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A company's supply chain is only as strong as
its weakest link…
How competitive is your supply base?
HOW DID WE GET HERE?
Re-engineering
The late1980s and early 1990s, the heyday of business reengineering,
was a difficult time for many procurement organizations. The focus
on getting close to the customer, short-term financial results,
and overhead reduction resulted in a de-emphasis on, and even a
gutting of, procurement departments in a misguided effort to be
"lean and mean." One forlorn procurement manager once
put it, "We went way beyond 'lean and mean,' all we got was
skinny and teed off!" As companies saved money on the reduced
cost of their purchasing departments, it became more difficult to
effectively manage the cost of purchases themselves, which can be
up to 80% of the entire cost base of a business.
Mergers and Acquisitions
The intensity of M&A activity that began in the 1980s has slowed
very little in recent years. Wall Street analysts always account
for "purchasing synergies" in their financial analysis,
yet very little true integration and leveraging of the purchasing
function occurred in these larger but now highly decentralized companies.
The result is that many organizations are still not using their
full buying power in the market place. By failing to tap the best
knowledge and skills of their various procurement staffs and to
present a unified image to the market they lose valuable economic
leverage with suppliers.
Partnering
Still reeling from these initiatives, understaffed and overworked
purchasing organizations picked up on a new buzzword in the 1990s-"partnering."
The promise was: identify a few strategic suppliers, get close to
them, commit to long-term relationships, and your business performance
will sky-rocket. Unfortunately, most companies were not selective
in choosing partners. They typically chose the "usual suspects,"
long-standing incumbent suppliers never knowing if they were competitive
to start with. The result is companies who are over-partnered with
under-competitive suppliers.
Global Competition
By the late 1990s, global competitors from Mexico, China, India,
and Eastern Europe put enormous pressure on U.S. and Western European
businesses. The suppliers from these regions are so competitive
that they can deliver comparable quality at 30% to 50% lower
cost. Therefore, the need for purchasing organizations to revisit their "partnerships"
could not be ignored. But lack of information, trust, and the prospect
of extended supply lines has prevented many companies from fully
exploiting this historic global business opportunity.
WHAT IS THE STRATEGIC OPPORTUNITY?
Dramatic Cost Reduction
The bottom line is that even the best purchasing organizations are
underperforming their potential everyday. Recent experience shows
that companies who apply best practice procurement processes, e-sourcing
technologies, and global sourcing strategies are consistently saving
15% to over 50% on purchases of both production materials and indirect
purchases. Moreover, these results can have even more impact when
purchasing focuses its efforts in the product design phase where
new products can now be launched at dramatically lower cost. This
can generate increased market share and earlier breakeven on products
thereby making procurement a driver of company growth.
For more information on purchasing, strategic sourcing
and supply chain opportunities click
here.
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