Chapter 3

1. Chapter 3 Organizing The Purchasing FunctionIDIS 424 Spring 2004

2. Purchasing Councils Pursuing purchasing leadership will lead to the development of an executive purchasing council with high-level responsibilities. Establish strategy direction for commodities Develop common worldwide sourcing policies and procedures Establish corporate cost savings targets Charter and staff global sourcing strategy development teams Executive Purchasing Council Search “outside the box” for new sourcing options and methods Measure and report compliance to corporate-wide global agreements

3. Integrating the Supply Chain Competition is forcing suppliers to work closely with the purchaser/OEM to understand end customer requirements Suppliers OEM/Producer Customer Customer Advisory Board • What is the benefit of key suppliers participating on an OEM’s customer advisory board? • Suppliers better understand end customer requirements • Suppliers better understand how they fit within the OEM’s business model • Suppliers can commit direct investment targeted to the needs of the end customer • Suppliers better understand supply chain risks and opportunities • Suppliers better understand demand planning data as its is developed and shared upstream

4. Supplier Councils Supplier councils will increasingly become part of the purchasing and supply management organization Supplier Council Objectives Characteristics • Share future product development plans • Develop joint measures of supply chain success • Create a co-destiny and trust between supply chain members • Align long-range goals and technology development • Involves 8-12 key non-competing suppliers • Membership rotates among suppliers • Features executive to executive interaction • Meets on a regular basis

5. Social and Workplace Changes The need to pursue strategic sourcing will create instability within purchasing and supply organizations • Movement of purchasing professionals between organizations often results in compensation discrepancies as new hires arrive with higher pay and benefits • The need to elevate the level of purchasing professional often results in “buying” talent in the open market at a premium price • New employees are increasingly demanding to work from home or remote sites, presenting communication, coordination, and organizational challenges • Professionals from other functional groups will increasingly accepting assignments in procurement. These professionals often arrive from groups that historically pay more than procurement, creating pay differentials The New Purchasing and Supply Management Workplace

6. Developing Organizational Structures Developing the right organizational structure will become “more chaotic” because of the convergence of many factors... • Commodity sourcing experts will increasingly be dispersed around the globe at business unit or geographic buying locations (with coordination) • Sourcing personnel will increasingly have dual reporting relationships • Greater use of global commodity teams adds to organizational complexity • Increased global sourcing requires the coordination of worldwide purchasing activities

7. Developing Organizational Structures Developing the right organizational structure will become “more chaotic” because of the convergence of many factors... • A shared services model requires an umbrella organization to oversee activities across business units • An integrated supply chain perspective will result in new executive positions with responsibility for overseeing and coordinating supply chain activities • E-procurement systems will place purchasing authority at different levels and locations throughout the organization

8. Key Procurement Organizational Features A separation of strategic and tactical supply management responsibilities A global procurement board or council that oversees global activities A chief procurement officer who executes purchasing council decisions KEY ORGANIZATIONAL DESIGN FEATURES A flat, horizontal structure with teams responsible for sourcing strategy development New positions to manage operational purchasing

9. Purchasing’s Changing Role Higher-level outsourcing will begin to shift how procurement and supply organizes its activities and responsibilities Component Outsourcing Outsourcing System Outsourcing • Manage thousand of component part numbers • Manage thousands of component suppliers • Manage hundreds of basic contracts • Employ many buyers • Pursue traditional relationships with most suppliers • Manage 100 or fewer critical suppliers • Manage strategic relationships • Develop alliances and partnerships • Pursue cross-organizational integration • Pursue value-creating strategic sourcing activities Procurement and Supply’s Role

10. Sourcing’s New Look Sourcing’s New Look • Smaller professional staff • Minimal involvement with day-to-day operations or transactions • Act as an internal consultant and problem solver • Responsible for managing alliances and other critical relationships • Greater responsibility for non-traditional purchasing • Involvement with cross-enterprise negotiations • Manage integrative activities with suppliers and the rest of the organization • Become process managers that oversee strategic and tactical responsibilities • Segment sourcing strategies to match requirements with an appropriate strategy The design and structure of the sourcing group will change significantly

11. International Purchasing Offices International Purchasing Offices (IPOs) will become an important part of the organizational structure as companies shift from regional to global sourcing Europe North America Asia-Pacific South America Role of International Purchasing Offices • Identify potential suppliers Manage technical concerns • Solicit quotes or proposals Represent the buying firm to suppliers Expedite and trace shipments Negotiate supply contracts • Manage countertrade Obtain product samples Perform supplier site visits

12. Separating Purchasing Authority A separation of purchasing activities will occur as organizations structure themselves to pursue strategic sourcing  Manage strategic relationships  Develop company-wide electronic systems  Develop and manage alliances and partnerships  Develop company-wide contracts  Manage critical commodities Strategic Sourcing Activities...  Execute transactions with strategic suppliers  Use e-systems to obtain standard or indirect items through catalogues  Source items that are unique to the operating unit  Generate and forward material releases  Manage accounts payable and material control Transactional Activities...

13. Co-Location with Internal Customers Procurement support personnel will increasingly co-locate with internal customers to achieve greater understanding of requirements and integration Operations Engineering Marketing • Evolving product and process technology requirements • Early insight into material specifications • Support new product teams • Insight into supplier performance • Requirements in cost, quality, delivery, cycle time • Insight into capacity, material, and service needs • Forecast and demand planning requirements • Early insight into new product ideas Procurement Support Personnel Formally report to the procurement organization