Total Value Management

Last Monday I posted a blog entry on “Supply Management or Spend Management” about the “phrase war” between Tim Minahan and Jason Busch that just … won’t … die!

Yesterday, Jason posted his final volley. Both have made excellent points, and these are two blog threads that you should not miss.

It seems Jason believes that Tim is overemphasizing the cost reduction aspects of Spend Management, which Jason says is really about “optimizing spend”, and that supply management is too limiting because it is overly sourcing centric, material focused, and not appropriate from other spend perspectives, such as services. In his defense, Tim says that he understands the holistic focus of spend management, but that it is only a stepping stone to strategic supply management which goes beyond simply leveraging spending power and improving operations to the development and nurturing of supplier relationships that will drive continuous improvements in total costs and performance (as well as joint competitive advantage).

So what do I believe? Again I’d have to say they are both right while they are both wrong. Everything they say is true, and if you truly want to maximize the return from your eSourcing investments, you have to heed and implement everything they collectively mention – leverage spend, understand TCO, improve operations, develop mutually beneficial supplier relationships, and optimize. But I also believe you have to go beyond a supply driven and / or spend driven eSourcing process focused on cost to truly be a market leader and secure long term success.

Look at today’s market versus the market of, say, five years ago. We have global supply chains and an uncertain global economic landscape; increased potential for supply disruptions as a result of unstable geopolitical situations, increasing terrorism, worsening natural disasters, shortening product cycles, and overnight bankruptcies; limited supply in many commodity markets; skyrocketing energy costs; a maze of new regulations to comply with; and decreasing returns from monolithic enterprise IT investments. Although they may have each had a different emphasis, both supply management and spend management were designed to address the issues of supply risk and spiraling costs that are a result of the dynamic market conditions of today’s global market place, but risks and costs are still increasing exponentially for your average company.

The only way to fully address these risks is to optimize your supply chain and associated spend from a Total Value Management perspective. You still optimize your total cost of ownership, but you balance that cost against the supply risk and potential losses each decision entails. For example, overseas single sourcing from a Chinese supplier might be your overall lowest total cost of ownership, but when you combine the regional instability from both a political and workforce perspective with all of the disruptions that could occur between the supplier’s factory and the docks, the overseas ports, the ocean freight network, your American port(s) of choice, and your local distribution centers with the supply risks your supplier has, the potential for minor supply disruptions is high, and if you run just-in-time inventories on commodities with unpredictable demands, the potential losses from even a minor disruption could cancel out by many factors the savings you thought you gained from your TCO-focused sourcing strategy.

That’s why Iasta has adopted a Total Value Management framework for eSourcing and is in the process of revolutionizing its SmartSource suite to build on associated best-practices. As I mentioned in my last blog entry, you need “the right products at the right time at the right price – every time – guaranteed. This requires an equal focus on spend management, to control costs and improve operations, and supply management, to mitigate risks and ensure supply.” A focus that is soundly based in Total Value Management, the logical evolution of Total Cost of Ownership, and the next generation of eSourcing.

You heard it here first, and we will continually focus on this concept of best practices in eSourcing.

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