Recently, Jason Busch essentially reprinted an article from the first edition of Azul Partners‘ newsletter Sparks on The Top Ten Myths of Analyst Relations over on Spend Matters. Although a very good article, I would have reprinted excerpts from regular contributor Lisa Reisman’s Aptium Global executive whitepaper on Lean Sourcing: Creating Sustainable Purchasing Savings since all reports indicate we are headed for a global economic slowdown, with U.S. growth expected to nearly halve in 2007 (from 3.3% to 1.8%), taking global growth with it (from 5.2% to 4.4%). *
Most of us realize that economic slowdowns result from reduced consumer spending and result in smaller coffers and lower profit margins as you trim prices in your attempt to maintain your market share. But what we may not realize is that from a sourcing perspective, this could actually drive our prices up, and not down as one might expect. Although historically downtowns may have been a great opportunity to extract concessions from your supply base desperate to maintain their volume when there is less market share to go around, the recent focus on strategic sourcing and, more importantly, e-Auctions in a transparent marketplace has not only trimmed all the fat there is to trim from many suppliers, but reduced the margins of some suppliers to the point where they can only maintain profitability under (very) high volumes. Therefore, if demand for their products drops significantly, they will have to raise prices to stay in business (unless the underlying commodities they require take a sharp downtown, which I would not hesitate to state is not likely in many markets with China and India still high on a global binge buying craze on pretty much everything they can get their hands on).
Therefore, as I have indicated before, e-Auctions and a myopic price focus is not going to cut it anymore, and you are going to have to start adopting a full-fledged sourcing cycle based on a TVM (Total Value Management) approach which includes sophisticated spend analysis, decision optimization, and compliance management and incorporates best-practice six-sigma processes, financing, trade management, inventory management, and lean sourcing.
Unlike stand-alone e-Auctions which caught on because of their quick-hit results (even though such results were not sustainable in the long term since three hits to the profit margin was usually the most your supply base could take and stay in business), Lean Sourcing is a long-term strategy that provides continued value to your organization over time. For many companies, it’s the next evolution of strategic sourcing where you take your TVM focus and augment it with best practice lean principles. And like any good process, it’s a journey – not a destination.
Lean Sourcing provides a number of benefits to organizations, but, as highlighted in the whitepaper, there are four key benefits that place it apart from most sourcing strategies:
- Greater buy-in from key functional areas
operations and purchasing which care about both price and performance
- Greater likelihood of implementing identified sourcing savings
- Improved quality and reduced waste
- On-going additional cost reduction opportunities via collaboration with supply partners
Furthermore, it’s not a hard journey either. The following advice (from the whitepaper) is more than sufficient to get you on your way:
- Create a Lean Sourcing processes that can be mapped and easily communicated to all team members
open communication facilitates fairness and buy-in
- Develop project milestones, deadlines, and target dates
in reality, only one thing can drive results better than accountability
- Create a team member incentive structure and compensation plan tied to process outcomes
nothing drives results from motivated (star) performers better than an incentive plan that not only rewards them for results, but rewards them more for better results
- Take a global perspective, albeit one that carefully analyzes supply risk
smart-sourcing requires you consider all the options and take the best one (sometimes that will be China, but sometimes it will be the factory down the street)
* Source: Lost in America, Canadian Business Oct 23-Nov 5, 2006.