Design for Sourcing
Successful innovation designs for sourcing. Waiting until the prototype phase, after engineers have made material and component choices, increases the chances that all designed-in-costs will be locked in. Considering that the Defense Advanced Research Projects Agency (DARPA) estimates these costs to be, on average, 80% of product costs, this is significant. Furthermore, failure to involve procurement early could risk increased direct material costs, unacceptable risk in supply, unexpected component obsolescence, missed regulatory compliance, the inability to expand into new geographies, the lack of ability to take advantage of sourcing leverage, increased quality inspection costs, raised manufacturing costs, and missed launch dates.
New Product Development is more challenging now than ever before since the majority of products require expertise across disciplines and organizational boundaries. Most products are so complex that it often requires cross-disciplinary teams across the supply base to design, prototype, and bring a product to market. Furthermore, innovation, which is as much as broadening the product development view as it is about managing the product lifecycle, requires input from almost every business unit.
Managing this innovation is no easy feat, but great results are much more likely if one follows the best practices of best-in-class companies that dedicate leadership, centralize control, standardize processes to capture and leverage results, employ technology to facilitate the process, and measure constantly.
Innovation on Demand
Innovation on Demand is an advanced version of TRIZ, Teoriya Resheniya Izobretatelskikh Zadatch, a topic I first discussed here on e-Sourcing Forum in Purchasing Innovation II: TRIZ. TRIZ is a methodology, tool set, knowledge base, and model-based technology for generating innovative ideas and solutions for problem solving and the advanced version employed in innovation on demand, sometimes known as invention on demand, is important because, as pointed out in this CPO Agenda article, it can be used by CPOs who want to help their firms escape the clutches of patent-protected, monopolistic suppliers.
Furthermore, as CPO Agenda points out, invention on demand can do more for a company than just improve terms from a patent-protected supplier or bypass it altogether. “It can replace expensive components with cheaper ones. It can generate product improvements in combination with target costing. It can be applied to any technical problem, whether for reasons of technical improvements, the value-price ratio, or both.” The process as a whole can considerably boost a company’s performance. As an example, CPO Agenda points out the Korean conglomerate Samsung where TRIZ has become part of Samsung’s culture. In 2000, Samsung’s market capitalization was less then a quarter of Sony‘s. Today, it is almost double.
Home Country Sourcing
A lot of companies have hopped on the low-cost country sourcing bandwagon, so many so that many low cost countries are not low-cost anymore. This has inspired some of the more progressive organizations to focus not on low cost country sourcing, but on right cost country sourcing. Right Cost Country Sourcing is a process of not only selecting the right country, but selecting the right country quickly and, more importantly, being able to reverse that decision and select a new country should circumstances change.
However, the most progressive organizations will be those that find ways to source at home and do so competitively on a global basis. After all, when an organization looks at the global risks the World Economic Forum is tracking, it sees retrenchment from globalization, failed and failing states, interstate and civil wars, the US account deficit, and a potential Chinese economic hard landing topping the economic, geopolitical, and societal risk watch lists. This clearly indicates that any organization that can source competitively in its own country definitely has an edge over the competition, considering any one of these risks could bring production to a halt in any organization unable to effectively mitigate such risk.
Visibility First, Consolidation Second
Some organizations hear the oft-quoted fact that, typically, 80% of spend is with 20% of suppliers and go on a consolidation spree, eliminating as many suppliers as possible as fast as possible to get to a number where all supplier relationships can be tracked and managed and associated risks identified and mitigated. This sounds great in theory, until the organization realizes it just cut the only supplier capable of producing the custom GPS chip for the new model of mobile phone it planned on introducing next year, or, even worse, it cut the only supplier capable of producing the guidance chip for the top-of-the-line SUV it is currently manufacturing.
The reality is that most organizations that do not do proper supplier relationship management and proper spend management probably have three to five times (if not more!) suppliers than they need, but the reality also is that until such organizations have visibility into who their suppliers are, what they are supplying, where it is being used, and how they are performing, they are not in any position to do proper supply base consolidation, which, in some cases, might actually dictate the addition of new suppliers where key parts are being singled sourced. Thus, it is important that they acquire visibility into their supplier network before consolidating.
Forget Savings … Avoid Cost in the First Place
Most organizations have a myopic focus on cost savings, but considering there ain’t no saving in a perfect world, this is a level of foolishness that even the SpendFool wouldn’t tolerate! In fact, the SpendFool, in full foolishness, would go Donald Trump on the organization! “You’re fired!”
A leading procurement organization doesn’t look for ways to reduce spend, since this is the result of overspending, which a good procurement organization that does a should-cost analysis on all purchases and makes proper total value awards would not do, but for ways to avoid spend in the first place. Leading procurement organizations will employ substitution strategies, lead innovation-on-demand initiatives, improve inventory management, revolutionize processes, and find ways to get around “fees” and “maintenance charges” that essentially represent low-value to the organization and pure profit to the vendor.