In Targeting Cost Reduction, Supply Chain Design and Network Structure Remain Essential

I remember when I was a wet-behind-the-ears consultant repeating what I was told to clients twice my age: that even if we did as best a job as we could in a sourcing initiative, that over 70% of the cost of a given part, component, or service was already locked in based on the original design or service specification. Unless these were on the table, the potential for any sourcing project would always be limited. It's good to see this mantra still repeated, albeit from a supply chain/logistics perspective. The point about locked-in cost still holds in this realm because in procurement, I don't think we challenge the specification and design status quo enough. In the above-linked Industry Week column, the authors repeat the old notion that "as much as 80% of total supply chain costs are determined by the network in place and not by the decisions the supply chain team makes on a daily basis within that network."

A number of their suggestions are directly relevant for both logistics and procurement folks, including the notion that "the time to discover the biggest supply chain improvement opportunities is during assessment or reassessment of the infrastructure in place; e.g. manufacturing capability, raw material sourcing, major transportation lanes, distribution facilities and delivery to customers." Even though the concept of the Spend Matters chart, below, is nothing new, hopefully it will be of some use for organizations looking for a simple way to articulate the importance of influencing both specification and supply chain decisions as early in the procurement process as possible.

I also agree with the authors of the Industry Week story that it is essential to consider and fully leverage technology analysis when it comes to impacting decisions. In their words, "Spreadsheet analysis can evaluate a potential change in a business plan or supply/demand balance and perhaps project the impact of a given course of action. However, when decisions involve multiple products made across multiple manufacturing sites, shipping and distribution point issues while serving thousands of customers, companies need sophisticated tools to effectively consider all the options to assure maximization of every supply chain infrastructure." I'd also add to this point that typically, the earlier a procurement or supply chain team can impact a design or network structure decision, the more complicated and data-intensive the analysis often is, owing to the number of potential scenarios that one should explore (e.g., technology, especially in the form of advanced sourcing/sourcing optimization solutions, is all the more important. Spreadsheets -- and even basic eRFX and reverse auction tools -- need not apply!)

For further reading on the subject, you can download recent Spend Matters research in the area:

A Personal Lesson: Reaching the Limits of Reverse Auctions and Strategic Sourcing

A Foundational Look at the Evolution of Sourcing Technology and Platforms

Advanced Sourcing Technologies and Platforms to Broaden a Portfolio

Jason Busch

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