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Microsoft’s Purchasing Problem


Problem


Microsoft today is finding that it has problems just like any other company. Problems could come from anywhere as far as cost reductions. All the material used in this paper is taken from the article Microsoft Takes Steps to World Class Procurement.


The problem that Microsoft found when it was looking at its financial material was that it needed to start cutting costs. Steve Ballmer the CEO of Microsoft issued a 1 billion dollar cost savings goal in 001. Today Microsoft was about to meet and exceed this goal. The goal was to be accomplished in 4 months and at 0 months Microsoft was sitting at $85 million. The cost savings could not have even come close to 1 billion dollars if it wasn’t for a worldwide procurement strategy led by Don Jones. Since Microsoft keeps on growing into new markets and new lines of products the cost cutting goal is harder to accomplish.





Microsoft


Microsoft is an ever-growing company from numerous new products in existing product lines to new products in new product lines. A new product that Microsoft recently put out two or three years ago was the X box. The X box is a gaming system that is different from what Microsoft usually puts out for products. Since the X box has come out Microsoft has had to go overseas to get the raw materials to put it together.


Environment


The environment that Microsoft works in is a very global industry. Everyone all over the world has computers and they use Microsoft’s software. Not only does Microsoft have to ship its software globally but also the material it brings in comes from different markets other then domestically. Microsoft today is the leader in the computer software industry. According to Microsoft financial statements history it brings in revenues quarterly from 5.5 million to 8.5 million. Revenues have increased over the years since Microsoft went from a domestic company to a global company. The Global environment that most companies are in now a day makes it a little harder to coordinate a very effective purchasing strategy. There are many factors that have to be taken into account when a company is dealing with suppliers in different countries. The two risks involved are political risks and economic risks. The economic risks deal with the currency changes, the fluctuation of the countries current currency compared to the American dollar. The political risks come from dealing with a company in another country and there political affairs.


Problem Resolution


The problem resolution began when Microsoft hired Don Jones to help out with the procurement strategy. The first thing that Don Jones and his procurement staff did was develop a set of online tools for use by the employees of Microsoft to buy indirect goods and services. Microsoft has online tools that let employees pick up day-to-day things that they need like PC’s that are replaced quite often at Microsoft. Microsoft keeps the technology that it uses updated.


MS Market


One of the online tools that is used is MS market. MS market is the foundation for Microsoft’s purchasing system. The MS market system allows company employees to buy goods and services from suppliers worldwide. With MS market Microsoft employees have the authority, when buying goods, to set spending limits. According to Don Jones, “Our online tools are so advanced that we pushed the buying function out into the business units.” Microsoft gives its employees in each business units the power to find suppliers that are low cost. According to Don Jones, “ Orders don’t flow through procurement, nor do we select all suppliers for the business. What we do in procurement is guide employees to do the right thing.”


Microsoft has 7 separate business units inside the company. The seven units are Client, Server Platforms, Information Worker, Business Solutions, MSN, CE/Mobility, and Homes. Usually on average these seven units spend about $10.5 billion annually.


Global Purchasing


The things that Don Jones and the purchasing department are doing now to decrease costs are pretty big. The first step that purchasing is working on is increasing the worldwide purchasing staff that Microsoft has by 50% in 18 months. This includes hiring experienced purchasers like when Microsoft hired Ken Litton. Ken Litton was the former vice president of sourcing at Rockwell International. Microsoft also has hired Winston Smith; Smith was the supplier diversity director for AT&T. Both of these guys have a lot of experience in the purchasing and supply chain field.


The second step that Microsoft has taken is to strengthen the reporting systems of purchasing in different countries. For example some buying groups that are in Asia report directly to the head of purchasing Don Jones. It is like this in all countries that Microsoft has buyers in.


Microsoft has been working on a few things to cut even more costs and to help out its purchasing department. The first is enhancing MS Market and starting up a new program called MS Spend. MS Spend is a program that will capture spending activity by United Nations Standard Products and Services Code of each business. The second thing Microsoft is doing is introducing MS Vendor Program. MS Vendor Program is a supplier management tool; it helps bring together a wider base of the companies suppliers.


Suppliers


A big part of what Microsoft has to buy is print and packaging for its products. Currently Microsoft is buying print and packaging for its X box, Windows, Office, the mobility group and the Great Plains division. On print and packaging alone for these divisions Microsoft spends $5 million annually. Microsoft was able to cut $0 million in costs by just finding the right suppliers. Microsoft had 15 suppliers for print and packaging and it was able to cut this down to about half. There have been a few other things that have been used to cut costs by reducing the amount of suppliers. By bringing together the purchasing of blank compact discs Microsoft reduced costs by $1 million dollars. One individual business unit was paying $1.0 per compact disk while a different business unit was only paying $0.0. When Don Jones came in and brought the purchasing units together and consolidated most of the practices Microsoft really started to cut costs.


Purchasing Council


A major change that Don Jones made when he came to Microsoft was to set up a purchasing council. The purchasing council consists of key decision makers and budget watchers in each of the seven business units. The council comes together about once a month to discuss the purchasing strategies that each business unit is using. The council also discusses business goals and then it also talks about how to align the purchasing strategies with the business goals. The council also goes over new purchasing strategies and supplier scorecards, which purchasing uses to rate suppliers.


MS Market


MS Market is a very useful tool that really helps out the purchasing department at Microsoft. MS Market is Microsoft’s computer system that places orders electronically with suppliers. MS Market gives Microsoft an easy way to add new suppliers to the database. A supplier only needs to fill out a questionnaire and they will be in the system. The best part about MS Market is that as soon as an employee types what it needs into the system, the system matches the purchase to the best supplier for the job. MS Market is used mainly for indirect goods and services. MS Market is used to purchase $6.8 billion worth of products or raw materials annually.


Microsoft also has a Microsoft Vendor Program or MSVP. MSVP provides standard contracts for Microsoft to do business with its suppliers. Microsoft uses $5. billion of the companies spending to buy supplies from suppliers in the MSVP system.


Supplier Scorecards


Another key to cutting costs for Microsoft is how it rates its suppliers. Microsoft does not want to waste its money on bad suppliers so it keeps very tenuous records. When a supplier becomes unfavorable in the system he is then dropped. Just up until a little while ago procurement was not the ones who measured supplier performance. When Jones came to Microsoft he made it a priority that purchasing rated the suppliers since it was the department that worked with them. The purchasing department came out with scorecards to rate the suppliers. Microsoft spends about $10 million annually to measure the suppliers. The measurements on the scorecards are quality, value, service, innovation, delivery, organization health and supply chain management. According to Don Jones, We’re connecting everyone in the company with the best suppliers through tools and practices and then measuring performance of those suppliers. We are going to expose that rating to everyone at Microsoft who may want to use that supplier in the future.”


The scorecards not only have helped out Microsoft with picking the right suppliers but it also helps out the suppliers. The suppliers now know what they have to concentrate on and do well on. Before the suppliers were not really sure what Microsoft was judging them on. The suppliers didn’t know if they were being chosen for what they did or if people just picked them because they were biased towards them.


Analysis


Microsoft Market


Microsoft is such a big company that it needs to have an electronic or computerized system to order its goods. Most companies can’t have a system like this because it costs too much money. The system that Microsoft has, Microsoft Market, is like an ERP system. An ERP system lets companies control and manage inventory. Some ERP systems can also give supplier selection assistance, supplier performance measurement and control. These are a few things that Microsoft Market has that are in ERP systems. The implementation of Microsoft Market has already been done so the implementation cost has already gone through. According to Purchasing and Supply Chain Management,” Although ERP systems hold out the promise of improved integration, some companies is finding the implementation process to be expensive, and in some cases ineffective.” This has not come into play for Microsoft yet the system seems to be doing exactly what Microsoft thought it would. It is helping them pick better suppliers, and it is making it easier to purchase everyday products. The fact is Microsoft is a very big company so it needs the computerized system. Supplies come in and out of Microsoft everyday and a computerized system cuts down on a lot of paper work. Another reason that Microsoft Market is a great idea for Microsoft is the fact that not only can it work with individuals who are internal to Microsoft but suppliers that are external use it as well. According to Supply Chain Management and Purchasing, “As supply chain members increasingly work together, integration must occur between different functions that are internal to the organization as well as between parties that are external to the organization.” A good way to do this is through Microsoft market not only can Microsoft have internal accountants, purchasing, manufacturing, engineering, marketing and logistics involved but it can also bring together suppliers, warehouses, and transportation providers as well.


Suppliers


I feel that the first good idea that Don Jones had was to set up the computerized system for purchasing. The best idea that Microsoft had was to cut down on the amount of suppliers it had. Like I stated with material from the article Microsoft had too many suppliers supplying the same items. Microsoft had 10 to 15 suppliers to supply blank compact discs at many different prices. The fact that Microsoft cut the suppliers down to the best and most reasonably priced and used them for the same products time and time again really helped to cut costs. When one supplier has compact discs for $0.0 and another for $1.0 and sometimes part of a department is ordering from the supplier who has the higher priced one the costs will be higher then it should be.


When Microsoft cut the supplier field down it was able to work with certain suppliers. I feel that Microsoft should pursue collaborative relationships with its suppliers. According to Purchasing and Supply Chain Management, “A firm can gain many advantages by pursuing closer relationships with suppliers.” A few advantages that the book says is the development of mutual trust. If Microsoft builds trust with its suppliers it can share data with them to see what area it could cut costs even more. Microsoft can work in a joint effort with its suppliers to help cut costs. Purchasing and Supply Chain Management says that another advantage is the opportunity to evaluate which suppliers should receive longer-term contracts. Longer-term contracts could help Microsoft and its suppliers come up with new technological ways to cut even more costs. Having a collaborative relationship will also help with quality problems. According to Purchasing and Supply Chain Management, because suppliers play an important role in an organization’s overall success,” it is not difficult to see why choosing only the best suppliers supports higher performance.” This is the reason Microsoft cut down its suppliers it wanted only the best. Most of the suppliers that are used are relatively large and give Microsoft plenty of options.


Worldwide Sourcing


Microsoft went into worldwide sourcing which I feel is a very good idea. There are a couple of risks that go along with sourcing worldwide and they are political risks and business risks. According to Purchasing and Supply Chain Management the four reasons companies source worldwide are to achieve cost/price benefits, to ensure better quality, to gain access to technology, and to access the only source available. A couple other reasons that the book points out is to introduce competition to the domestic supply base, satisfying counter trade requirements, reacting to the sourcing patterns of competitors, establish a presence in a foreign market, and increased supplier responsiveness. These are all good reasons for Microsoft to source globally. Microsoft already had very good control of the market in the United States so it was a good idea to source globally so that it could get into new markets.


Microsoft I feel has done a very good job with the problem of cutting costs. At the same time it cut costs it tremendously improved its purchasing department. Before Jones came to Microsoft the purchasing department was a mess. Even though Microsoft has improved and has cut some of its suppliers down I feel it is time that it starts to build collaborative relationships. It really helps out the supply chain when a company can get help with certain problems from people that are involved. The key for Microsoft to become even better is to build long-term relationships to help it keep progressing.


Works Cited


Avery, Susan. “Microsoft Takes Steps to World-class procurement” Purchasing.


April , 00.


Monczka, Robert M, Trent Robert J, Handfield Robert B. Purchasing and


Supply Chain Management. P. 1-17, -5, 6-65. 00


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