High powered purchasing

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Magazine Article, Source : The Manufacturer
Zone : Leadership and Lean
Published : April 2004

Centralised purchasing is an attractive utopia, but can be difficult to achieve, as Debbie Giggle discovers

Some business principles look attractive in theory but are difficult to implement. Centralised purchasing is one such concept. The benefits of making all corporate purchases via a team of procurement specialists are well

understood – economies of scale and increased negotiating power, greater control over departmental spend, reduced administration, and proactive relationships with suppliers committed to reducing costs.

Many companies have been able to achieve this corporate Utopia, but it would be wrong to assume that all manufacturers are equally well-placed to attain this ideal. A company’s ability to purchase centrally is dictated by the nature of the business rather than the management team’s willingness to adopt the concept. There is a world of difference, for example, between the following:

Example 1 is a global car manufacturer. A new product can be in development for a period of one to two years during which suppliers will work in close collaboration with the manufacturer. Major suppliers are often located geographically close to the car manufacturer. Spend is likely to be huge and suppliers will offer all sorts of value added services to keep the business. Once launched the new product will be mass-produced.

Example 2 makes specialist packaging machinery for the food industry. Design and build of each machine will vary according to the customer’s specific application. Suppliers are located nationwide and overseas. Spend with each supplier is relatively small and difficult to predict. Inventory needs to be kept to a minimum, but every order can conceivably involve a different bill of parts. Customers expect the job to be quoted, designed and built ... yesterday!

When it comes to centralised purchasing, manufacturers don’t all start out on an equal footing. A number of factors affect a company’s ability to harness its purchasing power. Businesses shaped by acquisitions and mergers for example have significant spend but considerable barriers to creating a centralised purchasing function.

Manufacturers with a design to order infrastructure, or a product range involving infinite variables, also have a far more complex purchasing need. However, the key to successful centralised purchasing – standardisation – is easier for some manufacturers than for others, but that doesn’t mean to say that we can afford to put this issue on the ‘too difficult pile’.

Roy Ayliffe, director of professional practice for the Chartered Institute of Purchasing and Supply said: “Strategic purchasing is even more critical for manufacturers than for the service industry.

On average a manufacturer spends about 70 per cent of revenue externally, compared to 40 per cent for a service sector organisation. Purchasing therefore has a direct impact on the profitability.”

So what solutions are there for manufacturers who want to purchase more strategically but do not have the classic large-company mass-manufacture infrastructure?

Even though it sounds obvious, the good-old ‘one stop shop’ shouldn’t be overlooked. Jeremy Tullett, corporate accounts manager for BSL (a major distributor of industrial engineering products) said: “Many organisations find themselves with IT connectivity problems between sites. This can be a problem for the management team. They need a clear picture of overall spend rather than fragmented reports. We have invested in IT that integrates with all systems, so we can act as an interface for customers. We bring purchasing information from all sites together into a single, usable format from which the management team can analyse current spend and develop future purchasing strategies.

“Typically we work with a new customer to understand the scope of products used in all group sites or departments. We represent around 3,500 product suppliers so we can match most technical specifications and allow for personal preference. Contracts are typically for one or three years. Service levels are agreed at the outset along with strategies for ongoing cost-reduction.”

This rationalisation of the supplier base could immediately reduce administrative costs and bring greater visibility of spend for the management team. Ongoing cost-reductions can be achieved by identifying opportunities to standardise.

“Its important to strike the right balance between standardisation and flexibility,” explained Tullett. “A customer’s existing suppliers may have important intellectual property that contributes to the integrity of the finished product. So our aim is to de-duplicate and rationalise. Never to ride roughshod over locally-held preferences.”

Duplicated products are black holes into which much of a manufacturer’s profit can disappear. Engineers often order parts unaware that the relevant item is already in stock, perhaps because they have no way of interrogating the spares inventory for their requirements. A further complication comes when a single item is listed by numerous different names.

BSL uses a database of ISO part numbers to cross-reference products and help customers to standardise and cut inventory.

Bob Clements of integration and automation company in2grate said: “Discovering duplications can be difficult when items are ordered by multiple specifiers and enter the company with differing descriptions. It’s not unusual to walk around a large workshop and find ten part bins, with ten

different part numbers, all holding exactly the same item.

“Often the engineer is ‘working blind’, reliant on catalogues or websites rather than company-held pricing data. The problem is even more pronounced when the part involved needs to be manufactured internally. Costing this part often becomes ‘rule of thumb’. While individual engineers may have excellent judgement, this doesn’t provide consistency of pricing. There is a danger that, to get a quote together as quickly as possible, an engineer will find a similar job completed in the past and set the price somewhere in that ballpark. The company could end up making the end-product at an insufficient margin – or even at a loss. But failing to send the customer a quote quickly could lose the contract altogether. Its an understandable reaction to a common dilemma.”

In2grate has developed d2order, a software solution aimed at companies that design to order. It links CAD, ERP and other IT tools to sales configurators and a central database. When specifying products the engineer can search the system for the item in question and see if it is already in stock. If not, the engineer can check previous suppliers of that item and the price at which it was bought, from the ERP data, to make an informed decision on where to order.

If the item needs to be designed and manufactured in-house, the system enables CAD drawings of the component to be linked to known costs of manufacturing, for example raw material costs (based on ERP data) and the costs of carrying out various procedures during manufacture. This intelligent estimating capability provides the engineer with a cost for the item, using current pricing data, enabling the bill of materials to be brought together more quickly and effectively. The system can also be integrated with various scheduling and CAM systems to estimate delivery dates and to take the component into production.

Clements continued: “Leadtimes can be much faster. For example, one user of d2order has reduced its leadtime from receipt of enquiry to quoting the job from three weeks down to one hour. In addition, with greater visibility, it has been able to reduce its inventory by half. As well as providing the quote to the customer much more quickly the man-hours involved in bidding for the work can be much reduced taking cost out of pre-sales estimating.”

One company that has installed d2order is Manesty – a leading manufacturer of tablet presses and tablet coating machines that has been supplying the pharmaceutical industry for more than 65 years. It employs a 200-strong workforce at its site in Knowsley, Merseyside.

Manesty’s customers require integrated process solutions rather than just a machine. As a result the company’s role has become highlycollaborative and Manesty is often part of the drug development project prior to launch. While the company has its own range of machines, customers are offered opportunities to customise and adapt the equipment for their own applications. When upgrading its IT systems, Manesty identified silos of disconnected information and installed the d2order system to provide greater visibility.

Jeff Robinson of Manesty’s IT department said: “Consistency of specification from enquiry through to service delivery is key to ensuring accurate cost and margin control,” he explained. “Most business system vendors fail to appreciate the specific requirements of the contract, design to order environment, on the premise that all manufacturing organisation produce pre-designed products to sell off the shelf.”

This is why so many business concepts are easier to apply in theory than in practice. These concepts, pioneered in mass-manufacture industries, don’t always fit comfortably in other production environments. Sometimes a little more ingenuity, or the help of carefully-developed technology, is needed to bridge the gap.

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