TCO – Strategic Sourcing with “Suppliers”
Ok, you’ve waited long enough. I’m going to give it to you straight as that’s the only way I know how. On my previous post I defined purchasing as the day-to-day tactical activity of a buyer acquiring goods or services for the organization with no real analysis, strategy or consistency. A best-in-class Procurement Organization typically saves the enterprise 2-15% throughout categories on a regular basis (conservatively); translating into a dollar-for-dollar increase in profits. Initially, and also by way of targeted projects, the results are typically much larger as formal processes are put in place and spend is analyzed, consolidated and leveraged. I have personally delivered over 40% savings in a single category! Any takers? Of course, who won’t want those savings!
So what’s the problem? Do you think leaders like me cost too much? Maybe you think your margins are just fine and you are doing well enough and you really don’t think it’s worth any extra expense. What if I told you I delivered a 400% ROI within the first three years, including systems and human resources. Would that get you excited? It gets me excited! Let me show you some of the things that a Best-in-Class Procurement Organization will do for you and your organization. Let’s start with some definitions. By now you have a fairly good idea on what purchasing is. I’ve also talked about Best-in-Class, Best Practices, and of course Procurement. Best-in-Class are the organizations that do the things (best practices) that have been proven to work and have been widely adopted among other winners in the industry, e.g., IBM, GE, Intel, Cisco, Honda, Toyota, Motorola, Johnson & Johnson, Deer & Company, and WalMart, to name a few. What all these companies have in common is a Procurement Organization functioning in a Total Cost of Ownership (TCO) perspective and a Strategic Sourcing capacity to improve margins, increase efficiency and mitigate risk for the enterprise. Wow! That was a mouth full! What happened to that plain talk? Okay, Procurement, TCO and Strategic sourcing coming up.
Procurement is a comprehensive strategic approach to the procurement and payment (P2P) of goods and services (stuff) as well as a continuous process improvement approach across functional areas. This approach drives the lowest TCO in all decisions. And like I said in my previous post, this is one of your greatest competitive advantages in the market place! So let’s take a minute to define TCO so we’re all on the same page.
TCO looks at the big picture, not just the discrete cost of a product or service. The cost of your favorite pen is not the only issue here. It’s the cost of getting it into your hand. TCO considers numerous variables across the Enterprise. For example: What are your direct purchasing costs? Most companies rarely look at this but a single purchase order can cost anywhere from $75-$150 depending on the efficiency of your systems and resources. Are you combining orders or wasting money on multiple orders when you could be bucketing more efficiently. Do you have inventory and do you know the holding cost? Are you balancing bucketing with warehouse/distribution operating costs? What is your shipping/freight costs? Do you know if you, the Buyer, are paying or is the Seller? Depending on the size of your organization it’s quite possible that you will have better leverage than the seller on shipping/freight and it will pay off big time to use your own accounts. These are just some examples; they are real and will either drive margins up or down depending on whether you subscribe to Procurement Value-Add, or traditional purchasing costs.
Your other great competitive advantage is Strategic Sourcing, so let’s look at that now. I’m a simple guy so in simple terms it means you have a defined method based on objective data that defends your decision making process. Okay, what does that look like?
A Procurement Organization with a Strategic Sourcing Process consists of the following:
- A detailed spend analysis that gives a clear picture of what you buy, who you buy it from and how much you spend with each Supplier. This is the starting point. You MUST have a system that accurately captures and classifies your spend or you will never get off the ground and will always be chasing your tail trying to figure out what you bought.
- Procurement Professionals who know their business model, asses current and future business needs, and challenge internal customers to identify opportunities for consolidation that will leverage spend, reduce costs, and shorten cycle times while enhancing quality and service.
- They understand the supply market and form category strategies that will deliver to your business model and optimize the supply chain.
- They spend the time up front to research, qualify, and develop Suppliers who will be partners in business; ones that are open and willing to share information and want to help you grow your business as you help them grow theirs; ones who are in it for the long-haul and will accept process improvements that increase efficiency, eliminate waste and improve quality (Six Sigma/Lean). They do this with formal objective tools, criteria, and scoring models across the supply chain that support your unique business model.
- They actively manage key Suppliers; writing, negotiating, and managing contractual agreements, not only for pricing, terms and conditions but to mitigate risk and exposure across the enterprise. They conduct business reviews complete with supplier scorecards that drive operational excellence and continuous improvements. They develop and execute transition plans with minimal impact to the enterprise.
You might hear these points referred to as the 7-step strategic sourcing plan. You can see I did it in 5. Plain talk and simplicity works best for me.
I would also like to point out item number 4 above which clearly defines a “Supplier” as a “partner in business”, open and possessing all the outlined attributes that mutually grow business. Unfortunately, Suppliers are not something readily available off the shelf, vendors are. Suppliers are developed by someone like me leading a Value-Add Procurement Organization to your specific business model.
Stay tuned for my next post with more plain talk as we go around the ProcurementSCM Value-Add (P2P) wheel.
Let ProcurementSCM do the heavy lifting so you can do what you do best!
See you Soon…
Steve Hasbrouck, C.P.M