The Role of Purchasing in Cost Savings Analysis

By Ellram, Lisa M. | International Journal of Purchasing and Materials Management, Winter 1992 | Go to article overview

The Role of Purchasing in Cost Savings Analysis


Ellram, Lisa M., International Journal of Purchasing and Materials Management


The Role of Purchasing in Cost Savings Analysis

The current recession has stimulated many firms' desire to contain or reduce costs. This article discusses a study that explored the role of purchasing in analyzing cost savings projects. The author argues that it is important for purchasing to be involved in purchasing cost savings projects. Such projects may be strategic in nature, and they may affect purchasing's decision-making process and its supplier relationships. Results of the study indicate that most purchasing departments are involved in cost savings projects, and believe that they should be involved in such projects. The purchasing function also expects to play a greater role in cost reduction projects of all types in the future. To support growing involvement in such projects, the author concludes that purchasing professionals must educate themselves to a greater extent in the techniques used to analyze cost savings projects. Further, the purchasing function must assume a more aggressive, proactive role in becoming involved in purchasing cost savings projects, educating top management, and publicizing the results of such projects.

BACKGROUND

Most purchasing professionals are acutely aware of the large portion of the organization's resources used to purchase materials and services for operations. One recent estimate indicates that in the manufacturing sector purchased production materials alone account for approximately 56 percent of the average firm's sales dollar.[1] The value of purchased items is by far the greatest single cost category for most manufacturing firms.

Until recent years, however, the potential contribution of the purchasing function to the profitability of a firm has received relatively little attention. Top management has focused on controlling labor costs, selling costs, and administrative expenses, while treating the cost of purchased goods and services as a largely uncontrollable item. As a result, efforts of individuals in the purchasing function who focused on improving the efficiency and effectiveness of purchasing frequently went unrewarded. The function itself often received only limited recognition and respect within the firm.

In the late 1970s and early 1980s, an increased focus on quality by many firms increased the visibility and involvement of the purchasing function in key decisions. Top management began to recognize the importance of the quality of purchased inputs in producing high quality end-products. Thus, the purchasing function proceeded to concentrate more heavily on quality. Even though higher quality inputs may have had a higher purchase price, most companies were not concerned. Firms felt that "quality was free."[2] The higher purchase price they thought would be more than offset by savings resulting from reduced rejects, rework, returns, and so on, reducing the total product cost.

With the recession in the early 1980s, many firms also began to focus on cutting costs. Demand was down, profit margins were being squeezed by intense competition, and inventory levels and interest rates were up. Firms began to question the high costs of quality. Enlightened firms began to further scrutinize the functionality of parts. Quality was important, but only to the extent that it served an important function. Thus, though not a new concept, value analysis or value engineering reemerged. Firms wanted a way to simultaneously improve quality and lower costs.

OVERVIEW OF THE RESEARCH

With the growing recognition and acceptance of value analysis, the purchasing function has an opportunity to achieve a more visible role in managing a firm's cost and profitability. The purpose of this research is to understand the role that purchasing plays in analyzing and justifying cost savings projects for various types of purchases. The study addresses the following questions:

1. Why should the purchasing function be interested

and involved in justifying cost savings associated

with purchased goods? …

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