Making the Transition to Strategic Purchasing

Most companies consider purchasing to be simplistic and merely a means to an end: The goal is to minimize costs while meeting functional requirements. Therefore, most major manufacturers play competing suppliers against one another, use their clout to squeeze suppliers or find other ways to force further price cuts through purchasing. And because senior managers in purchasing seldom stay in their positions for more than a few years, they rarely build good will among suppliers or create sustainable improvements in the overall purchasing function. As a result, the primary purchasing model in most companies rests on finding the best price for each isolated transaction through any means possible.

This approach misses a significant strategic potential to add value to a company through the purchasing function by driving innovation and superior long-term cost performance. Transforming purchasing into such a strategic function requires a long-term perspective aimed at building “networks of competence” — people who can cross boundaries and analyze the true costs of product and process proposals. It requires integrating purchasing into the beginning of a design or project rather than relegating it to the end of the process chain, where its role is viewed as simply buying the goods and services other departments need. It requires a fundamentally different approach to recruiting and training employees, as well as reorienting the entire company to a holistic view of purchasing that looks across many functions and entire supply chains.

Beyond its contributions to product quality and business performance, a systemically oriented purchasing department can foster knowledge sharing and innovation both companywide and across complex supply chains — a capability that is becoming a highly valuable strategic asset as manufacturers are increasingly held accountable for social and environmental impacts.

When I became the head of technical purchasing at Bayerische Motoren Werke AG in 1994, purchasing was essentially an administrative function, and morale in the department was low. Purchasing associates believed their knowledge was underutilized and their skills unrecognized. Many felt their work was not respected. It was clear that a new vision for the department was needed. If we could combine deep knowledge about markets and suppliers with strong relationship-building skills, we could influence what was bought, saving money and adding value from the beginning of the proposal process.

Over the past 10 years, BMW’s purchasing department has evolved into a strategic partner that influences numerous product and process design choices, realizing significant savings for, and having a strategic impact on, all areas of the company, from services to production, from IT to development and from production facilities to construction. The transformation was predicated on setting and meeting a number of mutually reinforcing goals: (1) to change purchasing from an administrative function to one that influences demand, (2) to concentrate on building and sharing deep knowledge, (3) to work as a fair and competent partner with all internal and external business contacts, (4) to commit to improvement in all areas and to becoming a benchmark for others, and (5) to develop a team approach that relies on shared values.

Influencing Demand

As a first step, we redesigned the organization to reflect a new role for purchasing. Traditionally, when purchasing decisions are made, each department is guided by its own proprietary knowledge, vested interests and idiosyncratic processes. Purchasing managers have a great deal of autonomy in how they approach their jobs because they work with many different people in different areas. This creates a certain lack of coherence. For instance, at one point we had 106 different contracts with companies involved in the maintenance of air-conditioning systems in our plants in Munich.

To become more strategic in our orientation, we began to transfer and share knowledge among departments and partners, seeking to influence demand from the ground up and lobby for the best overall solution. After three months, we were able to demonstrate to all the internal stakeholders that consolidating those air-conditioning system contracts made sense for them, and that one supplier had the expertise to handle all the different systems.

At BMW today, purchasing associates’ influence is wide-ranging. They play a role in key design and process purchasing choices that can have significant overall financial impact. At the early concept stage of product development, they have valuable input, suggesting how certain design features will affect the technical equipment at the factory or the level of investment that will be required to execute the design. They can also influence what types of materials, components and systems best meet end-user requirements. For example, the different BMW factories and departments such as painting or assembly use a variety of mechanical lifts to help with manufacturing. Through our influence, we were able to persuade all parties to use a common lift — which could be modified when necessary — rather than each one purchasing their own device. All departments now abide by one standard design, which has saved 30% on this significant cost companywide.

Centralizing Knowledge

Because BMW has only one product, automobiles, it has a very centralized organization. This has natural disadvantages: Decision making takes a long time, and information processes are complicated. But there are also advantages. By centralizing a major portion of the purchasing function, we were able to create more time for our associates to do high-leverage work on designs and projects with more significant economic impact.

For example, about 80% of BMW’s order volume involves small orders of less than $5,000 —for computers, furniture, office supplies and so on. These orders are certainly important but they take a lot of time and present few opportunities for enterprisewide leverage. To reduce the amount of time absorbed in these orders, we created an online system that allows people throughout the organization to order their own supplies from the standard that we have created. We preselected buyers and negotiated contracts, leaving managers to determine their needs and to manage their ordering and procurement within clear criteria. This freed up purchasing staff to spend time on higher-leverage work.

We have counterbalanced some of the negative aspects of centralization by ensuring that once decisions are made they are communicated directly and immediately on our intranet. Everybody can read each decision. Decisions are not spread via word-of-mouth, so people are less likely to interpret them differently. Employees working in China, the United States, South Africa or the United Kingdom know simultaneously what we decided in the central office in Munich, for example. It’s very quick and compensates for the slow diffusion of information normally associated with a centralized organization.

This communication works in both directions: Information that starts at the local level can also spread very quickly through the organization. Individual associates or cost engineers can put information on the intranet themselves. Someone with a problem in South Africa in the area of facility management, for example, can post a query, and someone in the United States or the United Kingdom can answer directly. If necessary, senior management can then step in and make the decision to send a specialist from Munich to South Africa to solve the problem. And when we send cost-engineering specialists to China to solve a problem in the paint shop, they may come back with new knowledge that we can quickly integrate and share.

Creating a Culture of Technical Competence

As a crucial prerequisite for any customer interaction, every purchasing agent must develop deep technical knowledge. Strategic purchasing can only be effective if the purchasing department constantly expands and updates its technical knowledge in the cost area in order to preserve credibility with both suppliers and internal departments.

When we began our department’s transformation, we first defined the necessary qualifications for each level of buyers — junior, senior, assistant and leader — and then compared those to the qualifications of the 123 associates we had at the time. The exercise revealed more than a thousand areas in which we needed to build knowledge, spanning everything from linguistic requirements in foreign languages to technical know-how to specific knowledge of contract law. We addressed this problem in two ways.

First, we developed a structured program so that our existing associates could obtain the technical expertise or process knowledge they lacked. In most cases, the knowledge already existed inside the company, and cross-training occurred through learning groups and seminars. In some cases, trainers from outside the company were retained. When the program was first developed, associates were spending 15% to 20% of their time in continual training and learning.

Second, we began to hire industry experts, specialists in particular areas, and to train them as buyers. We hired people from the construction industry as buyers on major construction projects. We brought in IT experts from external companies that were relevant to our business. We wanted to demonstrate, both internally and externally, our commitment to having buyers with as much in-depth knowledge as the suppliers with whom they would be dealing.

This enabled us to introduce a key structural and cultural change: the creation of the cost engineering function. Cost engineers work in purchasing but do not actually buy anything. They focus instead on developing specialized knowledge in particular areas for which they have worldwide responsibility. They work closely with technical suppliers from the earliest stage of a project, when prices can only be roughly defined, to help monitor costs and investments over the life of that project. Their goal is to apply their specialized knowledge to realize savings for all parties. One example of this cost engineering can be found in press tools (which help form the iron parts for an automobile’s body), where we were able to help reduce the amount of tools needed in this process, leading to a dramatic cost savings without any drop in quality.

Today, BMW’s cost engineers have built up a level of technical and cross-engineering know-how that is so deep they could run body shops, paint shops or assembly lines. They are thus able to effectively act as an interface between the engineering design people, the development department and the suppliers. They can influence the cost and investment level of suppliers and give good advice to internal partners about the potential effect of the various decisions they may make.

From a cultural standpoint, this means that purchasing is no longer mere “carpet trading,” but informed negotiation on the basis of shared knowledge and insight. Just as importantly, those in the purchasing department can have detailed, technical discussions with suppliers that help those suppliers see where they are not competitive, where they are wasting money or where they can improve their own processes.

Building Strong Relationships

Being technically excellent is not enough, however. Upgrades in technical capabilities must be accompanied by equivalent upgrades in human skills. Although a purchaser’s technical proficiency will build a supplier’s confidence, his or her integrity and solid interpersonal skills will ensure that supplier’s trust, and this is what cements the relationship.

In our purchasing organization, integrity and trust are core values. They are not written in a booklet hidden in a drawer or on a plaque hanging on a wall. They are integral to what we do. Along with a strong sense of responsibility, an emphasis on innovation and a fundamental belief in the inherent pleasure of work, these values foster a certain quality of relationship and a quality of spirit that help people do the right thing and coordinate effectively. Every situation our purchasers encounter is different, but the stable basis of their shared values guarantees that their approach will be consistent and honorable. The effect of this is evident in the feedback we solicit from our internal and external partners and in the demonstrable quality of our work, both of which correlate directly to measurable financial results.

A significant outcome of the purchasing department’s transformation has been the change in status and self-image of the purchasing professionals. Purchasing is now viewed as almost an elite function. Senior buyers, who have no leadership responsibility, are paid the same salary and given the same status as group leaders who have 20 or 30 people reporting to them, because the buyers can change the specifications of a product or the approach to a project, bringing in new ideas that can have a major effect on its success. Our purchasing associates even get letters from colleagues in other departments thanking them for their assistance and advice. In the final analysis, purchasing’s contribution is no longer measured merely by the incremental savings it garners by going with the lowest bid but by the enterprisewide value it creates.