I’m glad I read all the way to the bottom of a recent article in CPO Agenda on cutting it fine, even though I became a little discouraged about half-way through, because the response from Willem F van Oppen, owner of Provoque Consulting in The Netherlands, succinctly summarized the problem with continuously focussing on the non-strategic activity of cost cutting.
As long as companies only play to shareholder value and its myopic dynamics, procurement will not be able to successfully drive a strategic agenda of value sourcing.
There’s a limit as to how much cost can be cut. That’s why, by the third reverse auction on a category, costs actually go up. At some point, all of the margin is squeezed out of a supplier and the costs are not going to go down without a sacrifice in quality or service unless value is improved. This might take the form of increased quality (since a product that lasted longer or sold at a higher price would, relatively speaking, cost less) or better service (since service has a cost too) or it could take the form of raw material substitution or production process upgrades (since reduced production time would lower production costs). Either way, value is being added.
As Rod Wood pointed out, a key role of the Procurement function is cost management. Cost cutting is a knee-jerk reaction to a problem that often introduces more problems than it solves (when quality, service, and/or on-time delivery decreases) whereas cost management is done according to a strategic plan that balances quality, risk, security of supply, product development, and logistics. The odds of the success of the former aren’t much better than a roulette table while the odds of success of the latter are about equal to the house winning.
A great post over on the HBR blogs on Why I Appreciate Starbucks summarized some of the fundamental differences about Starbucks when compared to other multi-national corporations. These differences are part of its success story and contain best practices that can be used to improve your supply chain.
The author identifies the following fundamental differences between Starbucks and your average corporation as follows:
- it sees itself as part of a larger community,
- it tries to balance profit with social responsibility,
- it creates a “third place” between home and office where people can connect comfortably,
- it trains its employees to brew the perfect espresso in order to insure the quality of its signature product is not sacrificed,
- it doesn’t let major disruptions delay important actions and events that need to be done,
- it understands that employees feel far more committed to companies whose values and mission they find inspiring, and
- it understands that customers and clients increasingly prefer to support companies whose values are consistent with their own.
These lessons can be easily translated into supply chain organization success.
- The supply management organization must see itself as part of a larger company.
In a successful business, all of the individual units cooperate and act as one larger business unit.
- The supply management organization must balance cost reduction with social responsibility.
The media and consumer backlash that can result if the organization cuts cost by buying from third world factories that employ child labor, for example, can cost way more than the amount the organization will save.
- The supply management organization must create an atmosphere of collaboration
and provide a comfortable meeting area where cross-functional teams can meet and work together towards success.
- The supply management organization must train its employees to source the perfect bill of materials,
where cost, quality, reliability, and all other important factors to the business unit that needs the product or service are appropriately balanced and the end result is overall better than what the organization would have negotiated on its own.
- The supply management organization must be able to work through major disruptions quickly and without significant impact to overall commitments to its end customers.
The supply management organization should regularly be gathering market intelligence and updating its contingency plans and be ready to get the job done no matter what, even if it means a lot of extra elbow grease now and then.
- The supply management organization must hire an A-Team that believes in the mission and values of the organization.
A team that is not committed will never achieve the level of success as a team that is.
- The supply management organization must put the needs of the organizational units they serve between their own.
The needs of the many outweigh the needs of the few, or the one.
Follow this advice and your supply management organization is on its way to becoming world class.