Building a More Competitive Supply Base

The global downturn has, as is always the case, accelerated the imperative to reduce the costs of procuring direct and MRO materials.

Nevertheless, many companies do not have this equation quite right.

That's the opinion of Dr. Timothy Laseter, of  the Darden Graduate School of Business at the University of Virginia, and Raj Sharma, president of Censeo Consulting Group as well as the Federal Acquisition Innovation and Reform (FAIR) Institute.

Writing in the most recent issue of ISM's Inside Supply Management, Laseter and Sharma say that while the forces of competition usually bring out the best results in the overall economy, "Competition in the procurement world often focuses on squeezing supplier margins rather than building strong companies."

The result: Supply managers simply pit companies against one another to achieve the lowest prices without sufficient thought to supplier qualifications and the underlying drivers of cost.

They note the other end of that relationship spectrum, such as the generally more collaborative way that some companies, such as Japanese auto makers Toyota and Honda, work with their suppliers. The process there is one that looks to jointly reduce waste and come up with innovation.

While that can work well, the problem with this approach, Laseter and Sharma say, is that this usually leads to companies focusing on just on "large suppliers that can cover a broad geographic and/or product-service scope rather than the best supplier for the specific location or need."

Is there a middle ground? Yes, Laseter and Sharma argue. One key is to really focus on the best result, not what appears to be the best process to achieve short term goals.

"The most effective companies build a competitive supply base, not simply a competitive buying process," they write. "The latter is fairly straightforward; the former requires real skill."

While free and vigorous competition among suppliers is part of that mix, it has to be developed in the right context.

Steps to Building a Competitive Supply Base

Ensuring a competitive supply base requires four fundamentals," Laseter and Sharma say. "Without them, competitive bidding can do as much harm as good."

These four principles can be summarized as follows:

1. Understand the Sources of Value Creation: Procurement managers need to go far beyond the "specs." Before launching a competitive bid process, supply managers need to focus on two critical activities: (1) define the product or service requirements by truly understanding the performance objectives of the customer (either external, but more likely internal); (2) supply management professionals must understand the sources of value creation based not only upon customer needs but also supplier cost drivers.

2. Find and Attract the Best Suppliers: Too often, supply management professionals simply reach out to the same set of suppliers they always use. These may or may not really be the best or most competitive sources for a given buyer need. "No amount of bidding will help if the competition exists among noncompetitive suppliers," Laseter and Sharma say.

3. Align incentives to Create Value: After steps one and two, the challenge becomes aligning incentive to capture the maximum value. Laseter and Sharma recommend gaining sharing arrangements with suppliers for any improvements to cost they can bring to the table.

4. Collaborate to Achieve Results: "Supply managers who assume their job is done upon contract award will not build the best supply base," Laseter and Sharma say. Instead, the managers must champion joint planning, collaorative product design, etc., with suppliers for the long term.

"Competitive tension certainly prevents complacency among the supply base. But, a single-minded focus on competition - particularly among a marginal supply base - can wreak havoc by forcing suppliers to cut corners at best or put them out of business at worst," Laseter and Shaarma conclude. "To manage the balance, organizations need to move toward a focus on creating a competitive supply base rather than creating a competitive bidding process. The distinction is far from trivial."

Our take: These principles are not really anything new, having been promoted in one form or another by many procurement experts for many years. Still, we liked the points about how the highly collaborative approach too often leads to relationships with only large suppliers, and their contrast between a highly competitive process and a highly competitive supply management strategy.

We wonder, however, if many companies today can really put off what might (repeat might) be savings today for a potentially more competitive supply chain position down the road, and whether supply managegement staffing levels really allow procurement managers enough time to lead development of more highly collaborative relationships with suppliers.

Source: http://www.scdigest.com/