Eye For Procurement: Perspectives on Total Landed Cost

At the Eye For Procurement event in Chicago yesterday, Pierre Mitchell moderated a panel discussion of practitioners and experts examining total landed cost from a global sourcing perspective. Perhaps the most insightful commentary from the panel came from Ariba's David Morgenstern, who offered a number of constructive pieces of advice on how and when to deploy total landed cost models (as well as some great anecdotes). David, Ariba's Managing Director in charge of the provider's global sourcing programs, argued that companies should begin to run total cost models upfront in the sourcing project to understand the most competitive regional areas before going through supplier bidding and negotiation.

This upfront approach that David sugggests can help avoid supplier fatigue, as he puts it, from quoting exercises which rarely end up resulting in regional global suppliers winning business because the buying organization does not have a good handle on the best regions to source from in the first place. David puts it simply: "Know what country you're going to before you do it ... move TCO from being done after the fact to before." He also recommends balancing the ease of use of a landed cost model with the number of factors and variables it evaluates. Sometimes weighing a dozen or so variables can be nearly as effective as a hundred -- and far easier to manage.

Perhaps the biggest surprise in David's discussion was the 360 degree turn Ariba has done since my FreeMarkets days on the value of supplier research and negotiation in the global sourcing process. Now, David ranks "sourcing and supplier research" third in importance from a global sourcing perspective relative to the need to attract supplier quality engineers and logistics professionals to drive global sourcing efforts which are "absolutely critical" in his view. Among other efforts -- quality not withstanding -- David believes that getting a "handle on global logistics costs" is perhaps the most critical factor companies can focus on to better manage total cost from a global perspective. To make this possible, David argues that logistics professionals must have a seat at the table -- along with design engineering, procurement, and operations leaders -- when companies make global sourcing decisions.

Another fascinating piece of information David brought up involved the case of a global manufacturer -- I presume an automotive supplier because of his use of the PPAP term in discussing the example -- which was importing some 900 containers per month from China. It turns out that this company was expediting goods from its suppliers at a rate higher than it wanted to, resulting in air freight charges eating into savings. But the causes of the air freight were what was most interesting. First, raw material availability throughout the supply chain was limiting its supplier's ability to meet forecast demand. Second, first article approval (PPAP) was not yet in place. Third, engineering changes required longer lead-times than were possible with ocean freight. And fourth, general supplier capacity issues necessitated the need to expedite certain orders. In a follow-up post, I will discuss techniques that manufacturers like this can use to reduce their reliance on air freight as a last resort in a global sourcing environment.

Jason Busch

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