firm, finding and developing suppliers and bringing in expertise that is highly valued by the organization. Purchasing is generally responsible for spending more than 50 percent of all the revenues the firm receives as income from sales. More money is often spent for purchases of materials and services than for any other expense, and the spend in services is rapidly increasing.6 Often, the cost of materials is 2.5 times the value of all labor and payroll costs and nearly 1.5 times the cost of labor plus all other expenses of running the business.7 In the area of services, millions of dollars are spent on marketing and advertising, legal, information technology, logistics, temporary labor, and other categories. Although the involvement of purchasing in the services area is different than in a typical purchase of materials, there is significant opportunity for most organizations to save money by involving purchasing in this area of spend.

Figure 1-1 shows how supply management can drive sales up and costs down. The impact on net income and return on investment (ROI) have a major influence on shareholder value. The cost impacts are easily understood because cost reduction is typically considered a “purchasing job.” Purchasing works with internal customers to help improve processes and drive down costs. Purchasing also works with suppliers to improve processes, look at alternative materials, and look at different locations or transportation modes. Focusing on cost improvement is a core competency of purchasing professionals.

Figure 1-1

Figure 1-1 Supply Management’s impact on both top and bottom line

However, there are also many opportunities to help drive up market share. For example, strong relationships with the right suppliers might allow for early supplier involvement in new product development. Therefore, the supplier is prepared for the actual launch and can also contribute and make changes if appropriate to facilitate an easier and less costly production launch. In 1998, for example, suppliers were involved in the product development process and actually helped by providing inputs into the design of the Honda Accord. These inputs were both material in nature and process-oriented. This early involvement in the product development stages helped to save more than 20 percent of the cost of producing the car.8 In the casting industry, it was found that early involvement of suppliers in product development saved time and cost, and improved the quality of the parts.9 The request for quote process (RFQ) is reduced significantly in this industry because suppliers are more aware of what is required, long before it is needed.

As you will begin to understand from the information presented in this book, the supply base is a source of innovative opportunities and the supply manager is trained to be aware of these supply market opportunities. Having the appropriate supply base and relationships with the suppliers is like having thousands of additional people thinking of the next great idea or innovation. There is a famous and highly publicized quote about suppliers and the supply base by Dave Nelson, who was an award-winning purchaser who worked at Honda, John Deere, and Delphi—he is considered a “guru” of supply chain.10 Nelson said, “If you develop the right relationship with your supply base, you can have 10,000 additional brains thinking about ways to improve your product and generate cost-savings.”11 There is a lot of power resting in the hands of supply managers, if they can harness the strength and the capabilities of the supply base.

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