Supply Chain Solutions No. 47 – Strategic Sourcing Drive Cost Reduction.
Delivering strategic sourcing improvement doesn’t just come from finding new suppliers, it starts internally with understanding the business strategy and direction, market intelligence on competitors and customer direction and drilling down on historical information on category procurement to know where you have been. Once armed with this information on where you have been, where you are going and the competitive landscape, you will only then be able to form important initiatives.
Understanding an organisation’s 5-year roadmap goals and objectives together with the strategy surrounding how the supply chain will support that roadmap, sets the core direction for strategic sourcing. This path needs to be supported by market intelligence to ensure the latest competitor and customer best practices and advances are considered to remain at the forefront of service delivery, continually providing value is generated to the businesses clients.
The nuts and bolts of delivering initiatives is through understanding purchase history. There must be a well-structured database with consistent category and sub-category commodity information to drill down from, analysis of information will give data metrics of suppliers, categories, product ranking, and yearly price variance. Focus on percentage price change targeting significant deviations, will give your low hanging fruit to target.
Focusing on top spend areas will certainly drive TOC reduction, but more often than not where there is large pricing variance, there may be ways to make a significant improvement in areas such as; re-categorising commodities with similar sub-straits and suppliers to leverage spend. These spend areas may be languishing due to focus in other sectors, or commodities have been incorrectly spec’d making them untenable from a market perspective.
Understanding category spends, is the primary leverage to impact the total cost of ownership and how to drive improvement through strategic sourcing supporting the business vision. The process is not instantaneous, more often than not several tactical changes are necessary to deliver a full initiative.
Develop a process of continually monitoring and evaluating spend data, how actions have impacted results to create a continual improvement environment through data and metrics.
Establishing a dashboard is a good way to manage metrics versus measuring the success of initiatives. Dashboards need to highlight metrics that monitor projects ensuring one action doesn’t create wins on one metric and loss on another. Example; reduced commodity cost generates negative purchase price variance PPV, but warranty returns increase due to poor quality, or an inventory reduction program to reduce capital causes greater cost in inbound and outbound freight due to smaller shipment sizes with higher frequency. Good metrics ensure real TCO reductions are realised.
Before moving initiatives to suppliers, ensure that the right management tools, e.g., Dashboards are in place that measure and translates actual results.
ID Global Concepts are experts in supply chain management. We add value to your supply chain through consultancy or management contract to ensure the business has the best practice systems that are the right fit for your business, customer and meet your value expectations.
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