Case History

Reorganization of the purchasing department of a company facing serious production difficulties

Problem

The company is a leader in the manufacturing of major components for oil and gas facilities. They have plants in Italy, Europe and Asia. All products and processes are certified and meet industry standards.

The company sells worldwide (Middle East, Russia, America) as well as in Italy. Their customers are the world’s main builders of oil facilities.

The company had experienced severe delays in the production of components for their main customer, a multinational group with a turnover of several billion dollars. Problems mainly arose in the production of some components for a strategic contract the customer had won.

Penalties would have caused the company serious financial consequences.

Delays were found to be due to the late delivery of materials the Purchasing Department had sourced from low-cost countries.

To face this critical situation a temporary manager was sent in to support the department. The mission was to solve the problem and to improve the company’s purchasing process.

Solution

A temporary manager from Contract Manager takes on the role of Group Purchasing Manager.

The first activity is to reorganize the expediting function, putting in a junior engineer, together with an experienced progress-chaser to organize activities in this area. Previously the usual practice in the company had been to take action whenever production flagged a shortage of materials. This was handled without any set process, on a case-by-case basis. This only caused delays and chaos. Within two weeks suppliers’ plans were completely revised, based on the actual situation.

Reminders were sent out to suppliers and checks made with proper advance notice. A new software package was developed and deployed to keep the information system updated and to flag critical situations. It was also immediately made available to the workshops and PMs to help them keep abreast of the situation in real time. This reduced to a minimum the time previously spent by expediting in having to handle telephone requests from Production. In just one month the delivery of materials was significantly improved and under control.

Secondly, the Purchasing Department was reorganized. It had borne the brunt of the previous situation and its staff were understandably demotivated. After thorough assessment, the department organization was completely restructured. Supervisors and buyers were trained in hard and soft skills. This resulted in a marked determination to develop and to go on learning, especially among new graduates.

Thirdly, discussions were held with the Administration Department on the schedule of payments to suppliers and forecast outflows. The aim was to better manage supplier relations and to stabilize cashflow.

The fourth action was to cut procurement lead times, from RDA to delivery of goods. This required strengthening collaboration between the Sales and Technical Departments, from quotation stage on. Agreements and preferential channels were set up with the main suppliers. As a result, lead times were cut by 50%.

The fifth activity was Global Sourcing. By volume, purchases from “low cost” countries accounted for 10% of total purchases. Measures were taken to raise this share to 25% within three years. The Purchasing Department is committed to involving other functions, such as Quality, Design and Production, aligning them with the same timescale. Only by doing so can they hope to reach the ambitious objectives they have set themselves.

In addition to the above, the temporary manager brought about improvements in other activities of the Purchasing Department. This produced significant cost savings, despite the fact that raw material prices were rising at this time. He also set up a process of collaboration with strategic suppliers to reduce costs and improve quality. This has generated impressive results on both economic and technological fronts.

In some cases, efficiencies came from reducing the number of suppliers and concentrating more complex supplies (in both logistics and working capital terms) on main contractors. In other cases, it was necessary to increase the number of suppliers, bringing in new ones, to be able to keep up with the growing complexity of operations. Meanwhile, the warehouses were also reorganized, adopting technologically advanced management solutions.