Procurement Partnerships

Procurement Partnerships

by Tim Schaasfma

While the descriptors have changed over the years, theprocess associated with the system known as buying, purchasing or procurementhas not. Each party involved in the transaction wants to feel they have come outahead. It is akin to the Norman Rockwell print, The Butcher, in which thecustomer and the butcher are trying to obtain an unfair advantage. As they eachlook intently at the weight arrow on the suspended scale, the butcher has hisfinger on top trying to add weight, while the lady customer has her finger onthe bottom of the scale, pushing up as best she can to reduce the weight of theproduct. As is both human and corporate nature, competitive instincts come intoplay that can often create win/lose rather than win/win transactions.

However, in this increasingly competitive global environment,the most successful companies, whether customers or suppliers, will be thosethat create win-win partnerships. While many businesspeople may becomeimmediately defensive and acknowledge that in all their transactions the intentis to create win-win and that partnership is a given, practice suggestsotherwise. Fortunately, the natural products/nutraceutical industry has notexperienced the same transfer of sourcing or manufacturing outside NorthAmerica, as has been the case for the shoe and toy industries, for example. Mostdietary supplement products sold in North America are manufactured in NorthAmerica. The present trend away from North American sources is the increasingavailability of raw materials and components from Asia, primarily China andIndia. Those of us on the customer side have certainly witnessed this trend, andthe suppliers whose materials are grown or components manufactured in NorthAmerica certainly recognize that, unless they continue to make their suppliersand processes more efficient or they establish supply lines with Asiansuppliers, more activity will migrate to Asia. There is also no reason to doubtthat in the years ahead, more finished goods manufacturing will find its way toAsia. This trend only increases the pressure to establish extremely solidrelationships both in Asia and North America, as the wholesaler, distributor,mass merchant or retailer expectations will not change regardless of where theproduct is sourced.

While we talk the talk, putting win-win into practice is achallenging process. Raw material or contract packaging salespeople have bosseswho want them to maximize what can be charged to improve revenue and profits,while companies that purchase those goods and services have bosses who want themto minimize the material spend portion of cost of goods.So, is there a practicalsolution such that each party is confident, when the contract or purchase orderhas been signed, win-win has been achieved and true partnership established? Partnership can succeed when a disciplined sequence of people,process and product are firmly in place on both sides of the negotiation table.

People, Process & Product

Well-trained people of integrity are the most importantelement in any business relationship. There is no doubt that when a customer andsupplier establish not only a personal rapport but also confirm a strong mutualsense that the person sitting across the table is fair and ethical, there ishope that a solid foundation can be laid that will allow the parties totransition to the next phase of process. It is incumbent upon management to keepthis in mind when hiring buyers and salespeople, if they seek to enhance thereputation of their organization. The people who fill these roles are crucial,as they are the ones traveling about representing their organization. It is alsomanagements responsibility that when a problem arises, they call theircounterpart at the partner firm to advise them of the problem so correctiveaction can be taken. No one benefits when problems go unresolved and reputationsare damaged. Remember, the objective is win/win.

The next consideration is process. A disciplined process iscrucial, and each party needs to know and understand each othersexpectations. During my tenure with IdeaSphere, at its Twinlab manufacturingfacility in Utah, we had begun to develop and implement a process entitledValue-Based Purchasing (VBP). Like a three-legged stool, the VBP collapseswithout each of the three legs firmly in placeQuality, Price and Timeliness. Theoperative word of course is value.For example, when procuring a raw material, the intent is to establish arelationship with a supplier and seek not only the right balance of quality andprice but also timely delivery, thereby allowing for as rapid a conversion ofthe material into finished goods as possible. All manufacturers primaryobjective is to transition a raw material or component into finished product asquickly as possible, allowing them to sell it as soon as possible, thereby notonly maximizing material flow through-put but also converting payables intoreceivables in as rapid a fashion as possible. Material and component supplierswant to accommodate the same cash flow process, creating a classic win/winarrangement throughout the entire supply chain. In the end, a disciplinedexchange in the entire supply process benefits all parties involved, therebyfulfilling the old adage, when the tide comes in, all the boats go up.Finally, when people and process are in place, the conversion into a salableproduct will, in and of itself, become more cost effective and efficient. Whilematerial and components are a liability, finished product is an asset. However,while all organizations strive to minimize liabilities and maximize assets, whenit comes to product, turning the finished goods is something that should be doneas often as possible.

It is also incumbent upon management to provide the necessarycapital resources to allow for as efficient a transition from raw material intofinished product as possible. Associated efficiencies will contribute to reducedcost of goods as manufacturing managers are challenged to maximize their assets.Well-maintained machinery, quality material and a trained, motivated work forceshould guarantee quality, salable product ready for end consumer purchase andconsumption. While often mentioned, it cannot be over-emphasized that as werefer to financial assets and liabilities, successful, profitable organizationsreward and respect their people as crucial assets who also become the products,or outcomes, from these disciplined processes. Said another way, well-managedoutcomes are products of a cohesive process that is made up of people who areall on the same page and properly positioned within the organization to maximizereturn.

The nutraceutical industry is at an important crossroads, andmanagement teams need to communicate with all people within their organizationsthat they have a mutual responsibility to look for efficiencies and money-savingprocesses and procedures. If not, the consolidation already occurring will onlyspeed up, and the best-run companies will not only be manufacturing their ownbrands but also those of their competitors. This will create a situation wherecompanies will not only compete for shelf space and consumers but also thehistorical back-room areas of manufacturing and distribution. This transitionwill not be limited to the nutraceutical industry; many well-respected consumer goods companies may well decidein this global economy to invest resources in branding and marketingcompetencies and outsource manufacturing to organizations with that as a primaryor exclusive competency.

Whether competition from abroad or within our own industry,the companies that will be most successful and profitable are those that notonly create mutually beneficial win-win purchasing partnerships, but havemanagement that creates cultures where all people feel they make an importantcontribution.

Tim Schaafsma is the former vice president of supply chainmanagement for IdeaSphere/Twinlab, overseeing all operational and supplyactivities from IdeaSpheres primary manufacturing and distribution facilityin American Fork, Utah. He also held several executive positions within globaloperations and supply at multi-billion dollar world-wide consumer goods/directseller Amway Corp., now Alticor Inc. In all his ventures, his primary focus hasbeen on developing people, process and product to maximize efficiency andresource return. He can be contacted at [email protected].