Daily Archives: September 20, 2007

What’s the Key to Effective Purchasing?

CAPS Research latest Practix, The Key to an Effective Purchasing System: Is It Technology or Supplier Relationship Management?, by Keah Choon Tan asks whether sophisticated and often expensive information technology is the only solution to improve competitiveness in response to the tremendous pressures of globalization and increasingly demanding customers. The study describes the lean but highly efficient supply management system of a world-class casino-hotel chain that emphasizes strategic supplier relationships over implementation of sophisticated information technology and that has developed a supply management system founded on a contemporary management philosophy that stresses long-term, mutually beneficial relationships, trust, and sole sourcing.

The goal of the article was to demonstrate that an effective supply management policy can be the key to managing the supply function effectively. The policy emphasizes the formation of strategic alliances to achieve the lowest total acquisition cost, rather than forcing suppliers to bid on each purchase – since this approach tend to focus on short term measures such as unit price. Once the strategic alliances are formed, the best suppliers are selected for each item based on quality, reliability, delivery, and total acquisition costs and blanket orders are issued. Furthermore, to update and continuously improve centralized blanket orders, the company has processes in place to enable suppliers to solicit new business and chefs to request and receive samples and pricing information.

In addition to sole sourcing, the company also employs supplier performance monitoring, continuous evaluation, and competitive bidding when a new product, or source, is needed. The company also has well-defined, rigid, supplier selection criteria which include competitive pricing, quality standards, reliable services, processes, and delivery, the ability to provide niche product and design concepts, financial stability, provision of warranties, insurance and bonding, proven performance standards, and excellent service and support.

The study then deduces that implementing an appropriate process is the key to solving business challenges, and information technology is merely a tool to facilitate the process. Furthermore, the study notes that the process has led to time savings, cost savings, accuracy, waste elimination, and improved control without the support of much in the way of information technology.

Although I’d have to agree that the process is key, I don’t think the study stresses enough that it was based on the restaurant services arm of a casino hotel chain that has only eight locations, all of which require essentially the same items. This is not very sophisticated supply management. For an operation of this size, good processes backed by Excel and Access are pretty much guaranteed to get results (but not necessarily great results, especially from an efficiency standpoint).

Thus, although it’s a good report – it’s also a dangerous one. There’s no way this would work for a major fast food chain if it did not have good sourcing and procurement systems to back such a strategy up. Although tools alone do not a successful sourcing process make, without tools, the supply management team of any chain of even just a few dozen locations would quickly become swamped under information overload and be unable to keep track of who is supposed to ship what where, whether or not performance is acceptable, whether or not quality is acceptable, and whether or not they are truly getting the best price. Although a sole source strategy backed up only by good supplier management is often a great approach for a small business, without good technology to back it up, it just doesn’t scale!

A fool and his money are soon parted … don’t be a fool!