From SCDigest's On-Target e-Magazine
- May 29, 2014 -
Supply Chain News: Measuring Your Purchasing and Supply Chain Integration
Often more Opportunity from Collaborating Internally than Externally, University of Tennessee Report Says; Introduces New Purchasing-Logistics Integration Index
SDigest Editorial Staff
Are many companies missing opportunities for better internal collaboration and integration between their purchasing function and the logistics organization?
The answer is Yes, says a new report from the Global Supply Chain Institute at the University of Tennessee, though we will note in the end the integration being studied is really more about the total supply chain, rather than specifically logistics.
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While the theory and benefits of a more holistic view of true total costs and value have been around for many years, in the end many purchasing organizations still fall back to a focus in unit costs. |
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What Do You Say?
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That noted, there is "a major strategic integration opportunity exists between purchasing and logistics, and failing to capitalize on this opportunity is very clearly causing many firms to miss important opportunities to create value," the report says.
It is actually common for companies to have structures and reward systems that incentivize behaviors that sub-optimize this value potential, in part by sustaining operating in functional silos even within the supply chain organization.
The report also found that interaction between the purchasing and logistics functions in a company is typically informal and unstructured, and "decisions made in these two areas are rarely made in concert with each other."
In fact, purchasing tends to focus decision making on optimizing metrics associated with purchase price and cost of goods sold, while logistics is focused on optimizing metrics associated with delivery and storage efficiency and effectiveness. Neither area usually tracks performance to higher-level financial value creation.
So how to bridge this collaboration gap? Among the "best practices" cited in the report is to create what it calls "an operating decision framework based on best overall total value of ownership (TVO)."
It defines TVO as being total cost of ownership for a purchased item plus level of customer creation that might be achieved from that supply relationship (such as increased product innovation).
While the theory and benefits of a more holistic view of true total costs and value have been around for many years, in the end many purchasing organizations still fall back to a focus in unit costs, and often have their performance metrics structured in that way.
The report quote a supply chain executive from a large consumer products company as saying "Left alone, the culture reverts to a purchasing process based on piece price. To change this culture, supply chain leaders must be actively involved in the reviews - pushing for total value, driving to determine the cost of quality/service issues, and incorporating the true cost of cash."
(Sourcing and Procurement Article Continues Below)
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