Transforming Sourcing and Supplier Management: Seeking Process Excellence

This is the second in a three-part guest series by Michael Cross of Directworks. Missed Part 1? Read it here.

I began this series of blog posts by discussing the concept of the manufacturer of the future. I intentionally narrowed the emphasis on how manufacturers are beginning to transform their sourcing and supplier management functions, as these activities have become far more strategic than just a decade ago. These functions now require different skills, processes, and technology enablers. Yesterday, I focused on how the skill sets in the back-office need to evolve. Today I want to talk about processes, specifically emerging best practices that can greatly facilitate this evolution.

Much of the change has been driven by manufacturers’ desires for operational excellence. Previous LEAN initiatives were good at driving out cost, but history has shown us that this was too often done at the expense of quality, production down-time, or increased supplier-related risk. Manufacturers clearly recognize the opportunity for improvement, especially in terms of moving away from silo-based activities with conflicting goals to a collaborative approach that focuses on trade-offs. Savings is still a key driver, but you need to get target savings without sacrificing quality or introducing an unacceptable amount of risk. So how does one get started? I suggest you begin by looking at key questions that your process improvement initiative must address.

Who makes up my supply chain?

Globalization of the supply base has created complex, extended supply chains. Many manufacturers rely on Tier 1 suppliers to provide assemblies that bring additional tiers of suppliers, who provide the parts needed to make these assemblies. Because of increasing regulatory compliance and the need for more comprehensive risk assessment, manufacturers need to know the names of everyone touching any of the parts that go into the products that they make, all the way back to the mines of origin for the raw materials. This information needs to be collected and confirmed on an ongoing basis. If gaps in the information exist, manufacturers need to seriously consider changing suppliers until they have 100% visibility. Procurement, commodity managers, buyers, and supplier management professionals must work together closely on this issue.

Which of my suppliers could put me at risk?

With names in hand it is time to identify the risk associated with each supplier regardless of tier. Purchase of external data from providers such as Dun & Bradstreet, Rapid Ratings, and LexisNexis should be considered. Use the information to ascertain financial health. Map the locations of your entire supply base to determine the risk associated with geographic clustering. Look for potential threats to your production line especially the inability to keep up with growing capacity needs. Ultimately you want to be able to identify suppliers who will be difficult to replace, their value contribution, and the amount of risk they bring to the table.

What will my true total costs be for every supplier quote?

Among manufacturers, the holy grail of direct materials sourcing is gaining visibility into the complete and true total cost of the goods provided by your suppliers. Finding the lowest piece price, however, is not the same as determining the lowest total cost of doing business with a supplier. To improve your visibility into total cost, you need to develop more sophisticated total cost quoting models. You must be able to capture all the costs related to a supplier decision regardless of where those costs are generated. You must look well beyond the piece price and include transit, finance, and compliance costs, as well as the cost of poor quality. And don’t forget to determine the financial impact of differences in lead time, minimum order quantities, Incoterms, and so on. With the adoption of best practices for visibility into total cost, manufacturers should be able to experience the savings goals identified during the sourcing process.

What trade-offs am I paying more for?

With better visibility into cost, manufacturers can now focus on building processes that promote making the right trade-off decisions among cost, quality, and risk. You may decide to pay more to a supplier with greater capacity, especially if you still hit your cost targets. Or you may pay more to a Tier 1 supplier whose supply chain is certified as completely free of conflict minerals. And don’t be afraid to ask suppliers to provide clear product specs right on your total cost templates for more efficient trade-off analysis. For example, when sourcing any type of assembly, what specific materials were used? Is it nickel or nickel-plated? What is the hardness of the protective shell? How much heat will be generated? Looking at all this information side-by-side with cost data will help you make better trade-offs in terms of risk and quality. Best-in-class sourcing is about getting the right fact-base quickly and having more time to use the data in a strategic fashion.

As manufacturers continue to re-engineer their back-office to keep up with the evolution of the industry, they need to address the roadblocks that stand in front of them like those mentioned above. In additional to advancing people skills and best practices, technology adoption must also play a role. I will address that topic in tomorrow’s post.

Look out for Part 3 tomorrow. The series is based off Directworks’ new paper, A Manufacturer’s Guide to Transforming Sourcing and Supplier Management. If the topic of supplier collaboration is one that you would like to delve into further, join Pierre Mitchell and Directworks’ Stacy Leidwinger on next Wednesday’s webinar.

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