Professional buyers reveal how they buy supplies for their companies.
Few individuals in the U.S. spend as much money each year on supplies as farmers. Even small farm operations require hefty checking accounts to cover seed, chemicals and equipment.
How well a farmer purchases inputs can greatly affect his farm's bottom line. "There are farmers out there who if they can't get their inputs at the lowest cost, they can't farm," reports Frank Dooley, agricultural economist at Purdue University.
However, the decision to purchase an input should include far more than just its price. Dooley says farmers need to start thinking like their suppliers and set up a buying strategy to consider other factors such as service and delivery.
Major companies, including the suppliers of farm inputs, hire specialists trained to buy. These professional buyers set standards for purchased materials and then regularly evaluate a supplier's performance.
Here are five professional buyers, with tips to growers about how to better purchase supplies.
Paul Schreier Director of network supply Company: Land O'Lakes Dairy Foods Buying tips: Develop a supplier scorecard for evaluating companies. Hone personal skills to be a better buyer.
If you spread Land O'Lakes butter or cheese on your bread, chances are the orders for those products passed across Paul Schreier's desk. Schreier makes sure the Arden Hills, MN, based food company has the raw materials needed for its manufacturing plants. Each day, he buys commodities such as butter, cheese and soybean oil.
"What we look for as we buy goods from a supplier is breadth and depth," Schreier says. "For breadth, we want to know if the supplier is capable of performing a lot of different things and providing a variety of products for us. Do they have multiple production capabilities?"
Then he considers a supplier's depth or the ability to bring innovative products and technology to the table. "I want someone who is willing to work with very specific specifications and provide all the ancillary things to make that purchase work," he adds. "In other words, it's not just the product, but how it is shipped and wrapped and the ease of making payments and billing."
Land O'Lakes' buyers also evaluate their suppliers. Shreier says they use a supplier scorecard to measure performance. Items on the scorecard include:
v How product specifications were met
v Cost of the product and transaction
v If the order was complete
v If the order was shipped and delivered on time
v Number of consumer complaints linked to a supplier
v If information needed to complete the transaction was included
Purchasing for a major company like Land O'Lakes is no stroll at the mall. Over the years, Schreier has seen what characteristics it takes to be a good buyer of any materials. Most important, a buyer must know the industry and its products. He or she also must be a good negotiator.
Excellent interpersonal skills rank high on the list, too. "You have to be very straightforward and firm but willing to work with others to form a good business proposition," Schreier says.
And last, he says a buyer must be creative to help put together programs and alliances that are win/win for purchaser and supplier.
Matt Titus Logistic planning analyst Company: National electronics/appliance retailer Buying tip: Watch for supply chain opportunities; they are the future.
Matt Titus looks at long-term strategies for purchasing millions of dollars in electronics and appliances each year as part of his job with a major retailer.
What does he see ahead? "The whole concept of using the supply chain as a competitive force is going to be huge," he predicts. "For the food industry, it will be links between the grower and their suppliers to the end product like a box of cereal. The chain that satisfies the end user most efficiently will be the most successful."
Many growers already see the development of more complex supply chains in agriculture. Every year, more processors and food manufacturers offer contracts to growers for certain crops and supplies. What the grower buys and raises is determined by the end user, and the crop commands a premium price.
"We're just beginning to leverage our supply chain," Titus admits. "But we can envision we will have to have the most efficiently delivered product on the shelf."
This means collaborating with manufacturers on everything from product creation to order fulfillment. For example, his company may ask Sony to make a VCR with particular features that appeal to its customers.
Collaboration also occurs in transporting products. If Titus's company can save money by doing its own shipping or combining shipments from multiple vendors, it will do it. But it needs an open collaborative relationship with the manufacturer to discover these opportunities and their value.
For growers to successfully participate in the supply chain, they need to ensure equally open communications with their supply chain partners.
Tom White Manager of strategic sourcing Company: John Deere Buying tips: Align with leading technology suppliers for highly engineered products. Use the Internet for commodities.
For 35 years, Tom White has helped oversee the purchase of manufacturing supplies for John Deere. Now ready to retire, White says he's leaving just as the field of supply management booms.
Deere employs about 1,000 people around the world in supply management divisions. The company seeks new employees schooled in purchasing to replace people like White who have spent their careers learning how to buy. The demand for purchasing expertise is so great that Deere has a special master's degree program in supply management through Arizona State University available for employees. The company also hired 82 interns this past summer in supply offices, hoping to attract future employees.
"A lot has changed [in 35 years]," White says. "We've become a much more professional group."
After all, few activities impact Deere's bottom line as much as supply management. Today, purchased materials account for approximately 70% of Deere's cost of manufacturing. "So the significance of purchased materials and buying them well is very high," White admits.
Over the years, Deere has developed a detailed process to determine the best way to buy key materials. When the company applied the process to highly engineered products such as hydraulics and hydrostatic transmissions, it found it was in its best interest to form a close and committed relationship with two or three world leaders. "If we want to be on the leading edge of technology and distinguish our products with those features, then it is important for us to find the suppliers who bring that to us," White states.
"We still measure those suppliers for their ability to bring us cost-effective solutions. But there is much more to buying effectively than finding someone who can offer you that extremely low price.
"A farmer has to align himself with an industry leader, too," White claims. "There is value in quality [products], high resale value and productivity."
Farmers also can learn from Deere's extensive supplier audits. "We measure our suppliers in some pretty basic things like delivery performance, quality performance and cost competitiveness," White explains. "We also measure in support areas like technical support."
The evaluations provide suppliers with feedback so they can make changes and improvements. Farmers also can initiate improvements in a supply company by letting it know when product performance is poor or service falls short.
Deere joins many other e-commere buyers by going online for less engineered products. For items with well-established industry standards, White says they will prepare a package of materials they want to purchase. They notify suppliers about the package and the time of the upcoming Internet auction. Then during the one- to two-hour auction, suppliers place bids and Deere accepts the most competitive offer.
Growers may try similar strategies, watching Internet sites and auctions for products. Or a grower could put together a package of needed products and services, post it on various supplier sites and request bids.
But White says it is important that farmers, like the buyers at Deere, recognize that for certain items it is better to seek value and service rather than just the best price.
Travis Gullickson Business analyst Company: National grocery chain with $20 billion in annual sales Buying tips: Consider the cost of capital before buying supplies ahead. Adversarial supplier relationships cost money.
When Travis Gullickson used to combine wheat on his dad's North Dakota farm, he never dreamed he would someday be involved with buying tons of wheat products for a major grocery chain.
Today, Gullickson analyzes the procurement of thousands of food products from applesauce to zucchini in his Minneapolis, MN, office. He looks at not only the cost of the products, but how purchasing affects company productivity. What Gullickson learns applies to farmers as well.
"We worry about the cost of capital and storage," he says. "For example, what if I can get a certain product at a discount by purchasing in larger quantities or by making a purchase months in advance. Is this the best thing to do? The question to ask is, What does it cost to finance and store that product? How long can we store it before we're only breaking even?
"Our look is economic and by the numbers," Gullickson continues. "If a farmer buys $10,000 of something today and sits on it for six months before using it, that is $10,000 not used to pay down a note. What is the cost associated with that capital?"
Gullickson also looks at improving relationships with suppliers to improve the company's bottom line. Food companies and grocery stores traditionally have had adversarial relationships. "Now the trend is to work with these companies and identify the behaviors that drive up supply chain costs," he explains. "If we make all purchases in full pallet quantities, the supplier may give us 10 cents off per case to reward us for reducing their handling costs. We may chose this option, depending on its effect on our total costs."
Growers may try similar tactics. For example, a grower might find out what volume of product the manufacturer can handle most efficiently and negotiate a price break.
Better business relationships also cut the expenses related to conflicts. Gullickson says his company and its suppliers now try to resolve a price issue without wasting time and money researching, documenting and then arguing the issue.
The same applies to strained grower-supplier relationships. Drawn-out price disputes only cost everyone money, including the grower. Fostering good relationships with trusted suppliers should lead to better prices and service.
Developing these relationships takes time, however. Gullickson says his company ends up working with fewer and larger suppliers. "It is tough to sit down and have conversations about taking costs out of a system and working cooperatively with a thousand different companies," he says.
Jerry Warner Executive vice president Company: Farmers National Co. Buying tips: Scutinize bundles and special promotions for what fits your operation. Monitor the Internet for special buys.
As more farm land moves into the folds of management firms, professional farm managers like Jerry Warner wind up doing more and more input buying. Warner helps buy supplies and directs farm management for Farmers National Company, Omaha, NE, the largest farm management firm in the U.S. Farmers National manages 3,600 farms in 22 states.
Managers purchase inputs such as seed, chemicals and fertilizer for about 75% of the farms. Because Warner helps with these negotiations and decisions, few promotions and bundling programs have escaped his notice.
"With chemical companies owning seed companies, there's more bundling," he says. "We're also seeing risk management tied into the programs. If you use a certain seed, you are eligible to buy additional insurance coverage. I suggest farmers look at what they can afford and then what gives the best protection if there is a loss."
Warner admits the bundling programs pose a headache for farm managers. "We don't like bundling programs," he says. "They are tremendously complex from the standpoint that you have difficulty determining what the best program truly is for your farm. I suggest growers do the best they can to sort out the program that fits and then take advantage of it. We are starting to see more regional opportunities.
"Everyone is crying out to simplify [these bundling programs]," he continues. "On the other hand, as companies merge and acquire other companies, these programs will not go away."
When considering special promotions, farmers should check the cost of money and when they can pay for the products. Warner says a lot of programs offer deferred payment.
"If you need [deferred payment] for cash flow, it may make sense," he says. "On the other hand, if you can get more for the money by paying early, do it. While a lot of input financing is available, in reality you're paying for the use of the money one way or another."
Warner can see the day when farmers and managers will purchase more inputs on the Internet. Right now, he monitors what's available on different Web sites.
"If buying electronically fits the needs of a customer, we're prepared to do it," he says. "We haven't bought much electronically yet. We try to work through local vendors and maintain the service aspect. But we think the Internet is the way some products will move."
After 28 years of professional farm management, Warner says good buying still comes down to developing good relationships. He states, "In order to purchase, you need to know people who are leaders in the business and establish relationships with them."