There is some healthy debate on the blogosphere being generated on the subject of whether the strategic sourcing process has seen its best days. All of this got started with a rather interesting guest posting by Dalip Raheja on the Sourcing Innovation blog. Dalip’s argument is that a process that is driven by a principle motivation of cost reduction should not be characterized to be a strategic process that delivers exceptional business results over the longer term horizon. I enjoyed reading the various viewpoints and perspectives to Dalip’s posting. For an entire summary of various viewpoints, you can check out the full listing of commentaries on Sourcing Innovation.
I am admittedly late to this commentary and I ask for some indulgence from readers since this topic is one that I also have some passion about. I happen to be in the camp that advocates that a pure cost reduction driven strategy is indeed not strategic, and there is quite a bit of evidence all around us to reflect this condition. In fact I argue that there are many supply chains right now in a very fragile state, just one major incident away from a full crisis, because of the cumulative effects of a singular focus directed at cost reduction.
We perhaps need to place some context to this debate, since at face value, today’s strategic sourcing processes driven by spend analysis, eAuctions and other advanced supplier management tools have delivered significant savings in both direct, production-oriented procurement as well as indirect procurement. Firms would not be adopting this technology if it was not delivering value, and the various case studies speak to these results.
It is important however to place proper context. The last five years, and especially these last two years of severe global recession have not been kind to supply chain management teams. With top-line revenue growth evaporating in multiple industry settings, CFO’s had no choice but to take control and layout significant cost reduction goals. For a manufacturing firm, the supply chain, both inbound and outbound, holds the key for a good majority of the components that make-up the cost of goods sold, and thus came the mandates to significantly reduce costs, as soon as possible. A CFO having the procurement organization as a direct report in the organization, or having close association with procurement provided organizational leverage for turning to modern strategic sourcing processes as a catalyst for significant cost reduction. Justifying such investments was a safe bet, and companies saved significant amounts of money. As an example, we have commented on Supply Chain Matters how certain consumer product goods companies were able to take millions in supply chain savings as a funding source for new product development, marketing and sales initiatives directed at driving more top-line growth. CPO’s also gained considerable organizational stature by delivering results for the business, perhaps at the expense of other supply chain teams who had to live with the consequences of the ‘lowest-cost’ provider, but in the essence of team, the goal was delivered, and teams move on to the next challenge.
Now, some argue that strategic sourcing is not only thriving, but will take on even more responsibility such as supply risk and performance management. I’m not that confident in that argument, because such an argument stems from a purely functional perspective Many supply chains are being called on for more expectations. They are being called on to remain agile and responsive to unpredictable and changing needs in markets, yet product design and manufacturing are outsourced with external providers. They are expected to continue to deliver more cost savings when most initiatives have already uncovered the bulk of savings opportunities without introducing significantly more risk. Speaking of risk, a globally extended supply chain continues to add unprecedented levels of complexity and risk exposure, both internal and external in nature. As noted, some supply chains are so lean at this point, one major disruptive incident will create havoc.
Firms need to move away from cost-cutting to value and capability driven approaches. The perspective I argue is that everyone is in the same leaking boat, and everybody had better be rowing in the same direction, with the same strategic goals. The debate should be focused on leadership, strategy, and the skills and process capabilities needed to serve customer needs. It is not about one process, but a collection of capabilities. It is not about one function, but a cross-organizational objective on common goals and mutual rewards.