Can Buyers Live without Cost Objectives?

Every once in a while, our long held convictions get challenged.  That happened to me when Ton Finelli, Fiat Chrysler (FCA) vice president of purchasing announced that FCA buyers would not have individual cost savings goals in 2016.  This occurred at the recent CAR Management Briefing Seminars.

I have long been a believer in buyer cost objectives so the announcement made me stop and think.  My thought process was further energized when I heard Steve Keifer, GM global purchasing chief, and Robert Young, vice president, purchasing, at Toyota Motor Engineering & Manufacturing N.A., both indicate that their buyers also did not have specific cost reduction objectives.

The challenge to my thinking is this: how could FCA, GM and Toyota successfully control costs if their buyers do not have specific cost goals?  To come to grips with this question, I had to look deeper into my own beliefs on cost management in manufacturing companies.  Here’s a summary of my thoughts and practices.

Purchasing: Organization, Processes and Results

As far as cost management is concerned, purchasing management is responsible for: 1) delivering the results that the company requires by 2) developing an organization and processes capable of delivering the results.

The key questions that need to be asked and answered in the assessment of purchasing management performance are directly related to the results and the processes:

1. Organization: Was an organization developed that is capable of providing the required results?
2. Process: Were processes developed and executed capable of providing the required results?
3. Results: Were the desired results achieved?

This can be shown in a 2 X 2 matrix

When this approach gets cascaded to a buyer, the questions become:  Did the buyer use the processes correctly? And did the buyer achieve the desired results?

Supplier Relationships

So, why did FCA drop buyer cost objectives and GM and Toyota not have them?  The answer boils down to supplier relationships.  All three indicated that they wanted buyers to work collaboratively with their supply base and cross-functionally within their companies to achieve team and product objectives.    They believe that the processes they have put in place will be effective at both improving supplier relationships and achieving cost objectives.

So why not have cost objectives for the buyers?  In my experience, some buyers who have responsibility for both the cost results and process execution will focus on achieving the results and ignore or shortcut the processes.  This often results in buyers that are achieving the desired cost results but doing it in a way that damages relationships.

Focusing on the Process

My experience was recently confirmed when we did a survey and interviews with more than 30 automotive suppliers regarding the cost processes used by their customers.  One of the results focused on the high inconsistency in the use of the same cost methods by the buyers within the same company.  This inconsistency leads to supplier distrust in the processes and trustworthiness of their customers.

Removing the cost objective from the buyers’ scorecard enables management to focus their discussions with the buyers on how they are implementing the processes and the effectiveness of the processes.  Doing so, while keeping a supplier relationship metric, would further emphasize the relationship objectives.

So, will FCA be successful?  From a relationship standpoint, I hope so.  The key will be constant focus on the process.