Many manufacturers are still using outdated purchasing strategies from the 1980s that fail to enhance plant performance and optimize asset utilization. There is a notable gap between engineering and purchasing priorities, with engineering focused on long-term value while purchasing emphasizes initial costs, leading to dissatisfaction in supplier relationships. To achieve better outcomes, companies need to establish collaborative partnerships with suppliers that prioritize lifecycle costs and real-time performance management.

1. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN
ARC INSIGHTS
By Larry O’Brien
Many end users today employ
purchasing strategies that fail to
enhance plant performance, optimize
asset utilization, or achieve real
business value.
INSIGHT# 2003-18M
APRIL 16, 2003
Current Automation Purchasing Strategies
Fall Short
Keywords
Automation Systems, Purchasing Strategies, Supplier Relationships,
Collaborative Partnerships, Real-time Performance Management
Summary
End users today have a paradoxical relationship with their suppliers. Pri-
mary business drivers in today’s environment include maximizing asset
utilization, enhancing plant performance, and reducing capital, mainte-
nance, and operational expenditures, but many manufacturers employ
purchasing strategies and supplier relationship management strategies de-
veloped during the heyday of the 1980s. Rather than
focusing on achievement of today’s objectives, the
current environment is characterized by an approach
that relies primarily on initial cost, driving discounts
off list price, and failure to employ a lifecycle costing
perspective.
Analysis
Based on the results of a recent survey conducted by ARC, many end users
today employ purchasing strategies that were conceived in the 1980s and
fall short of achieving real business value in areas such as enhanced plant
performance, and optimized asset utilization. In many cases, these strate-
gies impede business goals and fall short of providing real, substantial
business value in today’s business climate.
Current Supplier Agreements Rely on Old Business Models
Most of the end users we spoke with feel satisfied with their supplier rela-
tionships, but almost all feel that they are not getting the most they can out
of them. Most have supplier relationships that do not maximize potential
or provide real business value. Most of the users surveyed stated that they
had formal agreements with one or two suppliers that they use exclusively.
Many of these agreements typically last for several years and provide users
with discounts on the purchase of hardware, software, and services. Al-

2. ARC Insights, Page 2
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
most a third of end user respondents, however, rely on a short list of pre-
ferred suppliers or an RFQ process only.
Out of the majority that has some sort of formal alliance or purchasing
agreement with their suppliers, most do not have what ARC describes as a
true collaborative partnership with the goal of maximizing performance
potential and asset utilization. Standard purchasing agreements, however,
do not typically address real business issues like asset utilization and RPM
implementation. Purchasing agreements address pricing, not performance.
Most Users Have Formal Alliances with One or Two Process Automation
System Suppliers
Lifecycle Cost Tops Pricing Evaluation, But Awareness Limited
Survey respondents were asked to rank the importance of several key fac-
tors when evaluating the cost of automation systems. These criteria ranged
from initial cost to increased asset utilization. Most users ranked issues
such as initial cost and installed cost as less important, while they placed
higher importance on issues such as lifecycle cost and enhanced asset utili-
zation. Lifecycle cost was ranked as the most important criterion for
evaluation of automation system price, while issues such as initial cost and
installed cost were ranked the least important.
Most respondents did not have a complete methodology in place for meas-
uring control system lifecycle costs. Most suppliers have some way of
measuring aspects of lifecycle cost, but lack a cohesive, holistic picture.
Most respondents that have methodologies for measuring lifecycle costs
2.4% 9.5%
21.4%
28.6%
33.3%
4.8%
No preferred suppliers. RFQ
process only.
Long term, formal agreement
with one or more suppliers for
systems sales.
Formal alliances with selected
suppliers.
Short list of preferred suppliers.
Formal alliances with one or
two suppliers used exclusively.
Other

3. ARC Insights, Page 3
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
did not employ them in the purchase of control systems or as a tool for
driving increased value out of supplier relationships.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Initial Cost Installed Cost Lifecycle Cost Return on
Investment
Return on
Assets,
Increased Asset
Utilization
Increased Plant
Performance
Not Important At All
Not very Important
Important
Somewhat Important
Very Important
Extremely Important
Lifecycle Cost and Increased Plant Performance Are Top Concerns for
Users When Evaluating Control System Price
Time Investment Correlates to Higher Satisfaction
Most of the users that reported high levels of satisfaction with their suppli-
ers were first able to form a well-defined strategic relationship with their
suppliers and were able to devote time to maintaining that relationship
once it was established. Ongoing relationship maintenance is essential.
Users who have little or no time to devote to their supplier relationships are
generally not satisfied with them.
Relationships between suppliers and users should be symbiotic. Collabora-
tive partnerships are high maintenance and can be more time consuming in
the long run than the traditional competitive bidding process. In the final
analysis, however, the time you spend managing the relationship should
result in increased productivity, return on investment, and enterprise opti-
mization. Conversely, the time you spend in a competitive bidding process
may result in a lower purchase price but does not guarantee a higher return
on investment.
Rift Remains between Engineering and Purchasing
Many users surveyed regretted the persistent rift between engineering and
purchasing organizations. Engineers continue to be concerned with auto-

4. ARC Insights, Page 4
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
mation strategy development and driving more value out of the control
system, while purchasing continues to focus on initial cost. Purchasing is
more concerned about what will happen in the next fiscal quarter while en-
gineering is concerned about the next several years.
For purchasing and engineering to find
common ground, it is necessary for both
to look at the total value that automation
brings to the enterprise versus the initial
cost. This requires adoption of a lifecycle
costing methodology, cost/benefit per-
spective, and ultimately adoption of real
time performance management (RPM) to
measure automation performance and its
impact on the enterprise.
Recommendations
• Achieving sustained value with supplier relationships is a major chal-
lenge moving forward. The users most satisfied with their supplier
relationships put in time and resources to maintain it. Collaborative
partnerships require the attention of user and supplier alike.
• Collaborative partnering involves working with suppliers to drive in-
creased performance out of plants. Collaborative partnerships should
be viewed with an eye toward achieving maximum asset availability
and implementing Real Time Performance Management (RPM).
The data presented in this Insight is the result of an ongoing survey of
automation users and is part of a new ARC Automation Benchmarking
Service. Since you are an ARC client, you can respond to this survey and
view results of the complete survey online by going to
http://www.arcweb.com/myarc/home/webcast/websurvey.asp.
Please help us improve our deliverables to you – take our survey linked to this
transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For further
information, contact your account manager or the author at lobrien@arcweb.com.
Recommended circulation: All MAS clients. ARC Insights are published and
copyrighted by ARC Advisory Group. The information is proprietary to ARC and
no part of it may be reproduced without prior permission from ARC.
End User Respondents Estimate Initial Cost Is
Less than 32 Percent of Total Lifecycle Cost
31.9%
14.1%16.4%
18.1%
13.2%
3.1%
3.2%
Initial cost
Installation,
Commissioning, & Startup
Operational Phase
Maintenance
Upgrades
Decommissioning
Other
31.9%
14.1%16.4%
18.1%
13.2%
3.1%
3.2%
Initial cost
Installation,
Commissioning, & Startup
Operational Phase
Maintenance
Upgrades
Decommissioning
Other