Cost Reduction and Value Enhancement are important messages, but if the CEO/CFO aren’t smart enough to understand the message, or don’t believe the message, start by focussing on their vanity. Specifically, as this recent CPO Agenda article on the multiplier effect points out, a CPO should focus on how the CEO and CFO can use Supply Management as a growth and career-enhancement ‘lever’. Money saved through the traditional tactics of aggregation, rationalization, negotiation, and optimization — core tools in the Supply Management toolkit — drastically increases profitability. And since increased earnings lead to market rewards, the CEO and CFO can look forward to accolades, and commiserate rewards, in their annual review. With little effort on their part.
Remember to point out that, without solid supply management, the company will be giving away 30 cents on every dollar that it could be keeping, and using to fund market expansion efforts in developing economies. Expansion efforts that will be key to continued corporate success given the stagnant sales environment in most of the developed economies. So appeal to their vanity. The important thing right now is to get the support the organization needs to take its supply management to the next level.
Monday’s post introduced us to Knowledge Based Sourcing (KBS), Booz Allen’s entrance to the Next Generation Supply Management Arena. Yesterday’s post introduced us to the philosophy of the KBS approach that is focussed on gaining an increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, to gain an ongoing business advantage. This philosophy revolved around a four-step continuous improvement cycle that started, and ended, with Cost Model Generation.
Today’s post is going to drive into the five-step process that is used to generate the cost models that drive Knowledge Based Sourcing.
- Engage Suppliers
Introduce them to the KBS methodology that will be used to drive the supply management process going forward. Explain the benefits to both sides and review the promises that KBS makes to the supply base. Make sure they know that the goal is to reduce underlying cost (driver)s, not their profit, and provide continual advantages to all parties going forward.
- Collect Cost Information
Start with conference calls to validate cost component templates and starting costs. Follow-up with on-site visits to validate general ledger information and confirm cost information with controller/CFO.
- Develop Starting Cost Models
Detail component raw materials and processes required to build the product from the component level upward. Then identify a best-in-class cost structure and operational model based on market research. Finally, evaluate impact of cost drivers and fine-tune the model appropriately.
- Calibrate Cost Models
Test the sensitivity of critical assumptions, internal demand scenarios, and cost models against current products. Include other TCO/TVM parameters as appropriate (to account for defects, brand power, etc.) and fine-tune the model(s) as appropriate.
- Communicate Gaps
For each supplier, provide cost element performance breakdown detail, focussing on those areas where the supplier is weakest. Classify the savings opportunity based on projected spend/volume, and then work with the supplier(s) to create collaborative action plans to close the gap.
Once the gaps are identified, the Supply Management department works with the supplier to reduce costs. This often involves the identification of appropriate lean manufacturing techniques to decrease setup time, reduce process steps, reduce delays between process steps, reduce variation, reduce manufacturing footprint, and reduce lead-time while increasing quality and reliability (as this decreases defect rates and return costs).
It’s a solid process, and correctly applied, will yield solid results.