1.5 Purchasing's Strategic Contribution

Purchasing's strategic importance starts with one simple fact: Purchased goods and services are almost always your firm's largest cost category. For the typical manufacturer, purchased inputs are about 60-80% of cost of goods sold (COGS)Direct costs attributable to the production of goods sold by a company. Includes material costs, labor costs, and manufacturing overhead. . Even for service companies, acquired inputs are often 30-40% of COGS. This fact means that purchased inputs exert a huge influence on your firm's value proposition—that is, the value you promise to customers. Specifically, purchasing has a huge impact on your firm's cost, quality, delivery, innovation, agility, and other value-added capabilities (see Figure 1-4). Let's exemplify the value-proposition effect by taking a closer look at how purchasing influences quality and innovation.

Quality

Innovation

The strategic contributions of purchasing and supply management go beyond operating performance. Purchasing is a vital source of competitive intelligence. Consider this pertinent fact: Only two functions work with the world beyond the four walls of your company on a day-to-day basis. Marketing works with customers and provides insight into what tomorrow's best markets and hottest products will look like. Purchasing works with upstream suppliers and provides vital knowledge about what new materials and technologies are being discovered and developed—and how they will affect the marketplace. To do this, you need to keep your eyes open and be an active and strategic scanner. Equally important, you need to tap into the 1,000s of eyes and ears across your suppliers.

For example, if the CEO asked you the following questions, you would want to have informed and intelligent answers:

• How do you expect additive manufacturingA process by which digital 3D design data is used to build up a component in layers by depositing material. Also known as "3D printing." to affect the make-versus-buy decision? How are competitors and suppliers exploring or exploiting additive technologies? What types of investments should we be making now?

• What is graphene? I've heard it is going to change the world? Where do you think it will make the biggest impact? Do we have the right suppliers to help us compete if graphene takes off as a viable material? What types of investments should we be making now?

Based on what you know right now (i.e., without a Google search), would you have lost or earned credibility with your answers to these questions? You should start building your scanning habits now. As a purchasing professional, you are the eyes and ears of your firm. Your job is to sense changes in the environment, discern their meaning, and help make the plans that will assure your firm stays relevant in a chaotic and dynamic world. Your supply team can help.

For example, in today's chaotic world, assuring access to scarce resources makes a huge competitive difference. Consider this historical example: As the American civil war loomed, managers at P&G realized that rosin—a critical ingredient in soap—could only be acquired in New Orleans, a southern confederate stronghold. They quickly bought an enormous supply of rosin at $1 a barrel. When wartime shortages drove the price of rosin to over $15 a barrel, P&G prospered (P&G even won Union Army contracts to supply soap and candles). 1 More recently, Southwest Airlines used a commodities hedge to protect against price increases in jet fuel. The result: When oil prices skyrocketed, Southwest Airlines made money as key rivals struggled. As a purchasing professional, you always need to ask, "What do I buy that might suffer a supply shortage?" Today, you might focus on "rare earth" elements, which are used in hi-tech gadgetry. 2

Proactive scanning makes you a better decision maker—consider our examples above. By anticipating supply shortages, you can buy in advance like P&G, hedge against price increases like Southwest, or become a customer of choice for key suppliers like Honda. You need to know resource markets well enough to ensure that your firm never suffers a work stoppage because of a materials shortage.

Have you ever heard of Kathy Lee Gifford? Kathie Lee is perhaps best known for co-hosting Live! with Regis and Kathie Lee for 15 years. However, her sterling, "girl-next-door" image was tarnished when activists linked her clothing line to sweatshop labor. Specifically, in 1996, the National Labor Committee, a human rights group, announced to the world that Kathy Lee's clothing line sold at Walmart was produced by child labor working in sweatshops in Honduras. However, just as you probably don't know what the working conditions are at the plants that make your clothes, Kathy Lee knew nothing about the sourcing relationships that brought her clothing line to the store. But, her lack of culpability didn't matter because the damage to her reputation had been done.

Purchasing's nature—i.e., working with suppliers that operate production facilities located in far off lands—almost defines reputation risk. For example, did you know that in 1997, Nike unintentionally popularized the term: "A living wage?" Consider the following excerpt from a New York Times editorial:

Even Doonesbury, the cartoon strip, lampooned Nike for not paying a "living wage." One pundit summarized Nike's dilemma, saying, "This is a $6 billion company that sells $140 shoes made by people earning $1.50 a day—that's difficult for the public to reconcile." 6

Unfortunately, image isn't just a fashion industry phenomenon. 7 For example, much to Tim Cook's chagrin, when workers at a Chinese supplier began committing suicide to protest "inhumane" working conditions, Apple found itself in the social-policy spotlight. 8 In the eyes of many critics, when you choose to buy from external suppliers, you become an accomplice to their labor practices. Your job is to make sure your suppliers—and their suppliers—do not cross any ethical, legal, or regulatory boundaries. That is the only way to ensure that your sourcing practices don't tarnish your company's image.

To summarize, a well-crafted-and-well-executed purchasing strategy does more than merely help you buy the right stuff at the best price. Great purchasing practice helps you bring unique, highly valued products to the market, identify supply opportunities and threats before rivals do, and protect your brand's image. The result: You earn customer loyalty.