For Procurement Teams, Keen Analysis, Intelligence and Internal Collaboration are the Keys for Controlling Costs as well as Risks

Henry Hwong, VP of Product Marketing and Allison Jeannotte, Director of Corporate Communications for Reardon Commerce called Supply Chain Matters attention to a recent “pulse survey” conducted among attendees at the recent Institute of Supply Management (ISM) annual conference.  The survey is rather timely, in that it uncovers the need for sourcing and procurement professionals, in light of current global supply chain developments, to possibly modify some of their current thinking. The context is for both indirect and direct procurement activities.

As noted in the press release, the survey points to where procurement will look for the next layer of cost savings:

• Nearly half (44 percent) believe more spending should be under the control of procurement and that controlling off-contract purchasing will make the biggest dent in purchasing.
• A smaller segment, 28 percent, indicated that enterprise-wide visibility into spending is the key to keeping costs down.
• A general consensus (60 percent) believed that consolidating the supply base was at the top of the procurement agenda.

Unstated and hopefully implied, is that in these current times of broadly extended global-wide supply chains, the ability for differentiating strategic, tactical and indirect material spending is more important than ever.  While procurement can’t control what it cannot see, control comes with other broader responsibilities that include the balancing of cost control with other business needs such as risk avoidance.

The recent tragic earthquake and tsunami that struck Japan has been a clear wake-up call among senior executive and supply chain communities.  Companies and suppliers, who initially thought that their supply chains would not be impacted, came to discover later that the visibility to the lowest tiers of supply were lacking, and these organizations were indeed impacted.  Companies that felt assured that key parts were not at risk because of single-sourcing discovered that their context of key parts did not extend far enough down the supply chain.  The headlines of supply disruptions involving Japan included epoxies, low-cost but required electronic components, resins, paint chips, and other components.  And as companies scrambled to find alternative sources of supply, the concept of reserving capacity for loyal and existing customers played out as usual.

In the past, procurement teams were very successful in mining cost reduction opportunities by operating on a principle that the tighter the control and oversight, the more leverage that could be gained in extracting cost savings.  That made the CFO very happy, but might have caused some business units to be a bit more innovative in rogue sourcing and hiding spend.  Today however, supply chain management is taking on a more strategic and risk-aware perspective, where agility, the ability to deal with constant variability and respond to events and opportunities in the market are the new table stakes for competitiveness.

Supply Chain Matters advises procurement teams to turn their energies towards more internally-focused collaboration among product development, sales and operations planning teams.  Strategies for direct and indirect procurement need to remain differentiated, with different sets of goals.  Every component or part that makes-up your finished products need to be analyzed for supplier coverage, capabilities and risk potential.

Rather than a broad swath of compliance and consolidation, the message of these times is keen analysis, intelligence and internal collaboration for achieving  broader business goals along with spend reduction.

Bob Ferrari

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1. Andrew Traill says:

   June 7, 2011 at 5:20 am

   It is good that you raise the issue of risk in the supply chain. Collboration between the parties in the chain and not excluding internal stakeholders will help manage out those risks; but make sure collaboration also includes the guys and girls procuring the freight and logistics services and those ensuring trade compliance. If you leave these people out (as too often happens) then any number of surprises may hit you – longer than expected lead times due to slow steaming, delays at port of export due to security checks because someone did not provide the right information, unexpected rate or surcharge increases, roll-overs (i.e. cargo left standing on the quayside) because a surcharge was not paid, or preference given to higher rate-paying cargo when demand for space out-weighs available capacity, shortages of containers or truck drivers, etc. Trade compliance managers can also provide opportunities for big supply chain savings by exploiting to their full potential the various duty relief schemes or trade facilitation measures, as well as avoiding big fines for unintentional non-compliance. Leave these people out of the collaboration strategy and the business will be exposed to potentially massive risks.