them more efficient, and they structure their workflows and processes around that chosen technology.
Instead, they should first review the processes that
need improvement, and only then select the technology that best satisfies those process needs. That may
seem self-evident, but I have seen more than a few
companies buy first and figure things out later.
Perhaps that is why in many companies, the supply
chain organization seems to be “feeding the system”
(such as an enterprise resource planning system) with
information, and they have difficulty retrieving the
type of data they need for making sound strategy and
business decisions.
At best-in-class companies, by contrast, managers
understand that “the system” should help them better
manage their supply chains. They find a way to use
technology to produce beneficial information without
having to perform various “work-arounds” to extract
and view the data. They recognize the importance of
an efficient purchase-to-pay process and have adopted
strategies and mechanisms to get the greatest benefits
from technology.
4Establish alliances with key suppliers. Best-in- class companies work closely with suppliers long
after a deal has been signed. In most circles today, this
is called “supplier relationship management.” But that
implies one-way communication (telling the supplier
how to do it). Two-way communication, which
requires both buyer and seller to jointly manage the
relationship, is more effective. A more appropriate
term for this best practice might be “alliance management,” with representatives from both parties working
together to enhance the buyer/supplier relationship.
The four primary objectives of an effective alliance
management program with key suppliers include:
1. Provide a mechanism to ensure that the
relationship stays healthy and vibrant
2. Create a platform for problem resolution
3. Develop continuous improvement goals
with the objective of achieving value for
both parties
4. Ensure that performance measurement
objectives are achieved
With a sound alliance management program in
place, you will be equipped to use the talents of your
supply base to create sustained value while constantly
seeking improvement.
5Engage in collaborative strategic sourcing. Strategic sourcing is a cornerstone of successful
supply chain management. But a collaborative strategic
sourcing initiative produces even better results.
Rather than consider strategic sourcing as just a
matter for the purchasing department, best-in-class
organizations get internal “customers” actively
involved in the decision-making process. More importantly, they solicit feedback and information regarding
their objectives and strategies from those customers,
which may include functional areas such as finance
and accounting, engineering, operations, maintenance, safety/health/environment, and quality assurance—any internal business unit or function that will
contribute to the initiative’s success. This approach not
only ensures availability of supplies but also results in
lower total cost, streamlined processes, and increased
responsiveness to customers’ changing needs.
6Focus on total cost of ownership (TCO), not price. One benefit of strategic sourcing is that it
shifts the focus from looking only at the purchase
price to understanding the total cost of owning or
consuming a product or service. For significant spend
areas, procurement teams at best-in-class companies
are abandoning the outmoded practice of receiving
multiple bids and selecting a supplier simply on price.
Instead, they consider many other factors that affect
the total cost of ownership. This makes good sense
when you consider that acquisition costs account for
only 25 to 40 percent of the total cost for most products and services. The balance (and majority) of the
total comprises operating, training, maintenance,
warehousing, environmental, quality, and transportation costs as well as the cost to salvage the product’s
value later on.
Identifying the total cost of ownership requires
looking at the entire process of procuring and con-
suming the product or service, something that can
only happen with cooperation and input from both
the buyer and the seller. Best-in-class organizations do
not stop there, however. They also ask suppliers and
internal stakeholders the following important ques-
tion: “How can we work together to reduce the total
cost of ownership?”
Establishing a “total cost of ownership” mindset is a
goal that the supply management organization needs to
embrace and perpetuate throughout the entire enter-
prise. It will not be easy, however, to convince your com-
pany’s executive leadership to truly prioritize value over
price. Since the global financial collapse in 2009, most
chief executives have focused on cost reductions, which
they expect will translate to reduced prices.
