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Reducing Costs in the Supply Base

Organizations all too often attempt to drive costs out of maintaining the supply base by looking for a simple technique or tool which will serve as the panacea for success. The solution is not quite that simple. This article identifies a few issues that need to be addressed prior to developing and implementing specific tools.

While it takes a grasp of numerous issues to facilitate an understanding of supplier costs, two in particular are recurring and consistent across companies: organizational culture and the degree to which weve been trained to develop and understand costs, and how these will be applied to the supplier.

It is not enough for companies to tell individuals to reduce costs or determine a fair and reasonable price without proper support, training and a willingness to “buy into the program.” Individuals often feel uncomfortable in asking suppliers for cost information, as they may perceive this type of question to be personal and proprietary. We often find that the main reason people are unable to secure supplier cost information is the unwillingness to ask or not knowing where to look for the information. People are often uncomfortable looking for cost information, hard copy or electronic, as they are not sure which costs are relevant once the information has been located. We have also found that when suppliers do submit cost information, supply management professionals may be unsure about how to interpret the data or may not know to what standard the information should be compared.

One of the most frequently asked questions throughout my 44-year-long career has been, “Should supply management be centralized or decentralized?” Our answer to this question has consistently been, “Yes.” While many find this response to be humorous (particularly experienced professionals), the fact remains that organizational structure does affect the degree to which supplier costs are understood and used beneficially within an organization.

Companies that have been historically or culturally centralized will have the potential to better understand enterprise-wide supplier costs, and will be in an excellent position to leverage this information. Companies that have been historically or culturally decentralized will face numerous problems in reducing supplier costs and will ultimately not be able to optimize their positions. The optimal solution for these types of corporations might be to centralize at the divisional level in order to have some leverage. In some instances, this may lead to further and future centralization.

More and more companies continue to use organizational structures that divide supply management into strategic and tactical activities. Larger organizations may have the resources to have people specializing in each area, while the smaller organizations have individuals who are responsible for both activities. In some cases, companies ask the supply management professionals to be strategic and yet pull them back into tactical activities on a day to day basis. In either case, the two areas need to be integrated to project a unified image for the company. We often find in larger corporations that strategic personnel are trained to be very aggressive, perhaps even abrasive, while the tactical people are asked to clean up the mess on a daily basis. Top management needs to address one complex question, “What structure and culture is needed?”—and then see that the support is provided.

Strategic thinking requires an understanding of the market – the ability to think globally, while the tactical participants are asked to manage locally. Strategic personnel must have a conceptual framework and methodology available to understand supplier costs. They must be knowledgeable of the commodity, industry and potential suppliers and not just focus on a single end price. This is accomplished by researching all aspects of the industry, including financial statements, industry-specific governmental data, press releases, current news and the evaluation of price trends. The market structure for the supply chain may change dramatically – from monopolistic to highly competitive to oligopolistic – and the strategic professional needs to understand the ramifications of these changes throughout the supply chain.

Tactical people need to be trained to observe the more immediate changes in suppliers and to understand the meaning of each. For example, have there been changes in suppliers’ performance? Is there a need for more expediting? Are suppliers suggesting the need for quicker payment? Has tracking become a larger issue? Suppliers often ask tactical supply management staff questions regarding company operations.


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