A 2013 IBM study found that companies with high performing purchasing organizations achieve 22% higher margins. This figure is especially significant for manufacturer’s whose material as a percentage of sales most often falls between 50 and 70%.
But what sets the high performing purchasing organizations apart and enables the margin improvement? To find out we surveyed 60 purchasing leaders to see what differentiates companies that exceeded their materials cost savings plans from those who did not. Following are the top 5 differentiators:
Manufacturing companies who over-achieve material cost savings have:
purchasing as an equal partner. Purchasing leaders who reported overachieving their savings goals were much more likely to believe that they were an equal partner in the development of company and business unit strategies. Does this mean that in an engineering-focused company, that purchasing is as important as engineering? Our opinion is no. But purchasing and the supply base need to help develop and implement the plan that enables the engineering-driven company to thrive.
a culture of cross-functional support. In simplistic terms, Sales organizations are responsible for revenue growth; Engineering for technology and Purchasing for material cost reductions. Purchasing leaders who reported exceeding cost objectives indicated that they received good cross-functional support for material cost savings. Our experience has been that when Purchasing is getting good support for the cost objectives; Sales is for revenue growth and Engineering for technology. In short, everyone wins.
Purchasing organizations who over-achieve material cost savings:
are leaders in setting performance objectives. The overachievers reported having a manageable level of objectives for each employee (3-7), having set them before the performance period began and having a rolling 12-month visibility on cost reductions impact.
have well defined roles and responsibilities for buyers. They reported that job descriptions clearly defined skill and knowledge requirements and were updated frequently.
view buyers as program managers. Overachievers were much more likely to have a documented process for buyers to use to program manage cost reduction ideas. Our experience is that the best processes are cross-functional and include gated phases that help ensure that all steps of the processes are addressed.
Although we have opened the door on the New Year it is not too late to review these key items to assess the current state and make improvements that can be impactful for the year.