A Purchasing Manager''''s Guide to Strategic Proactive Procurement pdf

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A Purchasing Manager's Guide to Strategic Proactive
Procurement
David N. Burt, Ph.D.
NAPM Professor of Supply Management and Marketing,
School of Business Administration,
University of San Diego
Richard L. Pinkerton, Ph.D., C.P.M.
Professor of Marketing and Logistics,
The Sid Craig School of Business,
California State University, Fresno
American Management Association
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Library of Congress Cataloging-in-Publication Data
Burt, David N.
A purchasing manager's guide to strategic proactive procurement/ David N. Burt, Richard L.

Pinkerton.
p. cm.
Includes bibliographical references and index.
ISBN 0-8144-0288-7
1. Industrial procurement. 2. Purchasing. I. Pinkerton, Richard
L. II. Title.
hd39.5.b857 1996
658.7'2—DC20 95-44558
CIP
©1996 David N. Burt and Richard L. Pinkerton.
All rights reserved.
Printed in the United States of America.
This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in
part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of AMACOM, a division of American Management Association,
1601 Broadway, new York, NY 10019
Printing number
10 9 8 7

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To Lamar Lee, Jr., Gayton Germane, and Bob Davis, all former members of Stanford University's
great School of Business, and mentors of David N. Burt
To William P. Stilwell, J. Howard Westing, Harland E. Samson, and Isadore V. Fine, all professors
emeriti, The University of Wisconsin, Madison, and the superb teachers of Richard L. Pinkerton

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Page v
Contents
Preface ix
Acknowledgments xv

1 Benefits of the Integrated Procurement System 1
The IPS diamond; success stories; the effect of quality of purchased
material on productivity and profits; five approaches to doubling profits;
IPS in manufacturing, service organizations and hospitals, government,
and construction; purchasing and materials management; the steps to
successful integration; summary.

2 Determining What to Purchase: The Design Process 23
Developing requirements; the design process and procurement;
crossfunctional teams; the investigation phase; the laboratory phase; the
manufacturing phase; engineering change management (ECM); key
purchasing inputs; how to integrate engineering successfully into the
procurement system; material engineers; design review committee; project
teams; approved components list; suggestions from pros; summary.

3 Developing the Right Purchase Description to Save You Time and
Money
37
Classifying an inventory catalog; requirement trade-off analysis; describing
the purchase by brand name, samples, standard specifications, design
specifications, or performance specifications; how to select the right
approach; summary.

4 Procuring Services 49
Six major problems; objectives; statement of work (SOW); professional
services; technical services; operating services; SOW language; summary.


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5 How to Stretch Your Equipment and Building Dollar 59
Major problems; the capital equipment buying team; the capital equipment
procurement flowchart; the process flow of procuring equipment;
classification of capital equipment; installation; requests for proposals;
supplier selection; total cost of ownership (TCO); financing vs. leasing,
new vs. used; purchasing plant facilities; top management functions;
alternative methods of purchasing construction; summary.

6 Two Key Interfaces: Production Planning and Inventory Control 72
Production planning; scheduling; forecasting; MRP; MRP II; JIT; supplier
schedules in production control; the role of purchasing under MRP and
JIT; proper levels of inventory; inventory costs; the fallacy of EOQ;
catalogs; distribution resource planning (DRP); integrating marketing,
production planning, and inventory management into the production
system; electronic data interchange (>EDI); purchasing credit cards;
summary.

7 To Make or to Buy: That Is the Question 96
The issues: strategy, cost, quality, quantity, service, specialized
knowledge, design or production process secrecy, urgency, labor
problems, plant capacity, capital equipment, use of idle resources; make
and buy; vertical integration vs. specialization; summary.

8 How to Select the Right Supplier 106
Prescreening; sourcing outline and checklist for major purchases; the
pre-experience supplier evaluation form; the critical evaluation factors of
management: financial strength, financial ratio tests, production capacity,
experience, quality assurance; R&D, delivery, purchasing expertise,
price/cost controls; direct or indirect, number of proposals, local or
national suppliers, global sources; request to bid, quote, or get

information; what is an offer?; lower bid implications; when to use
competitive bidding; selecting the source; source development; supplier
certification; supplier contract management; final supplier rating forms;
suggestions to reduce mistakes; summary.

9 Price Analysis 132
Basic supplier pricing strategies; pricing elements under the control of
purchasing; defining fair and reasonable pricing; the price analysis process;
competition; catalog or market price; price comparisons; engineering
estimates; keeping total cost low; transportation costs; two-step
procurement; the special case of "price in effect at time of delivery";

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target pricing and cost drivers; summary.
10 Cost Analysis 146
Cost within a traditional relationship; the supplier's cost breakdown:
materials, labor, overhead; activity-based costing; proof profit; the role


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of estimates; price increases; cost within a strategic supply alliance; target
costing; summary.

11 Value Analysis and Value Engineering 156
Development of value analysis and value engineering; principles,
techniques, and examples; the VA-VE procedure; the two faces of
VA/VE; the keys to successful implementation; summary.

12 Quality Assurance Overview 169

Defining quality; total quality management (TQM); mapping TQM,
quality function deployment (QFD); continuous improvement (CI); the
major technical quality tools; statistical process control (SPC); the
control; the investigative tools of quality assurance; design of experiments
(DOE); Pareto analysis; cause-and-effect diagrams or "fishbones";
plan-do-check-act (PDCA); the poka-yoke system; Certification Program;
the Malcolm Baldrige National Quality Award; the Deming Prize; supplier
certification; benchmarking; the role of purchasing in quality assurance;
summary.

13 Team Building 188
What is a team?; the team's charter; a recent case history; how to have
more effective teams; clearly defined objectives; explicit goals and vision;
team structure and mandate; competent team members; types of team
members; unified commitment; collaborative climate; the four stages of
team development; standards of excellence; exterior support; recognition,
rewards, and motivation; principled informal and formal leadership; the
special situation of cross-functional sourcing teams; measuring team
progress; final thoughts and warnings; summary.

14 The Winning Way of Negotiating 199
What is negotiation?; the best of Fisher, Ury, and Patton's "Getting to
Yes"; problems in negotiating; when to negotiate; what to negotiate;
preparing for negotiation and fact-finding; determining bargaining
strength; final agenda preparation; practice; the negotiating meetings;
negotiating techniques; how to handle the difficult potential or current
supplier; hints for the negotiator; terminating and/or documenting the
agreement; negotiation post mortem; negotiating with someone from
another culture; summary.

15 Strategic Supply Management 218
Supply as a competitive weapon; integrating supply strategy with the
strategic business units' (SBUs) strategy; gaining velocity during

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development and production; measuring continuous improvement;
sourcing globally; optimizing the cost of ownership; centralizing supply
strategy; purchasing power with measurement; data available and

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used; supply base by design; leverage supplier technology; monitoring the
supply management; managing relationships; value chain management;
summary.

16 Planning for Proactive Procurement 229
Defining "planning"; procurement planning; the current situation analysis
phase; the objective phase; the consolidation procedure as a major
planning tool; the creative new action steps (the new plan); the great
assumptions; the materials plan; the procurement planning chart; planning
hazards; implementation, monitoring, and revision; summary.

Appendix A: Make-or-Buy Policy and Procedure 241
Appendix B: Supplier Welcome Booklet 248
Appendix C: The Learning Curve 269
Appendix D: Alternative Methods of Contract Pricing 274
Appendix E: Other Approaches to Cost Estimating 282
Appendix F: Special Secondary Source Techniques for Estimating
Cost Components
287

Appendix G: Managing Price Increases 290
Appendix H: Statistical Process Control 292
Appendix I: Design of Experiments 297
Appendix J: Supplier Quality Survey Example 300
Appendix K: Sample Audit-Situational Analysis Questionnaire 307
Index 313

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Page ix
Preface
Much has happened in procurement circles since David N. Burt's book Proactive Procurement was
published in 1984. We like to think Proactive Procurement had at least a small part in focusing
attention on the importance of procurement in containing costs, improving quality, increasing
productivity, shortening concept to customer delivery times, and strengthening the integration of
materials management into the total operations of an organization. A Purchasing Managers Guide to
Strategic Proactive Procurement retains the visionary topics of Proactive Procurement while adding
the very latest and, indeed, future procurement methods for effective purchasing in the twenty-first
century.
A great many trade books addressing an organization's relations with its suppliers have appeared
recently. Perhaps the most advanced is the American Keiretsu by Burt and Michael Doyle
(Homewood, Ill.: Business One Irwin, 1993). Whether these books stress early supplier involvement,
partnerships, alliances, strategic procurement, or supply management, all these themes require and
expressly state the need for the procurement process to be a "value adder." The integrated
procurement system (or IPS) as first described in Proactive Procurement adds value to the firm's
operations. The heart of the IPS is the cross-functional procurement team composed of
representatives of Design Engineering, Manufacturing Engineering, Purchasing, Manufacturing,
Quality Control, key suppliers, Marketing, and, when relevant, Finance. This integrated procurement
system preceded the horizontal corporation by some 10 years, and in some ways, it prepared the way
for this approach to organization and management.
The other major action prescribed in Burt's 1984 work was the growing practice of beginning the

procurement emphasis at the design stage while contracting or outsourcing maintenance, repairs, and
operating supplies (MRO) and basic raw materials under long-term systems contracts and blanket
orders with one or two suppliers. Management is slowly recognizing that the major procurement effort
must be strategic and play a key role at the product-service concept development stage. At this stage,
quality is designed in, cost is designed out, and the time required to bring a new product to market is
reduced.
The foregoing changes also dictate the need for more professionally trained personnel in the
purchasing or procurement function, now called supply management or sourcing by a few
forward-thinking firms. Gone are the days when an individual could simply progress through
on-the-job-training from secretary or

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materials handler to buyer and then take a place at the product development table. The topics at these
meetings are simply too technical and too complex, and most of the team possesses university-level
technical and business training. Dear Old Betty and Good Old Fred are out of place; they have little
credibility, little to contribute, and little respect from the other members. They simply cannot add
value. This is one reason some forward-thinking companies have separated strategic procurement
planning from day-to-day buying: one procurement group designs, develops, implements, and ensures
the optimal functioning of the procurement process and another group executes the plan.
It is our hope that this book will provide renewed stimulation to move from reactive-passive
purchasing to proactive procurement, a move almost guaranteed to reduce material costs by 10% per
year, reduce the cost of converting purchased materials, virtually eliminate incoming quality problems,
and reduce time-tomarket. We define proactive procurement as the process of professionally and
aggressively adding value during the four stages required for effective procurement: (1) the
determination of what to buy; (2) the identification and development of the appropriate relationship
with the desired source of supply; (3) obtaining the lowest all-in or total cost associated with
purchasing and converting the required material or service; and (4) ensuring that the required material
or service is received in the quality required on time and that relations with preferred suppliers are
used to ensure these suppliers' availability for future procurements. Proactive procurement requires the

development and implementation of an integrated procurement system as described in Chapter 1. It
takes years for new concepts such as agricultural improvements regarding crop rotation and other
high-yield payoff techniques to be embraced. Our experience has been that only a handful of U. S.
firms have actually progressed from reactive purchasing to proactive procurement. Many firms go
through the motions of progressing to proactive procurement: they attend only one or two training
seminars and "think" that real change has occurred when, in fact, business goes on as usual. Thus,
even though many of Burt's concepts first appeared in 1984, this book is needed to rekindle the fire so
that American business can regain its competitive edge through the contributions of a proactive
approach to procurement.
The 1990s are the years of the revitalization of industry. Managers everywhere recognize the need to
increase profits or, in some cases, to become profitable once again. They know that productivity must
increase. They know that to compete in the world marketplace, they must improve the quality of their
firms' products, reduce cycle time, and lower costs.
There are abundant responses to the challenge of industrial revitalization: total quality management
(TQM); just-in-time (JIT); reengineering; lean manufacturing; the list seems endless. But the simplest
and quickest solution all too frequently is overlooked. It can be exciting, provocative, and challenging.
Its impact can exceed all the benefits of the foregoing techniques. It is called proactive procurement.
Ironically, it is a prerequisite for success with all of these techniques.
The procurement of material and services cuts across organizational boundaries. The process includes
activities in Marketing, Design and Manufacturing, Engineering, Operations, Production Planning,
Quality Assurance, Inventory Control, Purchasing, and Finance. Integration of the procurement
activities per-

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formed by these departments results in a synergism, a situation in which the whole is greater than the
sum of its parts. This type of integration and the resulting synergism take place in many settings:
manufacturing, service and construction firms, not-for-profit organizations, and government. The net
result for all is greatly increased profitability productivity and quality.
Proactive procurement requires that all members of the procurement system-whether forecasters in

Marketing, designers and cost estimators in Engineering, planners and inventory managers, quality
assurance personnel, the purchasing staff, and others-recognize their role in value-added procurement.
In reactive purchasing, the purchasing department becomes involved in the procurement process only
on receipt of a requisition for materials, supplies, or services and functions in a non-value-adding
mode.
Often at least 60% of a product's or service's cost is in the form of purchased supplies, equipment,
materials, and services. On average, 50% of a firm's quality problems can be tracked back to
purchased materials. The amount of time required to bring new products to market successfully can be
reduced by 25% and more through the successful early involvement of Purchasing and preferred
suppliers during the new product development process. Thus, it is easy to see that procurement has
more impact on the bottom line than any other process required to make the firm viable.
The concepts of proactive procurement and the integrated procurement systems have been embraced
by several authors since the publication of Proactive Procurement in 1984. A very popular trade book,
Reverse Marketing: The New Buyer-take the initiative in making the proposal" for supply objectives.'
In 1986, Witt described the virtues of looking at the entire logistical pipeline as "Logistics Early
Involvement (LEI)."
2
All three approaches require the implementation of IPS and a proactive
approach to procurement and IPSs. By the way as far back as 1981, Victor H. Pooler and David J.
Porter were using the term proactive purchasing.
3
Successful integration of the system leading to proactive procurement requires dedication, qualified
managers and subordinates, an understanding of sound procurement techniques by all involved, and a
can-do attitude.
This book is an outgrowth of more than 60 years of experience as practitioners, professors, and
students of procurement. It is based on the belief that proactive procurement is the key to greatly
improved profits, productivity, and product quality.
Although written for the purchasing manager, A Purchusing Managers Guide to Strategic Proactive
Procurement has considerable relevance for top management. The understanding and support of
senior management will greatly facilitate implementation of the recommended improvements.

This book outlines and discusses the steps required to gain the benefits of proactive procurement.
Over 50 specific problems that frequently block effective procurement are identified together with
suggestions for avoiding or overcoming them. The book is written with the objective of aiding busy
managers in their efforts to ensure the successful survival and increase the profitability of their
organizations.
This book will aid you in many ways. It will:
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• Create an awareness of the benefits resulting from implementation of an integrated procurement
system.
• Show you how to develop and sell your integrated system, including advice on how to overcome
resistance to the required changes.
• Provide understanding of the key procurement activities so that all individuals involved in
procurement understand their responsibilities and those of their counterparts.
• Identify and address over 50 problems or problem areas that result in ineffective procurement.
• Identify six points in the engineering design process at which purchasing can make a contribution to
the profitability and success of the new product.
• Describe how the procurement system can improve the quality of your firm's products.
• Show how to integrate engineering into the procurement system.
• Portray the cost implications of alternate approaches to describing requirements and show how to
conduct procurement research systematically.
• Describe professional sourcing procedures.
• Show how to improve purchasing lead time and how to live with material requirements planning.
• Provide insight into the conflicting forces that should be considered when developing inventory
policies.
• Tell when make-or-buy analyses should be conducted and discuss the issues that should be
considered.
• Explore pricing theory and practice including how to fight price increases with the Zero Base

Pricing
TM
approach.
• Identify the basis of cost analysis including target costs, cost drivers, and cost containment.
• Discuss issues to consider when dealing with potential suppliers in foreign countries and list several
critical cultural nuances to consider in such dealings.
• Describe the keys to successful win-win negotiations in concise and understandable language and
discuss the role of nonpurchasing members of the negotiating team.
• Tell how to develop and implement profit contributing value engineering and analysis programs.
• Explain all facets of TQM and how to ensure timely delivery of the prescribed quality.
• Describe the benefits resulting from purchasing's involvement in the corporate planning process.
• Tell how to develop a strategic material plan and detailed tactical plans.
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• Describe the benefits from purchaser-supplier collaboration and longterm relations.
• Show how to develop and manage competent suppliers.
• Show how to minimize the impact of material shortages.
• Describe the basics of team building.

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• Bring you up to date on the latest thinking from the best of the current literature.
• And much more!
Notes
1. Michiel R. Leenders and David L. Blenkhorn, Reverse Marketing: The New Buyer-Supplier
Relationship (New York: The Free Press, 1988).
2. Phillip R. Witt, Cost Competitive Products: Managing Product Concept to Marketplace Reality
(Reston, Va.: Reston Publishing, 1986).
3. Victor H. Pooler and David J. Porter, "Purchasing's Elusive Conceptual Home," Journal of
Purchasing and Materials Management (Summer 1981), p. 16

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Acknowledgments
Many people have contributed directly or indirectly to the development of this book. Burt's first and
greatest teachers were two people who ''worked for me'' in his first two purchasing offices during the
1950s: Dick Curtis and Ed Williams. Many people in academia have played significant roles in the
development of our understanding of business activities: George W. Zinke and Ruben A. Zubrow of
the University of Colorado; Clyde Johnson and Norman Maier at the University of Michigan; and Bob
Davis, Gayton F. Germane, the late Lamar Lee, Jr., and Steve Wheelwright at Stanford University.
Colleagues during Burt's days in Dayton- Joe Boyett, Dean Martin, Frank Stickney, Ted Thompson,
and Bob Trimbleplayed key roles in the development of our philosophy and insight into the
procurement process. Steve Achtenhagen, Mel Kline, Bill Little, Jack and Cathy Bergquist, and the
late Ed Cochran and Gail Murray all provided guidance and inspiration as the project developed and
grew.
Many individuals in industry have provided assistance: Ralph Dixon of Hughes Aircraft provided
invaluable input and counsel; Richard Y. Moss II of Hewlett-Packard, who developed the charts
describing the engineering design process depicted in Chapter 2, and Evelyn Szabo of Megateck were
both the source of great assistance. In addition, others in industry gave freely of their time: Nick Alex
of NCR; Richard Baribault and his staff at Alcoa; Tony Dereczo of Rohr Industries; the late Kenneth
Gay and Bob Peterson of Rockwell International; Brian Robertson of Apple Computer, Inc.; James M.
Hill of Raytheon; Bill Lambert of Boeing; Gordon Olson, Malcolm Smith, Don Taylor, and John
Veterren of Hewlett-Packard; Kevin C. Beidelman, and Gary Lenik of Newport Corp.; Bob Paul of
Lockheed; Myron Schwartz of Memorix; The Sea Ray Corporation; Bob Reynolds of McDonnell
Douglas; Andrew Scanlon of Hobart; James Walz of General Electric; D. C. Weinstein and Larry
Michael of Westinghouse; John Kelsey and Dick West of the Ford Motor Company; Anthony P.
Marino of Saint Agnes Hospital in Fresno, Calif.; Dick Erskine of the Bechtel group; John Zech of
Kaiser Engineering; Harry Wright of FMC; and one of Burt's other coauthors, Michael F Doyle,
formerly of The Ford Motor Company and Motorola and now president of Doyle and Associates.
Deans James Burns and Robert O'Neil of the University of San Diego provided both support and
encouragement. The word processing staff at California

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State University-Fresno, The Sid Craig School of Business, including Marcia D. Martin, Lorna E.
Lewis, and Kathy Uchiyama provided invaluable manuscript preparation. Sharon Burt provided
scholarly advice, counsel, Exhibit 3-1, and much encouragement. Finally Linda Vail, Secretary of
Marketing and Logistics at California State University-Fresno, Sid Craig School of Business, helped
on many details.

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Page 1
1
Benefits of the Integrated Procurement System
It is Saturday afternoon, September 6. Ted Jones, purchasing manager for the Eagle Manufacturing
Company, is in his office reviewing his life at Eagle. Since becoming the head of Purchasing, Ted has
been struggling with one crisis after another while trying to placate Operations, Plant Maintenance,
and seemingly half the management team (and their secretaries). Although only 35, Ted feels like 60
(his wife thinks he's starting to act like 60, too). Eagle is expecting a great deal for the money it is
paying Ted.
In the two years since taking over the department, Ted has put together a great team of buyers,
expediters, and support staff. Their work is tops . . . they are all professionals. But morale is becoming
a problem. On Friday, Bill Wilson, Ted's senior buyer, submitted his resignation. Bill decided to take a
job with a handsome salary increase at Cable Manufacturers of America. He said, "If I'm going to get
ulcers, I might as well be paid for them!"
Ted looks at the August performance data for the office: 743 transactions, 91% with delivery dates on
or before specified, 87% of supplies and material purchases at or within 5% of target price, 9% late
deliveries, and a 5% rejection rate of materials and supplies received. Compared with previous months'
activity, the trends look good, but there is still room for improvement. Ted feels that his department
could have a much greater impact on the firm's profitability if only he could generate more cooperation
with the other departments. He also realizes that a better training program will bring along some of his

own people a bit faster.
Ted thinks about some of the "big ones" that happened in August. Maintenance submitted a purchase
request for a new robot on August 29. According to the estimates supplied, the machine would cost
$4.4 million. It was to be delivered and operational in seven months. Only one source of supply was
able to meet the delivery date. Ted wonders how much extra money the lack of lead time had cost.
Tim Raines, vice president of Operations, held Ted's feet to the coals in the weekly staff meeting on
August 7. Operations had run out of parts that week. The vice president of Marketing, Ron Hankins,
helped to apply the coals. In retrospect, Ted is puzzled over the hopscotch communication patterns
between Operations, Material Control, Marketing, and his own office.

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Page 2
Tim jumped Ted on August 14, again during the staff meeting, saying that quality on the incoming
parts was causing major production problems. Ted tried to explain the greater attrition rate inherent in
new supplier production processes, but Tim was not convinced.
In fairness, not all his problems are with Operations, Ted thinks during his Saturday afternoon reverie.
The president's secretary called twice to say that the janitorial services contractor had not washed the
windows properly. Ted mentioned that poorly described, unenforceable specifications were part of the
problem. But the secretary was just trying to do her job in seeing that somebody else's job was done
right she didn't know about the "contractual provisions."
Mary Jacobs, head of Administration, had been complaining to Ted on a daily basis about the new
brand of reproduction paper: The quality of reproduction was down and the paper was constantly
jamming the machine. The resulting downtime was reducing productivity and increasing frustration in
her people. Ted pointed out that Finance had reduced funds available for supplies by 20%, which
consequently had forced some sacrifice in quality.
Yesterday, John McCauly, an experienced buyer and normally as cool as a cucumber, had exploded
when Ted asked how everything was going. John had replied, "Those blankety, blank estimators. This
morning, I was negotiating with Fenwick Electronics for that robot. The maintenance department's
estimate was $4.4 million. Fenwick proposed $5.8 million. You know that because of time, they were
already in a sole-source position. Imagine my reaction when I learned that our 4.4 million 'estimate'

was not an estimate at all but merely the amount budgeted for that machine last year! I had no basis
for developing a realistic negotiating objective. I literally had to throw myself on the mercy of
Fenwick's marketing manager."
Bringing his thoughts back to the present, Ted decides there just has to be a better way.
Extreme? Perhaps. Perhaps not. All managers have experienced many of Ted's problems. There is a
way of avoiding most of them, and, in turn helping the purchasing department to make a greater
contribution to profitability. That way is proactive procurement. And you can and should be
responsible for making it happen.
Total quality management (TQM), just-in-time (JIT) manufacturing, simultaneous engineering,
strategic cost management, flexible manufacturing, the virtual corporation, the protection of core
competencies, value chain management, activity-based costing (ABC), and reduced time to market all
have one thing in common: For the utmost success, the organization must have a well-designed,
well-managed supply management system! And the designer and manager of this system is the vice
president of Procurement.
The Integrated Procurement System
Procurement is the systematic process of deciding what, when, and how much to purchase; the act of
purchasing it; and the process of ensuring that what is required is received on time in the quantity and
quality specified. Procurement is

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Page 3
much broader than purchasing, involving activities that take place in many departments.
The quantity quality and cost of purchased items affect the quality of the firm's product, the ability to
produce it, productivity and, most important, the firm's profitability. Determining what to buy does not
begin when the purchase requisition is written but, rather, during the development of the product.
Early involvement of Purchasing can avoid these common situations:
* New product introduction delays, a deadly error in this age of intensive global competition
* Overbuying, based on excessive specifications
* Underbuying based on traditional overfocus on price (price myopia vs. a focus on total cost),
resulting in scrap, process yield losses, rework, time delays, and final customer rejection

* The purchase of large amounts of materials at quantity discounts causing needlessly high
inventory carrying costs
* Manufacturing downtime due to stock outages because of inventory reductions
* Use of slower modes of transportation to save transportation dollars, resulting in large inventory
carrying costs and/or manufacturing downtime
* The purchase of individual components without regard to the economies of modular packages
(buying pieces instead of systems) and neglecting the ease of assemblability
Organizations exercise the best control over the cost and quality of purchased goods and services only
when appropriate members of the various departments involved in the procurement process operate as
an interdependent, integrated system. When this happens, a synergism takes place with the result that
the integrated efforts become greater than the sum of the individual efforts. Conversely uncoordinated
action by one department's representative may optimize the success of that department but cause
undesirable results in another, to the detriment of the organization as a whole. For example,
incorporation of extremely high tolerances may make a product of great technical excellence but one
that is too costly to survive in the marketplace. The purchase of large quantities of materials or
supplies may mean lower unit prices through quantity discounts, but there will be increased inventory
carrying costs. Conversely, inventories may be reduced in an effort to lower carrying costs, causing
downtime in manufacturing due to stock outages, more frequent purchases at higher unit costs, or
both. Slower modes of transportation may save shipping dollars but lead to larger inventories or
downtimes in manufacturing.
Proactive procurement results in implementation of an integrated procurement system (IPS). With
proactive procurement, all members of the procurement system-whether forecasters in Marketing,
designers and cost estimators in Engineering, production planners and inventory managers, quality
assurance personnel, the purchasing staff, and others-recognize their role in the IPS. And they
cooperate in making the organization more profitable through more effective procurement. With this
proactive approach, representatives of the purchasing depart-

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ment are involved (frequently with one or more preferred suppliers) in the requirements process in which

they provide input on the commercial and technical implications of alternative materials, equipment, and
services. The purchasing department takes the initiative in developing and managing the system and
making savings happen. In reactive purchasing, the purchasing department becomes involved in the
procurement process only on receipt of a requisition for materials, supplies, or services. (In some
unfortunate cases, purchasing is not involved until even later.) An integrated procurement system is the
key to increased profits and productivity and is the quickest way to quality improvement. The many
interfaces and interdependencies of the IPS are shown in the IPS diamond, Exhibit 1-1, and are discussed
throughout this book.
During the design stage of a product's development, incorporating the "right" material to be purchased
significantly reduces material expenditures. Here are three examples of how this was done with
Purchasing's help.
1. A manufacturer found that a zinc alloy was an acceptable alternative to a high-leaded tin-bronze
casting alloy under consideration. The zinc alloy cost half the price of the tin-bronze alternative.
2. Another manufacturer found that a synthetic insulation material was far superior to asbestos in the
production of high-temperature hose lines. The synthetic material cost one third as much as the asbestos
and avoided the latter's hazards.
3. An appliance manufacturer found molded plastic knobs to be suitable alternatives to machined metal
knobs, at a savings of 85%.
Market share, prices, and profits are all favorably affected by attention to quality. Today, quality and
reduced time to market have replaced price as the key to increased market share and profit margins.
Procuring the right quality materials frequently is the quickest and easiest way to improve the quality of
the final product. Procuring the right quality materials is far more likely to occur when a firm uses a
proactive approach to procurement than the traditional reactive approach.
A recent famous case of unilateral purchasing decision making involved the enormous price pressure by
Ignacio Lopez, GM's former corporate purchasing chief. Lopez restored a focus on low price versus
total cost at GM with, according to Business Week, the following results:
But already, the Lopez system is causing problems. At the company's Arlington (Tex.) plant, an ill-fitting
ashtray from a new, sub par supplier caused a six-week shutdown of Buick Roadmaster production At
another plant, GM managers had to go begging for help from a supplier that Lopez had rejected in favor
of one that bid 5% less. Trouble was, half the low bidder's parts flunked quality tests. So within four

days, the other supplier geared up to make parts that were flown to GM by charter plane. 'My guess is
that their 5% savings turned into a 15% loss,' the second supplier says.'
Page 5
Exhibit 1-1. The many interfaces of the IPS.
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