Daily Archives: September 24, 2010

The Governator Has Your Supply Chain In His Sights!

Are you prepared?

As recently reported in Procurement Leaders, California Governor Arnold Schwarzenegger is being lobbied to sign a bill that, if enacted, would require retailers and manufacturers doing business in California to disclose their efforts to eradicate slavery and human trafficking from their direct supply chain. A letter, signed by 32 signatories representing organizations with assets of $40 Billion under management, which supports The California Transparency in Supply Chains Act of 2010 (SB 657) has been sent to the Governor, urging him to sign the bill, which will affect approximately 3,200 global companies with revenues of more than 100 Million each.

Beginning January 1, 2001, the bill requires companies (with more than 2 Million in annual sales) to publicly disclose the policies they have in place to ensure their supply chains are free of slavery and human trafficking, including the extent to which the company uses third party verification to evaluate and address human trafficking and slavery risks in their direct product supply chains. It also requires companies to conduct independent, unannounced audits of suppliers to ensure compliance. A company that does not comply will face action from the Attorney General for injunctive relief in addition to remedies that may be sought for violating other state and federal laws.

Giving the realities of the marketplace, the pressing need for companies to be sensitive to social and ethical issues, and the support of organizations that control over 40 Billion in assets, there’s a very good chance that the Governator will sign the bill into law. Are you prepared?

(The) Strategic Sourcing (Debate Part V): My 2 Cents

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

There is lots of debate in the blogsphere about what is strategic sourcing — whether or not it’s dead, alive, or a zombie. Over the past several months, discussions with consulting firms, large/small enterprises1, and technology vendors has revealed a few items:

“It’s called Strategic, but its not used Strategically”

Strategic sourcing, for the most part is seen as a procurement function, and typically, a transactional process leveraging tools such as RFx and Reverse Auctions in a tactical manner. Some large consulting firms who offer services, treat Strategic Sourcing services similarly and mainly are utilized as “staff-augmentation”. For manufacturing organizations, where materials can be 60%-80% of cost of goods, sourcing of direct materials needs to be approached as a Supply Chain challenge. Take the direct materials at the point of consumption and work backwards in the supply-chain several tiers, and understand costs. When the Supply Chain is worked cooperatively with suppliers, an organization can ask the question “How we reduce each others costs without adversely impacting each other’s margins”?

The Starting Point

One area missing in many Strategic Sourcing processes is a clear understanding of objectives of the process, the organization, or even a sourcing event. Is the focus on cost? A quick answer can be yes, but further details shows that enterprises are balancing cost with quality, supplier performance, and a host of other factors. A large consumer goods company recently awarded contracts which were 10% higher than the previous year to a different supply-base, due to very poor supplier performance the original supply base the prior year (late shipments). The objective of that sourcing event was shifting to more reliable suppliers while keeping the cost of the category within 15% of the previous year. Therefore, a 10% increase in costs actually exceeded expectations.

How are some enterprises leveraging Strategic Sourcing? They are leveraging strategic sourcing initiatives in other areas of their business.


Product Design Process Understanding cost structures, supplier capabilities and/or metrics when in the design process and adjusting as needed pays large dividends, since changes later on during the product lifecycle can results in much higher costs or longer innovation cycles. A consumer electronics manufacturer recently had to eliminate a product launch, due to the fact that a critical component, which was cost-effective at lower volumes, was more expensive at higher volumes, thus causing the product’s profitably to fall below acceptable levels.

Manufacturing Knowing which suppliers adversely affect production can be key in understanding qualitative factors (such as cost) vs. quantitative factors such as quality. If a specific supplier is 5% less expensive than others, but, due to inconsistent quality, causes lower yields, is that 5% in savings costing 10% in other costs such as product re-do’s, overtime, or waste?

Supply-Chain Strategy. By having extended supply chains, organizations now off-load much of development and manufacturing of their products to third parties. Should organizations take back some of this manufacturing, perhaps a final assembly step, in order to drive cost savings, perform better customer satisfaction (by offering custom final assembly), or achieve other objectives?

Is Strategic Sourcing Dead?

For some organizations, it may as well be, since top-performers leverage Strategic Sourcing in manners described above, or in other ways, thereby outperforming their industry peers. These top performers also take a multi-year view. For example, in year 1, develop an understanding of the cost structure of key materials or components. In year 2, leverage this knowledge and work with those suppliers who can attack the key parts of cost, lowering the overall cost of a product, thus increasing profitability, or maintaining profitability as the organization faces price-pressures. In year 3, the organization may start to drive out cost by (1) aggregating specific key components across it’s supply-base, (2) taking positions on these components in commodity markets, and (3) requiring the supply-base to purchase these components from the commodity positions.

Thanks, Sudy.

1 Primarily Manufacturing firms in a variety of industries: Hi-Tech, CPG, Process, Oil & Gas, Pharmaceuticals, Discrete Manufacturing, etc.

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