I’ve spent most of my industrial career working at factories and really liked it. Process improvement work—which, when you get right down to it, is (or at least should be) the essence of modern manufacturing—must be in my DNA. At the factories I’ve worked, though, it seemed like I always had a few colleagues who would do everything in their power to position themselves for “a job at corporate.” I understand that everyone likes a promotion now and then and if you move up high enough in most organizations this usually leads to corporate. With some guys, though, it seemed like they could hardly wait to get out of the factory.
I’ve come to understand one of the reasons for this is that at least in some minds factory jobs are thought to be menial compared to those at corporate, which are considered elite. I disagree. Don’t get me wrong, I’ve held corporate positions and understand that they can play a pivotal role in organizational success. On the other hand, I’ve seen them be detrimental, quite often so when they are held by individuals with that “menial vs. elite” mindset.
There can be benefits to having a corporate supply management function. A rationale often used in support of a more centralized corporate purchasing function is the need for a company to project One Face to the Supplier. When a corporation is comprised of multiple factories there are business reasons for ensuring that interaction between them and common suppliers is aligned properly with corporate goals. There is also a need to ensure that common suppliers work with all company factories in a consistent, mutually beneficial manner. The rub, however, comes down to the question of the roles and responsibilities that corporate takes on vs. those that remain the purview of the operating units. This issue often becomes a point of major controversy within many corporations.
My experience is that consolidating control of supply management decisions at corporate can be counter-productive, especially when that group promotes itself as the company’s exclusive One Face to the Supplier entity, de-emphasizing the role of factory purchasing. This tends to set the tone of factory procurement being somehow subservient to corporate along the lines of that “elite vs. menial” mind-set I mentioned earlier. Words matter. Those who champion the prominence of a centralized supply management function typically characterize corporate jobs as being strategic compared to factory ones—which are tactical—when, in fact, the only advantage a corporate function can really point to is consolidated company requirements.
When I held corporate positions I always avoided using characterizations like this. When I worked at factories I resented such portrayals. Their use implies that the people at corporate are somehow better positioned than factory personnel to make business decisions. I recognize the need for a division of labor. But blanket statements seldom apply across-the-board and in many cases—in fact, more often than not—I’ve found factory people better positioned to understand how supplier capability will impact business operations and costs. In other words, consolidating factory purchases can sometimes be the wrong thing to do.
Factories within the same corporation often serve radically different markets. To be successful in their own market a factory may need to manufacture products with little specification or processing commonality to products produced at sister factories, or support completely different market demand characteristics. Classifying factories as tactical discounts that such differences exist or even matter. Care must be taken in setting up a corporate procurement function to not consolidate control to the point that it gets in the way of factories making good market-specific business decisions about how to best service their customers. Corporate functions that do not get set up this way can cause more harm than good. Let me give you a couple of examples of what I mean.
Regarding Product Differences
I have first-hand experience in the manufacture of tires and their processing is as close to a “black art” as exists in industry, and I’m not saying this due to the use of carbon black! What I am saying is that while it may be true that “a rose is a rose is a rose,” it is definitely not true to say that “a tire is a tire is a tire.”
Commonality across the vast spectrum of tire products exists in name only. Specifications, materials and processing all vary significantly from tire family to tire family to the point that most tire manufacturers have expertise in producing product only within a narrow niche of the total product spectrum. This means that to buy from the top tire manufacturers different types of tires must be procured from different suppliers. Consequently, consolidating tire requirements yields few, if any, economies of scale yet exposes a purchaser to an overall less capable supply chain.
I hear time and time again of inappropriate corporate consolidation of things like tires. Consolidating company requirements in the purchase of commodities like gloves may make sense, but it doesn’t with products like tires.
Regarding Market Differences
The most straightforward example in this area may be related to demand characteristics. It is widely understood that the exact same part may need to be sourced from different suppliers if the products it is used on compete in markets with significantly different customer demand characteristics. For instance, highly seasonal markets tend to require short-lead supply chains, while those with more consistent demand may not. Similarly, meeting demand in markets that cannot be accurately forecast requires suppliers with more nimble order fulfillment capability than those where forecast accuracy is more robust. Again, though, I see companies that try to consolidate requirements across factories with differing customer demand characteristics in an attempt to gain economies of scale.
What generally happens when differences in product and market are not recognized? If you’ve followed this column for any period of time you’ve probably already guessed the answer, i.e., Total Cost goes up. This occurs when suppliers with skill in processing one niche of product are asked to supply parts outside of their normal expertise. It also occurs when wastes such as inventory need to be added to account for lack of supplier order fulfillment capability needed to satisfactorily support a specific type of market demand.
There is a whole array of related nightmare stories I could relate here but the bottom line is I’ve seen many, many instances where corporate supply management put together what they considered to be really a really good buying strategy that, when implemented, ended up creating havoc—and increasing overall cost—at the factory level. The result, then, can be corporate getting good marks for lowering piece-price while some “poor schmuck” at the factory ends up having to deal with an ongoing mess resulting from a “deal” that didn’t support actual factory needs. And if I seem a bit tense here I’ll admit it, more times than I like to recall I ended up being that poor factory-based schmuck!
So what’s to be done? Should we just forget about corporate supply management and make every purchasing strategy/sourcing decision a local one? Absolutely not! There definitely is a role for a corporate supply management group at most companies. But depending on differences in product specifications, processing and markets across products/factories, there are nuances that need to be understood in setting up structure, roles and responsibilities. My last column was titled “The Consulting Game, and How Not to Lose at it.” One red flag I didn’t mention there was that in my experience outside consultants rarely understand these nuances or are even willing to admit that they are important to recognize in setting up a corporate procurement function. Setting up a corporate supply management group using a “cookie-cutter” approach can be a true kiss-of-death.
So if you can’t call on most consultants to help you evaluate whether having a corporate supply management function will benefit your company and/or to help in designing one, how do you proceed? I’ll cover the issue of how to set-up a corporate group effectively in my next article.