Seven rules for creatingwinning sourcing strategies
By Staff -- Purchasing, 5/21/1998 2:00:00 AM
Good supply strategy demands a balancing act between the extremes of trust-based supplier partnerships and traditional market competition, according to Tim Laseter, vice president with Booz-Allen, & Hamilton in New York. In his coming book, Balanced Sourcing, Laseter details the "organizational capabilities" that allow companies to strike the proper balance between cooperative relationships and commitment to competitive pricing. "The model moves beyond the religion of 'trust' that is so popular today--without reverting to an adversarial approach," Laseter claims.
One such organizational capability is the capacity to create comprehensive commodity sourcing strategies. Sourcing strategy, according to Laseter, is far more than a simple allocation of business to suppliers by the purchasing function. "Instead it is a multi-functional activity that produces a plan of action for several years." Effective plans, he says, "are built on a rigorous analysis of the buy, the supply industry, and the fundamental drivers of value."
To Laseter, the act of creating a strategy is intrinsically valuable because it forces a team to "step back and make a comprehensive examination of the current supply base and to take a long-term view of purchasing-related decisions." It also builds cross-functional buy-in to the priorities for each commodity and supplier.
Laseter and colleagues at BAH have developed seven principles for creating effective sourcing strategies and seven crucial components of a commodity business plan. Here are the seven principles--
On rationalization
Principle 1: View supply-base rationalization as a result--not an objective. Most U.S. companies need to shrink their supply bases, Laseter says. But reduction as a measure of progress can be problematic. "At best, supply-base reduction is an indirect measure for improving purchasing. At worst, it can drive perverse behavior." Instead, Laseter suggests that companies should "optimize" the number of suppliers by commodity segment. Optimization, he says, should begin with the widest possible look at all supply options. "To test whether a commodity strategy employs the optimal number of suppliers, companies can examine supplier roles," Laseter says. If suppliers don't have unique roles, the supply base is probably too large. If a supplier with "a somewhat different scope" could be added without really increasing total cost, the supply base may be over-rationalized, he says.
On multi-functional teams
Principle 2: Use multi-functional teams. A survey by Laseter and colleagues finds that "most companies use multi-functional teams for developing sourcing strategies--but other functions are not consistently involved." For example, only one in three companies routinely involves design and product development personnel on sourcing strategy teams. The same is true for finance and accounting, manufacturing and operations, and materials management and distribution functions. Says Laseter: "Creating sourcing strategies should be viewed as an organizational capability--not a purchasing task." Two good reasons: Teams offer creativity through diversity of opinion and they build organizational buy-in for the sourcing strategy.
On coordination and integration
Principle 3: Coordinate across regions and business units where necessary. Sometimes it makes sense to manage a single commodity on a global basis. Sometimes it doesn't. Some executives may demand coordination across all business units worldwide to ensure maximum buying clout. Unfortunately, Laseter says, such mandates are misguided since few supply industries are truly global and since volume and/or price leverage is but one of several "opportunity levers" in balanced sourcing. Other opportunity levers: improved supply management and supplier technology. To be effective, he notes, these other types of opportunity levers usually require strong involvement at the business-unit level--forcing a focus that is more local than global.
Companies can avoid reinventing the wheel by developing commod-ity strategies centrally, Laseter observes. But simultaneously aggregating purchases can complicate matters and slow such processes. Ultimately, he argues, the balance between centralized versus decentralized control should go according to commodity. One solution: Create a standard commodity planning process for all teams to follow and then manage commodity families either centrally, quasi-centrally, or by business unit, according to whatever makes the most sense.
On research
Principle 4: Conduct rigorous global research. Too often, Laseter says, sourcing organizations use their current supply base as a point of departure for the commodity strategy. "Effective strategy development, however, requires a global view." While it won't always make sense to source products offshore, global research can unearth new suppliers and can provide benchmarks of world-class performance in a supply industry. Such global benchmarks, he says, can be used to drive improvement among local suppliers.
On total cost
Principle 5: Examine total acquisition cost. Most strategic sourcing decisions require tradeoffs--usually between price and some other cost. An effective sourcing strategy, says Laseter, "identifies ways to improve performance in the full set of supplier-related costs and opportunities." By thinking in terms of total acquisition cost, he says companies can identify opportunities for collaborations that will yield reductions to total cost. Example: "A cooperative program that decreases inspection through supplier certification may have no immediate effects on purchase prices, but could substantially reduce the customer's internal quality costs."
On segmentation
Principle 6: Segment the spend for focus and to break compromises. Some people--especially those from outside purchasing--think it should be easy to always source from lowest cost, world class suppliers. Elaborating on the reality that supply strategists usually face trade-offs, Laseter says "segmentation offers a way to have one's cake and eat it too." Example: A team might be wrestling with a decision to source from a low-cost supplier in a developing country, the trade off being higher inventory costs and obsolescence risk. "Tradeoffs are broken by recognizing that some of the purchased parts may have very predictable demand patterns, while others pose a high-risk of obsolescence," Laseter says. "The predictable parts could be purchased from a low-cost global supplier with significant savings, while the parts with a greater degree of obsolescence risk are sourced locally."
On measurement
Principle 7: Quantify the benefits. Real value can be hard to define and even more difficult to measure. When, for example, does supplier service level outweigh the higher prices it charges for products? Even if the quantification process is imperfect, Laseter says, sourcing teams should make some attempt to put numbers on paper. Frequently, he argues, "the hard savings do not justify the incremental cost of suppliers who tout their service orientation." Unfortunately, he adds, "suppliers who focus on service often do so because they can't compete on cost." While such exercises may fail to capture all the benefits of going with the high-service supplier, "a rigorous comparison ensures that tradeoffs are made with an adequate understanding of the cost implications," Laseter says.
Next month, we will outline Laseter's seven critical steps for creating a commodity business plan.
Timothy Laseter is vice president at Booz-Allen, & Hamilton in New York and a part-time doctoral student in the Darden School at the University of Virginia. His consulting work and academic research address strategic issues in purchasing management. Jossey-Bass of San Francisco will publish his book Balanced Sourcing this fall.
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