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Background
Jack Welch is credited with saying, “Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”
Every manufacturer has the need to procure something from somebody or some company. Therefore, every manufacturer has suppliers and most have staff responsible for procurement.
Building on Welch’s thoughts, the role of purchasing can be explained as follows: Good purchasing organizations understand the vision for the business; they develop and manage supply chains capable of relentlessly driving that vision to completion.
Strategic supplier management, or strategic sourcing, is the process of developing and managing a supply chain capable of supporting a company’s vision and strategy.
However, achieving this alignment is not easy.
- Corporate visions can provide conflicting messages for purchasing. A company may strive to be a technology leader while simultaneously experiencing pressures from low-cost producers.
- Economics and competitive pressures change significantly. While company visions should be rather static, plans to achieve them need to be flexible.
- Suppliers will have visions for their businesses that are not 100 percent in alignment with your company’s vision.
The Benefits of Building a Supply Base that can Support the Corporate Vision
A strategically aligned supply base efficiently leverages the resources of suppliers that can best help your company achieve its vision, and provides extended benefits to those suppliers. A strategically aligned supply base can also help lower the cost of products and reduce investments required to develop new products or expand into geographic regions.
Here are two examples:
One: A component manufacturer had a vision of expanding into Asia, with manufacturing locations dedicated to support Asian manufacturers with whom they did not have business.
A traditional first step would have been to establish a sales office to develop and sell to potential Asian customers. Instead, they led with purchasing. Export sources were developed to support the North American business units, which produced the product they were targeting to sell to Asian customers.
This effort resulted in immediate savings for the company and helped demonstrate its commitment to the region and their capabilities to the Asian customers.
Five years later, the company won a business award and built an Asian facility. Since the supply base for the new facility had already been developed, minimal supply issues arose during launch of the new facility, which quickly became the company’s most profitable and fastest growing facility.
Two: Using a traditional and price focused sourcing process, buyers in a $3 billion company always waited on engineering to finalize prints before they could market test. Since engineering had already completed most of the design and testing, optimizing the design for the selected suppliers’ manufacturing processes was always difficult.
The company implemented a strategic commodity management process designed to: 1) reduce the number of suppliers within the commodity from seven to three, and 2) implement an open book costing process that would enable purchasing to include actual cost to manufacture in the selection of the chosen three suppliers.
Understanding the chosen three’s manufacturing cost now enabled the buyer to appoint a supplier to work with engineering on new products before design work began. Thus, costs were optimized in the design process and prices were established using open book cost models once the designs were finalized.
The Steps to Strategic Commodity Management
The first two steps of strategic commodity management are designed to identify strategic commodities.
Step 1: Understand Company Strategy
The reactive leader of a purchasing organization waits on his manager or the CEO to faithfully articulate the company vision. Unfortunately, not all corporate leaders are Jack Welch. When we combine the inarticulate vision with the reactive purchasing leader, strategic supply base management will not occur.
The proactive purchasing leader will seek to understand the priorities/visions of the company, even if it is not effectively communicated by its leadership. For example, the inarticulate CEO states, “We are going to build a plant in India. Get the supply base in line.” The reactive manager hears these words and goes off to implement. The proactive leader finds ways to ask, “What are we trying to do in India: support the local market; develop an export hub, or both? Has a growth plan been developed? What products will we focus on?”
The proactive leader makes sure he understands the corporate visions at the detail level required to plan and execute strategic alignment.
Step 2: Assess and Identify the Commodities with the Highest Impact on the Strategy
When everything is important, nothing is important, according to an old management axiom that stands the test of time. Important things take resources, provide benefits and need management’s attention.
When it comes to strategy, the axiom would state: When every commodity is strategic, no commodity is strategic.
- A multibillion manufacturer decided to implement a vision to move manufacturing to Mexico and become a low-cost producer.
The reactive purchasing organization moved in lock step:- They developed a plan to procure all materials in Mexico without assessing each commodity’s impact on the vision of
becoming a low-cost producer. - They did not look at the cost of procuring raw materials in Mexico when the idea was initially in development. Result: In
Mexico, the acquisition cost of the raw materials and the resale of scrap had negative impacts on costs, offsetting the labor
cost savings. - The view that all materials had equal impact to the low-cost vision meant that precious resources were spent to localize
items that would not improve cost structure, while the efforts on the truly important items lagged.
- They developed a plan to procure all materials in Mexico without assessing each commodity’s impact on the vision of
Proactive purchasing organizations segment spend to identify the commodities with the highest impact and easiest implementation, and develop phased commodity-by-commodity plans commensurate with the costs and benefits.
Manage Identified Strategic Commodities
Once strategic commodities are identified, each should be managed using a process with the steps visualized below:
Build the Team
- Select the right team members. Understand which organizations are most impacted by the vision. Those organizations should be included in core team membership. In the Mexico example, purchasing involving operations in the strategy development should have been obvious. However, the impact on customers, which could necessitate sales involvement, is not clear and requires investigation.
- Provide the team with clear objectives. What are the must haves, should haves and could haves for the effort? What is the timing?
- Ensure they have the resources to deliver.
Understand the Corporate Vision
The commodity team needs to understand the corporate vision and develop a clear understanding of how the commodity can:
- Help support the vision: What does success look like for this commodity? Where do we want to be in five years?
- Present risks to the vision: How can the commodity derail or delay implementation of the corporate vision? What can be done to prevent?
Develop an Ideal Supplier Profile
Most companies have a set of baseline criteria for quality, delivery, commercial and technical performance that apply to all suppliers of all commodities and measure supplier performance using metrics or scorecards.
The strategic purchasing organization moves beyond these to identify the role each commodity can play in achievement of the company’s vision, and what characteristics are required of the suppliers of strategic commodities to support achievement of the vision. Purchasing will develop an ideal supplier profile by engaging in a process that makes them ask:
- If our company vision is to be A, B and C, what role does commodity X play in the achievement of this vision?
- What would the ideal supplier look like in this commodity to help us achieve this vision? How could our suppliers help? What characteristics would the suppliers need to be successful in assisting?
Once the characteristics of the ideal supplier are developed, evaluation criteria are established for the key characteristics.
Evaluate current and potential suppliers
The team looks at current and potential suppliers using the metrics developed. In most cases, they find that no supplier is really ideal in all aspects; this requires the team to prioritize the characteristics. This is a good time to get feedback from upper management.
Develop the commodity strategy
The better the team has done on the preceding steps, the easier the development of the actual commodity strategy. A commodity strategy should include:
- A clear statement on the current and desired future state
- Identification of the benefits that will occur from reaching the future state
- Action plans
- Metrics to manage the progress of the action plans and the achievement of desired results
Implementation and continuous management
Many organizations create a team for the development of strategies, and then leave purchasing to implementation and continuous management. This is a mistake. While it is purchasing’s responsibility to lead the effort, implementation, evaluation of results and inevitable adjustment of the action plans, all need the same level of continuous cross functional involvement.
Summary
While the actual steps for commodity management will vary, proactive purchasing leaders work to understand the vision for the business, develop and manage supply chains capable of relentlessly driving it to completion.
Jeoffrey Burris is Founder and Principal of Advanced Purchasing Dynamics, a provider of market-leading solutions to streamline all facets of manufacturers’ procurement and purchasing operations. Mr. Burris founded APD after spending 20 years in the automotive field. A noted builder of high performance teams, Mr. Burris led purchasing staffs at Ford Motor Company, Metaldyne and Intier Automotive Seating, where they were able to consistently save money on procurement costs and significantly improve related processes. Additionally, Mr. Burris became a successful global manager, running profitable facilities and joint ventures in India, Korea and Mexico.
In 2004, he founded APD to offer optimal methodologies for true cost model engineering: approaches to evaluate global sourcing options while performing precise, customized risk and opportunity assessments for valued clients. Mr. Burris believes in forging a better, more collaborative relationship with suppliers and his techniques improve the entire organization, not just the purchasing department. He remains a key figure in the world of procurement and global sourcing. He can be reached by email.
