It has been said that in organisation within a world-class procurement framework it is difficult to find a clear-cut distinction between the organisational drive for continuous improvement viz-a-viz value release from actively managing Total Cost of Ownership (TCO). “In fact, these objectives represent the two sides of the same coin and trying to determine which side is more important is irrelevant”, Nic Badenhorst, an independent procurement consultant, told SmartProcurement.
“The driving force behind the sustainable unlocking of shareholder value could come from various ‘inputs’ of which one is the will to survive in tough times. When declining markets and falling prices put pressure on revenue there is inevitably a call to cut input costs and specifically to reduce spend on goods and services”.
The uncertainty of the depth and length of the looming recession will, once again, bring forth cries for a lower total spend and freeing up of capital tied into stock. This again highlights the unfortunate custom of squeezing suppliers for better prices in good times and pleading hardship in bad times. This attitude underlines the need to collaborate with key suppliers under all market conditions with the clear objective to permanently reduce or eliminate costs from the supply chain. Beneficial relationships between supplier and customer in every cycle of the economy rely heavily on the understanding and management of all cost drivers.
But, every action in life needs a beginning and there is no better way than letting charity start at home. It is suggested that this should have been done some time ago in organisations in order to get a good grip on own spend. An analysis of total spend (goods and services), broken down per spending group or per commodity should thus be made available.
So, if the Chief Executive Officer (CEO) has been focusing on the monthly total spend figures being diligently drawn up, then the organisation is already in the starting blocks. But looking at these figures begs the question of “how do you manage them” and if the organisation prides itself in applying best practice in its sphere of business it would have already drawn up an annual target of reducing spend in real terms.
“If this has been done for the past few years the best practice procurement department should be ready to embark on the next phase of unlocking even more value from spend by involving the supplier. This does not imply insisting on a price reduction but rather the opposite in considering a formal collaboration with the aim to permanently reduce costs in the mutual supply chain”, Badenhorst continued.
There are a number of criteria that should be considered in selecting the best supplier to enter into collaborations with. The above figure suggests an area where the size and importance of a candidate could be found. A supplier should fall in the categories of core, leverage or critical with a fair, if not substantial, portion of its business with the customer. This ensures that the supplier would be in a favourable position to benefit from any cost reduction initiatives developed. When the selected supplier is blessed with a change ready management attitude, the stage is set for mutual beneficial cost collaboration.
Preliminary discussions with the supplier of choice involve the CEO or at least the Managing Director (MD) to spell out the objectives and to obtain buy-in, and accept ownership for the outcome of the process. It should be made clear that the cost collaboration exercise would result in several initiatives from both supplier and customer to eliminate, or at least reduce, supply chain costs over a predetermined period of time. The selection of team members to develop this initiative is critical and in order to effectively utilise time, members should be familiar with the elements of the supply chain and in a position to take decisions.
At this point in time agreement should be reached on the ratio sharing of benefits flowing from the process. Important consideration should be given to the following aspects of each idea:
- The area of impact in the supply chain;
- The scope and impact of the idea;
- Capital incurred in realising the benefit must first be recovered before any sharing; and
- The benefit spin-off to business with other customers.
It needs to be stated that an agreement of confidentiality should be drawn up and signed by all participating parties. This would ensure the unrestricted flow of cost information between task team members.
Although collaboration is an ongoing exchange of ideas the initial process should be scheduled for a limited time period of typically no more than 10 weeks. The process follows the supply chain and focuses on the identification and importance of the main cost drivers. Each element is challenged by the team and ideas are generated to permanently reduce or eliminate costs.
“Ideas are furthermore recorded, scheduled for implementation, tracked and reported on by members. The outcome of a collaboration exercise in terms of cost reduction as a percentage of the total cost structure for the identified supply chain could be between 8% and 12%. This number is over and above any savings generated internally over time by managing TCO’s. The savings thus generated is measurable and sustainable over time. It is, however, re-iterated again that this is not a once-off process and the generation of ideas between supplier and customer should form part of a bi-annual review session. It has been shown time and time again that change ready participants in collaboration exercises come up with the most amazing ideas to simplify processes and to eliminate or reduce costs”, Badenhorst concluded.
As a result, success belongs to organisations leveraging the benefits of collaborative supply chain initiatives with key suppliers.
Article by Nic Badenhorst, an independent procurement consultant and commentator on topical issues in the profession.
Nic Badenhorst can be contacted at the details below:
Cell: +27 83 609 1000