Originally posted on my other blog, The Red Renegade.
Your organization is working to improve its sourcing processes and strategy. Like areas of spend have been grouped together to determine what the organization spends annually. The department or division responsible for sourcing has identified areas of spend where savings can be realized.
But, as the organization delves deeper, they find that reducing outside drivers of cost isn’t the only hurdle they face.
There are materials and services within the organization that people have been dependent on for years, perhaps decades. Leaning these materials and services, or removing them altogether, will be a major culture shock. Senior management is even wary of cutting off these materials and services.
Senior management wants to save money, but the sourcing group knows that changing how materials and services are sourced, what will be sourced, and when will have a major impact on the organization’s processes as well as its budget.
Sourcing the material and/or service is just one part of the larger sourcing strategy. A lot of work goes into transforming the rest of the organization and how it does business in order for the wins in sourcing to have their full effect – one more part of total cost ownership. Process improvement in other parts of the organization are just as important as improvements in the sourcing function itself.
Total Cost Ownership
As discussed in a previous blog post, Total Cost of Ownership is everything that goes into before, during, and after the sourcing of a material and/or service.
Generally speaking, this includes administrative processing costs, technology costs, overhead, freight, the cost of lead times, if items are damaged, and rework that needs to be done.
Rarely do organizations look at total cost of ownership in terms of what their own organization is doing.
Does each project manager or department use the freight carrier they like the best?
Is there a service the company uses, but could be eliminated if project managers were held to better standards of planning?
Do employees make parts runs because favored suppliers “don’t deliver”?
It’s internal processes like these that need to be looked at in tandem with the improvement of sourcing the material(s) and/or service(s) and organization buys. They are as much a part of Total Cost Ownership as overhead or lead times on materials.
Let’s use an example from my experience.
The company I work for uses a freight service that only delivers between facilities in my company in the city we’re in. This freight service costs about $300,000 per year for them to move material from one facility to the other. We love this external freight service so much, their drivers park their trucks at our facilities.
Why do we use them?
Because sometimes project managers cut work orders associated with one facility, only to draw the material out of another. So materials needs to be shuttled around to ensure the proper materials are in the proper place at the proper time.
We also junk out some of our larger equipment, and this service transports the junked out equipment (they’re rather large) to our central processing facility here in town.
On the face of it, this is $300,000 expended by my company per year.
Immediately some will note that, if PM’s were held to a standard, and their work orders assigned to the correct facility, this would eliminate the need for this service. And can’t we use internal personnel (we have personnel qualified) to load the equipment and drive it to the central processing facility?
But it goes deeper than that. PM’s not assigning work orders to the right facility forces them to draw from that facility, which causes work in the warehouse, and then those materials aren’t there for jobs that are properly assigned to that facility, creating wait times as items are shuffled between facilities. Sometimes its time sensitive jobs that are forced to wait as the warehouses figure out where material went and what needs to be brought in from other warehouses. Sometimes people get lazy, and instead they just put in an order to have it bought from the supplier, costing the District even more.
So it’s not costing the company I work for $300,000. It’s costing them hundreds of thousands, or perhaps even millions, in additional man hours, rework, opportunity cost of inventory, and delays on projects.
Why do we still use this “shuttle” service then? Because we’ve had them for almost twenty years. Because no one has pushed back on PMs and other internal business partners to assign work orders to the correct facility. Because our warehouse personnel are doing the best they can within this system and the shuttle service is a Band-Aid that people have become comfortable with.
In this case, it’s not just a process – it’s a part of the culture.
Where to Begin
So where does a sourcing professional begin?
Start with the sourcing strategy.
The sourcing group has identified a need, and then they go and gather their facts. But they don’t just gather the facts on the surface. They have to dig deeper.
- What are like materials/services that can be grouped with the one being looked at?
- What vendor(s) provide this material/service and those grouped with it?
- What internal stakeholders use these?
- Why are they using them?
- Why are they using them the way they are?
- Are they still needed?
- What would need to be done to consolidate or remove materials/services?
- If this is done, how will it affect the processes and procedures of the different divisions and departments of the company?
These are just some of the questions that must be asked to challenge the status quo, especially if that status quo is costing the company substantial amounts of money.
And it has to be the group responsible for sourcing in the organization that must do this.
While part of sourcing strategy is definitely cost savings and value adds, it’s also process improvement around what is being sourced, and how it will affect the organization.
I caveat this with the organization should not mold itself around its sourcing department. The organization should mold itself around its overall strategy, and the sourcing strategy should support this. But if there are procedures (low level/tactical) changed by sourcing that will help the company achieve its goals, then these should be pursued.
As the sourcing organization moves to change the processes – and perhaps even some of the culture – of the organization, they cannot operate in a vacuum.
Any change initiative needs a guiding coalition, preferably upper management, and buy-in from managers at all levels. It will be up to the Director/Division Manager of the sourcing organization in the company to win that buy-in, and to communicate with upper management for their support.
This isn’t unique to sourcing. Any change initiative requires this. I would argue that sourcing needs it more since most people view sourcing or supply chain management generally as order takers, and resistance to change coming from this area may be greater.
The processes surrounding and effected by sourcing strategies within the organization for different areas of spend are just as much a part of total cost ownership as external factors. Sourcing professionals must take this into account when sourcing materials and services from a strategic level. Some organizations call these individuals Category Managers, and category management is a discipline all of its own with that broad focus. It’s up to the organization to determine how they will conduct their strategic sourcing, and they must do so with an eye to internal process improvement.