Over on Procurement Leader's blog, Sammy Rashed of Novartis has been penning a great series about a range of procurement topics from an executive practitioner's lens. Most recently, he introduced us to the concept of Total Cost-base Management. As Sammy observes, "I've seen a growing number of companies moving to a more comprehensive method of managing costs, both internal and external. This approach looks at the entire spend base and creates a single organisation composed of the most important functions that can look at costs not just as discrete components but also as a system that drives demand and expenditure."
Sammy encapsulates this approach, which he believes is gaining favor in the phrase "Total Cost-base Management" (or TCM, for short). To achieve an appreciation of total cost, he suggests its importance in the perspectives of multiple parties, including procurement, offshoring and outsourcing, and lean/Six Sigma. Thinking on a TCM basis requires moving beyond category management practices alone. In this regard, Sammy notes, "The importance of covering the entire company spend is particularly reflected in industries with low procurement ratio (e.g. Pharma), where only 40-50% of cost is external. There is a clear opportunity to address the remaining costs, which are mostly internal..."
But to target costs internally, a new approach is needed -- one that works more closely across functions, as Sammy suggests. Years ago, we started using the term "Lean Sourcing," writing extensively on this blog and others (including MetalMiner). Looking back on the outcomes of Lean Sourcing, which bridges both sourcing processes and operational excellence, we see the same desired outcomes that Sammy is striving for in TCM. This includes:
- Greater buy-in from key functional areas -- operations and purchasing (and potentially others) that care about price, performance, innovation and value (including top-line value)
- Greater likelihood of implementing identified sourcing savings from the start
- Improved quality and reduced waste throughout a product lifecycle, including sourcing and production
- Ongoing additional cost reduction opportunities via collaboration with supply partners and with internal stakeholders
Stay tuned as we continue to explore the intersection of TCM and Lean Sourcing in Part 2 of this post.