Sony's Savings-Driven Procurement Transformation is on Track

More and more earnings announcements these days are filled with references to operations- and procurement-led earnings improvement. Sony, the venerable Japanese electronics giant, is a perfect example. Earlier this fall Sony announced a quarter in which both supply chain and procurement investments played a significant role in propping up the bottom line and improving working capital through better managing inventory and supplier relationships. On the call, Sony suggested that "the structural transformation process that we initiated earlier this year is progressing in line with our expectations. We now have targeted 330 billion yen in annual cost savings from the structural transformation ... thus far, we have achieved approximately 80% of the targeted 330 billion yen in savings."

What is procurement's role in this transformation? Reporting on the quarter, Sony suggested that "on the procurement side, we continue to target the 50% reduction in the number of suppliers. We are also targeting 20% reduction in procurement cost and at this point in time, we're on track to achieve approximately 90% as a procurement cost reduction. So to put it simply, we are radically transforming the processes, the structure, the cash flow and the earnings of the company." In other words, procurement is playing a critical central role in Sony's overall cost reduction initiative -- if not the most important role. Interestingly, Sony also hinted on the call that pushing out payment terms to certain suppliers was part of its plan. But let's hope that they're doing it by providing more flexible options that they can profit from vs. just driving up supply risk by arbitrarily mandating new terms.

In our analysis of technology manufacturers, Sony stacks up well in the market. We currently rank them on our bell curve to the far left, in the innovator column. Other peer companies we rank in the same way include Apple, Dell, HP, Texas Instruments, IBM and Solectron. But that's not to say that Sony is resting on its procurement laurels. The plan Sony referenced in the call was publicly announced earlier this year when Sony stated its plans to "cut the number of suppliers it uses to 1,200 from 2,500 within the next year" and to "cut purchasing costs by about 20% -- roughly $5.3 billion -- in fiscal 2010". To make this supplier rationalization and savings initiative a reality, Sony also shared at the time that it was centralizing its procurement function vs. leaving it to "its operating units to develop approved supplier lists and contract terms," as was its practice in the past.

Jason Busch

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