ISCOM/476 Signature Assignment: Purchasing and Logistics Integration (PLi) Benchmark
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Resource: “The Research: Linking Purchasing and Logistics Integration (PLi) to Improved Functional and Financial Performance”, located in Achieving Supply Chain Integration, Ch. 5 (page 99).
Review the research tables and best practices.
Apply the four best practices to your industry, or one of your choice.
Write a 750 word summary suggesting improvements in financial and functional performance based on the four best practices.
Format your paper consistent with APA guidelines.
The Research: Linking Purchasing and Logistics Integration (PLi) to Improved Functional and Financial Performance
A survey was sent to purchasing and logistics managers from the University of Tennessee Global Supply Chain Institute and Forums mailing list, resulting in more than 180 responses from managers, ranging from CEOs and presidents to analysts. The respondent firms ranged in size from over $20 billion to under $100 million in revenue. The industries included the following:
- Aerospace/defense
- Apparel/textile
- Automotive
- Building materials
- Chemical, oil, and gas
- Commercial printing
- Components and systems
- Conglomerate
- Construction
- Consumer electronics
- Engineering
- Environmental services
- Facilities management services
- Financial institutions—banking
- Financial institutions—insurance
- Food, beverage, and nutrition
- Food service
- Government—national
- Government—local
- Health-care delivery services
- Heavy machinery
- High-tech network infrastructure
- Hotel/hospitality
- Household, personal care, and cosmetics
- Industrial equipment
- Media/entertainment
- Medical equipment
- Metals/glass processing
- Mining
- Office equipment
- Packaging
- Pharmaceuticals
- Plastics processing
- Professional/information services
- Pulp and paper
- Retail
- Telecommunications services
- Transportation services
- Utilities
- White goods
Respondents were first asked to identify whether they worked primarily in purchasing or in logistics. Purchasing was defined as including the following:
- Sourcing direct materials
- Procurement of maintenance, repair, and operating supplies
- Contracting services with outside suppliers
- Procurement of capital equipment/facilities
- Procurement of finished goods (completed items for resale)
- Supplier evaluation and selection
- Management of continuous supplier relations
- Supplier performance measurement
- Establishment of goods/services specifications
- Contract negotiations over materials supplies/services
- Global sourcing/sourcing strategy
Logistics was defined as including the following activities:
- Inbound/outbound transportation
- Owned fleet management
- Warehouse operations management
- Materials handling
- Packaging
- Order fulfillment
- Logistics information systems management
- Inventory management
- Management of third-party logistics services providers
- Customer service
- Reverse logistics flows
- Supply/demand planning
Next, the respondents were asked a series of questions related to their perspective on the nature and level of integration between their department and overall business strategy as well as between the purchasing and logistics functions. For example, if respondents indicated they were purchasing managers, they were asked about the purchasing group’s alignment with business strategy and the group’s relationship with the logistics group.
Major findings from the survey include the following:
- Purchasing and logistics frequently are found in a broader supply chain or operations organization but really exist as two separate and disconnected functions.
- Both purchasing and logistics are well aligned independently with their business unit’s strategy and activities but not nearly as well aligned with each other.
- Despite formal organizational links between purchasing and logistics, interaction between the functions is typically informal and unstructured.
- Maintaining open lines of communication is the most widely supported method of interaction between the functions.
More detail on these findings is provided in the tabular breakdowns that follow.
Major Finding 1: Purchasing and logistics frequently are found in a broader supply chain or operations organization but really exist as two separate and disconnected functions. ( Table 5-1 )
While nearly 58 percent of respondents reported that purchasing and logistics were part of a common supply chain organization, more than 45 percent felt that they exist as separate functions. Fourteen percent still viewed purchasing and logistics as separate functions that are not part of the same supply chain organization, and 28 percent reported some other organizational structure.
Table 5-1 Procurement and Logistics are Often Disconnected
Which of the following best describes the organizational structure for purchasing and logistics?
Percent Responding
Procurement and logistics are separate functions and are not part of a common supply chain organization
14.0%
Procurement and logistics are separate functions but are part of a common supply chain organization
45.5%
Procurement and logistics are part of the same function and are part of a common supply chain organization
12.2%
Other/Not Applicable
28.4%
Major Finding 2: Both purchasing and logistics are well aligned independently with their business unit’s strategy and activities but not nearly as well aligned with each other. ( Table 5-2 )
The respondents provided a very strong indication that both purchasing and logistics functions are well aligned to business unit strategy and activities. That means both groups essentially agreed with the statements supporting the alignment of purchasing and logistics with business unit strategy (1 = strongly disagree and 5 = strongly agree).
Table 5-2 Extent to Which Purchasing and Logistics are Aligned with Business Strategy
My Functional Area:
Purchasing
Logistics
Total Sample
Identifies opportunities to support the company’s strategic direction
4.28
3.99
4.08
Understands the strategic priorities of the company’s senior leadership
4.17
3.98
4.03
Adapts its strategy to the changing objectives of the company
4.21
3.89
3.99
Adapts its activities/processes to strategic changes
3.96
3.85
3.89
Maintains a common understanding with the company’s senior leadership on its role in supporting strategy
3.92
3.70
3.77
Educates the company’s senior leadership on the importance of procurement/logistics activities
3.72
3.63
3.66
Assesses the strategic importance of emerging trends in procurement/logistics for the company
3.60
3.51
3.54
Major Finding 3: Despite formal organizational links between purchasing and logistics, interaction between the functions is typically informal and unstructured. ( Table 5-3 )
Respondents were asked the level of engagement with the other function through a series of questions, where 1 = strongly disagree and 5 = strongly agree.
Of the different ways that purchasing and logistics might engage, informally working together, sharing ideas and information, and working together on a team scored the highest. More proactive approaches to collaboration, such as anticipating operational problems together and sharing resources, were by far the lowest. This supports the belief that purchasing and logistics, even when housed in the same supply chain organization, continue to operate in their own siloed worlds. Interestingly, purchasing managers perceived a much higher level of engagement.
Table 5-3 Level to Which Purchasing and Logistics Interact
My Function Engages the Other in the Following Ways:
Purchasing
Logistics
Total Sample
Informally working together
3.60
3.52
3.55
Sharing ideas and/or information
3.70
3.46
3.53
Working together as a team
3.77
3.42
3.53
Resolving operational problems together
3.75
3.38
3.49
Achieving goals collectively
3.58
3.30
3.39
Developing a mutual understanding of responsibilities
3.64
3.29
3.39
Making joint decisions about ways to improve overall operations
3.62
3.16
3.30
Anticipating operational problems together
3.32
3.12
3.18
Sharing resources
3.30
2.98
3.07
Major Finding 4: Maintaining open lines of communication is the most widely used technique to foster integration. ( Table 5-4 )
When respondents were asked how purchasing and logistics interact, maintaining open lines of communication emerged as the most important technique. These open lines are informal and typically not systemic. Again, more proactive approaches, such as identifying potential sources of tension and establishing joint prioritization of projects, were ranked lowest (1 = strongly disagree and 5 = strongly agree).
Table 5-4 How To Foster Integration between Purchasing and Logistics
Purchasing/Logistics Group Tends to Work with the Other in the Following Ways:
Purchasing
Logistics
Total Sample
Maintaining open lines of communication
3.94
3.52
3.65
Combining efforts on major initiatives
3.72
3.47
3.54
Developing clear lines of managerial responsibility for implementing plans
3.38
3.24
3.28
Achieving a general level of agreement on risks/trade-offs among projects
3.43
3.20
3.27
Coordinating project development efforts
3.53
3.16
3.27
Addressing potential sources of tension between procurement and logistics
3.21
3.14
3.16
Establishing a joint basis for prioritizing projects
3.28
2.98
3.07
We also asked respondents to indicate their functional area’s performance relative to expectations, where 1 = well below expectations and 5 = well above expectations (Table 5-5). Not surprisingly, purchasing managers felt their performance relative to expectations was greatest for performance metrics over which they have the most control, such as performing to purchase price/cost objectives, supplier quality, payment terms with suppliers, and supplier responsiveness/flexibility. Performance metrics that require collaboration with logistics to achieve were all well below 3.0 on the 5-point scale.
Table 5-5 Purchasing’s Performance Relative to Expectations
My Purchasing Group’s Performance Compared to Expectations for Each of the Following:
Performing to purchase price/cost objectives
3.28
Supplier quality
3.26
Payment terms with suppliers
3.17
Supplier responsiveness/flexibility
3.11
Supplier on-time delivery
2.87
Total cost of ownership
2.83
Supplier technology contribution
2.57
Inventory investment cost for purchased goods
2.40
Transportation and logistics costs
2.40
Similarly, logistics managers felt their functional performance exceeded expectations on metrics related to customer delivery. For example, customer service level establishment; network design/network location; full, damage-free, and on-time deliveries; and inbound/outbound transportation contracting and management are all metrics that fall under their control (Table 5-6). Performance metrics that require collaboration with other areas of the supply chain (for example, forecasting accuracy, total inventory turns, reverse logistics management, and time on back order) were among the lowest scores in the entire survey.
Table 5-6 Logistics’s Performance Relative to Expectations
My Logistics Group’s Performance Compared to Expectations for Each of the Following:
Establishing customer service levels
3.59
Network design/network location
3.38
Full, damage-free, and on-time deliveries
3.19
Inbound/outbound transportation contracting
3.16
Inbound/outbound transportation management
3.07
Inventory planning
2.92
Logistics information systems design and implementation
2.86
Transportation costs
2.72
Total logistics costs
2.70
Time between order receipt and delivery
2.53
Warehousing costs
2.47
Logistics performance measurement
2.43
Line-item fill rate
2.34
Inventory costs
2.18
Order fulfillment management
2.03
Finished goods inventory
2.00
Forecasting accuracy
1.98
Total inventory turns
1.93
Reverse logistics management
1.89
Time on backorder
1.63
Finally, we conducted an analysis to determine whether the data provided any indication as to whether PLi was perceived as an important lever of overall business success (Table 5-7). Although this statistic is highly subjective, the table that follows provides indications that managers from firms in the top 25 percent of PLi in this survey believe their firms significantly outperform their competitors as compared with managers from firms with lower PLi scores (1 = well below competitors and 5 = well above competitors). In other words, managers believe their company achieves a significant performance premium from aligning their purchasing and logistics functions.
Table 5-7 Perceived Alignment of PLi to Business Success
My Firm’s Performance in Comparison to My Competitors
Purchasing and Logistics Alignment
Firms in Top 25% of PLi scores
Firms in Bottom 75% of PLi scores
PLi Performance Premium for Highly Aligned Companies
Growth in sales
3.42*
2.91*
18%
Profit margin
3.51*
2.93*
20%
Growth in market share
3.39*
2.84*
19%
Return on investment (ROI)
3.58*
2.92*
23%
Cost reduction
3.56*
2.84*
25%
