Strategic Value Adding Purchasing

Monday, April 17, 2000
An effective purchasing strategy is at the core of successful purchasing departments. Strategies that offer total value to an organization should be the goal of all purchasing organizations. Purchasing professionals around the world are always in search of new strategies that creatively reduce costs and add previously unrealized value to an organization. Since motivating multi-company groups is difficult, the purchasing department must offer a clear strategy that offers value to all involved. Hence, Purchasing Programs, procuring products plus services, is a strategy that can be employed successfully to bring value to all involved.

The theory of Purchasing Programs is to leverage vendors to offer products and services — whereas previously — vendors were only offering products. The approach is to challenge vendors to offer significant value in areas not previously realized. This shift requires that the purchasing department refuse to purchase products based solely on the acquisition cost of the product. The evaluation of the total purpose of the product and services within an enterprise is the key. Purchasing Programs utilize the vendor's services to enhance the value of commodity purchases. Purchasing Programs focus on buying service plus products, not simply products. This concept is simple, however the application of such a methodology of purchasing within an organization is difficult. Unlike purchasing to simply reduce the purchase price of a product, Purchasing Programs need careful planning prior to the solicitation of requests from vendors. Effective Purchasing Programs must have clearly defined objectives, a process to review these objectives, and a method to evaluate the objectives of the process.

American Classic Voyages (AMCV) had been struggling with coating technologies, and had diversified their vendor and product base in the hopes of finding the most effective mix of products and vendors. AMCV also spent considerable time and effort in the research and testing products that companies offered in hopes of finding the correct items to meet their needs. After research and review, purchasing determined that concentrating purchases with one particular vendor would be more effective in gaining the commitment of one qualified company to assist in handling the company's paint requirements. After careful study of the company's total purchases, and vendor base, International Paint was determined to be the best fit - its size, reputation, and ability further supported this decision. In addition, the company was awarded significant projects in AMCV's future expansion.

Once International Paint was identified as a potential partner to create a Purchasing Program for AMCV, International Paint was approached by Ocean Development, a wholly owned subsidiary of American Classic Voyages, with the lure of additional business. A three-element program was created by Ocean Development (ODC) to offer incentives to all parties involved. Beginning with a rebate program, which was created to lower overall costs, it was also designed to offer the operating divisions incentives to concentrate their purchases with this supplier. Secondly, there was up front allowance granting paint to AMCV that would be used to support their upcoming projects. Third, there would be a quantifiable process to allow the vendor to address all coatings issues in an attempt to offer coating solutions to existing problems.

Upon implementation of this plan, there would be then be a multi-division meeting to address all of the coatings challenges. A meeting was set where all individuals involved with paint were to participate in a feedback session with a senior vice president of International Paint. The purpose of the meeting was to clarify requirements on both sides in order to establish an action plan.

With favorable intentions in mind, the initial meeting opened with all participants venting their dissatisfaction with the previous level of service of International Paint. There were several outstanding issues with the company, such as incorrect invoices, lack of a consistent customer service representative, and lack of product, which matched existing paint. The International Paint representative listened attentively to each complaint and took copious notes regarding each concern. Once all of the concerns had been raised, the International Paint representative apologized for all the problems previously encountered and assured that these issues would be corrected. He then launched into his presentation explaining what his company could offer and discussed what steps the two companies should take in the future. This presentation included considerable data regarding International Paint and its many different offerings. It was clear that International Paint had the resources to offer all of the needed coatings services. The challenge then became to determine in what priority should these offerings be implemented.

A few days following the meeting, International Paint had already distributed a task listing complete with responsible parties and due dates, which in turn became the vehicle for the Purchasing Program. Each issue, concern, support and training requirement was included on this list, thus mobilizing International Paint resources in ports around the U.S. This program also included the full time services of International Paint inspectors in three key ports in support of various projects, as well as a paint application and use training program for end users. International Paint was also called upon to provide coatings handbooks for new projects, the creation of a color matching program for existing coatings, a custom blend on demand program, and a paint identification program. Through the diligence of ODC and International Paint, the program was ultimately labeled a success. International Paint has been diligently delivering the desired results along with correcting previous omissions in their service. After six months all participants were asked to rate International Paint; the company was rated 3.59 on a scale of 1 to 4. Although there is some room for improvement it is very clear that the overall satisfaction level is favorable.

In addition to this improvement in service, AMCV has received custom training and the services of paint inspectors in three key ports. If AMCV were to fund additional full time paint inspectors and training at these sites the cost to the company would amount to approximately $100,000. Clearly there is considerable benefit by bundling these services within the cost of the product rather than purchasing these services independently. Labor savings, costs savings, expertise and training are all tangible benefits of the program. International Paint has benefited from its early involvement in the process of color selections. This has allowed them to offer critical input regarding past experience with other owners, as well as giving them input early into the upcoming projects. International Paint also learned how to mobilize its offerings in a manner to increase customer satisfaction and to better understand the unique needs of the cruise industry. In what could be dubbed as a win-win situation, AMCV has received a valuable partner with regards to coatings technology, and International Paint has been rewarded with a loyal client.

Robert Lee Gordon is currently the director of purchasing for Ocean Development Company. Mr. Gordon is responsible for all project related purchasing of hotel, nautical, and engineering products for Project America, M/S Patriot, Columbia Queen, and the coastal vessels.

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