Good Practice Example-Taking an Entrepreneurial Approach to Purchasing at Babson College
MEET A PURCHASING ENTREPRENEUR
Peter Russo has been an entrepreneur for more than 20 years. His hands-on experience is diverse— everything from founding start-ups in his basement, to serving as chairman of a venture owned turnaround, to licensing products to billion-dollar companies. He has opened design, sales, and distribution offices in both China and Japan, overseeing the transition of production and materials supply from the United States to China. Russo has also created production methods that are proprietary to the United States, successfully defending them against competitors with overseas sourcing. He has set up direct consumer selling systems and has developed and sold hundreds of products to America’s largest big-box retailers, such as Wal-Mart, Toys “R” Us, and Petco.
So what could entice this serial entrepreneur to leave his own business and become the director of purchasing at Babson College? Considering that Babson has the premier entrepreneurship program in the country, according to U.S. News and World Report, it is a perfect partnership. The academic world has traditionally been characterized as somewhat rigid and bureaucratic, following traditional rules and regulations engrained by decades of use or imposed by state legislators, boards of regents, or other governing boards. Purchasing is no exception. It, too, operates in a clerical, paper-intense atmosphere. But true to the very definition of an entrepreneur, Russo believes there is always the ability to innovate, so he decided to come to Babson.
“I undertook the challenge only because Babson encouraged me to take a fresh view,” says Russo. “They recognize that providing superior service and value can only be achieved by thinking of supply management as an entrepreneurial business.” Russo’s approach was to evaluate college purchasing in the same way he evaluated consumer products. “Buying can usually be segmented into buying processes and customer groups,” says Russo. In this discussion, Russo focuses on three buying processes and their associated customers:
Automated buying. This empowers the customer to purchase and manage material independently from a defined inventory. Office supplies are the best example of this type of purchase.
Competitively bidded buying. This requires the research and evaluation of multiple options to determine needs, best price, and service levels and is sent to multiple suppliers soliciting their bids. Examples in this category include laptop computers, kitchen equipment, laundry services, and construction projects.
Contracted services. This buying process involves using the expertise of suppliers that team with the college to provide products used on a daily, ongoing basis, such as dining and book store services. “Our purchasing department is no different from most companies in the private sector,” says Russo. As he sees it, today’s challenge is twofold:
Leverage technology to simplify and automate repetitive activities while capturing and disseminating information/knowledge.
Maximize strategic alliances for best practices and supply management in areas that are outside its expertise.
Russo goes on to explain how Babson’s purchasing group plans to address these challenges.
PREPARING FOR CHANGE
Among Russo’s first endeavors was to reinforce the idea and benefit of centralized purchasing, operating on a foundation of service. “Creating an effective, efficient process requires consistent campuswide use,” says Russo. “To achieve this goal, our purchasing department would have to be recognized by our customers as capable of reducing complexity and adding value, knowledge, and skill to the process.”
In the past, the typical purchasing process was initiated with the customer coming to the purchasing department with a product and supplier already selected. Overall, the process was fairly manual, with hand-completed paper forms and little use of technology. Everyone knew that before a purchase order was placed for any significant buy, policy required three bids to be received by the purchasing department. Some thought this process turned the purchasing department into the “purchasing police”—a mindset that Russo feels can be avoided with the proper buying processes. “We want to be viewed as fast and flexible, with creative solutions to sourcing,” he says.
Russo inherited an experienced team, led by two veteran staffers with extensive college purchasing experience. “I’m very fortunate,” he says, “to have a staff that’s not just talented and experienced, but service-minded.”
Russo and his team evaluated and modified the buying process to meet the desired format of the customers, but he felt it would also be critical to increase the campus awareness of each new service. Russo wanted to communicate the staff’s knowledge and professionalism as well. He and two key staff members participated in certification training, and both staff members passed all the requirements and achieved their Certified Purchasing Manager (C.P.M.) status. Russo also passed the four-part C.P.M. exam. However, his history as a career entrepreneur does not quite match the work experience requirements needed to achieve the CPM, so he must accumulate a few more years of supply management experience before becoming certified. Russo takes the personal setback in stride and states that he is happy with the outcome. His goal was to enhance his group’s common knowledge, experience, and camaraderie while illustrating his group’s desire to continually enhance its professionalism. The next level certification through obtaining Certified Professional in Supply Management (CPSM) is a future target.
“At Babson, many of our customers have advanced degrees,” says Russo. (It should be added that Russo considers everyone on campus a customer.) “We are obviously in an environment that values expertise,” he continues, “but it takes more than education. It takes motivation to enhance credibility. We need to continually increase our level of knowledge, professionalism and service.”
TAKING CHARGE OF PROCESS IMPROVEMENTS
After careful analysis and observation, Russo realized that his purchasing manager, Anne, and his buyer, Kerrie, were very good at administering the process that was in place. “More importantly, they were well-respected by the customers on our campus,” he adds. “But I realized that the antiquated, paper-based system they were using needed updating. It was too labor intensive and dependent on the staff’s personal knowledge.”
The system was weighed down by lengthy procedures and minimal automation, with no capabilities to assimilate current technology-driven processes, thereby creating two obstacles. First, Russo’s team was prevented from fully leveraging group buying efficiencies or maximizing product knowledge. Second, Russo was concerned with “what if?” Should one of the purchasing team leave for another job, a major setback would be inevitable.
Speaking with his team, Russo discovered that day-to-day operations required 100 percent of their attention, leaving little time to enhance the purchasing process. He quickly learned that his talented staff was drowning in paperwork and telephone calls.
The inspiration came in the form of a question: What would you do to fix what isn’t working? “My staff really had knowledge of which processes were effective and which needed changes. In many instances they had started to lay out solutions; however, limited time and resources kept the realization of these improvements on perpetual hold,” says Russo. “I also believe,” Russo continues, “that an effective purchasing process is built upon the customers’ desired buying behavior. We realized it was not effective to force customers to change their behavior to meet a purchasing process. Our first steps were to prioritize our objectives, establish our strategies and timelines, and outline measurable goals. Next, we quickly determined what actions could reduce their current workload without risking service levels, so my team could focus on enhancing the process. Then we went into action.” Russo empowered his staffers to get the job done, then let them be. After just six months, their progress was impressive!
AUTOMATING THE EVERYDAY
Kerrie focused on the automated buying processes. She spent many hours at the computer, creating an interactive purchasing website for both internal customers and suppliers. Now that it is up and running, a new era has begun. Gone are the manual entries and multiple data inputs. POs being faxed across campus and then reentered by hand into the system will finally be a thing of the past. Customer-friendly, user-driven resource pages are now used. The campus will also have a master supplier list with links to company websites, eliminating the time-consuming search for basic products and suppliers.
The suppliers will also benefit, with access to complete information on how to do business with Babson and forms for each online process. Best of all, every aspect of the website can be continually refined, adapting to the appropriate circumstances. As their workload is reduced by automation, both the purchasing and accounts payable departments will be able to explore new, improved ways to serve customers.
CLOSING THE BACK DOOR
The underside, if you will, of Babson’s entrepreneurial culture is the action-oriented independence of its internal customers. Supply management channels are often overlooked by those who believe “we know what we want, so why do we need central purchasing?” The result has been multiple purchasing of single-need items, lack of safeguards, inconsistent pricing, and contracts. Russo’s goal: “To maximize our department’s ability to leverage campuswide buying power, benchmark resources, negotiate better terms, eliminate duplicate spending, and manage contract services.” He adds, “We haven’t forgotten that faculty and staff want maximum freedom in sourcing, so our challenge is to preserve their independence—and still improve the way we manage the $145 million in college spending every year.”
Anne put her efforts behind improving the competitively bidded buying process. She started evaluating current campuswide strategies for products and services that were previously made on a single-purchase basis. A great example of this is the snack vending machines. Around the Babson campus, there are many snack machines. Each of these machines was purchased on an individual, as-needed basis. The result was a total of six machines, bought at six different times. More importantly, Babson received no financial incentives, such as a percentage of sales for allowing the suppliers to put the machines on campus. Often the machines had malfunctioning card readers—a problem Babson seemed powerless to impact with so little supplier leverage.
Taking a strategic approach, Anne reevaluated the customer need for campuswide snack vending. She started with a survey of the customers’ buying needs. To develop a new strategy, Anne also evaluated headcounts of residents and office staff, studied traffic flow, and benchmarked her findings against other schools. This effort culminated in a request for quote (RFQ).
An RFQ is a document provided to bidding suppliers which details exacting parameters of the goods or services being requested. For example, an RFQ from snack suppliers might include details such as number, kind, and location of vending machines; snack prices; and method and timing for refills; even issues regarding potential vandalism are covered. This provides the suppliers with all the specifics on which to base their bids and, later, the contracts.
The result is that now Babson will have just one supplier that will manage approximately 22 machines, and a comprehensive card payment system. Babson will enjoy shared profits—and online live tracking of snack purchases by machine!
In another effort Anne developed a travel portal to help faculty, staff, and alumni access discounted flight deals, hotel rates, and special promotions.
Anne also evaluated purchasing card satisfaction and found both user dissatisfaction and transaction processing to be less than ideal. She prepared and launched a beta test and has since implemented a new procurement card system, allowing customers to make adjustments to a general ledger prior to posting online expenditures. Not only will this allow users to better manage their budgets, but the time spent by the purchasing department making adjustments will be reduced by over 20 hours a month.
DEVELOPING NEW RELATIONSHIPS
Although the traditional college purchasing process presents both challenges and rewards, Russo’s enthusiasm peaks when he talks about contract services. He draws from his preBabson decades and recalls that finding the right partner was crucial. Leveraging a supplier’s expertise, whether it is in raw materials testing or third-party fulfillment and distribution, was a major tool in realizing success. The common perception is that outsourcing reduces supply options and service management flexibility. Russo feels differently. “It actually increases capabilities,” he says, “as I can leverage the talent, skills, and assets of both Babson and the supplier.”
As a modestly funded entrepreneur, Russo often called on suppliers to perform functions that would traditionally go to a key department in a larger company. In order to make this “outsourced/in-house operation” effective, a cultural shift had to take place. Suppliers need freedoms and restrictions, as well as incentives and guidelines that are similar to those of an internal department.
“I try never to fall into the trap of thinking that the customer is always right, or that the supplier is holding out and can always do better,” says Russo. “Once you replace ‘us’ and ‘them’ with ‘we,’ the returns come in multiples!”
Russo’s relationship-building philosophy is practical and powerful: • Get a tight contract agreement, stating even the most basic terms. Who gets what, as well as when, where, and how they get it. When facts like this are unclear, the relationship can suffer. • Set a tone of collaboration and teamwork. When suppliers realize we are all on the same team, they provide revolutionary new products, enhance production methods, and even reduce their prices—voluntarily! • Fight for supplier rights, protect them in company-driven experiments, help to train their employees, and collaborate on improving their companies! In short, make sure you understand and respect their company’s mission, goals, and objectives. • Together, create goals, measurements for success and a communication system that assures clear and constant understanding of action steps and timing.
Establishing such strong relationships with suppliers has often resulted in lifelong friendships for Russo. Ironically, these friendships have made it easy to terminate professional ties if and when the alliance is no longer working. “Cooperation and communication at that level insures that there’s no mystery about performance requirements,” Russo adds.
WHAT’S IN STORE FOR BABSON?
“At Babson, we aren’t experts in every field. Take dining and book sales, for example,” says Russo. “In these areas, contracted service companies like Sodexo and Barnes & Noble have historically done a great job working directly with non business departments such as the Student Affairs department as their primary contact...”
“These campus departments know their particular customer—the students in this case—and they interface with suppliers in a role I call ‘Use Managers,’” continues Russo. “They identify the need based on their observations and student comments on use. They then request the service and challenge the supplier to propose a creative solution.” The challenge with the Use Manager format is that it leaves the operational decisions and responsibility totally in the hands of the supplier. Russo has gained agreement with these Use Managers and suppliers on campus for him to take on complementary and partnering role of “Operations Manager.”
Russo says this new Use Manager and Operations Manager team model has been a great success. “My intention is to enhance the Use Manager model by working with the contracted service companies as a business partner of sorts—as if we had a stake in their success, which we do!”
“In my role I review detailed elements on the operational side, such as tracking equipment life and monitoring the associated repair process and capital planning for replacement.”
Russo also gets to look at the Babson customer from an operator’s point of view. “The great part,” he says, “is the information these contracted service suppliers possess. They provide access to statistical data that adds to the observation-based information we get from the Use Managers. For example, Sodexo dining tracks how many students are served during 15-minute intervals of each day and how much of each entrée is consumed per day. My goal is to add this type of data to information provided by our Use Managers and additional consumer surveys and research to assure that we are providing the best food product, when, where, and how the student desires. I can also work with suppliers to determine the benefits, risks, and effects of various staffing options, service and materials changes, merchandising, advertising, and promotion plans that they may be considering.”
Russo believes that once a team approach is truly in place at Babson, “safety positions,” otherwise known as “sandbagging,” will be abandoned. “When our goals and those of our suppliers are aligned, it follows that mutual benefits are at a maximum, and risk is at a minimum,” he says. Another benefit is that Use Managers’ operational demands are reduced, allowing them to focus energies on their customers. “And that,” he adds, “is a definite win-win!”
Peter Russo’s 20-plus years of experience are hard at work in his position at Babson. But it might be argued that his best qualifications are his three children currently in college. And so the father, entrepreneur, and director of purchasing wryly sums up his professional philosophy: “Nobody understands how crucial it is to maximize the buying power of every tuition dollar more than I do!”
Source: L. Giunipero, Personal interviews with Peter Russo, February 2008 and May 2010. (Note: While Peter recently left Babson after three years to pursue another position, his legacy continues with his successor.)