Why Should Loggies Care About Purchasing? - logistics

It is not the strongest of the species that survive, nor the most intelligent, but the ones most adaptive to change.

Charles Darwin

When talking to Air Force people about purchasing, the question that often comes up is, "Why should I care about purchasing; that is someone else's job, right?" Let us face it, Air Force people work pretty hard in their functional stovepipes and seldom have the time or energy to cross over those barriers. In fact, most fight hard to keep business as usual. So why should you care about purchasing? In the most basic sense, aircrews want mission-ready aircraft to fly and modern, new weapons to play with. Logisticians want available spare parts or at least accurate information on delayed spare parts in order to make wise maintenance decisions. How the purchasing process is accomplished directly relates to spare parts availability and information on spares to support mission-ready aircraft. Having too small a supply base can result in poor spares support. Conversely, having too large a supplier base, let alone one that frequently changes, naturally results in increased variability in lead times, materiel consisten cy, interpretation of specifications, and the quality of relationships. [1] If you are a logistician, you should absolutely care about purchasing because you have to live with its outcome. Perhaps it is time to take a good look at how the Air Force might make the purchasing process better by focusing on the very start of the supply chain.

While the Air Force continues to do purchasing and materiel management in a very functional, vertical structure, many leading commercial firms have dramatically changed their purchasing and supply management (PSM) practices and earned some impressive cost savings and performance improvements for both the short and long term. For the Air Force to take advantage of the benefits achieved by innovative firms, it must change the way it purchases and sustains its weapon systems and commodities.

Explained broadly, PSM [2] is a horizontal, integrated process that encompasses all key areas of spending and core supplier networks. PSM's goal is to create continuous improvement in the performance and cost of purchased goods and services. Innovative buyers recognize that these areas can account for a very large percentage of an organization's expenditures--for 38 percent of the total Air Force budget, $31B in fiscal year 2000. [3] As a result, PSM commands the attention of high-level leadership, and best PSM practices are often at the heart of successful, continuous improvement programs. In other words, PSM is a strategic weapon for continuous improvement in total costs and performance (improving buyers' competitive advantages), and it requires an integrated team effort.

Implementation of the best PSM practices represents a number of major shifts in practices, processes, status, focus, organization, and outcomes. The largest shift changes the present operation of PSM from a tactical, backwater shop to a strategic, corporate resource. The total change effort must be led and supported by top management to change a vertical, functionally stovepiped organization into a horizontal, integrated process as shown in Figure 1.

PSM replaces small, distributed, low-skilled purchasing functions with highly skilled, multifunctional teams that transfer many short-term contracts, often with adversarial relationships, into fewer, long-term partnerships with the best suppliers. The dozens of small, distributed buys, normally based upon price data, are replaced with more centralized, large commodity or industrial group buys based on lowest total ownership costs using supply markets and supplier economics insights. Instead of onetime cost reductions generally associated with the many initiatives implemented over the years, PSM offers continuous improvements in costs, quality, responsiveness, flexibility, and technology.

Many innovative buyers have reported that implementing best PSM practices has produced substantial benefits. The types and magnitude of the benefits and how quickly they are realized vary significantly based upon the characteristics of the goods and services involved and the initial sophistication of the existing procurement function and supplier relationships. Some buyers have reported very impressive results as follows:

* Cost savings as high as 20, 30, and even 50 percent for a specific group of goods or services [4]

* Savings of as much as 3 to 4 percent of the total spend per year for 4 or 5 years

* Average quality improvement of 10 to 13 percent per year

* Delivery responsiveness improvement of 10 percent per year [5]

* Faster (22 percent over 8 years) and better product development [6]

The Air Force is in the process of implementing acquisition reform (AR), which includes some PSM practices. However, most AR initiatives target the acquisition community as opposed to the broader Air Force functional community. Some focus primarily on system acquisition, excluding the characteristics and needs associated with sustainment and operational contracting. The key difference between PSM and AR is PSM's strategic, horizontal (that is, cross-functional/business unit), integrated process approach that focuses on continuous improvement, not just on one-time cost savings or performance improvement. For example, a best PSM practice of supplier rationalization has not been an explicit goal of AR due to concerns about the Air Force's meeting obligations for competition and socioeconomic goals.

The commercial world has already stepped out smartly in implementing PSM. One merely has to read any purchasing or supply chain magazine to see the large benefits earned by the firms. The following examples from the commercial world highlight the ongoing change effort and the savings and performance improvements achieved. This change is so dramatic the National Association of Purchasing Management recently changed its name to the Institute for Supply Management.

The aerospace industry is revamping purchasing to enhance material and component quality and reduce delivery cycle times and costs. Toward these goals, firms are making strategic efforts to outsource noncore activities, consolidate their supply bases, forge stronger relationships with remaining suppliers, and create long-term commodity contracts. Other strategic efforts include adapting lean manufacturing techniques, integrating purchasing and key suppliers into product development, and pushing manufacturing techniques that increase productivity into the supply base. [7] Recently, the Center for Advanced Purchasing Studies surveyed 48 aerospace product manufacturing firms and found that 91 percent use multifunctional teams that include purchasing, engineering, manufacturing, quality, finance, logistics, customer support, and supplier relations executives. [8]

Less than 10 years ago, IBM was an extremely vertically integrated company that made most of the components for its own computers. They hired Gene Richter as chief procurement officer and transformed a collection of divisional purchasing groups into a centralized structure that truly recognized the importance of suppliers in keeping IBM a leader in the technology marketplace. The company combined the requirements of all its divisions and locations to gain clout, and Richter formed commodity teams to manage the global purchase of components and services. Purchasers began evaluating the performance of suppliers, reducing the number of suppliers, and identifying potential new ones. The teams also negotiated long-term contracts with suppliers and reduced IBM's supplier base from about 4,900 in 1993 to only 50 for 85 percent of its $17B in production purchases. [9] "Of the 3,800 men and women in procurement globally, we are 70 percent tactical and 30 percent strategic with the way we spend our time," says Richter . He goes on to say, "We think we can flip those percentages."[10]

At Lockheed Martin, finding the best-in-class suppliers is important to maintaining delivery of best technology and best product components and systems. According to Northrup, they will be concentrating more work with fewer best-in-class suppliers. [11]

In 1988, there was no corporate visibility because there was no strategy, according to Terry Sueltman, Honeywell's Vice President of Supply Management. He also noted, "Nobody cared about the money being spent as long as manufacturing got what it needed to make the products. Purchasing people were viewed simply as the in-house group that expedited orders and sometimes solved material supply problems." Sueltman says, "When this operation was just purchasing, it was a tactical subset of manufacturing--its duties were transactional." The purchasing group has since evolved into a strategic part of the company's supply management, quality control, and cost-reduction systems. Among the internal changes necessary to manage the total supply chain was upgrading the personnel within supply management. Today, 90 percent of the staff members have 4-year degrees, and 27 percent have advanced degrees. Nearly 30 percent have become certified public accountants. Long-term relationships with cost-effective suppliers are a key piece of the company's global supply strategy, called Supplier Alliance. The results speak for themselves. From 1990 to 1996, product quality defects were reduced by 90 percent. Honeywell has more than halved the company's suppliers, with 55 key suppliers now providing 75 percent of all production components. Lead times for parts shipments have been reduced by 75 percent, and investments in materials for major products were reduced by 50 percent. [12]

DaimlerChrysler developed a program called Supplier Cost-Reduction Effort that netted $2.3B in savings in 1999. According to the author of the program, Tom Sidlik, head of purchasing:

We are after waste and cost, not price. Some other major suppliers go after price, which reduces profit margins. We are not after reducing profit margins--we want to get the whole supply chain better managed to take the waste out so everyone makes more money. [13]

The salient point from the organizational perspective is the transformation of the purchasing arena from a tactical to a strategic focus. Air Force PSM is very tactically oriented with many short-term contracts and adversarial relationships with suppliers. A change from the small, distributed low-skilled purchasing functions now prevalent in the Air Force must be made to centralized, multifunctional teams that include logisticians and create fewer, long-term partnerships with best suppliers. The pain involved in the change will be worth the effort to obtain the benefits and experience of PSM.

Contracting cannot and should not work the PSM transition alone. Logisticians need to take the lead in shaping this change and making it happen. We do not have anything to lose but a little of our time, and we and the Air Force have much to gain if we do this right!

Notes

(1.) Robert J. Trent, "Applying TQM to SCM," Supply Chain Management Review, May/Jun 01, 75.

(2.) There are many facets to PSM and several excellent projects that describe PSM more completely than this brief article. One in particular from RAND--Report AB-352-1, Implementing Best Purchasing and Supply Management Practices: Lessons from Innovative Commercial Firms, by Nancy Y. Moore, Laura H. Baldwin, Frank Camm, and Cynthia R. Cook--is a superb document providing a comprehensive background on PSM.

(3.) USAF FY00 Statistical Digest, Tables C-3 and C-6.

(4.) Robert J. Trent and Robert M. Monczka, "Purchasing and Supply Management Trends and Changes Throughout the 1990s," International Journal of Purchasing and Materials Management, Fall 1998, 3-4.

(5.) Ibid.

(6.) Ibid.

(7.) Tom Stundza, "Aerospace Purchasing Gets Overhauled," Purchasing, 3 Jun 99, 1.

(8.) Tom Stundza, "Prepping the Supply Base for Leaner Supply Systems," Purchasing, 1 Jun 00, 3.

(9.) James Carbone, "Reinventing Purchasing Wins the Medal for Big Blue," Purchasing, 16 Sep 99, 2.

(10.) Carbone, 7.

Stundza, "Aerospace Purchasing Gets Overhauled," 3.

(12.) Tom Stundza, "Purchasing Evolves into Supply Management," Purchasing, 17 Jul 97, 1-4.

(13.) John McCormick, "Scoring Goals Towards Cost Reduction," Automotive Sourcing, Vol 7, Issue 3, 3-4.

COPYRIGHT 2001 U.S. Air Force, Logistics Management Agency
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