How to Determine Purchasing Organisation: Purchasing Activity Analysis

Judging by the limited references in the literature on purchasing practice and purchasing organisation, it would seem that purchasing activity analysis is a much underrated tool.

Why is activity analysis an important tool in determining purchasing organisation and establishing good practice?

Upstream and Downstream Activity

The raison d’etre of modern procurement organisations is to focus on the ‘upstream’ activities – such as sourcing, agreement of contract terms and vendor improvement – so that ‘downstream’ purchasing activities can be minimised. ‘Upstream’ refers to activities up to the point of agreeing contract terms; downstream includes the placement of orders, and the subsequent control and administration of the supply and payment processes. On the basis that the right contract has been placed with the right supplier, we would expect the relevant products to be delivered on time, to the required specification and quality, with appropriate documentation, and for the invoicing to be error-free. Whereas downstream activities incur cost, upstream activities are aimed at reducing cost and adding value.

A Purchasing Activity Survey

Figure 1. illustrates the actual results of an activity survey in a large multi-site company with a relatively immature purchasing organisation. In this case, the time spent on a total of 24 defined activities (and “other” undefined activity) was recorded. [The author would like to stress this is an old model, reproduced to illustrate a concept, and that more recent studies and analyses have been substantially refined and improved.]  A horizontal red line has been added for convenience, so the most time-consuming activities can be highlighted, i.e. those exhibiting values above the line.

Purchasing Activity Analysis

FIGURE 1

In summary, this is an organisation that specifies its requirements, negotiates terms, places orders, checks stocks and plans deliveries, checks invoices and complains!  More buyers’ time is spent on complaints than on supplier analysis, audits and improvement activities. The indications are that insufficient attention is being given to upstream activities. Besides the obvious imbalance in the cost of purchasing management and administration, there are all the additional consequential costs of the defects such the time of other staff, waste in materials and other resources, and potential loss of goodwill with customers.

The Application of Purchasing Activity Analysis

This kind of analysis has proved to be valuable in three areas:

  • refocusing activities from those that add cost to those that add value;
  • identifying activities that might be targeted for systems improvement;
  • indicating the scope for re-allocation of manpower as more effective processes are established.

The activity analysis can only be performed where there is existing purchasing activity. There is scope, however, to take analyses from appropriate benchmarks and apply these to new organisations.

Activity studies have been extremely informative for mergers and post-acquisition integration, where failure to appreciate the pre-integration deployment of resources can result in serious problems with the new organisation, and potentially damaging consequences for the business. The analysis has proved to be beneficial also for demergers and the separation of upstream procurement activity from downstream supply management, for example, when establishing new procurement organisations. A more sophisticated development of the analysis resolves activities within purchasing categories, and differentiates requirements in terms of skills and experience.

 

Footnote:

This article is a digression in a series of article on how to determine procurement organisation. Previous articles have focused on macro-organisational issues, which the author will return to in future articles.

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