DOCUMENTED BRIEFING R Implementing Best Purchasing and Supply Management Practices Lessons from Innovative Commercial Firms Nancy Y. Moore, Laura H. Baldwin, Frank Camm, Cynthia R. Cook Prepared for the United States Air Force Project AIR FORCE Approved for public release; distribution unlimited The research reported here was sponsored by the United States Air Force under Contract F49642-01-C-0003. Further information may be obtained from the Strategic Planning Division, Directorate of Plans, Hq USAF. ISBN: 0-8330-3007-8 The RAND documented briefing series is a mechanism for timely, easy-to-read reporting of research that has been briefed to the client and possibly to other audiences. Although documented briefings have been formally reviewed, they are not expected to be comprehensive or definitive. In many cases, they represent interim work. RAND is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND® is a registered trademark. RAND’s publications do not necessarily reflect the opinions or policies of its research sponsors. © Copyright 2002 RAND All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2002 by RAND 1700 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 201 North Craig Street, Suite 102, Pittsburgh, PA 15213 RAND URL: http://www.rand.org/ To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: [email protected] FOREWORD Thirty years ago, true supply chain management was almost unknown within American industry. Manufacturers usually made most of the parts that went into their finished products. When they needed to buy materials or services, they relied on purchasing departments that were seen primarily as order takers and order placers. These departments had little visibility, had little perceived value to the bottom line, and enjoyed little respect from other parts of the organization. That scene has changed dramatically. Although few companies are as strategic as they need to be, and few apply best practices to maximum benefit, almost every company today understands the link between supply management principles and strategic goals. More and more companies now understand the concept of becoming lean—the ability and competitive necessity of getting waste out of processes. They understand why integrating suppliers into new product development is important. Over time, the tactical purchasing function has given way to supply management processes in which highly trained professionals take a systemic, strategic approach to the drivers of total value. The reason for the change? A changing world. As demands increased for better quality, faster delivery, and better overall value, a few visionary leaders began to deliberately distinguish between the things that created value and the things that did not. What they discovered was that the supply chain was a huge opportunity waiting to happen. Their companies adopted best practices such as supplier development, cost management, supplier integration, strategic sourcing themselves and value engineering to stay ahead of competitors and position for future success. Other companies resisted change too long and were forced to make traumatic adjustments when competitive and economic challenges left them two choices: manage more efficiently or fail. (A burning platform is always an effective catalyst for improvement.) Whatever the reason for change, companies that implement purchasing and supply management best practices find that they can make their total iii dollars go 20 percent to 30 percent further. Imagine saving 20 percent or more of the Air Force’s annual purchased costs—that is $7 billion or more annually to spend on research and development, new systems, human resources, and other areas of vital importance to national defense. The good news is that supply chain best practices can work for any organization that wants to eliminate waste, improve quality, move more quickly, and make dollars go further. One does not have to be in business, nor does one have to wait for a crisis. Air Force leadership has recognized this by taking several courageous first steps to enhance its purchasing and supply management capabilities. It has further demonstrated its commitment by commissioning RAND to report on the key practices of innovative commercial firms. Besides the thorough and insightful findings of the report, RAND makes two critical points: First, the Air Force has distinct needs that cannot be satisfied by a one-size-fits-all approach; second, change will be difficult. We agree wholeheartedly. No two organizations are alike, and no two organizations will apply purchasing and supply management best practices in exactly the same way. Whether a commercial firm, not-for-profit agency, or government entity, every organization must be guided by its structure, mission, history, culture, and strategic goals. It is also true that change is seldom easy. Old ways die hard, even when there is wide agreement that change is needed. We have seen organizations struggle helplessly to implement change, and we have seen organizations transformed into powerhouses through their ability to innovate and adapt. IBM, which spends some $40 billion a year with suppliers—nearly the same amount as the Air Force—is a good example of the latter. Until the mid-1990s, IBM made most of the parts used in its finished products. Highly vertical and closely guarded, the company went to great lengths to prevent its own suppliers from knowing how their parts were being used or how they fit into overall business strategies. This lack of supply chain integration was common within the computer industry during the 1970s. So was the need for top-level secrecy. By the 1990s, however, the game had changed. Most of IBM’s competitors were reducing costs by outsourcing and integrating their own capabilities with iv the technological expertise that existed among their suppliers. One day, IBM could no longer compete. Hanging onto the old ways had prevented it from leveraging its huge global purchases, from eliminating waste in its processes, and from taking advantage of innovative thinking. IBM’s story has become a textbook example of how purchasing and supply management best practices can change an organization almost overnight. In a few short years, IBM climbed up from a burning platform to a new level—that of a lean, highly integrated company whose hallmarks were speed, efficiency, and innovation. In 1999, the company won Purchasing magazine’s Medal of Professional Excellence, one of the most respected purchasing awards given. How did IBM do it? In one word: leadership. IBM’s top leaders had a vision and a commitment to strategic intent, strategic thinking, and complementary actions. IBM’s senior leaders hired people who were experts in their fields and gave them the tools they needed to succeed. Leaders understood the link between incentives and success, and they held each decisionmaker accountable for measurable results. They recognized how difficult change would be but never allowed difficulty to become an excuse for inaction. This description of leadership should sound familiar; it is the model the Air Force has used for decades. This leadership style, along with the Air Force’s more centralized command structure, represents a huge advantage in speed and agility over any decentralized commercial entity. Leadership is one reason we believe that the Air Force is well positioned to implement best practices in purchasing and supply chain processes. In addition, the Air Force has a strength that distinguishes it from any other commercial or government organization: the best capabilities in the world. When it comes to achieving its goals, the Air Force is without peer. There is no doubt that if leadership believes that purchasing and supply management best practices will help achieve strategic goals, best practices will be implemented successfully. We know from experience that change is most difficult when there is no perceived crisis. We also know from experience that crises arise only when change is not made in time. The Air Force has a window of opportunity to pave the way for the war fighters of the future. A body of knowledge exists in private industry, in government, and within the Air Force’s cadre of prime suppliers to v become leaner, more flexible, and more efficient, and to provide new capabilities that today are only dreamed of. It is a dream worth pursuing. R. David Nelson (Vice President, Global Purchasing, Delphi Automotive Systems; he was formerly Vice President, Worldwide Supply Management, Deere & Co.) Jonathan R. Stegner (Director, Supply Management Strategic Sourcing, Deere & Co.) vi PREFACE The Air Force has been looking for ways to substantially improve the readiness and reliability of its equipment, the responsiveness and quality of services, and the quality of life for its personnel, particularly in the post- Cold War environment. Because of budget pressures, it has also been actively seeking savings, primarily to pay for force modernization. Our study sponsor, the Deputy Assistant Secretary of the Air Force for Contracting (SAF/AQC), believes that the private-sector revolution in purchasing and supply management (PSM) practices is