In the following article, from 2014, I discussed an organization-related issue that limits the overall positive impact the purchasing function can have on company financials. Specifically, the article considers the impact of company organizational reporting structure. For instance, when I was a chief purchasing officer, I reported to the VP of operations. As you’ll see, a good case can be made that supply management at the factory level should report to the general manager, and the corporate level should report to the CEO.
Where Should Supply Management Report in an Organizational Hierarchy?
The organizational structure issue I’ve presented in the title is loaded with emotion, at least on my part. Perhaps the best way to both defuse this emotion and determine manufacturing’s optimal procurement function reporting structure is by identifying and eliminating those functional areas that should definitely be avoided. Even if this process does not result in a last-man-standing scenario, it will certainly reduce the options.
Purchasing’s current tactical focus on piece-price sets the stage for discussion of the No. 1 reporting structure relationship that should be avoided: supply management reporting to finance. Let’s face it, chief financial officers already have their tentacles into the conduct of virtually every functional area through the financial exhibits they impose, monitor and report on. This greatly limits the flexibility both on how these areas are managed and their resulting business impact.
You only need to think about how finance penalizes manufacturing for reduced lot sizes – a basis of lean production — to understand what I’m getting at. These restrictions only get worse if your functional area actually has to report to the finance function.
A 2014 column written by IndustryWeek editor Pat Panchak, Did Finance Gut Manufacturing?, has quite a thought-provoking title, which I’m sure raised the hackles of any financial people who read it.
That title could just as easily have been posed as Did Finance Gut Supply Management? The primary financial exhibit finance uses to measure supply management productivity is material variance, which is essentially a stand-in measure for piece-price; i.e., did it go up or down? As I’ve written many times before, having an exclusive focus on piece-price will never land supply management a seat at the table. But this is exactly the strategy that finance would impose on the purchasing function. Panchak’s column demonstrated this by quoting Marty Thomas, then-senior vice-president of operations & engineering services for Rockwell Automation:
“If you have strategic sourcing reporting to finance, what do you get? You get purchase price reduction. What else do you get? Nothing. You get purchase price [reduction] at all costs. You don’t get lead time; you don’t get order quantity; you don’t get on-time delivery, and; you don’t get quality. You get purchase price reduction. You get what you deserve.”
This quote hardly needs any elaboration. It is a classic description of the smothering impact that finance bias can impose on supply management practice. Recognize that Thomas isn’t even a purchasing professional, yet he sees and remarks on this negative impact.
Panchak poses the question, “Has our focus on financial metrics held back manufacturing business success?” and goes on to cite two manufacturing authorities that answer that question with an empathetic “YES.”
I’ll piggyback on her words again by relating them to supply management, i.e.: Has our focus on financial metrics held back supply management contributions to business success? Re-read my column Should Procurement Have a Seat-at-the Table? and you’ll see that if you want to work for a supply management function with the freedom to have the maximum positive impact on your business, don’t hire on to a company that reports to the finance function.
Another reporting relationship supply management should try to avoid like the plague is the one with Procurement reporting to Product Engineering. Why? First, but (probably not foremost) is the bias that many engineering executives have regarding procurement being nothing more than glorified “shopping.”
In my experience, this attitude is fairly prevalent among design executives and discounts virtually every other financial impact procurement can have outside of material variance. But it gets worse. When supply management reports through Engineering, engineers tend to rainbow the procurement process by working directly with specific outside firms on development of new or revised products, essentially limiting any opportunity for an evaluation to determine the most capable source, and negotiations.
Of course, supply management impacts much more than piece-price, and removing competition from the sourcing process diminishes the impact Procurement can have on design effectiveness, pricing and supply order fulfillment risk. For instance, is the firm that Engineering has worked with financially viable? Further, does it have the manufacturing wherewithal to transition its prototyping capability to a production basis in support of forecast order fulfillment needs?
Read more Supply Chain Initiative columns by Paul Ericksen
What about Manufacturing? Should factory operations have oversight over the procurement function? Forward looking supply management functions view OEMs and suppliers as all part of a single value stream. Consequently, an OEM’s manufacturing facility is seen as just another link in the order fulfillment chain. Granted, it is an important link, but it is a link nonetheless.
Many OEM organizations have supply management reporting up through the factory operations. This usually results in a focus on internal constraints. In other words, they look inside at what they would be able to produce and expect suppliers to jump through hoops—if that’s needed—to match it. Quite often the schedule loaded by the consuming factory is either not feasible or requires additional supplier expense to support. The issue then becomes what functional department has the best visibility to all bottlenecks—whether internal or external—and correspondingly, can put together a schedule that can both maximize alignment with demand and minimize waste?
Supply management, of course, is best positioned to do just that since they have visibility to overall value stream constraints. It is important to understand that today’s prevailing organizational structure—where supply management reports to factory operations—harkens back to the day when the largest portion of a company’s cost of goods sold was generated internally with purchasing, for the most part buying commodities such that costs were more of an afterthought. Think about how roles have reversed over the last 60 years. Purchased content today usually accounts for well over 50% of an OEM manufacturer’s cost of goods sold, and internal manufacturing costs have become the afterthought.
In one of my past materials manager positions I convinced the general manager — whom I reported to, by the way –that supply management should oversee factory scheduling. He agreed and because of this, during my tenure there were significantly fewer breaks in the loaded schedule than over any previous period and the factory did as good a job as was ever done in supporting customer fill rates. I’m a realist and doubt that you’ll find many General Managers today that are willing to have their manufacturing operations report to their supply management function.
But the above role reversal and the reduced order fulfillment risk exposure cited above create a bully pulpit for purchasing managers to propose that the supply management function report directly to the general manager, just as Finance, Product Engineering and Operations do. And with that, the function will be better positioned to earn a seat at the table.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.
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