evolution at work

What exactly is the difference between "procurement" and "purchasing"? Some would say "procurement" is nothing more than "purchasing" in fancy dress—a 50 cent word sometimes trotted out where a simpler one would suffice, like "utilize" and "use." But technically speaking, there are differences, and they can be significant.

Though the public at large might not see much distinction, those in the trenches typically view purchasing as a single step in the broader procurement process, which is essentially the entire process of acquiring goods (and services) from third parties. That notion seems to have gained fairly widespread currency, with as august a body as the Council of Supply Chain Management Professionals defining "procurement" as "The business functions of procurement planning, purchasing, inventory control, traffic, receiving, incoming inspection, and salvage operations." Another group takes it a step farther. The Institute for Supply Management (formerly the National Association of Purchasing Management) defines "procurement" as "The acquisition, access, positioning, and management of resources that an organization needs …in the attainment of its strategic objectives"—a definition that would appear to encompass manufacturing, warehousing and physical distribution, and inventory management, along with a cast of thousands.

We could argue all night about where procurement leaves off and other functions take the wheel, but that would be pointless. We can probably all agree that sourcing and purchasing are the strategic and transactional elements of procurement. Sourcing encompasses spend analysis, purchase strategy, category management, supplier qualification and selection, make vs. buy analysis, and group buying. Purchasing, then, would include repetitive buying, discrete purchase authorization, effectiveness evaluation, payment systems, and contract management.

These distinctions have arisen as a natural result of what could be seen as an evolutionary process. As organizations have become more sophisticated, the acquisition process has evolved from purchasing to procurement to strategic sourcing. By this definition, the oldest of these, purchasing, is simply the function of buying the right quantity at the lowest possible price. Procurement would go beyond that to include the materials management expenses associated with the transaction, so inbound transportation and inventory carrying costs are added to the price. Strategic sourcing is the alignment of purchasing activities to support your company's business goals. It is based on the total cost of ownership, including acquisition, use and maintenance.

Trends in procurement
During the past few decades, the process of procurement has moved from a traditional to a value-managed approach. The traditional approach usually involved adversarial negotiations with many suppliers. Communications were sporadic, and the prime emphasis was on searching for the lowest unit cost.

The value-managed approach features strategic alliances and longterm commitments with most vendors. It includes frequent communication in an effort to better integrate operations. Where possible, there is an attempt to share risks and rewards. Instead of seeking the lowest unit cost, the emphasis is on discovery of the lowest total cost—that is, the lowest price after logistics, receiving, inspection, administrative and other expenses have been factored in.

Strategic sourcing kicks the process up a notch, in that it emphasizes buying better, rather than buying for less. For example, buying better might mean shifting responsibility for quality assurance to the vendor, allowing you to eliminate the inspection process. Or it might mean developing a simplified bidding process to reduce the cost of procurement.

Better consumption is also a factor in better buying. This includes product simplification and standardization, for example. Sometimes it also includes postponement, or delaying final assembly or passage of title to the latest possible moment.

Strategic sourcing, we should note, requires that the parties share all kinds of information: demand forecasts, production plans, shipment schedules, and the like. It also includes the sharing of best practices, which can be done in any number of ways. Eastman Kodak, for instance, has developed a program called SOLID—Supplier On Line Idea Database—in which it solicits creative ideas from vendors (with the promise of a response within 60 days).

A prime example of a strategic sourcing technique would be vendor-managed inventory. While not a new concept, vendor-managed inventory has attained considerable popularity in recent years—partly due to the availability of visibility software that has greatly improved the process.

But even as they seek to form closer relationships with a select group of vendors, procurement people must guard against putting too many eggs in one basket. Concentrating too much business with a single supplier exposes them to serious risk of disruption should disaster strike that vendor, whether in the form of a worker strike or other labor action, fire or other natural disaster, management disruption (like the loss of key people), or bankruptcy. In a perilous world, procurement professionals face a never-ending need to assess the likelihood of those risks and plan for contingencies.

Relationship buying
It may sound like a lot of work, but developing world-class supplier management capabilities could pay off in many unexpected ways. In the best applications, a company develops close relationships with the top tier of its suppliers, across its principal products, materials, ingredients and packaging categories. These connections then engender multiple teams, often cross functional, that drive improvements throughout the operating—and planning—relationships. The targets can include anything from joint product development to joint marketing. The objectives are simple: lower costs, higher quality, customer benefits—and mutual competitive advantage.

Every one of your suppliers has the capability of reducing your costs. The procurement department's job is to discover ways to make that happen—but without sacrificing service or performance (for procurement professionals, an appropriate watchword might be Ronald Reagan's memorable phrase "Trust but verify."). This is the level of supplier management that puts teeth into the idea of supply chains' competing against other supply chains.