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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

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

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

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

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

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

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