Is your company getting the most from its supply management function? Here's a step-by-step look at how to phase in a successful "end-to-end" supply management strategy.
Growing grass in New England can be quite a challenge. There is no single key to succeeding at this task; using the most expensive and "guaranteed" seed will certainly fail if you sow it on unprepared native, rocky soil. Watering profusely will only sprout the crabgrass faster, unless you attended to preventing its germination. And applying the proper fertilizer at the right time will only "burn out" an under-watered lawn quicker during the hot, dry summer months.
What does this have to do with supply management? Well, just as you need a comprehensive program that addresses all the keys to "turf success," the supply management professional cannot succeed with a one-dimensional sourcing strategy.
Simply establishing commodity teams and entering into enterprise-wide contracts for key materials is not enough. Having an e procurement capability to order indirect material from a Web-enabled catalog does not constitute a procurement strategy. Moreover, your job is not complete just because you have appointed a "director of strategic sourcing."
The greatest benefit to the organization from the supply management function comes with the implementation of a strategy that addresses the entire spectrum of supply management challenges.
For those organizations that have yet to devote serious consideration and corporate focus to the supply management function, the challenges are numerous. Manual, cumbersome and disconnected procurement processes foster off-contract or "maverick" buying, which results in distributing a company's volume across too many suppliers, rather than utilizing preferred suppliers with global contracts and preferential pricing and terms.
Inefficient processes lead to fat procurement organizations, high per-order or per-line-item costs, and slow response times. According to the Yankee Group in its report "Enterprise Spend Management: Taking Charge of Enterprise Value," only about 50 percent of the commodities or total corporate spend is actually managed by the procurement organization, with commodities such as airlines, travel, Web-conferencing and couriers making up a large portion of this unmanaged spend. Few organizations have spent the time to categorize all materials for type, usage and supply philosophy, or suppliers for strategic alignment.
Competitor firms are sourcing both direct and indirect materials from low-cost countries, including China, India, Malaysia, Singapore and Korea. The savings associated with offshore sourcing can range from 10 to 35 percent of the total delivered cost, according to Aberdeen Group's "Global Sourcing: What You Need to Know to Make It Work," providing, of course, that you are prepared to manage the technical, geopolitical, and logistics risks associated with that activity.
To rationalize a company's supplier base you need accurate spend data. However, a roll-up of payables data to the chart of accounts (COA) usually results in spend data becoming hopelessly aggregated to the point where they are of little value to the procurement professional. And spend data in the enterprise resource planning (ERP) system is often categorized by business unit rather than anything useful, such as vendor, geography or finished-goods stock-keeping unit (SKU). In addition, a large percentage of spend data come from external systems, including bank wire transfers, credit card and purchasing card (P-card) vendor systems, freight forwarding and freight payment systems. Performing a comprehensive spend analysis that provides the data with which to rationalize the supply base is often too costly and time-consuming, but doing the job partway (only for a specific commodity or business unit) is guaranteed to not provide the enterprise-wide insight that will lead to big opportunities.