Purchasing Must Become Supply Management--Twenty Years Later and Counting

A broader view of supply management can yield tantalizing returns, but while groundbreaking new tools are showing merit, technology market confusion has muddied the pathway; a proper framework can help pave the way.
Written by Pierre Mitchell, Contributor on

The Issue: A broader view of supply management can yield tantalizing returns, but while groundbreaking new tools are showing merit, technology market confusion has muddied the pathway; a proper framework can help pave the way.

Back in 1983, a McKinsey consultant named Peter Kraljic wrote an article for Harvard Business Review titled “Purchasing Must Become Supply Management.” In this seminal piece, Kraljic laid down the fundamental principles of modern strategic sourcing, arguing that the purchasing function should transcend the back office to take the strategic role of optimally provisioning supply. Well, 20 years later, we are finally getting close to this vision; even the venerable National Association of Purchasing Management (NAPM) has renamed itself the Institute for Supply Management. Yet, true supply management is not about renaming departments, and it remains elusive for most companies, with no one company considered best in class across all areas. And while innovations in IT are providing a new slew of tools to the supply management area, technology markets often create confusion as vendors strive to create branded application markets and associate them to business processes or operating philosophies. In this context, I’d like to offer up a simple three-level framework that may be useful:

  Sourcing and Procurement (or Spend Management) is internal facing, dealing with identifying spending patterns, organizing internally based on commodities, and directing employees toward low-cost purchasing behaviors, contracts, and automated processes. It’s the “Show Me the Money” view to get visibility and control of spending, especially in indirect goods.

  Supplier Relationship Management is supplier facing, dealing with automating supplier interactions, whether transactions, information sharing, or true collaboration. Sticking with Jerry Maguire lines, it’s the “Help Me Help You” theme; think of it as pretty much all of the stuff that shows up in a supplier portal (CRM’s twin sister): orders, inventory, forecasts/schedules, scorecards, designs, project plans, and such.

  Supply Management is customer facing, dealing with getting the extended supply chain ready to execute on customer demand--and profitably. It combines the previous two areas with the supplier-facing portions of PLM and the supply chain. Think of it as a near-real-time network design and redesign that minimizes Total Cost of Ownership (TCO) and maximizes customer service.

For direct goods, supply management is based on the Point-of-Postponement (POP), which can mean optimizing finished goods for a Make-to-Stock (MTS) firm, a cellular manufacturing line poised to execute a Configure-to-Order (CTO) process over the Web, or a highly capable quote management and cost estimation process at an Engineer-to-Order (ETO) firm and its tight network of strategic suppliers. However, this integrated view of supply management is actually a double-edged sword. The good news is that a slew of new technology is being proven in the field, showing the significant bottom-line effect of aligning engineering, sourcing, logistics, and manufacturing/quality functions:

  Supply-aware design, which includes part/supplier re-use, quote management support, cost estimation libraries, target costing support, and such--for example, IBM has reduced its BOM costs by almost 3% using a subset of these tools

  Logistics sourcing that transcends isolated carrier optimization, load tendering, spot bidding and fleet scheduling to move toward a view where logistics is considered simultaneously with the other components of the supply network being evaluated--even just optimization-based bidding tools used to re-bid corporate freight contracts (or sourcing the commodities that have large logistics cost elements) are saving large firms from 3% to 25% incrementally over existing competitive bidding techniques

  New analytics such as multistage inventory optimization to turbo-charge traditional programs for lead time reduction, lean manufacturing, Vendor-Managed Inventory (VMI), strategic sourcing, and supply chain planning

  True Balanced Scorecards for supply performance that unites departments at a common set of evaluation criteria (like TCO) for suppliers, commodities, and employees (especially given the daunting number of improvements that can be made using the above tools)--these should ultimately be used to measure all efforts and projects in a supply management project portfolio. AMR Research feels that this holistic project portfolio management approach, which has saved companies 2% to 3% of their IT costs in IT project portfolios, will have even more effect on supply management. Motorola is working in this direction, and Braxton actually just published a book called Connecting the Dots on this topic.

The payback of such tactical network redesign efforts will form a major research theme for AMR Research in 2003 as well as some SRM field studies, a look at supplier portals, and progress toward building a best-of-breed IT architecture, which can unite transactional, planning, and analytic applications to these challenging new requirements--and not force grim choices between application anarchy or idly waiting for your Enterprise Resource Planning (ERP) vendor.

Such business change will also require healthy re-engineering of data, business processes, and performance measures, creating way too many recommendations for this humble Outlook.

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