Most sourcing and procurement professionals know how difficult it is to accurately quantify the real value if their work.
P. Fraser Johnson and Michiel R. Leenders, of the University of West Ontario and the Richard Ivey School of Business, respectively, have recently offered some excellent insight into that topic in a new article for MIT's Sloan Management Review. A few weeks ago, we summarized their thoughts on the challenges of accurately calculating the real value of supply management and the harm to companies from either under or over-estimating that value. (See
The Challenge in Quantifying Savings from Supply Management.)
This week, we look at their recommendations on how to best overcome those challenges. In the end, Johnson and Leenders say, getting that number close to right not only serves the cause of the supply management function within a company and the professionals who practice the craft there, but actually helps to maximize those savings to the company by eliminating barriers or mis-incentives that can get in the way of optimal performance.
They offer three strategies for more accurately calculating supply management value and getting more of the total savings that may be available:
Focus on the Total Cost of Ownership: This is something of a "holy grail" for the supply function, in which both procurement professionals and their internal "customers" would focus on total supply chain cost - not just purchase price.
"Don’t call the results “supply savings.” The richest opportunities for supply savings originate from cross-functional efforts and coordination," Johnson and Leenders say.
supply managers must be prepared to replace their frequent focus on purchase price savings and take aim instead on total supply chain savings. This requires giving credit to others in the organization who contribute to major supply initiatives, in such areas as engineering, manufacturing, etc.
The authors say, for example, that one
consumer packaged goods company shifted its procurement team's focus from the lowest price to achieving the the best total value. That encouraged teams to consider trade-offs between manufacturing uptime, price and delivery consistency, inventory levels and obtaining and retaining retail shelf space. Since team members were evaluated on team results, individuals had every reason to work together, and ultimately expanded the role of supply management within the company.
Categorize the Different types of Savings: It is a mistake to try to come up with a single number that reflects the total "savings" that were achieved say annually by the supply management function, Johnson and Leenders write.
Supply management-related savings "can come from cost avoidance or year-over-year cost reductions," they note. "They may be the result of improvements in per-piece prices, working capital, variable costs, fixed costs, capacity, quality, sales revenues and margins."
and Procurement Article - Continued Below)