A Purchasing Manager''''s Guide to Strategic Proactive Procurement phần 1 pdf

2 Determining What to Purchase: The Design Process 23 Developing requirements; the design process and procurement; crossfunctional teams; the investigation phase; the laboratory phase; t

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

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Library of Congress Cataloging-in-Publication Data

©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

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

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

Six major problems; objectives; statement of work (SOW); professional

services; technical services; operating services; SOW language; summary

Page vi

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

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

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

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

10 Cost Analysis 146

Cost within a traditional relationship; the supplier's cost breakdown:

materials, labor, overhead; activity-based costing; proof profit; the role

Page vii

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

costing; summary

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

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

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

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

sourcing globally; optimizing the cost of ownership; centralizing supply

strategy; purchasing power with measurement; data available and

Page viii

used; supply base by design; leverage supplier technology; monitoring the

supply management; managing relationships; value chain management;

summary

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 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 K: Sample Audit-Situational Analysis Questionnaire 307

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

Page x

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-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:

• 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

• 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

• 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

• 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

Page xv

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

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

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

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

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-ment are involved (frequently with one or more preferred suppliers) in the requiredepart-ments 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.