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<MOHAMMAD KHAIRUL AZMY BIN MOHD GHAZALI> <1215075>

<28 OCTOBER 2013>

Managerial Report Properties Purchase Strategy


Developed in conjunction with total organizational strategies and supply partner objectives, effective purchasing strategies can become the means to a competitive chain. I'm purchasing the corporate jet. Years ago, that would've been a job for the board of directors. Now that responsibility goes to us in the purchasing and supply management department. Our organization recognizes the value we can bring to the total corporate spend and purchasing decisions." This example, given by one organization's chief purchasing officer, illustrates the progress of purchasing strategies and their increasing importance within the organization. Evolving from an era after World War II, when many organizations were purely sales-volume driven, to more recent years when the supply chain was identified as a means to reduce costs and add value to the entire buying process, purchasing strategies have had to change with the times. Just how that type of strategy is developed and what key elements must be included is one of the initiatives in the NAPM and Center for Advanced Purchasing Studies report, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast." The 1998 study says that in the coming years, successful purchasing strategies will be directly linked to organizational and supply chain goals, will be more formalized, and will result in a purchasing contribution that gives an organization competitive advantage. Linking to Organizational Objectives The first step to successful purchasing strategy development is linking strategy to organizational objectives. To accomplish this, strategy development must be a formalized process, according to Robert J. Trent, Ph.D., associate professor of management at Lehigh University in Bethlehem, Pennsylvania. Trent suggests a formal steering committee can identify specific steps, such as market analysis, milestones, and deliverables. The result will be a strategy with well-defined goals. An example is negotiating a single-source, three-year agreement that lowers total cost by 20 percent. Trent also explains that a major step will be educating individuals internally about the strategy and its effects. This typically consists of showing internal business units the benefits that the entire organization will realize as a result of the strategy. For example, if the strategy is to reduce the supply base or use preferred suppliers, purchasing and supply management professionals must be prepared to demonstrate how fewer suppliers, or the preferred supplier, will reduce costs, provide better quality, lead to improved processes, or otherwise add value. Connecting total organizational objectives into a complementary plan is difficult because often the different functions are measured on different factors. For example, if the sales organization is measured on volume of new business, it may be promising deliverables that the production side can't realistically support. Or, if a customer support function is measured on customer satisfaction and expedites materials to customers through the quickest possible means, this might conflict with operation's goals to lower costs of shipping. There is no right or wrong answer as to what the priorities should be; the key is that each function understands the overall goals and develops its strategy to support them, in concert with every other group in the organization. Through a cross-functional review all the business units can learn how the strategies will work together. The groups will be able to see how, for example, an organizational strategy of "gaining early access to technology" will be achieved by developing long-term strategic relationships with specified suppliers. Hurdles exist in developing a comprehensive strategy that links organizational goals, including information systems for various functions that don't communicate well, conflicting priorities of other business units, and lack of executive support. At IBM Global Services in Raleigh, North Carolina, William S. Schaefer, vice president of procurement services, says that compliance is a major - yet manageable - hurdle. Even though years ago the company's highest executive made it clear that all buying would be handled by the procurement department, the function still found it had to sell itself. Traditionally, advertising at IBM was thought to be an area where purchasing and supply management could

<MOHAMMAD KHAIRUL AZMY BIN MOHD GHAZALI> <1215075>

<28 OCTOBER 2013>

add little value. "To be honest, they were right; procurement didn't have experience in that area," says Schaefer, "but we hired advertising experts into procurement and analyzed the advertising value chain." The procurement group went to those purchasing the advertising and asked for one year. Once they became educated and learned the industry, they were able to add value to the process and deliver significant savings. In the past, 30 to 40 percent of the corporate spend took place outside of purchasing; now it's less than 2 percent. They didn't have to rely on a mandate for compliance - they were able to sell themselves. Linking to Supply Chain Objectives Developing purchasing and supply management strategies that are directly linked to overall organizational goals is a first and necessary step, but it doesn't stop there. The next evolution is to ensure those strategies are designed to support total supply chain objectives. Schaefer offers another example of how IBM is involving supply chain partners in strategy development. "If you look at how we approach business equipment, such as copiers and fax machines, the only way we were able to successfully drive a new strategy was to put purchasing people on a team with internal stakeholders and suppliers to devise a set of technological standards that defined a 'future' office," he says. This way, suppliers can give IBM insight into what technology is available and what might be available soon. At the same time, internal business units are voicing what is attractive to them. "It becomes clear that alone, the purchasing organization can not provide all the answers - you need to involve other members of the supply chain," says Schaefer. Success Factors What steps can purchasing and supply managers take to ensure their success in developing an effective strategy? As mentioned previously, the first step is to make the process cross-functional. This should happen both internally with other business units as well as externally with suppliers. Rather than a purchasing organization only interacting with a supplier's sales department, engage the supplier's purchasing function as well, as this will create a link to the second- and third-tier suppliers. Ensure that the focus of the organization is not on price standards, but on total cost concepts. To today's purchasing and supply management professionals, this may be routine, but for future success, these concepts must be communicated and thoroughly understood by others in the organization. For example, be prepared to explain how a shift to automated systems - an expensive venture initially - will provide return on investment for the total organization. Lehigh's Trent also identifies four key areas in which the purchasing organization must be well developed for purchasing strategies to be successful: Human resources, to aid in the recruitment and training of (a) top purchasing professionals who will need specific skills as commodity experts and financial analysts, and (b) highly skilled individuals for other functions within the organization as well Information systems, to not only automate tactical purchasing activities, but also leverage information from various functions and other organizations Organizational structure, to facilitate purchasing processes that complement the development strategy Measurement systems, so that purchasing processes and strategies that affect other functions can be tied to overall organizational strategies and proven valuable

How Far Will It Go? Looking forward, purchasing and supply management strategies will evolve even further, both in their content and in the manner in which they are developed.

<MOHAMMAD KHAIRUL AZMY BIN MOHD GHAZALI> <1215075>

<28 OCTOBER 2013>

Suppliers will be brought in early in the strategy development process. This is different from bringing them in early on a particular project or product to leverage their knowledge. The future trend implies developing a purchasing strategy - essentially a supply chain strategy - jointly with them. For example, by developing a joint strategy, suppliers will be able to commit specific capacity levels to the purchasing organization and, conversely, purchasing organizations will be able to make plans based on upcoming technology or supplier capabilities that are still being developed. Purchasing and supply management will become more process-focused, rather than activity-focused. Automating tactical activities is imperative to this shift, but once it happens, "purchasing activities" become "commodity management" or "strategy development" processes. To best accomplish this, supply managers work side-by-side with engineers and other groups in their environment, and vice versa. Collectively, the unit manages - and purchases - the supply. IBM's Schaefer says that an isolated procurement strategy will be obsolete. "Procurement and traditional supply chains merge together and essentially become an 'e-business network.' Procurement strategy must encompass how we derive value from integrating the complex and multi-tiered relationships between purchasers and suppliers in the network," he says. Keep in mind that the specifics of the purchasing strategy will vary greatly depending on what industry is being considered, since each industry's goals are different. For example, in the electronics industry, the objectives often revolve around gaining competitive advantage by being first to market with a specific technology. The supply chain goals - and purchasing strategy - will reflect that. However, a less dynamic industry, such as furniture-making, might focus on supply chain goals related to delivery, quality issues, and internal process automation. Regardless of the specifics, purchasing strategy development is becoming a process that reaches far beyond a purchasing and supply department; it encompasses the total organization and supply partners. The result is a strategy that functions as a vehicle for their progress.

10 Ways to start or enhance your sustainability purchasing strategy


Sustainability Purchasing can be as simple as choosing office products with recognized green certifications, buying from local suppliers or leasing equipment for temporary needs instead of buying it. Depending on the size and scale of your organization and your supply chain, sustainable purchasing programs can be very sophisticated, including scorecard evaluations that follow a total cost of ownership approach, Supplier Codes of Conduct to govern fair labour practices and human rights in the supply chain, or collaborations among purchasers and suppliers to address key sustainability issues such as the carbon footprint of products or local employment for disadvantaged groups. The key when starting out is to follow the KISS principle; keep it simple. Get started now by using the following 10 steps whether you are a small to medium sized organization or a large firm with an international supply chain and annual spend in the hundreds of millions. These steps and approaches are proven and scalable. Dont reinvent the wheel. Youll find its easier than you may think and the potential impacts on your organization, the community and the environment can be incredibly transformative.

<MOHAMMAD KHAIRUL AZMY BIN MOHD GHAZALI> <1215075>

<28 OCTOBER 2013>

1. Find Allies in your Organization If you spend some time reviewing case studies, youll see that a sustainability purchasi ng strategy usually starts as the project of a few sustainability champions in an organization. Talk to your colleagues and senior executive about sustainability purchasing and how it can benefit the organization use the Sustainability Purchasing Networ ks Guide to the Business Case and Benefits of Sustainability Purchasing as a resource to help you articulate the benefits and for insights on how to manage the costs. Support from the top is critical. Strike up a committee or cross functional working group that meets regularly to discuss and work on sustainability purchasing initiatives. 2. Tap Into Key Resources Few have the time and resources available to them at work to conduct original research. For reliable and current information on sustainability purchasing, contact the Sustainability Purchasing Network to find out what is new, what is being done and who is doing it. 3. Draft a Policy Statement and Make a Plan Putting a policy in place is an important step especially for larger organizations that may have a culture that is policy driven or oriented. A policy is a formal signal inside and outside of your organization that sustainability purchasing is a priority. A good policy should clearly state what sustainability purchasing means to you and what qualities you are looking for in the products and services you buy and the organizations you buy them from. The good news is that there are great examples you can draw from as you draft a policy that makes sense for your organization. Ensure you understand your organizations spending and consumption patterns in order to focus your policy. Identify the organizations single point of accountability to implement your policy and plan. TIP: Dont wait to start buying items on the shopping list in step 8 while you go through a policy development process. Many of these things can be done at the same time. 4. Start a Sustainability Conversation with Current Suppliers Start up a two-way conversation on sustainability purchasing with your suppliers. Share your organizations interests, needs and policy if youve developed one. Communicate your goals and standards. Take time to get to know who your suppliers are and what they do. Think about your most strategic suppliers and their products, services and operating practices. You may wish to draft up a simple survey on sustainable practices and ask that your organizations top 10 suppliers fill it out and return it to you. This will give you a good idea of your current starting place and it can help you identify social or environmental performance areas you would like your suppliers to improve upon. Outline the expectations you have for your suppliers and how they will be assessed to ensure that they put in place the processes and procedures that fulfill their obligations. 5. Find Ways to Use Less of What You Already Have A simple and very effective thing to do when getting started is to be more efficient in how you use what you already have. Try to squeeze a bit more use out of products before they are disposed. As one example, try to print and photocopy double-sided on paper and re-use misprints and drafts as note-paper where possible. Before purchasing something new, take a step back and ask yourself if it is really necessary. If so, only purchase the quantity actually needed and sure to be used. 6. Choose New Suppliers Committed to Sustainability When getting ready to go to market for a new product or service, use the opportunity to find out more about the sustainability performance of prospective companies and their products and services. You might want to create a questionnaire for suppliers as part of an Expression of Interest or Request for Proposal that asks for information about the companys environmental performance, track record on community -based initiatives, local economic development, and/or ethical standards whatever is most important to your organization. Determine how you will use this additional information in your process of selecting a supplier. Create clear metrics for measuring this as part of your review of supplier performance. You may also wish to ask potential vendors to complete a questionnaire that describes their environmental and social impacts and practices. This can help you identify those suppliers and their products and services that are most aligned with your organizations social or e nvironmental priorities. Remember to do the low-hanging fruit first. Identify quick wins such as simple improvements in energy efficient products that can both deliver bottom-line results and kick-start your sustainable purchasing initiative.

<MOHAMMAD KHAIRUL AZMY BIN MOHD GHAZALI> <1215075>

<28 OCTOBER 2013>

7. Take a Total Cost of Ownership Approach to What You Buy You already spend valuable time on your purchasing now take a few more minutes to consider the life cycle of what you want to buy. It will be well worth your time! A Total Cost of Ownership (TCO) assessment adds up the financial costs over a product or services life cycle the acquisition costs of the item or service plus any staff costs, training, training aids, support equipment, transportation and logistics costs, operating costs, maintenance costs, and withdrawal from service and disposal costs. With this information you may find that the product that looks more expensive up front, is actually cheaper over the life of the product. 8. Make a Top 10 Sustainability Shopping List Theres a wide array of high quality and reasonably priced sustainable products and services available on the market. A shopping list is a simple and powerful tool to get you started. Write down common items that you buy that have the seal of approval from credible certification systems such as the ISO 14001, EcoLogo, Energy Star, Green Leaf, LEED, Fair Trade, and Certified Organic. You can usually substitute some of these products and services with minimal impact on your budget or operations. You can post this list in your office and refer to it when your organization needs one of the items on your list. 9. Set Goals and Track Your Activities What is it that your organization really wants to achieve? Consider creating an opportunity for colleagues in your organization including the senior management team to spend some time with this question. Clear sustainable purchasing goals accompanied by measurable targets assigned to a timeframe are likely to be most helpful. An example of a goal is to review the sustainability performance of your top 10 suppliers or your top supplier with over 10% of your purchasing budget and set an objective to engage them on your sustainable purchasing needs. Once you have goals in place, ensure you have a regular schedule to track your performance and make improvements where you fall short of your expectations. 10. Communicate and Reward Achievements Spreading the word about your success in sustainability purchasing is a powerful way to promote your organization and its products and services within and outside of your organization. Half the battle is getting the word out and people on board. Tell the good news internally and watch the boost in productivity and employee satisfaction. Tell the good news to suppliers, consumers, and other stakeholders and watch relationships improve and sales increase. And remember that through case studies, testimonials and fact sheets, you can convey the highlights of what you have done and how you have done it to the media and award and recognition agencies. Communicate to all levels why these efforts are being undertaken, what will be measured and how you are going to get there.