Buying power

Posted on 12 Mar 2009 by The Manufacturer

Implementing effective purchasing strategies should be a fundamental best-practice exercise in all economic conditions. In a recession, applying the most effective purchasing strategies becomes imperative. Mark Young explores both new tactics and tried and tested tools used by three manufacturers – BAE Systems Submarine Solutions, Willerby Holiday Homes and Brompton Bicycle – for the building of a smooth procurement plan

A common definition of an effective purchasing strategy is: “to acquire the right quality of material, at the right time, in the right quality, from the right source, at the right price.” These ‘five rights’ have arguably become the unofficial golden rules of procurement, rather like the ‘six Ws’ that journalists should abide by. Although the checklist is partly subjective, it is seen as the foundation for the planning or review of any purchasing strategy.

However, the ways by which companies ensure those factors are ‘right’ are changing. New practices, operational theories, industry trends and the economic climate all shape the way procurement managers and supply chain directors do their job. Increasingly, along with its efficiency in terms of time, cost and space, a company’s purchasing strategy must also be socially and environmentally sound, to conform to corporate social responsibility and sustainability targets which the company has adopted. At times when access to credit is still very restricted, firms must look at alternative ways of freeing up finance. Purchasing strategy savings are a good place to start.

The Chartered Management Institute (CMI) has developed its guidelines, aimed at “presenting a proactive approach to purchasing”, targeting both centralised and de-centralised systems. It includes action checklists for how a purchasing company conducts itself and the way it evaluates its suppliers, some general advice and a list of ‘dos and don’ts’. “Adopting an effective purchasing strategy,” says the CMI, “will turn a reactive buyer into a proactive buyer, one that adds value to the process.”

The CMI says an organisation should closely review its purchasing history and use that to become a ‘proactive’ buyer. This involves weighing up the benefits of bulk purchasing against storage costs, anticipating reorder dates, saving on delivery charges by ordering all items from one supplier in one hit and monitoring seasonal fluctuations in price.

For suppliers it recommends frequent communication with customers, site visits, continual market research, competitive negotiations and agreeing deals well in advance of action, while negotiating cheaper rates for doing so. It also suggests initiating a culture between organisations whereby each benefits from the other’s expertise in different areas of businesses to strengthen processes and relationships. Companies, says the CMI, should also have a strong awareness of their importance to the supplier. For example, awareness of what proportion of a supplier’s turnover they will account for and whether rival companies might take precedence.

A supplier’s insurance is also important, as is their quality control, customer testimony and any third party accreditation. Leave an audit trail, the CMI suggests, and stick to a code of ethics including confidentiality and abstaining from gift-swapping.

Measure the relationship
Malcolm Dare, supply chain director for BAE Systems Submarine Solutions says that a close working relationship with tier one suppliers is one of the most important elements in an effective purchasing strategy. “I don’t believe a company should have to provide assistance through the whole supply chain,” he says, “but it stands to reason that problems further down could have knock-on effects on us. So part of our work with our tier ones is ensuring they too are working closely with their tier ones – our tier twos. That reciprocal support network is the simplest way to ensure a healthy chain.” Over the last two and a half years, BAE has focused on turning its relationships away from what Dare labels “an adversarial approach” towards “a much more integrated working relationship,” between BAE, the Ministry of Defence and tier one suppliers.

Dare also advocates a holistic approach to assessing the performance of suppliers which ensures both parties are aware of what parts of the relationship are working and what needs to change. This is integral not only for solving problems but for of transparency and creating trust. Open-book costing is another practice he recommends.

“You need clarity in what you are measuring suppliers’ performance against, and that supplier must understand exactly how the assessment is made. You need rolling two-to-three-year continuous improvement programs set up with each individual supplier. I’m a great believer in having regular business reviews with clients on a three month basis, or six month if the regularity of supply dictates it.”

Wherever possible, says Dare, companies should adopt common and industry standardised performance techniques and, if available, conform to codes of practice. In the defence industry there is a method called SC21 – Supply Chains for the 21st Century which has set out pan-industry standards of performance for delivery and quality and includes checklists for measuring relationships.

“You have to blend the intangible methods of supply chain management – things like regular supplier forum – with tangible methods like monthly and quarterly performance reviews, SC21, improvement plans and partnering styles. Blend them and you get a very powerful way of monitoring how effective your supply chain is while building some very good relationships.”

Solus to multi-source
Will Dennett, purchasing manager at recreational home manufacturer Willerby Holiday Homes, says that, responding to the economic downturn, the company now holds a monthly supply chain risk assessment with its board of directors. This ensures top-down agreement for short term policies of resource. Policies to come out of such meetings include the strategic change from ‘solus’ (single-source) to multi-source agreements in order to de-risk and secure supply. The procurement team are now more involved in analysing company finances, rather than simply having the figures fed down the line. The balance sheets are now reviewed almost constantly, says Dennett, and in this way he feels the economic downturn has even had its merits, for this company at least, as it has inspired “a little extra touch of vigilance”.

Willerby has forged strong alliances with suppliers, through which it has developed and changed the production and procurement policy of many key suppliers to the holiday home industry. “By far the biggest evolution has been a supply chain-wide adaptation from batch and queue to demand pull lean production,” says Dennett. “And the risk from solus supply has become greater as specific suppliers have gone into administration or reduced output or capacity to match the general market output during last year. So we had to make the decision to revert back to multisource to ensure our processes are not going to be held back going forward.” Willerby will, though, continue to source specialist products from secure firms that agree to supply it exclusively, thus ring-fencing and protecting supply chains for key risk items.

“Essentially, the most important aspects of my job as purchasing manager is to make sure the company gets what it needs on time and at a price that represents value for money,” says Dennett. “The best way to ensure that happens is by cementing two-way relationships with suppliers based on the trust that in doing the best for our respective organisations we are doing the best we can for each others’. This is why we’ve engaged with our suppliers through things like credit-risk coaching and have set up supplier alliances. It helps to cement everybody’s position.”

One of the most widely acknowledged tools to releasing tied-up capital is the principle of Just-in-Time (JIT). The principle was first introduced in the 1970s by lean expert Taiichi Ohno at the forerunners of mass production efficiency, Toyota. As the University of Cambridge’s Institute for Manufacturing notes, JIT “is a management philosophy and not a technique”. It is applied to the entire manufacturing process for the purposes of total elimination of waste and a culture of continuous improvement. Elements of JIT, however, have been extracted and applied to specific processes within wider manufacturing operations; purchasing strategies is one. Several benefits of this can result, including reduction of work-in-process inventory, improvement in inventory turnover, better inventory records, easier inventory quantification and improved supplier-purchaser relationships.

Don’t bite the hand that feeds you

Will Butler-Adams is managing director for Brompton Bicycle, a London based manufacturer of foldable bicycles, which has seen a sharp rise in sales in the downturn as city-dwellers look to swap their second cars for two-wheeled means of transport. He outlines how the company has adopted some JIT principles to make operations leaner. The benefits of this can be realised throughout the supply chain, he says. “Our stock levels are currently too high,” says Butler-Adams.

“Reducing these levels will free up cash. In the current environment we are in a stronger position to negotiate with our suppliers for them to offer better service; to hold stock on our behalf and to deliver more regular deliveries on suited pallets – in return we won’t look for price reductions or longer [payment] terms.”

“This is the very time when you need to work with and support your suppliers – if you use the current economic climate to squeeze them on price and terms you may put them out of business which will cause far more problems.”

Butler-Adams says Brompton is trying to reduce the points-of-use for its stock from ten to one; an initiative which he says will immediately reduce stock-in-hand and, consequently, reduce wastage. “We are looking to introduce a barcode stock control systems, with the aim to give greater clarity of our stock position so we can operate leaner, to free-up valuable cash,” he added.

Problems can arise with JIT in purchasing models due a potential lack of flexibility when things don’t go precisely to plan; having the supplies available to respond to a sudden need to increase production, for example. Or, if a firm receiving goods does not pay in ample time, there may not be other cash available in the business to fall back on and buy supplies from a third company, again causing disruption to the manufacturing process.

New code for prompt payment

One form of mitigating the second problem is the Prompt Payment Code (PPC). This is a recently introduced initiative that intends to improve purchasing strategies for all small businesses. Developed and administered by the Institute of Credit Management (ICM) in conjunction with the Department for Business Enterprise and Regulatory Reform, the PPC is a voluntary best-practice policy which involves signatories paying suppliers on time and to agreed terms, along with the commitment to quickly resolve any dispute that might arise. The ICM seeks positive references from a firm’s commercial partners before allowing it sign-up to the code. It plans to review its approved signatories twice yearly to check they are still operating inside its guidelines.

ICM and BERR advise companies to seek partners in their supply chain that have signed allegiance to the PPC as, in the words of business secretary Lord Mandelson: “suppliers can have confidence in any company that signs up to the code that they will be paid within clearly defined terms, and that there is a proper process for dealing with any payments that are in dispute.” He referred to the PPC as “an exciting development” and says government will be monitoring its ongoing effectiveness.

“One of the biggest elements to effective supply chains is ensuring everyone pays on time,” said BAE’s Dare. “Our typical payment times are 30 days. In the current climate, it is essential that businesses in a healthy position pay promptly to help out other companies, or at least not add to their problems, because that’s when you get knock-on effects. We need a smooth flow of money owed throughout the chain.”

Dare said BAE are due to sign the PPC. “We will attempt to work out a deal with any company that asks for quicker payment and be sympathetic to its needs should its viability be at risk,” he added.

As these three manufacturers advocated, the main concern in an economic downturn should be the concerns of a company’s business partners, no more so than from a supply chain perspective. Simply looking out for number one is a doomed strategy when your own supplies run low and, worse, nobody left for you to supply.