From the Back Cover As we approach the 21st century, organizations are reengineering various functional areas to become more competitive in the World Class arena. With this in mind, consider these concerns raised by author Ben Laaper: At least 75% of all companies still have the traditional, bureaucratic, auction type procurement process. Price is only a fraction of total cost. The balance largely consists of non-value added administrative paperwork. Purchasing people have been trained to seek out the lowest price regardless of total cost. That is why procurement reengineering is so important. Just as Total Quality Management (TQM) brought significant reductions in the cost of quality. Procurement process reengineering will bring about a sharp drop in the cost of acquisition. Procurement Reengineering starts by examining the traditional purchasing process. What follows is a discussion of reengineering and what changes need to occur in the purchasing process. Laaper even discusses the benefits and drawbacks of using procurement 'credit' cards in procurement reengineering. Follow the practical examples and use the tools and principles in this book and watch as the focus on adding value and the dramatic reduction in total procurement cost have a profound impact on you organization. Read more Excerpt. ? Reprinted by permission. All rights reserved. From Chapter One: 1.1 Fasten Your Seat Belt In spite of great intentions, lots of momentum, hundreds of business articles and numerous books on the subject, many companies continue to flounder at 'Reengineering the Corporation.' It seems that many organizations are just waiting for the 'Magic Wand of Reengineering' to strike while others have made serious attempts but failed to get the desired results because they either refrained from aggressively reorganizing for change, attempted to tackle too many processes simultaneously, or allowed for certain isolated functions to remain independent. Reengineering requires top management support but above all else - leadership - since most projects are focused on revenue generating and value-adding processes such as business growth, customer order realization and lead time reductions. Contrary to popular belief, reengineering doesn't have to encompass all aspects of a business at once but can be performed within certain, independent, closed-loop processes. Departments in and by themselves cannot be reengineered because they merely represent a component of a process and not a process in its entirety. A process, on the other hand, runs across numerous functional areas and departments. An example of such a cross-functional process is the procurement process which, inasmuch as it touches every employee, is a process that is self-contained between the requisitioner, Purchasing, Receiving and Accounts Payable. It also is a process that, traditionally speaking, consists of numerous poorly coordinated silo types of functions and controls. In subsequent generations of reengineering many companies and Business Process experts have come to the realization that the procurement process in particular, offers substantial opportunities, as it appears to consist of very expensive, bureaucratic and non-value-adding activities. For companies seeking continuous optimization and true cost reductions, the procurement process by and in itself is considered 'low hanging fruit,' one of the last great bastions of major inefficiencies yet to be conquered. Once reengineered, the entire procurement process should, through the process of empowerment and decentralization, simulate the Total Quality Management movement, which ultimately makes all the operators and process owners accountable for quality and the cost of quality. It took approximately a decade, starting in the early 1980s, and beginning with Statistical Process Control, for the quality culture to be fully integrated into our processes. Now, through procurement process Reengineering, we appear to be on the eve of another cultural breakthrough: the decentralization of and a substantial reduction in the cost of acquisition. The cost of quality ranged from 15-18% of a company's total costs just a decade ago, compared to less than 5% of total costs for today's world class companies. Similarly, the cost of procurement and acquisition should tumble from 6% of today's total costs to less than 2% over the next few years. As it turns out it is the process in itself that is cost prohibitive, or to paraphrase then presidential candidate Bill Clinton: 'It is the process, Idiot!' Some of the more obvious costs associated with the procurement process include: maintaining a larger than needed supplier base. obtaining larger than needed volumes. lack of standardization. the cost of extended lead times and cycle times. the cost of order processing & receiving. Unfortunately, beyond a few strategic raw material suppliers the executive level interest in Purchasing drops off faster than it took the Allied Forces to crush the Iraqi resistance in the Gulf War. This is not only unfortunate, but also a very expensive short coming in the way our corporations are managed, as many companies still treat the purchases of shop supplies as some sort of black magic. Traditional purchasing organizations are quite isolated and continue to hang onto a set of outdated policies and procedures that call for extensive bidding cycles. This kind of bureaucracy tends to perpetuate variability in: product, process and service along with increased lead times and cycle times. Consequently, this should no longer abdicate the procurement professional from seriously taking a close look at how the often voluminous and bureaucratic purchasing process functions, or, as it turns out, dysfunctions, within the majority of our corporations. Even today, as we rapidly approach the 21st century, we find the traditional, auction type, purchasing process still at work in at least 75% of all companies. Even at divisions and plant locations of many Fortune 100 corporations, we still encounter such elaborate, outdated, non-value-adding systems. Consider this example from an international pharmaceutical company. When its maintenance department needed some fasteners, it followed all the proper procedures. That resulted in a long-distance phone call, a fax, and a two part purchase order-all for a $2.18 box of fasteners. Many routine maintenance items are purchased in such an elaborate and expensive fashion. 1.2 Why Purchasing? In spite of the overwhelming evidence to the contrary, most procurement professionals have a very difficult time in breaking away from their customary cycle of doing business the old fashioned way and often don't possess the leadership skills to break out of the mold to bring about true radical change. However, purchasing is the key component within the procurement process, and it must help drive the elimination of paper work and the facilitation of the migration of transactions to sources external to the organization. In order to optimize a company's performance the Chief Executives and Business Process experts need to aggressively focus on the need for partnerships and alliances throughout the entire organization. It is not the high profile raw materials that absorb the cost of acquisition but the basic shop supplies, referred to throughout this book as Maintenance, Repair and Operating supplies (MRO). When we refer to Reengineering the procurement process, we must realize that in most traditional companies the accounting control process in fact functions as an imposed purchasing process. Therefore, through reengineering we are seeking for the emergence of an entirely new identity for Purchasing. This new identity should be the catalyst to turn the department upside-down and create a new process where Purchasing rapidly gains credibility and enables it to flourish by getting into areas heretofore inaccessible to purchasing personnel. Read more
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