In Win-Win Sourcing by Bill Jackson and Michael Pfitzmann in Booze Allen’s Sourcing Reloaded, the authors define knowledge-based sourcing as an approach where manufacturers and suppliers share a long-term commitment to improving each other’s capabilities, starting by working together to eliminate wasted effort and other inefficiencies. They then highlight the Honda Motor Company approach to contract formation. The executives of each company come together in a room, put their concerns on the table, write their proposed actions on a whiteboard, discuss them, and when everything on the whiteboard is agreed upon, the meeting is over. The contracts are typed up, printed, signed, and the contract is executed.
It has many benefits. For example,
- there is no wasted effort in months of back-and-forth point-counterpoint negotiation
- openness and trust is established up front
- action plans are defined day one
- teams can focus on building value and sharing knowledge
Instead of being at odds, the two sides collaborate openly to lower costs and raise overall performance, with the expectation that this mutual effort will continue over many years and benefit both companies. The focus is on value creation, and not just the lowest price. Considering that the lowest price is rarely the lowest cost when you consider transportation, reliability, quality, and “value” that you can charge a premium for, the approach certainly makes sense. That’s why the knowledge-based sourcing model traditionally outperforms the traditional bid-based model and one of the reasons why Honda and Toyota are not in the same straits as their American counter-parts.
But we all know that there is no silver sourcing bullet or universal sourcing model that will always work. So when and where should you use it? I believe it really comes down to what are you buying and the faith you have in your supplier. Are you buying raw material or finished product? Commodity or Premium Product? Production or Value-Add Design? I also believe that it should be part of a multi-step sourcing process and not just the go to method. A deep relationship is only going to benefit both parties if it is a good match and your supplier is going to be around for the long term.
Basically, I think it’s just another method instead of “sealed-bid” or “e-auction” as part of a multi-round process. If the category you are sourcing could benefit from the approach (i.e. it is of sufficient complexity and there is an opportunity for joint value creation), then I would start with a two-step RFX process. First, I’d do an RFI to find out what suppliers have the potential to meet my needs and then an RFP to find out how, and in what expected price range. Then I’d take the best RFP and stat the knowledge-based sourcing negotiation. If it went well, there’s my supplier. If it didn’t, next supplier on the list. Thoughts?