While purchasing managers know what good purchasing entails—knowing what you're buying, centralizing the process and decreasing the number of suppliers and different purchased items—they often don't have the necessary information to make the right changes. Unlike financial managers who can monitor the movement of money through enterprise-resource-planning (ERP) software, purchasing executives historically have been unable to tell who's doing the buying, what is being bought and from whom. Fortunately, recently developed software products are helping them attain a more complete view of purchasing.

While these new software solutions can't single-handedly overhaul the process, they can help companies grasp their total purchasing outlays and realize cost savings when combined with the proper business changes. They have the ability to integrate information to generate the big purchasing picture. While companies using ERP software have nearly accomplished this, ERP is not geared toward purchasing, but financial accounting and control. To completely shed light on spending, purchasing-management software must combine both general-ledger systems—which monitor spending by cost center—and invoicing systems—which keep tabs on the amounts paid to each vendor.

In particular, purchasing managers are having a hard time improving two areas of purchasing—spending analysis (understanding all company purchases) and demand management (probing and checking whether theses items are needed in the first place). In fact, McKinsey research found that managers at a whopping 95% of the companies in which they held interviews badly need help in tasks falling under these two areas. Currently, many companies don't have a clear-cut way to manage demand even for commonly made purchases such as personal computers. In many cases, managers can sign off on computer purchases from say, an IT vendor, or Wal-Mart, even though a company-wide process could deliver volume and service benefits.

McKinsey research indicated that new software tools have the potential to improve both spending analysis and demand management, but they can't do so on their own. For example, while analytical tools can automate the process of organizing databases on vendors, staffers still have to make sure that computer output is accurate. Similarly, demand-management tools can only automate processes and policies that are already defined; purchasing managers must first create them, guided by a complete picture of purchasing—which new software can help them attain.

Pairing new software solutions with good principles will allow companies to improve their purchasing operations, especially when they utilize closely integrated tools. For example, one electronics company that McKinsey research studied was able to boost its compliance with demand-management policies from around 70% to above 90% by identifying the makeup of its spending, pinpointing the needed data sources to monitor products through their lifecycle, automating its invoices and delineating a simple data model to connect general-ledger and invoice data.

But deploying new software tools without modifying business practices can have less-than-stellar results. A medical device company, for example, neglected to obtain a complete picture of total spending before implementing software to expedite its purchasing approvals. As a result, the company's chief financial officer says, "We used to take two weeks to buy a lot of the wrong material, and now we still buy a lot of the wrong material but do it in a day."

Finally, McKinsey research discovered that, for companies with sound purchasing principles in place, the more heavily they use software tools for procurement, the more they save. In fact, on average, McKinsey research's sample companies started to realize the value of deploying software solutions when they used it for around 13% of their expenditures. Additionally, closely connected spending-analysis and demand-management software tools—achieved either through applications suites or through a company's integration initiatives—delivered excellent results by permitting precise and full flows of information between applications.

Source:

The Promise of Purchasing Software
Kishore B. Kanakamedala, Glenn Ramsdell and Paul J. Roche
The McKinsey Quarterly, 2003 Number 4
www.mckinseyquarterly.com