The Value Creation Challenge

Add comment October 25th, 2006 David Bush - Iasta

Another great article in the current Frasers/PMACNewsLetter this month is Paul Inglis’ article Supply management takes on the value creation challenge.

According to the article, cutting costs and improving quality is no longer enough (echoing the fact that good sourcing goes beyond simple cost cutting, as discussed in Dr. Lamoureux’s recent post It Only Starts with Cost Cutting). Supply and Spend Management sourcing professionals now have to capture value beyond cost.

Possibly taking a cue from Aberdeen (which now boasts more alumni than employees, see JB’s post Aberdeen’s Hall of Fame Grows Bigger than the Active Roster), this study differentiates “Leadership” (Best-in-Class) practices from “Follow” (Laggard) practices. “Leadership” practitioners deliver more value by reducing the total cost of ownership, rationalizing specifications, and managing demand.

In addition, leaders create value by focusing on four key areas:

• innovation and growth
• value chain optimization
• risk management and supply continuity
• advanced cost management techniques

The last category is quite interesting. The article lists the following advanced cost management techniques:

• Complexity reduction
  rationalizing specifications to eliminate value-draining complexity
• Tiered sourcing
  combining company and tier one supplier volumes so that the supplier negotiates more favorable contracts with its own suppliers
• Mega-supplier strategies
  offsetting a supplier’s advantage in a non-negotiable category by bundling other categories in the negotiation
• Supplier tiering
  restructuring the value chain by bundling or unbundling activities at various value-added stages
• Value-based sourcing
  using supplier capabilities to generate other kinds of value such as shorter time to market or innovation
• Best shoring
  finding competitive suppliers in inherently cost-advantaged countries along each step of the value chain
• Target costing
  determining what a company ought to pay for an item by analyzing various ratios of its performance, technical and other characteristics to its price
• Design to cost
  revising specifications to avoid costs, for example, by eliminating over-specification or optimizing subsystem design
• Collaborative cost reduction
  generating and implementing cost reduction ideas (and sharing risks and benefits) with suppliers
• Demand management
  rationalizing requirements, controlling approval and reducing or eliminating non-essential purchases in certain (primarily indirect) categories

About the only thing they leave out is the usage of advanced decision optimization within the sourcing process to make sure the total value of your acquisition is optimal.

Entry Filed under: Analysts/Research, General, Supply Management Best Practices