The Intersections of “Total Cost-base Management” (TCM) and Lean Sourcing (Part 2)

Please click here for Part 1 of this post.

The concept of Total-cost Based Management (TCM) that Novartis' Sammy Rashad introduced is similar to the Lean Sourcing concept we've been exploring for years. In looking at both TCM and Lean Sourcing in terms of negotiation and supplier engagement, both consider strategic sourcing as only a precursor step to identifying long-term supply partners and more tightly coordinating purchasing efforts with operations and manufacturing (or with other internal business functions such as IT or HR).

Looking outside the organization, those who embrace either concept also realize that in increasingly global supply economies where companies buy locally for local production and sales, conditions not only can change more frequently -- they change because of the local markets we most monitor. For this reason, it is even more important to understand how one stacks up relative to peers through going to the market to identify, qualify, benchmark, and ensure the best possible supply base as an integral part of frequent sourcing efforts (which are really just one form of information discovery rather than a direct means to savings outcome).

In the spirit of heeding Sammy's call for suggestions and input on the topic of TCM, I will share our thoughts on how organizations should prepare to get the most from such programs. First, it is essential to create a process than can be mapped and communicated to all team members. Open communication and participation across functional areas provides a couple of significant benefits, the first of which is fairness and buy-in across the company. Second, greater cross-functional input provides a more comprehensive view of the issues that impact the company. By incorporating multiple views, solutions can be developed that directly address problem areas.

Next, in pursuing a TCM or lean sourcing program, it's important to develop project milestones, deadlines and target dates to get the job done. While this should be self-explanatory, it's our experience that accountability drives results. A "never-ending" start or end date results in malaise and weak execution.

It's also important to create an incentive structure and compensation plan for all participants in a program tied to process outcomes. In our experience, we have seen incentive structures that can be incongruent with an outcome that an organization wants to achieve (e.g. a plant manager earns a bonus based on company sales instead of quality or total landed cost). This is why developing bonus structures and cash compensation plans that identify and help implement programs based on the shared definition and value from a TCM or Lean Sourcing approach (or any type of similar program) is so key.

In short, break down the silo walls. Start to communicate. Define. Measure. And incent! And don't forget to engage with those suppliers outside of negotiations as well.

- Jason Busch

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