This article describes 2 Pitfalls In Purchasing Management, encouraging purchasing and supply management professionals to move these organizational functions toward 2 critical areas of excellence, which are often overlooked. 1. Not thinking strategically about how to add value. This strategic area includes selling the importance of Purchasing, Procurement, and Supply Management to the C-level (CEO, COO, CFO) executives responsible for strategy involvement. If purchasing cannot prove it is adding value to the organization, the function may face outsourcing or elimination or downsizing. According to the Center for Advanced Purchasing Studies Report on CEOs'/Presidents' Perceptions of the Purchasing Function, the problems that purchasing has to deal with are these:
- Many firms feel their purchasing and procurement function is not very effective.
- In the eyes of many CEO's and presidents, purchasing is not a major contributor in most business decision making.
- It follows that there are two possible reasons why the purchasing and supply management profession today does not command higher, value-added respect by an organization's C-level management:
- Purchasing is actually not adding much value to the bottom line.
- The purchasing department is indeed adding value, but it is not communicating it in a manner readily understood by senior management.
- The market determines the selling price.
- Prices fluctuate-both up and down.
- Prices have a tendency to react faster to upward pressures than to downward pressures.
- Downward pressures include lack of customers, vigorous competition, and insufficient total demand.
- The buyer needs to understand the difference between price and cost.
- The knowledge of prices and costs is a powerful tool in negotiations when determining what something "should cost."
- The buyer must ensure that the prices offered are fair, reasonable, and affordable.
- Minimizing costs
- Maximizing profit or revenue
- Maximizing the value of the organization