Over two years ago, I read a piece on global sourcing by Booz Allen Hamilton that I could not help but chuckle at. The entire article -- which you can navigate to through the above link -- reeked of pie-in-the-sky global sourcing knowledge that might have been practical in a classroom, but lacked any sense of real-world implementation knowledge and experience. Unfortunately, this type of thinking still predominates the client studies of many consulting firms who think they know how to source globally and get cost savings, but when it comes to actually implementing identified savings and proactively managing risk, their beautiful slides fall flat on their boat-charts and take-away arrows. Fortunately, though, it's possible to redeem oneself in the eyes of this blogger.
In a recent article in Strategy and Business, Booz actually authored a piece focused on "win-win" or "knowledge-based" sourcing. I know, I know ... the concept sounds hackneyed. And the jargon alert buttons go off as well. But underneath the professionally word-smithed and polished copy, I can't help but agree with much of what the authors argue. They begin by citing the way Honda approaches face-to-face supplier negotiations and work their way into an argument that posits a new type of supplier relationship and development effort in an industry that needs it most -- automotive.
The article takes us immediately into the room of a Honda supplier meeting, where "the executives write their proposed actions and agreements on a whiteboard. When all the items have been discussed, the meeting is over. The contents of the whiteboard are then typed up and two copies are printed, the supplier and the automaker sign them, and the contract is complete. Thereafter, both sides focus on executing the plan. Honda and its suppliers thus avoid the drawn-out, querulous negotiation process that is common at other automakers, a process that can last months and even then sometimes blow up without reaching a resolution." The authors then note that "this is one of many ways in which far-reaching manufacturers like Honda and Toyota rewrite the conventional rules of procurement. Their methods add up to a form of procurement based on shared information and insight: One could call it knowledge-based sourcing. With this approach, manufacturers and suppliers share a long-term commitment to improving each other’s capabilities, starting by working together to eliminate wasted effort and inefficiencies."
Now, don't think for a minute that Honda and Toyota avoid the stick in managing their supplier relationships. It's quite the opposite in fact -- both companies are always thinking about introducing competition into the sourcing and supplier management process, and often know more about the cost structures and drivers of categories than their suppliers do (and they'll use this knowledge in negotiations). But it is against their Spend Management religion, for example, to arbitrarily say that they'll pay supplier invoices at some percent of their face value (in effect, strong-arming a price reduction, just as two of the Big 3 did).
For those individuals on either side of those types of truly combative supplier relationships that made GM and Ford famous back in the day of the "hammer and knee" -- hammer them in the head, then knee them where it really hurts -- this article should be required reading. Heck, I would suggest that it might even be worth committing the entire article to memory. But even for others who might find that the piece only serves as a review of a more collaborative sourcing approach, it's a great refresher. Nice work, Booz.
Stay tuned for another review of this essay on Spend Matters later this week. In this second take, Brian Sommer will examine Booz's argument from a different -- and highly entertaining -- vantage point.