For example, the chief procurement officer for a leading international manufacturer of electronics products and telecommunications systems reports that material purchases represent the single most important cost item in its profit-and-loss (P&L) statement, and that a 5 percent reduction in these costs would add $1 billion to the company's bottom line.
Strategic Sourcing and Total Cost Management
Strategic sourcing, and ultimately TCM, aims to reduce COGS, not by reverse auctioning or "beating up" suppliers for lower prices, but rather by establishing systems for more effectively communicating with suppliers and working with them on issues of quality, delivery, standardization and innovation. Such collaboration is becoming essential as manufacturing industries undergo a transformation toward increased outsourcing in which suppliers take responsibility for production of major components, assemblies and entire subsystems, as well as product design and assembly. For example, a leading manufacturer of computers and peripherals recently reported that whereas it was 90 percent vertically integrated in the 1980s, today only 10 percent of its components are manufactured internally.
In the 1990s, organizations deployed lean manufacturing concepts to streamline their internal operations. The "lean" concept involves a strict employee focus to eliminate waste of all types through standardization of work processes, zero defects, flawless new product launches and secured supply sources. Product companies are now extending "lean" to the supply chain in order to achieve TCM.
This shift gives OEMs an opportunity to use innovations stemming from the background and skill sets of their suppliers. However, reaping this benefit hinges on the relationships being properly managed so that communication and data exchange occur seamlessly, through collaborative processes that allow suppliers to provide ideas and suggest product changes throughout the product lifecycle. This level of close collaboration is particularly important early in new product development when concepts are beginning to take shape and changes are made most easily and inexpensively. In fact, once a product reaches its final design, 80 percent of the product costs are locked into place, making early supplier collaboration critical to costs.
TCM Requires Cross-functional Team Collaboration
A growing number of companies have elevated purchasing to a more prominent position within the organization, often led by a C-level executive who reports to the company president or CEO, reflecting the potential impact of purchasing on a company's bottom line. Thus, titles such as Chief Procurement Officer and Procurement Director are emerging in the upper ranks of corporate organizational structures.
Beyond working more closely with suppliers, the purchasing group also must collaborate closely within its own enterprise across a variety of different disciplines including engineering, manufacturing and finance. Moreover, it often must spearhead a cross-organizational alignment and commodity councils that put the efforts of suppliers in sync with internal groups from those areas. Executive-level commitment and direction become critical when instituting such organizational realignment in order to obtain buy-in from all necessary stakeholders. But with high levels of commitment comes a high payoff, such as direct collaboration between suppliers and OEM engineers, alignment of centralized corporate purchasing with decentralized purchasing departments, company-wide visibility into metrics on supplier quality and performance, and streamlined supplier design and sourcing collaboration through standard electronic tools, among others.
Tools and Technology
Since strategic sourcing and TCM focus on understanding product cost drivers and expanding lean concepts through the supply chain, and given the functionality required to consolidate and comprehend such a wide range of product data and to enable collaboration between so many dispersed groups within the supply chain, best-in-class strategic sourcing solutions have product lifecycle management (PLM) technology as a foundation.