Cost Nonsense

Cost Cents is one of the most promising blogs in our sector. But Eric Hiller gets it wrong when he argues that "Much of the focus of SRM / SCM is on the SG&A expenses and in managing risk in the supply chain rather than on the direct reduction of COGS. The largest component of COGS and therefore the largest opportunity for cost reduction and cost savings is in 'direct material'. These are costs that directly result in finished products. Beyond the commodity level material procurement costs, their costs are difficult to identify, measure, and manage at the product level with traditional ... solutions."

Dr. Hiller, while you're right on some levels, I could give a list of fifty global 1000 companies who have saved tens -- if not hundreds -- of millions of dollars already from direct materials strategic sourcing initiatives (part of what you would define as SRM). Working capital reductions can also be massive (ask John Deere, by way of example here). What you guys are doing on the enterprise cost management side of the table is great -- but you undermine your arguments for it by knocking existing direct materials sourcing approaches which have already save companies such as UTC, Wal-Mart, Toyota, and others billions of dollars to date.

Jason Busch

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