You’re partof a progressive Supply Management organization that has strategically sourced the top 10 categories by spend, supplier, geography, and department. The low hanging fruit has been picked, the big fish have been fried, and you’ve even implemented a catalog-based tail spend solution to make sure all spend is at least visible, if not managed or minimally sourced. There are no more obvious avenues for big savings, yet the CFO and CEO are still screaming for savings (despite the fact that you should be focussed on working with Sales to identify low-cost value-adds and NPD to take cost out before those unnecessarily fussy and short-sighted engineers bake it in), so what do you do?

You take a hint from your forward thinking peers, start doing cost break-downs on your more expensive categories and products, and look for raw materials with a high-spend that could potentially be reduced by consolidation on behalf of your suppliers. But are the opportunities real?

Just because your organization spends $20 million on steel doesn’t mean it spends $20 million on steel. It might spend $3 million on carbon steel, $2 million on nickel steel, $4 million on nickel chromium steel, $1 million on chromium steel, $5 million on molybdenum steel, $3 million on tungsten steel, and $2 million on silicon-manganese steel. While that’s $20 million on “steel”, it’s not the same “steel”, and might require half a dozen different suppliers in an area to provide at acceptable quantity and quality levels. Not the leverage an initial spend analysis might suggest.

Moreover, even that $4 million of nickel-chromium steel might not be $4 million of nickel-chromium steel. You could easily be buying four primary grades: 1.25% Nickel, 0.8% Chromium (31xx); 1.25% Nickel, 1.07% Chromium (32xx); 3.5% Nickel, 1.5% Chromium (33xx); and 3.0% Nickel, 0.77% Chromium (34xx) in roughy equal quantities, with a few other grades thrown in. This means your “volume” leverage is at most $1 million per grade of steel. Not a huge volume leverage at the end of the day.

A cost model tells you where your money is going, but not necessarily where your opportunities are. You need to drill into the bill of materials for the product, extract the specs, and see where there is enough standardization for negotiation leverage. And then you need to work with engineering to see where greater standardization can occur so that, as new designs come in and old designs phase out, you have more and more negotiation leverage over time.

And that’s why you need good visibility into your product information, which is not something your average sourcing or procurement system captures. It’s the detailed BoM with material composition specs, fabrication requirements, and so on that really allow an analyst to identify the real raw material (or even energy in deregulated markets) volume leverage savings opportunities, not the phantom opportunities that arise when a superficial spend analysis using systems designed for indirect spend are used.

And you need this information on an ongoing basis. Just because you spent $4M this year on nickel-chromium steel doesn’t mean you’ll spend $4M next year on nickel-chromium steel. Maybe most of the buy was in cancelled product lines and the new product lines have all switched to molybdenum steel, which means that could be where the real opportunity lies — if the grades can be standardized and agreed on by the various engineering teams. With regular updates, trends can be projected and predicted, even if sales or engineering forgets to inform Procurement that a product line was suddenly cancelled at re-sourcing time.

In other words, the nature of supply dynamics is that for both real supply assurance and real supply chain savings you need detailed product information that goes beyond a cost model and even a high level bill of materials, and an ability to work with that data.

Despite the constant pressure from the CFO to squeeze every peso out of the supply chain (not penny, that’s not good enough any more, they want to squeeze tenths of a penny now), the primary purpose of Sourcing is not cost reduction — it’s assurance of supply. (And that’s why Sourcing Innovation prefers Supply Management terminology over Procurement and Purchasing, but that’s another post.)

Assurance of supply is no easy feat. Just because you do a sourcing event, identify a supplier, cut a contract, send a purchase order, and arrange a delivery date, it doesn’t mean the product is going to show up. The product might not be manufactured on time due to a a raw material shipment delay on behalf of a tier 2 supplier or a production line breakdown. The shipment might be lost, stolen, or under 3 km of water. Or, the supplier might go bankrupt. Either way, no supply.

But this is a risk that can be fairly well managed through proper supplier qualification, production tracking, shipment tracking, and dual-supply. However, a bigger risk, and one that keeps the CFO (vs. the COO) up at night is the cost control measures you put in place during negotiations to keep supply affordable so the company (knowing that there is always a ceiling to what customers will pay) can maintain profitability.

If you are in an advanced Supply Management organization, one measure you are probably taking is aggregating raw material supply needs across products and categories and buying the raw materials on behalf of the supply base as your volume can often net a better deal than individual suppliers that supply products purchased in lower volume or that use lesser amounts of expensive raw materials (like steel and rare earth metals). This measure can save an organization a lot of money in markets where prices can fluctuate 50% or more in a few months, but only if the suppliers buy off of the contracts you tell them to when they are supposed to.

But how do you insure this? And more importantly, how do you even know what they are doing? Your organization can put in the contract that they have to buy off of any raw material contracts your organization mandates and your organization can ask them to report regularly, but how does your organization really know? The account rep might report 95% compliance and claim only a few “off-contract” purchases due to the need to buy emergency supply as a result of a late shipment, but the reality could be the exact opposite. And you can ask for records, but will you get the right ones?

If you don’t have anyway of keeping tabs on the situation, and managing it to whatever extent it can be managed, it’s completely unknown. It’s the nature of supply dynamics, and why visibility is needed both into, and across the supply chain. So how do you get it? More on that later in a later post. But first, how do you know the analytics is right and the master contracts are appropriate in the first place?