In “A Structured Method for Applying Purchasing Cost Management Tools” by Lisa Ellram, many solutions to cost management are discussed. Before going into further detail regarding the classification and appropriateness of varying costing techniques, she lays out the following framework for the purchasing professional:
1.Develop a framework for classifying purchases.
2.Discuss which cost analysis techniques best support each classification in the framework.
3.Focus on strategic cost management techniques.
A framework for classifying reoccurring purchases is a necessity due to a compression of job duties, thus requiring supply management personnel to prioritize their job demands. As a result, it is extremely important to understand the nature of the buy – the type of contract, whether the buy is a repetitive or one-time buy – before analyzing purchasing techniques. Supply management professionals then have the capability to apply the appropriate purchasing techniques to varying classifications. More time and energy can be spent working on strategic purchases.
For low impact purchases, techniques such as competitive bidding, use of price indexes, and varying comparative approaches, such as comparison to market, may be appropriate. In the case of leverage purchases, however, techniques such as estimating cost relationships, value analysis, analysis of supplier cost data, cost estimates, industry analysis, and total cost modeling should be used. Techniques used for analysis of leverage purchases are necessarily more complex than those used for low impact purchases, which underscores the importance of correct classification of purchases.
Strategic purchases, on the other hand, require more in-depth analysis than leverage and low impact purchases. Cost analysis techniques for strategic items entail open books, target cost analysis, competitive assessment/tear-downs, and total cost modeling-including total modeling of the supply chain. Strategic items should remain the primary focus of the supply management professional’s attention and such items must be constantly monitored. The purchase of such items necessarily encompass a strategic relationship with the supplying organization. This relationship must be managed effectively for appropriate cost analysis techniques such as open books to work effectively.
In my opinion, this is an extremely informative article that I will probably reference time and time again in an entry level position as a purchasing professional immediately following my graduation. However, I feel that it contains too much information and fails to go into depth as to the actual process of classifying purchases, which, in my understanding, is the basis for focus on strategic items. The table provided to help with classification is a good starting point, but the article does not fully address how such decisions are made when the purchase contains characteristics of several categories. While it is true that the article that the article fails to go into detail on the techniques used for both strategic and leverage purchases, I found it very helpful that the author took the initiative to point out that more information can be acquired through the use of her list of references. In addition, I feel that much of the detail lacking in the article was adequately covered in class.
