Study: Purchasing, logistics and operations professionals acknowledge collaboration shortcomings

University of Tennessee’s Global Supply Chain Institute reports on successful strategies for supply chain integration.

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By Josh Bond, Associate Editor

June 17, 2014

A new study has found organizations that closely integrate supply chain functions, cultures, metrics and operations – especially ties between purchasing andlogistics—deliver better business results.

These are among the results from a new study from the Global Supply Chain Institute (GSCI) at the University of Tennessee, Knoxville, which reflects the views of more than 180 supply chain professionals. The report, titled “Bending the Chain: The Surprising Challenge of Integrating Purchasing and Logistics,” was sponsored by IBM and is the second in the “Game-Changing Trends in Supply Chain” series from UT’s supply chain faculty. Companies surveyed ranged in size from less than $100 million to more than $20 billion and covered a cross-section of industries.

In a recent interview, Mike Burnette, supply chain executive for GSCI, said advances in recent years and global progress in terms of business process integration were steady. However, in a key part of the study, a number of purchasing and logistics professionals acknowledged pitfalls resulting from their lack of collaboration, ranking performances below expectations in areas that required the two groups working together.

“This research suggests that some of the silos have stubbornly persisted,” said Burnette. “This is particularly true with regard to supply chain integration and especially the connection between purchasing and logistics functions. Some companies even still have separate budget lines for the two, which was surprising to me; I didn’t think anyone did that anymore.”

Burnette said the study supported the notion that best-in-class companies with the least amount of supply chain losses (excess inventory, time lost, lack of responsiveness) tend to have end-to-end supply chain integration encompassing purchasing, planning, transportation, warehousing, engineering, engineering, order management, quality assurance. This is true, he said, for both regional operations and global ones, where transportation becomes an even higher priority.

“The best case scenario is that stakeholders in each area all report to the same person and work with common metrics, vision and culture,” he said. “It should all roll up to the same scorecard.”

The next best thing, Burnette suggested, and one which might have seemed ideal before the emergence of modern best practices, is for the head of purchasing and the head of supply chain to a least agree to common metrics, visions and reward systems. “This can and should be a short-term solution, since companies are compelled to publish and pursue these practices,” Burnette said. “That way if a champion leaves the role there won’t be any hiccups.”

The third best situation might see finance functions step in to provide common metrics in the event purchasing and logistics can’t get on the same page. Burnette said he’s seen a fair amount of this, and the best metrics center on total value, or total cost of ownership, as opposed to those geared toward short-term financial gain.

The low-hanging fruit at this point lies in the interface between operations and purchasing, Burnette said. “Where purchasing is often more price-oriented, operationsis focused more on uptime, efficiency and responsiveness,” he said. “Some organizations have a sense that warehousing and transportation are on one end of the chain and purchasing is on the other. The study’s title reflects an effort to bend those two ends together. We would love to see a holistic solution that makes the supply chain balanced, efficient and responsive.”

More key conclusions from the study:
• While purchasing and logistics are both typically found in a supply chain or operations organization, they are disconnected and operate separately.
• Both purchasing and logistics are well aligned to the business unit’s strategy and activities but not nearly as well aligned to each other.
• Despite formal organizational links between purchasing and logistics, their interaction is typically informal and unstructured.
• Maintaining open lines of communication is the most widely used technique to foster integration.

Study highlights: Four best practices of supply chain leaders who have successfully integrated purchasing and logistics groups:
• Fully integrate all of the functions in the supply chain organization and use common metrics throughout.
• Create a talented supply chain organization that rewards people for in-depth mastery of a specific functional area as well as a broad range of skills that demonstrate a keen understanding of how the entire supply chain operates.
• Create a purchasing and logistics network that uses a decision framework where the overall good of the firm is paramount.
• Utilize effective information systems and work processes that provide multifunctional supply chain teams the proper tools and information to foster superior business results.
The full text of the study and a short quiz to measure the level of integration of your firm’s purchasing and logistics groups can be found at http://utk.edu/go/i4.