Engineered Products as Commodities? It’s Time to Rethink Procurement Metrics
Procurement teams that use the Internet to research highly engineered components and then select a lower-priced alternative product may think they’re doing a good job, especially if they are measured on how well they manage cost. Yet they may unknowingly be putting their companies at risk.
Editor’s note: This article is part of the MyPurchasingCenter content archive. It was originally published in 2015 and appears here without revision.
“To save upfront, procurement can make a mistake that can cost significant money,” says William Moore, [Former] Senior Vice President, Sales and Channel Development at SKF USA, in an interview with My Purchasing Center.
In his role, Moore regularly works with procurement teams. We like to catch up from time to time so he can share his experiences.
Recently, he spoke to the practice of turning highly engineered components such as metal tubing and bearings into commodities.
Procurement teams typically receive accolades for minimizing the spend and are not held responsible for the product’s performance.
“To create competition in the sourcing process, procurement departments will frequently introduce competitors that have an extremely similar, but not the same, product,” Moore tells My Purchasing Center. In some cases, procurement is selecting a bearing based on general standards followed by multiple manufacturers. Bearings, for instance, have general standards for boundary dimensions. Standards organizations also set minimum performance standards.
By turning a highly engineered product into a commodity, procurement is actually doing the company a service. More competition can be a good thing, and there are times when it makes sense. For instance, procurement may request a vast array of equivalent products from potential suppliers with the knowledge that many may not meet the most demanding specification. This is done as a way to put pressure on the selling community to reduce pricing or improve services for no cost.
Other times, commoditizing a highly engineered product can be dangerous. Taking a product down to the minimum of its capability instead of to the maximum is one of those times. When some manufacturers get wind of this, they may take themselves out of the competition for procurement’s business.
Commoditizing a product also does not give procurement the opportunity to consider the value add of products. “In our case, we design our products to maximum usage standards,” Moore says. “We use the highest grades of steel and the most sophisticated machining. We test our products across a range of applications and ensure that it meets the most rugged, so we know it works on lower-duty applications.”
In his eyes, a worse-case scenario occurs when procurement puts out a bid sheet without additional specification criteria. “That leaves procurement at the mercy of suppliers that may make a decision on what they even offer procurement.”
Yet it’s up to procurement, with a little help from colleagues in engineering and operations to determine whether the products the supplier is offering are good, better or best for the specification. This is especially critical if the product being sourced has a secondary or tertiary impact other operations in the plant.
That’s why it’s so important in this day and age that procurement ensures the specification is fully developed,” Moore says. “Easy to say. Hard to do, especially if the buyer is using an ERP system that requests a secondary or tertiary approved supplier.” ERP systems ask for “the preferred supplier or equivalent” and that, he says, opens the door to a myriad of problems.
Distributors can play a key role in helping procurement to minimize any risk to the company. In addition to providing logistics services, distributors represent the manufacturer and, as such, are expected to be prepared to present not only options, but also differences between their products to procurement.
Yet not all distributors are up to the task. Distributors may lack qualified personnel with a knowledge of manufacturers’ products. Procurement teams that source through distribution need to vet the suppliers on their ability to provide on-time delivery and emergency services as well as their understanding of manufacturers’ products. Moore says SKF can offer assistance with this.
Still these procurement teams are being pressured by management to reduce the spend and present alternative products, Moore says. “Yet they recognize that highly engineered products can have a tremendous impact on their company’s productivity. So, procurement needs to ensure that the company is getting the full benefit of the price they pay. If not, then it’s fair to ask, ‘Why not purchase a less expensive alternative’?”
Depending on the product, SKF offers some value added services such as failure analysis, usage analysis and training, among others.
In addition to procurement performance metrics that favor unit price reductions over total cost of ownership, another commoditization driver is staff turnover. An individual new to a role in procurement may not have an adequate understanding of products he or she is sourcing and may jump on an opportunity to select a lower-priced alternative.
So, what should procurement be thinking about going forward? Moore would like to see procurement teams develop a hierarchy of products that clearly identifies commodities and engineered components to refer to when sourcing. “I’d also like to see the hierarchy cover ancillary impact so that those that have such impacts receive more stringent review,” he says. “I’d like to see these products sourced by more experienced procurement officers.”
Some procurement teams review processes that include representatives of engineering or operations already in place. As such, these cross functional teams review the bid and vet the responses. “I’ve seen them throw out several because from their experience they know the product will not work for the company in the long term,” Moore says. “The initial savings is not worth the cost to the company over the life of the product.”
Another driver: an abundance of information available on the Internet. While it may seem that having more information at your fingertips is a good thing, Moore again sees experienced procurement professionals as better equipped to distinguish between the marketing hype of some websites and the true value a company can provide.