Extracting Values From Merged Purchasing Operations: Purchasing departments account for 50% of a company’s costs. Why then do merging firms often blow the opportunity for real savings by botching their integration?

With a committed focus on purchasing, it is not uncommon for a business to achieve cost improvements of 15% to 20% in the first year of consolidation. ften lost in the shuffle of paperwork, lawyers, and bankers in a merger or acquisition is how the newly consolidated company will approach the purchasing of goods and services after the deal is completed. This is shocking for two reasons. The purchasing function is responsible for 50% of total company expenditures. Second, combining companies may offer a tremendous opportunity to realize cost savings and value improvements from the purchasing process that can ensure successful early returns on the deal. There is much more to purchasing than adopting a mentality of “we’re bigger now, so we can get better volume discounts.” Rather, a merger is the ideal occasion to reengineer purchasing practices that not only return quick results but also set the company up for sustainable benefits and gains. Evolution of Purchasing It is important to understand how purchasing is evolving into a top driver of cost and value improvement. However, many companies possess an outdated purchasing philosophy that fails to recognize this paradigm transformation. For most companies, purchasing is still a transaction-based function where people process orders, track inventory, chase shipments, and put out fires as they happen. Very little, if any, emphasis is placed on setting long-range goals, planning, reducing costs, and adding value. By reengineering purchasing into a strategic business function that sets long-range plans, develops defined measurement criteria, and forecasts business activity, companies are beginning to realize that they are transforming it from a simple “function” into a necessary “process.” This repositions purchasing as a driver of continual cost and value improvements and develops it into a marketable competitive advantage. To a company embarking on a merger or acquisition, this is the time to initiate a shift in thinking from traditional to strategic purchasing. While this will take time, the endeavors set forth during the business consolidation will lay the groundwork for the evolution. As noted earlier, purchasing is typically viewed as a service center within an organization that focuses on the here and now and has low management expectations. It is very likely that both companies involved in the deal will view their departments the same way. An immediate change in mind-set should be at the top of the to-do list of value-creating steps. Strategic Purchasing Overview Evolving from a traditional, transactional approach to a true strategic business function involves a progression of steps that drives continual improvement in the people, processes, and practices of the purchasing organization. The middle ground of the purchasing evolution is to build a profit center that focuses on cost and value with limited forward planning. This requires more advanced skills such as a focus on supplier costs and cost drivers rather than price, category management, strategic source planning, portfolio analysis, opportunity analysis, and cross-functional/cross-business processes. The addition of these new skills within your purchasing process will help your effort gain more respect and buy-in from top management as the return on investment begins to materialize. Finally, purchasing as a fully realized strategic process places greater emphasis on best practices and long-range planning throughout all major spending categories. As a result, purchasing occupies a higher seat at the management table and often plays an important role in acquisitions. The processes set forth during the merger or acquisition ideally will move the combined company toward a profit-center approach within 12 to 18 months. Companies employing the techniques cited below will identify purchasing tactics that can be implemented along the way and will deliver immediate bottom-line results. In addition, new initiatives and disciplines will be set in place to further transform the company into a strategic purchaser in the years ahead. Executive Leadership to Drive Change For a purchasing transformation to be successful, senior management must throw its full support behind the process from the outset. Top-level executives need to provide the resources, corporate direction, goals, and accountability to the leaders of the project. With that backing in place, senior management can wield its influence to change how the company purchases supplies and services and provide the leadership to sustain the change well into the future. Creating Cross-Functional Teams With executives providing the leadership and direction, the first step in moving the process forward is to assemble teams focused on a commodity or spending category, such as key raw materials, packaging, or professional services. To be fully effective, these teams need to include multiple disciplines such as engineering, purchasing, materials, operations, and other functions from both organizations. This enables the greatest sharing of information, knowledge, data, and skills. The process you are entering into begins the ultimate integration of two business cultures on a common objective that will occur throughout the combined company. As the teams take shape, you must overcome the challenges in getting people from different work environments – and probably different corporate cultures – to collaborate. The cross-functional team members must be sensitive and respectful to different perspectives and mores and use open, honest communication to work together. The employees of the target company most often will have a different outlook than the acquiring company. It is up to the team leaders to convey that they are part of a unified company and that all will benefit from the actions to change the character of purchasing operations. Implementing Category Management Focusing the cross-functional teams on spending categories enables you to create a business plan for each item purchased. These business plans should contain a number of strategies to reduce costs and add value. Some actions can be implemented quickly while others will be designed to create sustainable improvements in the future. An initial strategy to focus on is developing tactical changes in how you purchase from suppliers, typically with regards to pricing, delivery, quality, and other measurable criteria. Supplier rationalization, category consolidation, and market disturbance are all examples of tactical actions that can be implemented quickly for early returns. Headcount reduction is another byproduct of a category management approach to purchasing. Through this process, expenditures will be consolidated and duplicate responsibilities identified and eliminated. Your remaining highly skilled staff will be more focused since the buying process has become more focused as well. In one chemicals company, the reorganization of the supply chain function drove a $1 million staff reduction cost improvement, streamlined the process, created the right focus, and reduced material costs by 40%, or about a $350 million cost savings. To achieve the same results with a top-line sales increase is nearly impossible. Data Management & Assessment One of the more difficult tasks facing the cross-functional teams is acquiring and assessing purchasing data. The teams often will be working with incompatible business systems that will require hard work and diligence in obtaining the information needed to identify real opportunities. The process itself will help identify holes in the business operations and set requirements for internal change to facilitate better access, review, and reporting. Quick Wins From Purchasing With data in hand, the cross-functional teams can begin identifying and examining opportunities so that the new company can quickly take advantage of them. The misalignment of pricing by suppliers is an easily identified opportunity to reduce costs. In instances where one of the businesses had a competitive advantage over the other, the result should be to leverage and maintain that advantage for the combined company, thereby decreasing costs for the benefit of each side. The combined company’s impact on the marketplace may be another opportunity on which it can capitalize. Suppliers often will be confused about where they stand and be concerned about the potential changes in their competitive positions and the possibility of lost revenues. At this juncture, suppliers may feel vulnerable and very willing to work with the new company to ensure their place at the table and maintain a healthy relationship. The key is to not over-leverage the change to the point where the supplier is better off walking away from the business rather than meet possibly excessive demands from the new company. Industry consolidation signals danger to the supply base. If multiple suppliers served both businesses, the vendors will soon realize that consolidation and leveraging will be the likely outcome. Most suppliers are proactive in trying to solidify their position in a merger or acquisition. The key for you – and them – is to capitalize on the supply market disturbance. What to Expect With a committed focus on purchasing – from tactical actions that address synergies to leveraging supplier opportunities – it is not uncommon for a business to achieve cost improvements of 15% to 20% in the first year of consolidation. In years two and three, the company should be realizing cost savings through the harmonization of specifications. This takes some technical resources, but the payback is significant. The goal of the cross-functional teams is to create sustainable, strategic business plans for their spending categories and for senior management to support their long-range cost and value-improvement initiatives. As a result, purchasing will continually improve and make considerable contributions to earnings and shareholder value. When a company enters into a merger or acquisition process, it should review how it purchases everything and organize a cross-functional team that can develop an early win campaign to contribute to the deal’s success. This is a significant opportunity that can deliver quick results and better position the company for greater cost and value improvements in the future. All it requires is focus, energy, top management support, a smooth process and the strong will to succeed. William Michels, CEO of ADR North America, Rochester, N.Y., and a Partner at ADR International, is a consultant on cost and change management and supply chain transformation. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com