OVERVIEW OF PURCHASING AND SUPPLIES MANAGEMENT IN BRAZILIAN INDUSTRIAL COMPANIES

The 90s experienced the emergence of the importance of the concept of Supply Chain Management (SCM) or Supply Chain Management, mainly with regard to integration, greater visibility among chain agents and reduction of variability in the processes that support business between this players.

In this context, an attempt was made to define SCM as the realization of a set of key business processes that interconnect the chain agents from the final consumer to the initial raw material supplier (Lambert et al., 1998; Fleury et al. , 2000). These processes can be summarized in the list below:

• Customer Relations • Customer Service • Demand Management • Order Fulfillment • Production Flow Management • Purchasing / Supplies

  • Development of new products

Purchasing / Supplies, as one of the key processes above, accompanied the development of SCM and, in Brazil, in the last 10 years, it has been showing significant changes, particularly in terms of how this function has been managed and gained status within organizations (Braga, 2006).

The Center for Studies in Logistics, concerned with contributing to the construction of knowledge in this sector in Brazil, has been carrying out studies on Purchasing / Supplies and in 2007 prepared the first Brazilian survey that demonstrates how supply management is organized in companies in our country.

This article, therefore, reports, in summary form, some findings registered in the document Panorama of the Management of Purchasing and Supplies in Brazilian Industrial Companies, which is the complete report of the research. Aspects that reflect the importance of the Purchasing area for the organizations where they are inserted will be approached, the organizational structure of these areas and where the companies are using the resources destined to obtain the goods and services.

The survey itself was carried out with 105 industries among the 1000 largest and best companies according to the classification established by Exame magazine. The revenue of these companies ranges from R$ 187 million to R$ 15 billion. The sectors analyzed are listed below:

• Sugar and Alcohol• Food and Beverage• Automotive• Auto Parts• Electronics and Equipment• Hygiene, Cosmetics and Pharmaceuticals

  • Construction material

  • Mining

  • Paper And Cellulose

  • Chemical and Petrochemical

  • Steel and Metallurgy

  • Textiles and Footwear

THE IMPORTANCE OF THE PURCHASE/SUPPLIES AREA

A first piece of data extracted from the survey, which reflects the importance that the sector has been gaining in companies, concerns the hierarchical level of the main executive responsible for the area. See in figure 1 the distribution found in the research sample. It is observed that in Brazil, 84% of the large industrial companies assign the management of this area to executives of high hierarchical level, confirming a global trend of more and more Purchasing professionals occupying high levels in organizations.

The high position of the Purchasing/Supply executive improves the sector's status and increases the chance of him/her to participate and influence the elaboration of strategic guidelines and important corporate decisions, bringing the perspective of the Purchasing function to the table where decisions that define the future of the organization are consummated.

Figure 1 – Hierarchical level of the main Purchasing executive

Source: CEL/COPPEAD Survey – 2007

Other relevant information that reflects the importance of Purchasing in organizations concerns the volume of resources spent on annual purchases and under the responsibility of this sector. To give you an idea, the figures reach close to 50% of the companies' revenues, which demonstrates the need to use efficient management practices that lead to the adequate use of these resources. The left side of Figure 2 indicates the representativeness of expenses incurred by Brazilian companies in relation to gross revenue. The right side of figure 2 shows this same indicator extracted from a benchmark survey in the Purchasing sector carried out in the US, in 2007, with 250 companies from different sectors. This table, and others that will be shown throughout this text, indicate that our companies are very close to American companies in terms of the best practices perceived in that country.

Figure 2 – Annual value $ purchased/gross revenue – Brazil X USA

(1) Source: CEL/COPPEAD Survey – 2007 (2) Source: CAPSResearch – Report of Cross – Industry Standard Benchmarks – 2007

The importance of the sector outlined so far is certainly confirmed when looking at the total expenditure incurred by companies under the responsibility of Purchasing. This means that the sector exerts great influence on what is actually spent in the organization. For a better understanding, let's look at Figure 3, part of this text. The segment on the left indicates the average percentage of the annual amount purchased that is under the responsibility of the Purchasing sector. In other words, of all that is spent annually on the acquisition of goods and services, 89% is carried out under the responsibility of the Purchasing executive. This finding is quite interesting because it demonstrates the degree of maturity of our companies with regard to supplies.

The higher the percentage represented in Figure 3, the greater the opportunity to control the expenses incurred, preventing other sectors of the organization from carrying out their negotiations and acquisitions without the slightest knowledge of the Purchasing sector. This procedure is known as maverick spending. In fact, when the other sectors carry out their acquisitions directly, the Purchasing sector only becomes aware of and is activated for operational and execution tasks – for example, the formalization of the contract – of what was previously agreed.

The practice of circumventing the Purchasing department when dealing with the supplier may not bring a good result, as the skills and competences of the Purchasing personnel are not used in dealing with this supplier, losing the opportunity to use the principle of economy scale of existing knowledge in the company. In other words, pulverized procurement carried out by different sectors and without guidance from the supply sector leads to redundancy and operational inefficiencies. Figure 3 also compares the result found in Brazilian industries with a similar investigation carried out in the USA in 2007. The result points to a greater concentration of expenses in the Brazilian environment than in the American universe, indicating a better positioning of our companies.

Figure 3 - Amount purchased under the responsibility of the Purchasing area - Brazil X USA

(1) Source: CEL/COPPEAD Survey – 2007 (2) Source: CAPS Research Report on Cross Industry Standard Benchmarks – 2007

ORGANIZATIONAL STRUCTURE

Companies all over the world seek to organize their Purchasing sectors around the concepts of centralization and decentralization of the process of acquiring goods and services. A Purchasing/Supply sector with a centralized process can provide many advantages, particularly when the organization has several business units or local sectors where Purchasing activities are carried out. Centralization does not mean that the central core performs any and all acquisitions. However, it can select vendors and negotiate contracts that will be used throughout the organization. Some advantages of the procurement process with central coordination can be:
• Consolidation of volumes: Historically, the main advantage of centralization is obtaining favorable prices in negotiations due to the greater volume demanded. This does not mean that the company will lose flexibility in its purchases, as placing orders and contacting the supplier can be done in a decentralized manner, taking as a reference something that was centrally negotiated.

• Reduction in the duplication of acquisition efforts: This fact happens because the company reduces the risk of buying the same material from different suppliers or even buying the same item from the same supplier, but with different prices due to the geographic dispersion of the business units that are buying from that specific supplier.
• Easier to develop and coordinate Purchasing strategies: It is very difficult to create, implement and coordinate a purchasing strategy without a centralized structure being established. In addition, the Purchasing function is increasingly becoming involved in issues of defining the companies' strategies and this requires the Purchasing group to have uniformity in strategic thinking in order to be able to influence the company's long-term decisions. This standardization can only be achieved through centralization.
• Greater possibility of coordinating and managing the technological tools available to Purchasing agents: The design and coordination of sophisticated e_procurement and e_sourcing systems should not be the responsibility of individual business units. It is necessary to ensure that tools and procedures are standardized so that standardization is achieved.
• Improved qualification of personnel in the central Purchasing nucleus: Purchasing professionals in a centralized structure have the possibility of carrying out training and improvement in various activities of the supply process, allowing for a more efficient performance of these activities. Negotiation, international purchasing, legal aspects related to purchasing, supplier quality programs, budget and system performance measures, market research, value analysis techniques, total cost of ownership, skills in dealing with cross-functional purchasing teams, usage of electronic tools in procurement, are examples of initiatives that are best executed in a centralized setting.
• Better control over large capital expenditures: A core group is more likely to monitor, on a consolidated basis, the total expenditures incurred by the organization with an interest in investigating opportunities for gains with more appropriate and efficient expenditures in terms of cost and quality.
• Ease in managing change: The company that has a centralized focus on supply management finds it easier to win over local buyers and make them act within the mindset of centrally dictated norms. Decentralized structures, on the other hand, normally have a real struggle to initiate any organizational or process change, as this does not translate into a priority for the buyer and, also, due to the need to win over this same buyer from a volunteering perspective. .

On the other hand, the decentralized organization has some advantages that distinguish it from the centralized one, more specifically, due to the appeal that the assistance of the Purchasing personnel can occur where the action is happening, that is, at the end of the execution, obtaining some benefits such as those listed below:

• Speed ​​and quick response: Proponents of this type of structure claim that decentralization allows the buyer to be much closer to where the need is happening, being more aware and involved in the unfolding of actions in the sector where the demand for goods and services arises and , therefore, responds faster than the centralized option.
• Understanding of operational requirements: Purchasing personnel working in a decentralized structure have the ability to better understand and value the operational requirements that are characteristic of the requesting sector of a given acquisition.
• Better support for new product development: The decentralized structure facilitates the adoption of the supplier involvement strategy in the early stages of new product development. This happens because the purchasing personnel of the business units can interact with the supplier more easily, locally evaluating the specifications of the materials that will integrate the new product being designed, determining the supply strategies for these items and identifying the availability of substitute materials. .

There are still those who believe that the most appropriate structure is one that reconciles the advantages of the two structures presented above, resulting in a hybrid or mixed configuration combining centralization with decentralization.

In this format, there is the possibility of establishing a local purchasing authority, but there is a central power where policies, norms, strategies are established by a single command. In addition, a significant volume of acquisitions occurs centrally, for example, acquisitions of high financial volume, strategic items and purchases of items that can be used on the principle of consolidation.

The research demonstrated that centralized and hybrid structures were predominant in the Brazilian scenario, following the trend of these configurations in the rest of the world. See Figure 4, where 31% of large companies have their purchasing structures fully centralized and 57% have a hybrid structure, but with most decisions and processes carried out centrally.

Figure 4 also allows us to compare the Brazilian situation with the result of a similar survey carried out in Japan in 2006, where 118 companies were consulted about the design of their Purchasing structures. The result was that 53% adopted the centralized structure and 40% were structured in a hybrid way.

Figure 4 – Purchasing Structure – Brazil X Japan

(1) Source: CEL/COPPEAD Survey – 2007 (2) Source: CAPS Research – Strategic Supply Management at Japanese Companies – 2006

ANALYSIS OF ANNUAL EXPENSES

In order to have an idea of ​​how the annual expenses of the companies participating in the research are distributed, we tried to follow two paths usually used in the market to portray where the financial volumes are being used.

At first, the representativeness of productive and non-productive inputs was investigated. The first group, also called direct materials, consists of items (goods or services) that are directly related to the product to be produced or are essential for other services to be performed. The second group is the sum of goods and services that do not enter the final product or that are not used in the services offered to final customers.

Examples of indirect materials can be, among others, professional services, water, electricity, airline tickets and office products. Raw materials, in turn, constitute a classic example of direct material. The survey pointed out that, on average, 63% of companies' annual expenses are allocated to the purchase of direct materials.

A second way to obtain an analysis of expenses is to try to classify them according to categories or clusters that are formed according to the positioning of the items within a matrix having as dimensions the annual value purchased and the supply risk (this procedure is part of of an activity known as spend analysis).

The dimension that represents the annual value purchased is quite clear and is translated into quantitative terms. Supply risk, on the other hand, is a more complex dimension, as it is constructed in terms of the availability and number of suppliers, competition among buyers in the demand for products, opportunities between making or buying, stocking risk and substitution possibilities. Each dimension has two possible regions, namely low and high. The result is a 2×2 matrix, and a classification into four categories, as shown in Figure 5:

Products that have a high supply risk and low annual purchase value can be classified as “bottlenecks”. Examples of bottleneck items are the companies' spare materials. Goods with high supply risk and high annual purchase value can be termed “strategic” because they are usually very important to the company and usually communicate directly with customers. Products with low supply risk and low annual purchase value are known as “non-critical”, due to their ease of acquisition (office supplies, for example). Finally, items with low supply risk and high annual purchase value are classified as “leverageable” due to the great cost reduction opportunities that can be achieved in this group, as this is where competition between suppliers is encouraged.

Figure 5 - Product classification matrix

Source: CEL/COPPEAD 2007 survey

Returning to our survey, we asked companies to classify the expenditures incurred during the previous year, according to the matrix commented above. The result was a classification shown in Figure 6. It is interesting to note that the sum of the categories of strategic items and leverage items represent 76% of the annual total purchased. This proportion found in practice is very much in line with that recorded in the literature, where several authors indicate that the two categories in question represent about 80% of the annual volume purchased.

Typically, the financial volume of 80% of annual spending is allocated to a set of suppliers that does not represent more than 20% of the company's entire supplier base. Thus, the categories of strategic and leverage items must be managed using supplier relationship strategies that allow, at the same time, guarantee of supply and cost reduction.

Figure 6 - Classification of the annual amount purchased

Source: CEL/COPPEAD 2007 survey

The cost analysis portrayed in this text can be very useful, as a first indicator, to define how the Purchasing sector should manage the materials located in the four quadrants and abandon the old practices of treating everyone in the same way. Items considered non-critical, for example, require efficient processing, standardization of products, optimization of purchased quantity and control of inventory levels. Items classified as leverage allow the purchasing company to exploit its purchasing power, such as, for example, with tight negotiations, fixing the purchase price of products and replacing them. Items considered as bottlenecks can cause problems for the purchasing organization and bring risk to its operation. It is advisable to ensure supply through a purchase volume guarantee to attract the seller, supplier control, inventory insurance and a contingency plan for supply interruptions. Finally, the strategic items require as main tasks the development of a long-term relationship with the supplier. For these strategic items, additional analytical techniques should be employed, including market analysis, risk analysis, price forecasting, simulation and optimization models.
 CONCLUSION

Growing market pressure to reduce costs and maximize service levels has brought to light the importance of efficiency in business management. Specifically, Brazilian companies value activities related to the supply of products, due to their potential to generate significant savings, reduce risks and improve service rates.

The recognized importance that the Purchasing/Supply Area occupies in the business environment is observed by the large presence of directors and/or executives of high management level as the main responsible for the department. In Brazil, 84% of the large industrial companies assign the management of this Area to high-level executives. In other countries, these same executives rise to the level of president. This has been happening particularly in the automobile industry where GM, Ford, Toyota and Chrysler had some of their presidents (Chief Executive Officer – CEO) coming from the Purchasing area.

The fundamental role of supply management becomes even clearer when one observes the representativeness of the volume of purchases made by companies compared to gross revenue. Both in Brazil and in the United States, the value of inputs purchased annually by companies is equivalent to more than 40% of revenue. These high volumes purchased by companies are, for the most part (89% on average), under the responsibility of the Purchasing/Supply department. In the US, this percentage is also similar to the Brazilian: 82% on average.

Companies are also concerned with establishing differentiated relationships with suppliers and, for this, segregate past acquisitions according to the importance and representativeness for the organization of each one of them. From this point on, they establish which will be the appropriate relationship strategies for each category.

The development achieved by the Purchasing/Supply sector in Brazilian companies is undeniable, especially during the last fifteen years. This function ceased to be fundamentally tactical and transactional, to perform activities that effectively impact the profitability and competitiveness of organizations.

READING RECOMMENDATION

ILOS team; Overview of Purchasing and Supply Management in Brazilian Industrial Companies , Rio de Janeiro, 2008.