Me purchasing, you logistics – the organizational and procedural separation of corporate functions leads to sub-optimum results from the point of view of the supply chain

Although the discipline “Supply Chain Management” combines aspects of purchasing and logistics from a procedural point of view, both functions exist in the majority of manufacturing companies as separate organizational units. This fact has generally been taken for granted up to now without questioning the overall aspects.

The Supply Chain Management Faculty of the University of Tennessee has taken a closer look at this topic and discovered something interesting “We have met the enemy and he is us …!”

‘Bending the Chain’ – bending the value-creation chain leads to better results on a corporate level

Purchasing and logistics mangers from a wide variety of industrial branches were targeted in the study per questionnaire. These included not only the biggest manufacturing industries such as the automotive and aerospace sectors, the chemicals industry and high tech but also the financial and banking industries, telecommunications and the transport sector.

The questionnaires contained specific questions with respect to the roles, task and objectives of the managers. However, the main emphasis was on finding out how relevant the business strategy of the overall company was for the division’s strategy and the extent to which the logistics and purchasing strategy were based on this and are aligned to each other.

The term “bending” in this context means the uniform, consistent orientation of the functions Source (procure/purchase), Make (produce) and Deliver (supply / transport / logistics) to the company’s business strategy. Companies who are quite successful in “bending” in this sense achieve the best results at the corporate level.

The main findings of the study were:

1. Although almost 60% of companies classify purchasing and logistics as units in an overall supply chain organization, they exist as independently operating, separate functions.
2. Purchasing and logistics are well-aligned with the corporate goals, be it independently and separately, there are usually no joint strategies and activities.
3. Notwithstanding a formal, organizational relationship between purchasing and logistics, interaction between the two divisions is informal and unstructured.
4. The deliberate establishment of open lines of communication is the most common way of improving integration. Unfortunately, this interaction usually takes place unsystematically.

The following measures were derived from the study as Best Practices and can thus serve as an aid to orientation for one’s own company:

1. Create end-to-end supply chain organizations that handle the overall value-creation process in an integrated way without organizational obstacles (‘fully integrated supply chain organization’)
   The most successful companies in terms of customer focus, quality of the customer service, product quality, cost efficiency, liquidity and profitability are better able to dovetail the key corporate functions, i.e. purchasing, logistics, production/manufacturing, development and quality assurance in the sense of end-to-end supply chain processes. This is achieved with respect to the organization by establishing a central division responsible for supply chain management to whose manager the function owners report. Interdisciplinary teams should work on supply chain projects and pending decisions wherever possible to ensure that the general perspective is not lost.
2. Focus on supply chain expertise and cross-functional management
   Supply chain executives in the most successful companies value a cross-functional approach and skills when it comes to compiling and controlling their teams. Expertise in a certain discipline is still in demand, but only within the context of integrated process handling.
3. Establish a purchasing and logistics network whose basis for operative decisions is not the purchase price but the TVO – the Total Value of Ownership
   A number of operative decisions that relate to suppliers are made by Purchasing in the less successful companies and are based primarily on the price per unit. However, suppliers are selected and evaluated not just on the basis of prices and costs in the more successful companies but also on criteria such as the ‘partnership value’ (consisting of customer and supplier satisfaction), the ‘long-term value’ (including the innovative capability of a supplier) and the sustainability (consisting of environmental aspects, social and ethical aspects as well as compliance).
4. Implement effective processes and the correct information systems for a successful cooperation within your multifunctional supply chain team
   Even the most capable of employees cannot achieve optimum results if they don’t have efficient processes and the relevant information. The provision of supply chain information is particularly important in this context since it can only be supplied in some cases by external business partners– in the case of Purchasing by the suppliers. When evaluating and aggregating the valuation data, it is important that the information be provided electronically wherever possible so that it can be processed automatically with no manual input.

Quintessence for the supply chain management

It would appear the supply chain management still hasn’t been identified as a separate discipline in a number of companies. However, there is increasing evidence that a classic, function-oriented corporate structure with no dedicated supply chain department that integrates procedural functions can no longer fulfill the current requirements of a globally oriented company. What the University of Tennessee study summarized here is a further indicator of this theory.

Although the study has no concrete reference to IT, it is clearly emphasized, that the correct IT systems are an important component in the overall construct of measures for success as a best practice measure. This is far less surprising than the fact that the IT department of a company assumes the leading, or at least a very prominent role, in very many decisions for supply chain planning or information systems.

This is astounding insofar as the intrinsic value of a software system in a supply chain environment and the business case that can be achieved with such a solution often depends on factors that either cannot be influenced separately by the selecting company, or have nothing to do with the software itself.

These include the acceptance and cooperation of the external supply chain partner (supplier, customer, carriers, etc.) and a sound support plan, without which it is impossible to ensure that the external partner acquires the skills necessary to actually operate the system. No project in a supply chain environment can be brought to a successful conclusion without the active cooperation of the supply chain partner. In this respect, we can only hope that, on the one hand, the discipline ‘Supply Chain Management’ will find increasing acceptance as a separate function in many more internationally active companies.

On the other hand, however, it is to be hoped that the multi-functional supply chain teams assume a more important role in the evaluation and choice of supply chain IT systems so as to avoid critical mistakes.