A New Purchasing Philosophy

Picture source: www.crushstrategy.com

BY: CHRIS HARRIS AND CHUCK STREETER

INDUSTRIAL ENGINEER – VOLUME 42 NUMBER 9

Lean enterprise systems require supplier partnerships

Purchasing component has become an area where there is opportunity for improvement. Purchased components and other material normally make up a large percentage of the cost of goods sold and therefore make the arena of purchasing one that deserves a great deal of attention in the implementation of lean enterprise systems. Preparing the implementation of a lean enterprise system takes a philosophical change in thought process to support the lean enterprise initiative effectively. The philosophy needs to change from a traditional supplier-customer relationship to a mutually beneficial partnership mentality while understanding true cost and information flow between the new partner and customer.

There are many different costs that go into sourcing a component, many of which are not calculated in the cost of a component. For example, if a production associate has to open a cardboard box. That is a cost. If the production associate has to move the box multiple times due to the large quantity of parts in a box. That is a cost. These are both legitimate costs, but ones that often can be dealt with through a well-designed and efficient internal timed material movement system.

The thought process of looking at true costs that are not normally calculated in the “piece price cost” is valid on a larger scale for buyers in a global economy. Three types of costs need to be considered when determining the true cost of a component: ongoing cost, change cost, and risk cost. Ongoing cost is the cost of the component that an organization incurs as it continually buys the component. For example, piece price, transportation, inventory carrying cost, customs and duties are all costs that occur on an ongoing basis. The second type of cost is risk cost. Most organizations cannot name one supplier that they never had a quality problem with. And the third cost that needs to be considered when determining where to source a component and how much that component will cost is the change cost. Changing suppliers can cost a lot of money, but many times a purchasing organization cannot calculate the true cost of this change, and the true change cost is neglected.

In the future, it likely won’t be facility versus facility or even company versus company. It is going to be supply chain versus supply chain. The organization with the best supply chain is going to win. Therefore, it is imperative that organizations looking to compete successfully in the global economy focus on developing a lean, agile and efficient supply chain. An effective supply chain that competes successfully in a global economy has suppliers that are healthy, efficient and in it for the long run. To achieve suppliers with these traits, It takes a commitment from the customer and resources to help develop good suppliers into long-term partnerships.

The problem with this type of change in thinking is it takes time to have the impacts that is expected. But if the end goal is to compete successfully in the global economy, then successfully developing suppliers into key partnership throughput the supply chain is necessary. There is no doubt that this is a drastic change from the way that many organizations purchase their components, but it is necessary to compete effectively around the globe.