Are Purchasing Departments hurting America long term?
Chapter 1: Defining the problem
American business purchasing departments have evolved quite a bit over the last 30-40 years. The world has become a global business and many countries have become more involved with design and manufacturing. Technology has made many tasks easier and more efficient. Computers have dramatically improved along with the internet to the point we can send large amounts of design data around the world in just a few minutes or even seconds. Computer software has also improved in both speed and capability. We can actually push, pull, heat, bend, melt, crush, and even crash our 3D product designs on computer. We can prototype our designs by just hitting a “PRINT” button and a machine builds a plastic part without a mold or a toolmaker. We have come a long way. But is it all for the better good?
Our American purchasing departments are under tremendous pressure to buy more for less. They are responsible to purchase quality materials and services while reducing costs. They are tied directly to corporate profits and are blamed if the company loses money. Our current generation of purchasing agents and managers now believe that they can “OURSOURCE their way to PROFITIBILTY”. Allow someone else take all the responsibility, take a variable cost product development cycle and force it into a high quality fixed cost product with a tangible quality output. When the quality is not up to expectations, then they……
- Reject their products at the vendor’s expense.
- Require them to make the products over at correct specifications.
- Have them expedite new products at their cost
- And if all fails, send in the lawyers to sue them for bad product and late deliveries.
While all of this is true and typical, there is one major factor missing. Customer Satisfaction! What happens to your sales when you can no longer deliver your product because it is either wrong, late, being replaced, or on back order? Your customers will scream, you will lose business, and you may get sued yourself if you do not deliver. This is a huge flaw in this purchasing strategy.
Once this system starts to fall apart, the natural reaction is to start cheating on materials, product specifications, expedited shipping, and full testing procedures. There is no time to do it correctly so now you decide to short cut the process to get product out. We have all seen this happen and sometimes it works, and sometimes it fails miserably. Many times the casualties are the products that are sold, the products fail down the road, and the end customer is completely dissatisfied and taken his business elsewhere.
I am not taking lightly the responsibilities and pressures on the purchasing teams in America. They work very hard, long hours, and are responsible for buying millions of dollars of goods and 1,000s to 100,000s of parts with very little time to review, research, or test. They literally may only have seconds to a few minutes to find vendors, generate quotation packages, send them out, follow up on them, receive them in, digest them, and make a decision on each purchase. This is just not enough time for more complicated engineering based projects.
A typical purchasing agent may have a college degree, several years of experience and work within a team of buyers. They each have specialized skills and experiences either in metals, plastics, commodities, raw materials, or machinery. Based on my experiences, most of these buyers typically do not have engineering or manufacturing training or experience. These purchasing agents have no choice but to rely on information from the vendors or to ask the engineering department for guidance which is perfectly acceptable. They do a great job with what they are given.
The problem arises when prices go up, deliveries are missed, and products do not perform as expected. Once these difficulties start, the problem usually exceeds the experience and scope of the purchasing department depending on how it is structured. Some larger companies have many purchasing people responsible with specialized skills in tooling or materials and they tend to do much better. The general purpose agent may not be as successful and require extra help.
I have seen a few companies keep the purchasing decisions isolated away from engineering as a separate profit and control center. They tend to report directly to the manufacturing wing of the company and not under the engineering. They also incentivize those in management with excellent bonuses and high levels of authority to remain autonomous and not accountable to engineering in any way. A few of the managers spent quite a bit of time blaming engineering for their designs because their “export” vendors were not able to deliver the parts at the expected quality, price, and performance levels.
These same purchasing managers get rave reviews from upper management because they saved millions of dollars by outsourcing projects to “low cost countries” and other cheap domestic suppliers. The engineering departments had to scramble with internal design reviews, material changes, mold revisions, computer simulations to verify the design and processing problems, and literally race overseas to teach the “expert vendors” how to make the parts correctly. Then once they return back home from a 1 to 3 week trip fixing problems, they get interrogated in meetings to explain why the products failed, the project is late, and now over budget.
On paper, upper management sees that purchasing is making huge profits and that engineering is spending those profits fixing their own problems in design. It appears, obviously that engineering is the problem. This phenomena has happened over and over again. Sales driven organizations that make their own products spend so much time focusing on sales and customer support that they tend to ignore engineering development, training, intellectual property, engineering talent, and the development of new technology. They compete for resources and budgets to support their sales efforts at the expense of engineering. R&D budgets are cut, employees are not trained as well as they should, and the quality of engineering candidates are lowered based on cost constraints. The entire system starts to collapse on itself. After this process takes hold, it is nearly impossible to fix it and companies fail and close. These Americans employees are sent overseas to train these “LOW COST COUNTRY manufactures” with skills and experiences that took us several generations to learn and we just give it away to help our offshore competitors learn our secrets and take our jobs.
We are selling our souls to the devil one project at a time.
These same low cost countries manipulate their currencies to keep the exchange rates high and continue this incentivized process. I find it amazing that the exchange rates are as much as 1:8 yet the same products are only 10%-30% cheaper. Would you not expect them to be 87% cheaper based on labor? (Not materials) I asked this question to my international business economics teacher as to how this works and I never did get a factual answer.
The problem with purchasing and sales based management teams are that they do not understand how to quantify “SKILL, TRAINING, and CRAFTMANSHIP “, and differentiate that from “QUALITY, DURABILITY, WARRANTY COSTS, and COMPANY PROFITS.”
Let’s face it, you cannot easily quantify an engineering team or manufacturing organization with a “SKILL LEVEL” in an excel spreadsheet and easily determine whether a vendor is actually qualified to do the job or not. The vast majority of vendors, especially overseas vendors are going to tell you that they can do the job on time at the expected price and required specifications. They will never say “NO”.
To summarize the problem….. Purchasing, engineering, and manufacturing are having a difficult time keeping up with technology and may be losing control of how to best compete. Material costs and employee wages are rising which in turn makes purchasing determine that it is just faster, cheaper, and easier to outsource. Purchasing does not have the time, skills, budget or authority to bring in the technology, learn it, develop it, and implement it to compete. The latest trend in business is to become a virtual company that outsources the risks and responsibility for these difficult programs. It is a great business model but someone has to design, build, and manufacture something eventually. As the saying goes, if you want it done right, you just have to do it yourself. Who takes care of your children better than you do?
To finalize to our friends in purchasing, there are many great technologies that are improving daily. A constant effort must be made to keep up the best way possible. Computer simulation in engineering and manufacturing have had huge improvements in the last 5-10 years. We are now able to analyze virtually anything on computer with very high accuracies. If the company does not have that capability, they can always outsource these services. While high level of skills exist within the company and in the vendor’s company, analysis has proven to consistently improve performance by 10%-50% on cycle time, scrap, strength, cost, and performance. The software is able to pick up flaws and areas of concern much more accurately than the skilled mold designers, product designs, tool makers, and processing engineers ever imagined.
Getting both engineering and purchasing to embrace these ideas and options can be quite difficult. There is the cost of analysis and also the time delay to do the analysis. This scheduling paradigm can be greatly offset downstream by saving time and money on cycle times, reduce the number of expensive molds, and the reduction in warranty claims to replace broken and flawed products. In one example, product needed to double its production and the current mold was not able to keep up. Manufacturing required a 2nd mold to keep up. The new mold was so much more efficient, that the original mold was retired and never used again. There was over a 50% savings in cycle time and the plastic warpage was also reduced by approximately 50% as well.
I have found that when purchasing departments become to autonomous, they do not appreciate engineering getting involved in auditing or disapproving of vendors. It is also highly volatile when engineering is viewed as driving up costs, causing purchasing to exceed their cost goals and, more importantly, interfering with the purchasing manager’s personal bonus program based on “LOW COST COUNTRIES”. So, political and technological walls get built and problems increase within the company.
Since we at Procad Technologies have had a very long career working both in design and manufacturing, we understand what engineering needs, purchasing wants, and manufacturing delivers. We take this information and utilize state of the art engineering and computer simulations to evaluate products and processes. We are able to focus on and maintain product performance while increasing manufacturing efficiencies. Weight reduction, cycle time reduction, product strength, cost reduction, and durability are all important areas of focus. By working directly with purchasing departments and engineering departments, we can reduce the risk of failures while improving profits all at the same time. We are an independent 3rd party that can review your designs or your vendor’s designs and catch many of the issues that tend to slip through the cracks. We have found that the savings that we typically create more than offsets the costs of our services. Give us a call so we can help you optimize your processes.
There will be more chapters to follow detailing more issues, problems, and solutions to this complicated issue. If you would like to learn more, please follow us on Linkedin or visit our web site at procad.tech.com