Companies that are organized by business unit or region often face problems when procurement and engineering units dealing with a similar scope of commodities and components are not co-located. This leaves potential synergies unexploited and managers with two questions: 1) How can I leverage synergies and achieve savings in procurement and engineering?, and 2) How can I achieve a balance between the need for standardized components and regional or brand requirements?
A “lead” approach to this problem achieves global synergies by shifting the focus from business units/locations to commodities/components, and is based on a common understanding of how a product is structured from the perspective of the procurement and engineering functions. Lead Buying enables volume bundling within each commodity, thus increasing negotiating power with suppliers. With Lead Engineering, universal solutions are developed that utilize common system architectures, components, and modular construction concepts. This process has the benefit of fulfilling customer requirements and ensuring that brand and product identity are retained. Moreover, both approaches offer excellent opportunities to leverage cross-business unit and cross-functional synergies, which can unlock hidden savings that boost corporate profits.
Optimizing global procurement and engineering
Taking a lead approach means shifting the focus from business units/locations to commodities/components. It is a dynamic process, however, as the level of coordination can be adjusted for each commodity and component as required among three options: Mandate, Leadership, and Local.
In the Mandate approach, one business unit/location takes over the entire task. In engineering, this may mean that all development and testing for certain technologies or systems is bundled in dedicated competence centers. In procurement, it means that one location selects suppliers and negotiates and signs contracts on behalf of the entire company.
The Leadership option says that one of the business units or locations has the lead for a certain component. A “lead buyer” is identified and he handles most of the procurement activities, and is responsible for negotiations, contracts, and selecting suppliers. A “lead engineer” is then made responsible for selecting concepts, developing parts and testing. Local buyers and engineers are used to support global activities. For example, they may be used to by provide local market know-how and handle region-specific parts.
With the Local method procurement or development is exclusively handled by local buyers or engineers. Only information and best-practice knowledge is exchanged. In this example, the lead approach is applicable to procurement and engineer-ing either separately or in an integrated form. Once it has been established, other locations can be easily integrated into the plan.
Success factors for the lead approach
The lead approach is most successful when:
- Procurement and engineering strategies for each system and component are aligned. Modular construction concepts make common components possible. Tailor-made procurement strategies leverage global volume by taking preferred suppliers and future technologies into account.
- An integrated global organization based on common product structures, processes, and commodity codes aligns responsibilities accordingly.
- Cross-functional teams ensure that available know-how is used at an early product development stage. Teams can comprise members from engineering, procurement, production, logistics, sales, value analysis, product planning, etc.
- Integrated processes enable fast and efficient actions and decisions.
- Target setting and tracking is based on key performance indicators that measure the global optimum, not a business unit or functional optimum.
- Harmonized support systems ensure optimal data transparency and seamless data exchange.
Experience shows that Lead Buying and Lead Engineering are best-practice approaches that help leverage synergies and boost profit, provided that the methodologies are tailored to the company’s specific needs. They represent creative strategies that work.