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Sources of Strength

Sources of Strength

With globalization forces transforming their businesses, manufacturers are creating more powerful sourcing strategies to control costs throughout the supply chain.

As complicated as it's made out to be, applying a strategy to a business practice comes down to a relatively simple premise -- developing a good plan to reach the goals you've set out to achieve. Of course, where it gets tricky is in the details. And for manufacturing companies, those details are becoming increasingly difficult to manage as sourcing efforts spread to all corners of the world.

On one side, globalization has allowed manufacturers to dramatically reduce unit prices at the point of sale. However, the practice also has the potential to introduce a variety of unforeseen intermediary costs that, in many cases, can defeat the purpose. As a result, manufacturers are using any means necessary to refine their sourcing strategies and have a better understanding of where each piece of the puzzle should fit.

Recently this has involved not only more careful vendor selection and better management of critical supplier information, but also a better approach to cultivating relationships with their sources to form strategic partnerships, saving money and improving efficiency on both ends of the supply chain. According to Marc Tanowitz, a principal with consulting firm Pace Harmon, globalization has made sweeping changes in the way companies go about strategic sourcing.

"Manufacturers are no longer just purchasing goods from local suppliers; they're doing it on a global scale so the scope of sourcing ultimately had to change," says Tanowitz. "They have become far more sophisticated in their analysis, far more predictive about what they are going to consume, and far more knowledgeable about the global marketplace and the changes taking place that are driving prices."

First Thing's First

How manufacturers choose to approach strategic sourcing obviously changes from case to case. But invariably, it comes down to the integration of three main components: the process itself, organization and technological assistance. Going back to the 1990s, many manufacturers utilized consulting firms to get the process started on the right track. Firms would initialize the first couple of "waves" (each addressing a handful of supply categories) that were directed at areas of spend that had the best opportunity for benefit and were the easiest to implement.

More Demanding Relationships

"Supplier relationships are more intense and subject to far more scrutiny than they've ever been -- and that goes for both sides. As manufacturers, we expect them to have the right skill sets, leadership capabilities and programs in place to develop their people. That lets you know right away whether they can supply your company with what it needs."

-- Glenn Johnson,
director of supply chain optimization for IBM

Once they were on their way most companies would wean off the consultant's support and carry out the rest of the waves on their own. Of course, moving these operations in-house introduced a new set of challenges. Eventually software vendors stepped in to help optimize the process, offering advanced software solutions designed to help with rapid bidding events, reverse auctions and managing vendor profiles and access.

Today, sourcing suites from companies like Aravo, Ariba, Oracle, SAP and several others have become essential tools for manufacturers to sustain the benefits of their strategic sourcing programs. However, manufacturers still need to be cautious of jumping into a software solution without first changing their processes and focusing on the organization and all the necessary skill sets.

According to Sanjay Argawal, a principal in the strategy and operations practice of Deloitte Consulting LLP, companies are unlikely to reach the full benefit of any technology if those critical steps are overlooked -- no matter who makes it or how much they paid for it.

"Having the technology by itself doesn't do anything unless you know how to use the data," Argawal says. "You're only able to gain the true benefits of these technologies once you have effectively changed your processes. Where the technology then comes into play is by helping you sustain those benefits, because the next time you want to do this process, you're going to have easy access to the data and you'll be able to do it much more easily. Not having a robust technology solution shouldn't be an excuse for not doing a strategic sourcing program effectively."

Still, there's no denying that the right IT tools can make a world of difference. Take global hardware and software maker IBM Corp. for example. When IBM wanted to reduce inventory buffers that had become increasingly difficult to manage throughout its supply chain, they created an IT system that combined technology from outside sources such as SAP and Siebel Systems, and IBM's own WebSphere and DB2 technology. This has brought a new level of consistency to how the operation is linked with every source in the supply chain.

According to Glenn Johnson, director of supply chain optimization for IBM, once they had a powerful IT system that brought certainty to what the OEMs were seeing, the buffers came tumbling down.

"In the past, when we did have changes in the marketplace, or changes technically that we needed to make, it would cost us a large amount of money to rework the inventory, or in some cases we would actually scrap the inventory," explains Johnson. "But when you have certainty throughout the supply chain, in terms of what [suppliers] are able to transmit through their IT systems, inventory buffers decrease, your ability to change increases and your liability for those sorts of issues disappears."

The key to the system is consistency. Once IBM takes an order, it's linked into the order management process and then to the OEM vendor, who uses the same tools and looks at all the inventory in the hubs around that manufacturing site. But as much as the advanced system can be credited for the improvements to their supply chain, Johnson agrees that only the right people can allow it to truly be effective.

"It's definitely a combination of having the right processes in place and the right IT tools, but you can't discount the people who are operating them," Johnson says. "We have initiatives in place where we look for innovative ideas from everyone from manufacturing guys on the plant floor to the people working in procurement or logistics. So it is a combination of the people, the processes and the IT."

A Two-Way Street

While technology can certainly take some of the pain and strain out of your strategic sourcing plans, none of it will amount to anything if a supplier isn't willing to work with you. A good relationship gives you the opportunity to create flexibility with your suppliers, and creates a means to reduce costs at each stage of the supply chain.

Six Benefits of Better Strategic Sourcing

Strategic sourcing initiatives can offer several ways to make your supply chain more efficient, claims Archstone Consulting, including these six areas of improvement:

1. More Cost-Efficient Supply Chain. Driving costs out of the supply chain remains a key objective for many corporations, especially given the challenges of the current economy. Sourcing clearly is a major enabler of cost reduction across the supply chain.

2. Better Supply Chain Partners. Strategic sourcing helps you select the right partner with the right capabilities to help meet your business needs. It can help strengthen your overall competitive advantage and improve your partner's capabilities, whether they be logistic providers, component or raw material suppliers or other key outsourcing partners.

3. Improved Service Levels and Coordination. Suppliers that interact throughout your supply chain can provide a opportunities to define the appropriate service levels and specific roles of each partner in the supply chain. One of the biggest challenges today is the coordination and communication across partners in order to meet customer demands.

4. Improved Partner Network Capabilities. Done right, strategic sourcing can provide for reduced relationship risk through improved visibility and partner management; reduced costs across the network through joint-process improvements; and provides for increased collaboration and long-term planning through improved communication and aligned processes and incentives.

5. Enhanced Flexibility and Responsiveness. Today, the competitive advantage of most manufacturers is highly dependent on a vast partner network -- both inbound and outbound to the customer. Strategic sourcing can be the platform that properly aligns partners and allows for the "tuning" of the network's overall responsiveness and flexibility in reacting to changing market conditions or shocks.

6. Increased Revenue. Some manufacturers make the mistake of focusing strategic sourcing efforts only on their core business -- thus damaging a crucial element in providing high margin aftermarket revenue capabilities. Approached properly, strategic sourcing provides partner continuity tied to customer requirements and business lines.

According to Bob Derocher, a principal with Archstone Consulting, a strategy and operations management consultancy, sourcing is not just a matter of finding the right provider. It involves establishing a relationship that allows you to sit down with that provider to continuously improve the process to reduce the total cost of the purchase.

"One of the things you see being done between manufacturers and some of their major supply partners is a focus on supply relationship management, creating a collaboration," Derocher says. "That way, manufacturers don't have to just demand a lower price from the supplier. If they can reduce the friction between the two companies and the effort it takes to do business together, the supplier can keep a good margin and give you a good price. Then they're both better off, which is important because in many ways, their fates are tied together."

In efforts to strengthen supplier relationships, some manufacturers have consolidated their supplier base to facilitate cooperative efforts called joint process improvements. These arrangements push manufacturers to partner with their suppliers and communicate the needs of their business, such as demand forecasts and other critical factors. On the other side of the relationship, suppliers work with their buyers to cut costs on their side of the operation.

These partnerships take more effort to manage compared to the rest of your supply base, requiring a higher level of transparency on both sides. Understandably, some manufacturers are skeptical to the idea and still have reservations. And even those who are open to the idea choose the candidates for these relationships carefully, and in most cases they are kept to a minimum. But when these collaborations are done right, Argawal says the extra effort is worth it in the long run.

"It addresses one of the biggest challenges companies have today -- not having very much visibility beyond their Tier One supply base," he explains. "When you form a strategic partnership with your supplier, you also get visibility into the supply chain beyond that supplier. And the more visibility you have in the supply chain, the more influence and control you're able to have to prepare for supply disruptions."

In addition to maintaining flow throughout the supply chain, manufacturers have also focused their efforts on reducing waste to make every stage of their operation more lean. Since the lean approach is driven by improving the manufacturing process in a way that doesn't require keeping extra inventory or raw materials around, finding suppliers that match your manufacturing strategy can go a long way. According to Derocher, this issue can be addressed by having your specifications correct from the beginning of the relationship.

"Manufacturers spend so much time determining the specifications of the actual product, the specification of the logistical aspects of receiving that product are often left out," notes Derocher. "But the specifications process is not just about the engineering aspects of the components, it's also about the business relationship between the buyer and the supplier. How will the supplier deliver the product? When do you take financial ownership? How will the supplier know when to ship another batch? If you have a collaborative planning and forecasting process with the supplier, you'll know all of that up front."

Measuring Success

Not surprisingly, most manufacturers will say they do strategic sourcing, in one form or another. But just like anything else, what really matters is how well you do it. While there are a number of ways companies measure their strategic sourcing efforts, one of the more common methods is an overview of year-over-year savings and comparing them with performance targets.

However, while cost reductions are always at the front of the line, it's rarely the only benchmark being evaluated. Other important measurements are more intangible, such as innovation gained from suppliers that help develop new products, and the sales figures that can be derived from any subsequent sales. More commonly, manufacturers are evaluating metrics in terms of supply disruption and security, looking at whether materials are being delivered on time, variance in lead times, or damages resulting from lost shipments.

According to Tanowitz, companies that are successful in their strategic sourcing efforts set the proper metrics that they are going to measure success by, and drive those metrics to their vendors so that they're working from an aligned set of metrics.

"If the goal is to minimize the amount of inventory on hand, that goal is carried through to the vendors as well," he says. "Once they have an aligned set of metrics and understand what their individual drivers are, they can work to collectively optimize the process."

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