Avon Point Advisors, LLC

Strategy, Sourcing, Supply Chain, Sustainability, Tax Services

THE SOURCING CONTINUUM

It comes as no great surprise that companies are returning their focus to Cost Reduction in light of the lingering recession. Although focusing on cost reduction is nothing new, it does seems to be returning to the forefront as net income expectations remain high while revenue growth remains challenging in the poor economy. Historically, sourcing and supply chain operations are fertile grounds to pursue cost savings. That said, many companies have addressed much of the low hanging fruit or at least they think they have. Go beyond enter the Sourcing Continuum! David Wolski, President, Avon Point Advisors September, 2012

How to leverage your Sourcing Organization to achieve breakthrough savings.

David Wolski The Sourcing Continuum how to truly leverage your Sourcing Organization to achieve breakthrough savings.

It comes as no great surprise that companies are returning their focus to Cost Reduction in light of the lingering recession. Although focusing on cost reduction is nothing new, it does seems to be returning to the forefront as net income expectations remain high while revenue growth remains challenging in the poor economy. Historically, sourcing and supply chain operations are fertile grounds to pursue cost savings. That said, many companies have addressed much of the low hanging fruit or at least they think they have. Most Mid-tier and Leading companies can certainly claim that they have leveraged their spend to achieve cost savings. Savings that comes from incumbent suppliers reducing their pricing is certainly nice - but this isnt an approach that yields significant new savings on a year over year basis. You can only go to the same well so many times. Figure 1. Sourcing Continuum
1. Incumbent Renegotiation
Material Cost Value Levers

3. Component Value Engineering (VAVE)

5. Material Substitution

7. Product Line Make/Buy (Insource or Outsource)

2. Multi-Supplier Competitive Bid (LCR & Domestic)

4. Component Make/Buy (Insource or Outsource)

6. Product Redesign (ICR)

Complexity & Savings Potential

Sourcing Continuum Avon Point Advisors

Relatively Simple Modest Savings Opportunity

Moderately Complex Significant Savings Opportunity

Highly Complex & Cross-Functional Very High Savings Opportunity

In order to truly leverage your organization and deliver significant, sustainable, year over year savings, you need to concentrate on three key activities: 1. Focus your energy on moving across the Sourcing Continuum, 2. Build cross-functional teaming skills within your Sourcing organization, and 3. Implement a multi-year project staging process for your sourcing projects. First, the Sourcing Continuum is an illustration of the different types of projects that Sourcing professionals can lead to deliver savings to their companies (Figure 1). As you move across the continuum the projects become more difficult and significantly more cross-functional but the potential impact dramatically increases. The only type of project a Sourcing professional can execute on his own is an Incumbent Supplier Renegotiation. Every other type of project, including Competitive Bids that lead to a new supplier, involves other organizations such as Quality, Manufacturing, Engineering, R&D, Marketing, or Sales to help execute the project and implement the new solution.

Value-Added Value Engineering (VAVE) involves making design changes to parts/components that either increase its functionality or makes it easier to manufacture (Less Expensive). Different companies have different organizations leading the charge on VAVE but good sourcing professionals are capable of leading this type of project and they know which parts have the most opportunity for savings. A typical VAVE project can deliver 2 to 5 times the savings normally achieved through price negotiations. Make/Buy projects involve analyzing whether certain parts or products are better manufactured internally or outsourced to other suppliers. Decisions that were made several years ago may no longer be valid and may be worth revisiting. Material Substitution involves working with Engineering, Marketing, and Sales to consider new/different materials as substitutes for existing materials (e.g. different grades of steel, plastics, polymers, chemical additives, etc.). Its truly amazing how many good alternatives exist once you open your eyes to the possibilities. Product Redesigns, which incorporate all the other cost reduction techniques into one project, requires significant voice of customer but can generate exceptional value for you and your customers if done properly. Second, if youre committed to moving across the Sourcing Continuum, its critical that your team member are strong project managers and are capable of leading cross functional initiatives. The skill set of a top-notch, modern-day, Sourcing professional is very different than that of a traditional Purchasing resource. In order to effectively collaborate with Marketing, R&D, and other functional disciplines, the sourcing resources must be great communicators, possess strong business acumen, and be technically savvy. If your sourcing project managers arent capable of leading meetings comprised of executives from across your company - you probably dont have the right talent to execute projects on the right side of the continuum. The third key success factor is related to project planning and staging. Given the complexity and the number or resources from across your company that are required for many of these projects, its very important that these initiatives are researched, planned, and socialized well in advance of kicking them off. The more complex projects will be doomed for failure without the appropriate buy-in and availability of key resources from other functional areas. While one set of projects is being worked, it often helps to have future projects being researched in parallel. A good mix includes having twice the number of active projects being researched for feasibility with a smaller subset going through a more detailed due diligence process including cost/benefit analysis. With this approach, new projects can be added more seamlessly as other projects are completed.

It can be challenging to expand Sourcings role into these areas but by doing so you can truly unleash the full potential of your sourcing organization and deliver breakthrough savings to your company every year. David Wolski is the founder and president of Avon Point Advisors, LLC, a Sourcing and Supply Chain consultancy located in Avon Lake, Ohio. Dave has led the supply chain organizations of three multi-national companies. Please visit www.avon-point.com to learn more about Dave and Avon Point Advisors.