Knowledge Based Sourcing IV – Focus Areas

Monday’s post introduced us to Knowledge Based Sourcing (KBS), Booz Allen’s entrance to the Next Generation Supply Management Arena. Tuesday’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 revolves around a four-step continuous improvement cycle that starts, and ends, with Cost Model Generation. Yesterday’s post described the cost modelling process in detail. Today’s post will conclude our series on Knowledge Based Sourcing by describing some of the focus areas of Knowledge Based Sourcing.

As per Booz Allen’s recent article in SIG on Achieving Greater Impact Through Advanced Sourcing Approaches, Knowledge Based Sourcing is focussed on developing a deep contextual and analytical understanding of several critical areas associated with the spend category, including:

  • Supply market economics and cost drivers,
  • Drivers of price in the supply market (beyond costs),
  • Variation in supplier capabilities and cost structure (and its drivers),
  • Spend category economics, including internal usage economics as well as cost/performance trade-offs, and
  • Spend category impact on broader business objectives.

An understanding of these areas is critical because:

  • without an understanding of cost drivers, the true sources of cost can never be attacked,
  • without an understanding of costs beyond raw materials, processes can never be improved,
  • without an understanding of variation in supplier capabilities, it will be difficult to determine which suppliers are high performers and which suppliers are low performers,
  • each spend category has its own distinct cost drivers, and
  • controlling cost is only one component of the overall value equation — and the customer wants value.

Furthermore, the most appropriate spend categories for KBS are those with:

  • highly volatile market prices,
  • a large number of component inputs,
  • highly variable product specifications,
  • large fixed costs in production process,
  • scale and utilization cost sensitivity, and/or
  • complex multi-tiered supply chains.

These categories are typically tackled with:

  • Industry value chain analysis,
  • Analysis of supply-demand dynamics,
  • Production process mapping,
  • Bottom up cost build up — by component, plant or supplier,
  • Parametric modelling and regression analysis,
  • Comparative factor cost analysis across suppliers and locations,
  • Analysis of scale and utilization impact on costs, and
  • other advanced analytical techniques.

And the end result is that insights beyond price materialize, including:

  • the identification of cost-advantaged suppliers,
  • the identification of appropriate order quantities,
  • the identification of trade-offs between cost and product performance, and
  • improved transparency of underlying cost drivers that drive “win-win” outcomes.

And in the end, not only does the Supply Management organization get price under control, but it is better able to support strategic business objectives which gives it stronger positioning and credibility within the organization as a whole.