Under certain conditions, the purchasing department can make a significant contribution to a precisely measurable positive business result.
This opens up new opportunities:
The purchasing department gains access to top management. This is because the CFOs of all companies have to reckon with factors that influence the profit and loss account (P&L) - all the more so when it comes to high monetary values on the expenditure side of the balance sheet. At the same time, purchasing thus becomes one of the most important strategic partners of the specialist departments along the supply chain.
The prerequisite for this, however, is that the purchasing department is at a high level of development and maturity.
But what does the reality look like in many companies?
Today, many purchasing departments are still purely sourcing and order processors - without management tasks or strategic orientation. They therefore operate under titles such as Operative Purchasing or Purchasing, sometimes also under Strategic Purchasing or Procurement, if the company management has set ambitious targets for purchasing. But be careful: not everything that says strategic is also about procurement management!
In addition, digitalization means that purely administrative and operational purchasing activities in the procurement process can be increasingly automated or at least outsourced. The potential for cost reductions and savings in the purely operational purchasing of B and C materials is low anyway and the impact on EBIT as well as process and cost efficiency is not decisive.
Increasing the maturity level of the purchasing department
As a general rule, cost optimization is an endurance run - not a sprint. The impact of a highly developed and effective strategic purchasing department on the company's success is many times greater than quick cost reductions. This is because attempts to push prices down in the short term are increasingly coming to nothing. After all, suppliers on the other hand have long since learned their lesson and know how to react accordingly.
What matters more is strategic action and better exploitation of cross-functional synergies along a company's value chain. At the heart of an effective purchasing organization is the product group strategy, particularly in the form of product group management or strategic category management.
Such a strategy can be developed in the following six steps:
- Determine the vulnerable spend
- Specify possible purchasing levers
- Identify stakeholders
- Validate the potentials
- Finalize the purchasing levers
- Create project and action plans
But before that, I would like to address two prerequisites, which, in my experience, are essential for the implementation of a product group strategy.
Two prerequisites for implementing a product group strategy
The first prerequisite is to familiarize strategic purchasing with the annual budget figures of the specialist departments at an early stage so that it can answer the two crucial questions:
- What will money be spent on in the coming financial year?
- Which parts of the budgets are not tied to current framework agreements, but can be attacked, so to speak?
A spend cube for the five Ws of purchasing
The implementation of a product group strategy also requires transparency regarding expenditure within the individual product groups - ideally in the form of a spend cube that answers the so-called five Ws of purchasing:
Whe buys what, wwhen, from w whom, at w what price?
Gathering this information is a matter for controlling. The information should be prepared in such a way that the product group strategy can be controlled and mapped via hardness level developments - from HG 1 ("Estimate potential") to HG 5 ("Effectiveness of measures"). Ultimately, this is how purchasing controlling becomes a functional interface to management. This is because potentials with a high degree of severity have a correspondingly high impact on the operating result - which makes this information relevant for the CFO.
Category strategy: six steps from cost transparency to implementation
A category strategy can roughly be developed in six steps. However, I would recommend keeping in mind that such a strategy - in all likelihood - cannot be implemented using the waterfall method. You should therefore allow enough room for flexibility during development.
1. Determine the attackable spend.
By determining the attackable spend, you create initial spend transparency for each product group. The spend transparency then forms the basis for formulating initial ideas for possible purchasing levers and prioritizing them. It thus becomes the starting point for developing an effective product group strategy.
2. Specify possible purchasing levers.
The second step is to further specify the formulated ideas for possible purchasing levers. The data for this can come from market analyses or the evaluation of price-performance ratios, for example. The further specification of possible purchasing levers also allows an initial assessment of the savings potential. These are then documented in a low level of severity.
3. Identify your stakeholders.
Cross-functional collaboration with the specialist departments is essential, as technical input from the specialist experts is absolutely necessary in order to develop the strategy and script for the subsequent negotiations with the suppliers - for example, because there are deadlines that need to be met at an early stage or other contractual restrictions. This is why all stakeholders who need to be involved in order to exchange information of this kind must be identified.
4. Validate the specific potential.
The specific potential is validated and documented in the fourth step. The difference to the documentation of any savings potential in the second step is that the documentation takes place in a continuous and higher degree of rigor: Consideration is now given not only to pure cost reductions, but also to a reduction in the number of suppliers, respecification of products, a reduction in design-to-cost, make-or-buy decisions and much more. In fact, around 45 short and long-term purchasing levers can be distinguished. However, not all of them are aimed at direct savings. Some are aimed at long-term measures that affect the cost efficiency of structures and processes.
5. Finalize purchasing levers
In this step, the purchasing levers are finalized, which prepares the formulation of the project and action plans. A clear negotiation strategy can be derived from the finalization of the objectives and levers, which must be coordinated with the specialist departments. If, on the other hand, the objectives are more long-term projects - such as product respecifications or optimizations in the overall procurement chain - the finalization of the purchasing levers can also be used to specify the next steps. It is important here that the project participants from all departments are involved.
6. Create project and action plans.
In the sixth and final step, the project and action plans as well as the individual work packages are finally formulated. One way of involving those responsible from all departments here is, for example, to form a decision-making committee in which the stakeholders receive decision templates for approving and prioritizing the measures. In any case, it is up to the purchasing controlling department to support the implementation and then document the purchasing and negotiation success in further and higher degrees of rigor.
Conclusion: Increase the value contribution of purchasing with the product group strategy
In my experience, the strongest lever for increasing the value contribution of purchasing is a product group strategy that increases cost efficiency. It requires the following:
- a cross-functional collaboration under the auspices of a clear strategic objective. Modern purchasing departments must not be lonely islands. They should skillfully position themselves as strategic partners along the value chain. The soft skills of buyers and their ability to manage strategic projects are absolutely essential for this.
- Interdisciplinary teams that meet regularly to support and manage the implementation of the product group strategy. These teams can also identify potential savings that are relevant for the CFO or the management of the Finance department using a hardness level system.
- The early involvement of current and future suppliers, depending on which strategic purchasing levers are currently being considered.
- A permanent implementation. Because only such merchandise strategies provide the opportunity to reassess things every financial year: after all, market and business conditions - and therefore the associated cost risks - are subject to continuous change.
