By Selwyn Parker
Until a few years ago, the purchasing officer ranked way down the executive pecking order. After all, purchasing officers just negotiated the best price from suppliers and wrote out cheques, didn't they?
Certainly, they had to be good negotiators and keep tidy records, but it was basically a simple executional job. You certainly didn't need an MBA for that.
However, suddenly, big companies are paying big money for purchasing officers, except that they aren't called purchasing officers any more.
They're now called procurement managers. Among companies advertising for this new breed are Carter Holt Harvey, New Zealand Post and AFFCO. According to industry sources, Carter Holt Harvey want around six of this new super-breed.
Among other companies, Fletcher Challenge already has one - Ross Darrah, who directs relationships with suppliers under the group procurement strategy project.
The reason for procurement managers' new-found status?
Simple. Somebody looked at the size of the cheques they wrote out. Obvious though it might seem, the realisation dawned that a department writing anything from a million to a billion dollars' worth of cheques a year must be able to exercise a significant influence on the bottom line.
After all, that's a lot of unmanaged money.
That was in the late 1980s. Since then the importance of managing the procurement role effectively in big companies in practically any sector - telecommunications, banking, oil and gas, utilities, manufacturing - is well and truly appreciated.
"There are 60 different ways to reduce supplier costs, explains Darrah, a convert to the importance of procurement management, who has just brought out to New Zealand the American supply chain expert, Tim Underhill, to preach the gospel at Fletcher Challenge, which is taking a scythe to its bottom-line costs.
Underhill, who advises Fortune 500 companies and has written a book on the subject called [I]Strategic Alliances: Managing the Supply Chain, comes armed with a laptop bursting with examples of bottom-line savings.
For example, in 1991 energy giant Amoco used to spend an average $US1.1 million \[$2 million\] to drill a hole.
In the good old cost-plus days when, as an OPEC delegate once said, "a fair price for oil is whatever you can get plus 10 per cent, the cost of drilling holes didn't matter too much.
But it does now, and after sweating the supply chain for a bit, Amoco got the price down to $US550,000 five years later.
With those savings available, it is hardly surprising that a lot of New Zealand's big companies are looking for guidance on managing the supply chain, among them Telecom, Westpac and the New Zealand Defence Forces.
More proof? Take inventories, which are a major cost for all manufacturers. A year or so ago, one of Underhill's clients, a major American utility, spent $US2 million a year on the $US10 million worth of inventory it normally held in electrical consumables. Now it is down to $US187,500, the supply chain expert explains.
That's a saving of over $US1.8 million a year. Put another way, it means the utility slashed its inventory costs by over 10 times. Too good to believe?
Not at all, says Underhill. "The utility told its supplier that it wanted it to manage the inventory. The supplier said that would cost it $US187,500 a year. So the utility simply paid the supplier $US187,500 and saved itself the difference.
Simple, except that this happy conclusion first required a new kind of attitude towards the entire purchaser-supplier relationship.
"Instead of managing your supplies, you manage the supplier and let them manage the supplies, added Underhill. Where there is a natural affinity, it makes sense to work together.
Thus, effective procurement management isn't necessarily about head-butting suppliers into ever-lower prices. Although price will always remain an issue, the process is much less adversarial than that. "You've got to be friends with the suppliers, chimes in Darrah.
By sharing information about each other, purchaser and supplier can gain insights into each other's businesses that allow them to devise ways of chipping away at the bottom line, often to their mutual advantage.
According to the supply chain believers, there are apparently heaps of ways of saving money without even asking for a cent off your (surviving) supplier's margin.
For example, by slashing the number of suppliers. The more suppliers, the higher the costs, in terms of resources in managing them all. "Let's say you put out 1000 invoices or orders a month and each invoice costs about $55 to process, explained Underhill. "That's $1.3 million. But if you reduce your suppliers or package the invoices better, you could get that down to 25 invoices a month. That's just $1375 a month.
"Or you could consolidate the invoices into one, even though it might cost $1000 to do the single invoice.
This is pretty much what a lot of American companies are doing.
Wisconsin Electric, for example, practically eliminated its suppliers.
From a total of 136, the utility got them down to one. Yes, just one, with a massive saving in "soft costs, or the human resources employed to look after them all.
There is, of course, a risk in all this. Purchaser and supplier must become virtually interdependent, living in each other's pockets with all the problems that can entail.
But the risk, argues Underhill, can be managed by using the same sort of disciplines employed by managers of investment funds.
Can smaller companies profitably use supply chain management?
"It does not apply as vividly, says Underhill. "You have to identify the potential of the savings. It's not worth $1000 of effort to save $100 but it is certainly worth $1000 of effort to save $10,000.
Contributing writer Selwyn Parker is available at wordz@xtra.co.nz
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