Linking Supply to Corporate Objectives
Jim Morgan, Editorial Director Emeritus -- Purchasing, 9/27/2002 6:00:00 AM
( Last time we examined the way corporations are looking to economic value added (EVA) equations as they seek to raise competitiveness. This time, let’s look a little deeper into the connecting link that the supply operation need to play in using of EVA.)
As corporate strategies become more centered on overall corporate performance, supply/purchasing/sourcing processes will need to play more of a conduit role to the supply base. At a minimum, this requires being part of the team that interfaces demand with supply in bringing new, better featured, and better value products to the market faster so that revenue starts flowing to the bottom line faster.
Particularly important in this new role is the need to understand how to link with corporate financial functions in a way that makes sense to both. For instance, when procurement considers the cost side, it will need to take into account the fact that financial people require that both sides are analyzed at the same time. For example, if costs are going down, that could be a very acceptable outcome. But if the revenue line is not hitting targets because the company can’t sell as many units or services as it planned -- due to constrained supply, lack of new technology, missed new product introduction dates -- corporate performance will be significantly and negatively affected. Such misses will need to be captured in the metrics used to measure performance.
EVA linkage also will become more important in determining what a specific business strategy is or is not likely to contribute. Linkage also should prove to be highly useful in determining which of several possible strategies is likely to be most successful. For example, a one-time measure of success might involve finding new technologies first and getting them into new products. A performance metric in such a scenario might involve introducing a new technology in a certain percentage of new products and then measuring acceptance.
Or a strategy to increase revenue might involve bringing an increased number of new products to market. A strategy to produce such an outcome might involve finding the suppliers with the required technologies and capacity and combining them with internally-developed technologies to make the required technologies available faster and earlier. To enable development of this product or service feature, strategy may involve the use of a transition metric -- one that is employed for a period of time. In the future such strategies will be a primary part in the supply/sourcing specialist’s job and the metrics around this job will involve making sure there’s availability of what’s needed to generate more revenue.
Another factor to consider in putting in place strategic measures is the fact that strategies change -- often drastically. For instance, based on EVA criteria, it may be found that a revered strategy of being the low cost producer in the field may no longer be enough to out-compete the competition. It may even be necessary to refocus the competitive strategy toward bringing products or services to market before the competition. As the result of such a change in strategy focus it may be necessary to develop new suppliers and new measurements of performance.
One point to keep in mind at all times is that supply-purchasing-sourcing specialists ignore cost of capital at their own peril. They need to look at such things as investment in plant and facilities. Indeed, in the future a good part of the sourcing job will involve analysis of financial aspects and opportunities in supplier partnering and how to transition work from internal plant and facilities to external facilities. Those who are able to improve the performance of the buying company in this way can truly enhance the implementation of their core competencies -- and be recognized for their part in corporate competitiveness.
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