SwitchCrafter makes electronic switches that are installed in the dashboards of semis. For years, its biggest customer has been TruckMaster, which bought these vital little parts for $6 a piece. One day, the purchasing powers-that-be at TruckMaster decided that perhaps $6 was too much. So the head purchasing guru—let's call him Joe—decided to shop around. He found that CopyCat Corp. sold a switch for $4. So he called up Fred, his loyal SwitchCrafter sales rep, and gave him the "opportunity" to match the price.

Not surprisingly, Fred hesitated. "I'm familiar with CopyCat's switch," he said. "It's a fine part, but the lower price is due to the type of plastic used in the switch. It is not designed to withstand the cold temperatures your trucks operate in, which will lead to a higher failure rate." But Joe dismissed his advice with a curt "that may be, but my job is to reduce the cost of all our parts, and your competitor can save us $2 a pop. Are you willing to match his price or not?"

Fred could not. TruckMaster switched switch providers and, lo and behold, the new components started to fail in the field. TruckMaster found itself sending out heavy-duty tow trucks, to the tune of $350 each time, to replace a $4 part. It doesn't take a math genius to realize that the $2 cost savings was getting eaten up quickly. So TruckMaster's service/warranty repair people started voicing complaints—loudly—and SwitchCrafter started looking good again. Before long, Fred was back in business.

* * *

The above story is true. It happened to a client and it illustrates what can happen when a company's purchasing department is driven to achieve its goal (lower acquisition costs) with little or no regard for the value impact on other areas of the company. It's a classic case of tripping over dollars to save pennies.

The point of this story is that the truck manufacturer allowed purchasing department to make a that the service/warranty department knew nothing about. The purchasing agent was honest; what happened down the road really wasn't his concern. He was paid to lower acquisition costs, and he did his job. Too bad his decision was detrimental to the company's bottom line.

The shortsighted decisions by commodity-minded purchasing departments are not uncommon. In this case, purchasing was a key culprit (though by no means the only one) in what can be termed "cross-functional dysfunction"—the phenomenon of departments' operating in conflict with each other.

I have two big concerns with today's purchasing departments. Most obviously, purchasing has an incentive to save dollars in cost, a mandate that too often means dollars of value are lost. And the other problem—which is interconnected with the first one—is that purchasing often operates by obsolete and counter-productive rules. I am speaking specifically of the "x number of bids required" or "create a level playing field" rules that pit vendors against each other with the intent to drive the price downward. It certainly does, but the net effect of creating a level playing field is that solutions at the high value side are systematically eliminated from consideration.

So what can companies do to ensure that purchasing is not undermining other departments by diluting value and ultimately bringing down profits? Here are some tips:

1. Make sure procurement incentives do not overpower other functional interests

In other words, purchasing should not be making complex buying decisions. Period. It should operate in an administrative capacity, orchestrating a quality decision process that ensures a complete value impact is reviewed. A purchasing department with too much power will gravitate to the lowest common denominator: price. Worse, it will generally not be held accountable for the value that a solution delivers in business performance terms. A department that has to live with the outcome of a purchasing decision will almost always have a better grasp of the big picture and an eye on revenue as well as the bottom line.

Too often, centralized decision making equals lack of accountability. Consider a major manufacturing client that buys tons of resins every year. It used to be that each local plant would buy the resins it needed from the vendors that best served it. But one day the company decided that it was better to buy mass quantities, so it consolidated its purchasing at corporate headquarters.

At that point the people in the plants, those familiar with the service of the resin vendors and the quality and applicability of their products, were taken out of the equation. All corporate cared about was—you guessed it—"how much is this resin per pound?" Purchasing was allowed to ignore individual problems at individual plants. This is not an unusual scenario. Purchasing ignored a documented six million dollar value impact to capture a six hundred thousand dollar cost savings.

2. Don't approach buying complex solutions like raw materials

Doing so strips value from solutions. If you are buying raw materials—for instance, a truckload of sand—the purchasing function may make sense. Sand is sand is sand. It would make sense to have vendors place bids and then go with the cheapest one. But as soon as you buy something for which there is a variant in quality or capability—say, consulting services, complex components, or software for a new database—that same process begins to lose effectiveness and to impinge on the value purchased from the supplier. It's always a mistake to apply commodity purchasing processes to a value-added service, especially when support given by the vendor is a critical ingredient to success.

Think of it this way, what if you had the choice of a $10 haircut or a $50 haircut? And what if someone else got to decide which haircut you choose? Further, suppose that you are a politician, a profession in which appearance really counts. If the decision maker was driven totally by price, he would certainly go with the $10 haircut. But, in the long run, you, the politician with a bad $10 haircut would experience the voting impact of the negative image. Your career would fail.