Building Procurement Prowess

Article #12 in a series by Jim Correll and Jim Bentzley

Introduction

In our article on Demand Planning, we said it was the hardest of all the Material Requirements Planning (MRP) support activities because it required looking into the future which is always difficult but is essential to running the business. Our best demand planning efforts are always far superior than just looking at history or guessing. The least rewarding of all the planning or support activities for MRP is Procurement which is represented on the diagram below as Supplier Scheduling. If you follow the diagram down from Advanced Sales and Operations Planning to Master Scheduling to Material Requirements Planning, you finally arrive at Supplier Schedules. That means any errors in any of these prior planning steps caused by inaccurate data or human error falls on Procurement to react to and solve. To make it worse all manufactured parts start with a purchased part (the bottom level of every bill of material is a purchased item). So not only does Procurement have to deal with all the planning steps but with anything that happens or fails to happen in manufacturing. If you have a Class A MRP process (includes everything in the chart below at Class A standards), then life in Procurement isn’t so bad because you would normally have only a couple of items each day to adjust, which is manageable. But if your planning and execution process isn’t in control the Buyer ends up with nothing but expedites and an overwhelming task load. We often think of Procurement as the tail on a dog. Pat the head and the tail is going like crazy. That is Procurement when there isn’t good control over the planning process.

Impact on People

The problem with all of this constant change on those is Procurement is it can really wear them down personally. A Buyer can easily slip into “I don’t care mode” because there is just nothing they can do to solve all the issues caused elsewhere on the chart. You can detect this when you see the comic to the right hanging on their wall.

The other mode we often see is the “ornery.” Our first encounter with someone from Procurement was John. We had just moved to a new location at Corporate Headquarters and needed a set of tires. Our friend Pat advised us that we could go to the plant Procurement department and they would get them for us real cheap. “It’s just down the hall”, Pat advised. We replied we didn’t know the size and again Pat said John would know what size. We wandered into Procurement and found John. In a very sour tone John asked what we wanted. All of a sudden we didn’t think this was a good idea but proceeded anyway. It all came apart when John asked the size and we said we didn’t know. When we returned to our work area (no cubicles) Pat and a half dozen people were waiting for us with a big smile on their face. Pat (some “friend”) said John’s nick name was the “cruncher” and we knew what it was like to be crunched.

Another mode Buyers can get into is the “got you covered” mode. The problem is they don’t have you covered and they are giving you the line just to get rid of you.

We have run into another problem. While coaching a company that was starting to operate in a Class A mode, we noticed that Procurement wasn’t making any progress. We sat with the Procurement Manager to help solve the problem. He said we were getting the “wool pulled over our eyes” because they were still getting thousands of expedite (move in / reschedule in) messages from MRP and showed us them all. The rule we recommended and the President supported was that, “No order was to be accepted inside lead time without getting concurrence from the support (supply side) organizations that they could do it.” The President called together his Vice Presidents and Directors of Sales and Operations Planning, Order Entry, Master Scheduling, Material Requirements Planning and us where he reinforced the rule as a principle were to operate under. We suggested that a log be kept of any work that was accepted inside of lead time with the cause and action. Two weeks later we meet again to review the situation. A total of 23 orders had been accepted inside lead time by Order Entry because of the customer’s request and all had been approved by the support organizations. Master Scheduling said they had done the same 23. MRP had 28, five more because of inventory, bill of material and scrap issues. The Procurement Manager said they didn’t keep track. Further investigation revealed that they weren’t working their messages. A new Procurement Manager was hired who immediately started working on all the messages. That resulted in a big improvement with on time deliver from suppliers.

Procurement Importance

How much of role does Procurement play on in the whole scheme of things of a manufacturing company? For many years we have talked about the cost of sales with hundreds of companies. We used the following example:

Cost of Sales

Material = 40-60%

Direct Labor = 5-15%

Overhead Burden = 55-25%

Sometimes students would say that there is more purchased content and, once in a while, they would say there is a lot more purchased content. No matter how you cut it, half of the cost of sales goes to suppliers in most companies. Yet management is concerned if direct labor people break to wash up a few minutes early. What they should be worrying about are their suppliers. What should management worry about? 

Management should worry about helping their suppliers be the “best they can be” by supplying as much information to help them plan and then coaching them on how to improve their processes.

We were coaching a large engine supplier (over the road truck engines) achieve Class A. During the original assessment we talked with Procurement. Ten Procurement people in the room (Director and below) were anxious to tell us what a great job they were doing and how they were already operating at Class A levels. Their suppliers delivered every afternoon for the next day’s production. They also had to send a transaction saying that the items had shipped. If the transaction wasn’t received on time the MRP system automatically sent a message to the Buyer who immediately contacted the supplier in question. They had better than 99% on time delivery. What more could you ask for? Our question was simple, do you send you suppliers schedules they can trust not only to ship to but, also to build to, plan capacity (people and equipment) to and plan long lead time material to on their side. There was dead silence. We then asked how their suppliers were able to deliver on time. The answer was given in a very depressed tone; they stock lots of extra parts because our schedules are constantly changing. We then asked if they thought their suppliers operated efficiently and again the answer was subdued. They confessed that they beat their suppliers up the best they can hoping they didn’t put them out of business. To their credit, they were excited when they found out that we were working with the all the other organizations (see the diagram above) to improve the planning.

That leads to another example where we were coaching for Class A. This was a large plant that built transmissions for heavy equipment. As the rest of the organization was moving forward toward Class A practices, Procurement was dragging their feet. While reviewing the progress they were making, which was not much, the Procurement Manager got angry with us. In essence, he said we didn’t know anything about how Procurement works. He proclaimed, “You have to be very skilled about how much you can beat up a supplier on price and how to expedite effectively.” Less than a month later, one of their major casting suppliers closed their doors over night because they were losing so much money. Talk about disruption – transmission cases had to be welded together from plate steel as an alternative to supplied castings to try and maintain the production rate until another casting supplier could be found. A change in their behavior finally came and they eventually reached Class A.

Suppliers are just like you. They have all the same problems. The better information you send them the better they can do their job and pass some of the benefits to you. Of course if you have lousy plans that doesn’t help the supplier much. On the other hand, if you do have good plans and the supplier doesn’t use them you (and they) won’t get the benefit.

Supplier Schedules

Sending suppliers good information in this day and age is relatively simple. You just need to electronically send them your MRP orders, firm planned orders and planned orders (by item number) for all the items you buy from them. They can enter that in their forecast and now they have your view of what your projects are. This happens quite frequently in companies but, the problem is that most customer schedules are not accurate because of the things we discussed in previous articles. If you want to see significant improvement from you suppliers, clean your own house first.

Commodity Manager / ‘Internet Age’ Buyer’s Job

The Buyer role of yesterday is gone and there should be no one at your company that simply releases and seeks acknowledgement of Purchase Orders to Suppliers. That’s why we have dual-titled this as “Commodity Manager” and “Internet Age Buyer”. So what is a Buyers job today? To answer that question properly we have to set some parameters. Really there is only one – send the Buyer an accurate plan. Once a Buyer has an accurate plan they can operate with their key suppliers in the manner described below:

Leads Supplier Teams for both Supplier Issues and Improvements Request by Customer:

• Quality - Both existing quality problems and analysis of the whole quality system looking for things like are they trying to “inspect quality into the process” or create processes that consistently “build quality.”
• Value Analysis – It’s amazing what can happen when designers and manufacturers can accomplish when working together.
• New Technology – New technology can significantly improve quality and reduce costs and the buyer has to stay on top of this to ensure that suppliers are also up to date.
• Manufacturing Process Capabilities – Can their processes continuously produce quality items at the lowest cost? And what percentage of material will be scrap due to manufacturing process variation?
• Planning Improvements – How is their planning process working? Using the diagram above how are they performing in each of the boxes?
• Variation at Supplier – Did the Supplier’s new part prove that they could manufacture it reliably or did you get their best lot so that it could technically qualify and every lot after that will be different?
• Transportation Lane – is the transit time from the supplier consistent and does it make more sense for the company to control it or to allow for a delivered price?
• Sourcing – taking all of the other facets of the role into account, what is the true Total Cost of Ownership (TCO) to the company for each item or service purchased by the company and can a lower TCO be achieved elsewhere? This is a continuous bench-marking of all purchased goods and services to keep on top of TCO/cost saving opportunities including using that information for negotiations at current suppliers.
• Risk Mitigation – Supply base risks must be identified and prioritized for solving. Where is the company single-sourced? Where is the company sole-sourced and can that part be designed out of the company’s product?
• Negotiates Agreements with Suppliers – since accurate plans of the future have been shared that allows the supplier to better plan with fewer expedites (request a price decrease for fewer expedites) there is a lot more room to ask for a price reduction for your parts because of the efficiency improvements gained. Also ask your supplier to separate your pricing from other customers because of the better information you are providing.
• Monitor Supplier Performance – quality, on time delivery, price and flexibility.

* A Buyer can’t be expected to be skilled in all of these areas so internal experts should accompany the buyer for assessment of supplier capabilities. This can be a very rewarding experience for both parties.

What we are really saying is that there needs to be more collaboration with the suppliers across all the functions of your business. The first diagram below show how the communication typically works – all conversations are between your company’s buyer and the supplier’s sales person.

The second diagram shows what it takes to get the best results and this is where there is interaction directly between multiple functions at the customer and the supplier. It is Procurement’s job to facilitate these meetings.

MRP Planner Job

• Operates MRP for their items.
• Releases orders after quick review to verify information.
• Reschedules orders with suppliers. It’s important to note that companies need to spell out clear priorities for working the reschedule, or exception, messages that the system creates. These prioritization rules should not only tell the Planner which ones to work on first, they should also limit the work to only those reschedule messages that are “significant”. The criteria for a being a “significant” reschedule message will differ for each zone of the planning horizon: firm zone, trading zone and free zone. We’ve seen a lot of success with this approach since it creates clarity for the Planner.

- Reschedule “in” done only after verification that the need is real and that the supplier agrees to the new date which they will be accountable to meet.

- Reschedule “out” done before “in” to provide capacity. All reschedule “outs” passed to supplier.  Always communicate move outs even if it is inside the commitment date. Give the supplier the opportunity to move the date but also accept it if they wish to ship per contract. 

• Routine communications between supplier Master Schedulers and MRP Planners.
• Resolves minor problems (see below).
• Notifies Buyer of unsolvable issues or requested changes to the contract.

Buyer/Planner Concept

Some years ago, when we were in the Materials Manager role we heard great things about the Buyer/Planner concept. Basically how this works is that the one person does the Buyer and Supplier Planner job. We thought this was a great idea because one person has the supplier end to end. We took Stan, who was the buyer of steel and castings, and Meryl, who was the planner for steel and castings, and made Stan the buyer/planner for steel and Meryl the buyer/planner for castings.  What a terrible mistake. Stan was had built incredible rapport with the suppliers but was a miserable planner. Meryl was a great planner but as one supplier said, “Had the personality of a dead fish.” We are not saying Buyer/Planner won’t work but you have to be really careful.

Expedite Loop

In the best Class A companies, things still go wrong. The difference is not that things go wrong but that the frequency with which they go wrong. In non-Class A companies, it is a never ending stream of fires to put out whereas at Class A companies it is infrequent. But when things do go wrong, you still need a process be as efficient as possible. Let’s follow a traditional expedite loop.

MRP Planner to Buyer: “Can we get 100 more of item 1234 next week.”

Buyer to Planner: “I don’t know I will have to call the supplier.”

Buyer to Salesman: “Can we get 100 more of item 1234 next week.”

Salesman to Buyer: “I don’t know will have to ask our Master Scheduler.”

Salesman to Master Scheduler: “Can we get 100 more of item 1234 next week.”

Master Scheduler to Salesman: “Hang on let me check. [Pause] No, but I can give them 50 next week and another 50 in two weeks. Will that work?”

Salesman to Master Scheduler: “Don’t know, will have to call and see if that works.”

Salesman to Buyer: “Can’t give you 100 next week but can give you 50 next week and another 50 in two weeks. Will that work?”

Buyer to Salesman: “I don’t know, will have to talk with our MRP Planner.”

Buyer to MRP Planner: “They can’t give you 100 next week but can give you 50 next week and another 50 in two weeks. Will that work?”

MRP Planner to Buyer: “Hang on let me check. [Pause] Yep that works fine.”

Buyer to MRP Planner: “OK I will tell them it is OK.”

Buyer to Salesman: “OK.”

Salesman to Master Scheduler: “OK.”

And how long do you think that will take? It all depends how easy it is to contact the people. In some companies it could be a week. No wonder there are so many shortages.

How about this approach? 

MRP Planner to the Supplier’s Order Entry: “Can we get 100 more of item 1234 next week?”

Supplier’s Order Entry: “Let me check the Available To Promise (ATP) [Pause] Yep we can do that!”

Or if there is no ATP, how about this approach?

MRP Planner to the Supplier’s Order Entry: “Can we get 100 more of item 1234 next week?”

Suppliers Order Entry: “There’s no ATP but, let me check with my Master Scheduler.”

Supplier’s Order Entry to Supplier’s Master Scheduler (includes Customer MRP Planner on Communication): “Can we get 100 more of item 1234 next week?”

Supplier Master Scheduler to Supplier’s Order Entry and MRP Planner: “Can’t give you 100 next week but can give you 50 next week and another 50 in two weeks. Will that work?”

MRP Planner to Master Scheduler and Supplier’s Order Entry: “Hang on let me check. [Pause] Yep that works fine.”

A three minute communication and it is done!

The response at many companies from Procurement is that we don’t or can’t do things that way. Buyers say they will not give up that responsibility. Therein lays the major problem with many of the things we are suggesting. People resist change. The issue is how to get them to change. Hmmm, seems like we have discussed this before – education, design the process and then put in the discipline to make it work. Who should do the design? After the education of the owners on the process, the process owners do the design with some coaching. Someone from the outside can’t do the design because it will never work the users will see to that and buy-in to the solution. 

Supplier Measurements

As we have tried to do in all the articles is provide a set of measure that will give a complete view of the process. We have listed those below by importance:

• Quality – if the supplier doesn’t send a quality product you are in for big trouble. Even if you catch it during incoming inspection (hopefully you have progressed beyond that with your supplier).  By the time the supplier can get you some new ones there will be a delay in production if you are running MRP lean as we have suggested. Carrying safety stock at either your site or theirs is waste. Of course the worst thing is for it to fail in the field (that is ten times+ the cost of discovering when received). Quality is the buyer’s responsibility and should be supported by the Quality Department as discussed above. The Quality Department should determine the measurement and apply it to all suppliers.
• On Time Delivery – has to be expected. Often there is a desire to protect against late deliveries by carrying safety stock at your site or at your suppliers. This is an expensive way to cover up planning problems. Fix the problem. The same OTD measure should be used that is being used for production. See our previous Internal Scheduling Article.
• Cost – ranked number three but considered by many as number one and overemphasized by some and the exclusive criteria for awarding business.  Cost is impacted by a lot of things but we know costs can be reduced significantly by the buyer doing all the things we suggested above. 
• Lead Time – reduced lead time from your suppliers can significantly improve your forecast accuracy, including to them, and make Demand Planning a lot easier. Sharing information and the cost of your supplier’s long lead time material can do wonders in reducing lead time.
• Reaction Time – A lot of companies value this very highly but, what they are overlooking is the supplier has often overstated their lead times so you have to be careful on how you measure this. This could just as well be the opinion of your Buyer to put this metric in place.

Conclusion

We have described the way a Procurement Organization can be operated with the right processes and behaviors in place. Below is a list of those items:

• Valid Schedules – accurate and executable/doable. We have beat this one to death in all the previous articles so if you would like more detail on this, review the previous articles.
• Support From Other Departments – A Buyer can’t be expected to know in detail all the functions of a company so those in the other departments should help the Buyer discover and solve problems at the Supplier.
• Streamed Lined Supply Chain – the way you are operating today needs to be reexamined and much of the busy work needs to be eliminated like the “Expedite Loop” described above.
• Education – the first step in changing the way people operate is education on the processes. That has to start internally and then move to the suppliers. We have found that the best people to educate suppliers are the Buyers and other experts in their field from the company. In order to educate someone, you have to know the subject very well.
• Measurements – we discussed the measurements above but measuring without corrective action is a waste of time. No supplier can change overnight any more than you can but, if change isn’t coming there has to be consequences.
• Implementation Plan – this depends a lot on where you are starting from. An assessment of where you are needs to be done in order to determine where you are going. We strongly suggest that you start with a qualified person that has experience doing all these bullets.

?Jim Correll is an author, a certified Fellow of APICS and former Chairman of Oliver Wight Consulting who has more than 30 years of experience helping companies with improving their supply chain processes through education and coaching. Connect with Jim Correll at (503) 329-6607.

Jim Bentzley is an end-to-end Supply Chain Executive and Consultant who has worked in the Medical Device, Electronics, CPG and Food Manufacturing industries implementing IBP (Advanced S&OP) and other process improvements to deliver bottom line results.