As many in supply chain management know, sourcing and procurement professionals are tightly linked to value in the supply chain; the price of locating and managing materials obviously effects profits. However, many fail to realize is value in the supply chain is derived from more than just calculating sales minus costs. In fact, "softer" skills like collaboration and relationship building may be just as important as unit price in creating customer value and reducing supply chain risk. There are a number of strategic ways that managers can add lasting value in sourcing and procurement. In the end, the most talented supply pros know that putting the biggest squeeze on suppliers doesn't create the best value.
As part of a partnership between APICS Supply Chain Council and Michigan State University's Eli Broad College of Business, the Supply Chain Management: Beyond the Horizon project explored the components of supply chain success, as well as examined elements of an organization's business model, management, and interrelationships between the business model and supply chain operations. In the latest research report from the project, Creating Value Through Procurement and Sourcing Efforts in Integrated Supply Chains, five actions that executives believe are necessary to create value and enhance procurement practices are identified.
In order to increase value, it's important to readjust traditional ideas of what the word actually means in the supply chain. In procurement and sourcing, value has long been measured by unit costs, with successful professionals mastering the art of negotiation techniques to lower prices. However, cheaper items often are lower quality than their more expensive counterparts, which can lead to greater costs – and more risk - down the line. Additionally, time spent on replacing or supplementing low-cost units often translates to loss of productivity. So how do successful managers instead define value creation?
The report shows that the nature of value for supply chain professionals has shifted toward a more rounded approach that measures tradeoffs and best value arrangements. Value in this sense includes forming collaborative relationships with suppliers, rather than those that are purely transactional, in order to gain access to more innovative technologies and service offerings. Supply chain professionals that can leverage supplier expertise are often able to offer better products to customers and create more lasting value, including enhanced customer loyalty.
Create strategic impact
To develop a competitive advantage in integrated supply chains, it's important for the procurement and sourcing team to understand the customer: what exactly are they looking for? Strategic thinking that incorporates knowledge from every step of the supply chain ensures individual teams are not working in silos, and teams can leverage this to create value. That way, teams can focus on making sure supplier capabilities are aligned with customer value propositions.
Four interrelated strategic activities are required for procurement and sourcing professionals to create strategic impact:
- procurement process discipline;
- leveraging buying power;
- strategic sourcing;
- and engaging strategic suppliers.
By connecting suppliers with customers and with other suppliers, organizations can focus on providing customers with the innovation they expect, and not just on lowering costs.
Expand relevant scope
As noted above, with limited visibility across teams, professionals are often focused on functional metrics such as lowering costs instead of the overarching business goals. How can organizations combat this? One thing they can do to improve strategic insight is to expand visibility and responsibility for teams across the supply chain. The whitepaper identifies three processes related to value that an integrated supply chain should include: value creation (new product/process/service development); value delivery (customer order fulfillment); and value maintenance (after-sales service and support).
Take risk management, for example: when procurement and sourcing teams have visibility into the entire end-to-end supply chain, they are better able to identify and manage weaknesses. It's also helpful with regard to new product development and after-sale service, during which expertise from multiple teams can help to create additional value.
When designing a new product, who better to involve early on than suppliers, who are the obvious experts on their own manufacturing capabilities? Executives interviewed in this study recognize that early supplier involvement means lower expenses, due to fewer and less complex redesigns and a better understanding of after-sale serviceability. The idea that value is created through collaborative work is integral to successful supply chains. It's important to extract strategic value through suppliers to develop integrative product solutions and to gain a competitive advantage. This ensures continuity of business goals and combines various skillsets throughout the supply chain.
Earn preferential treatment
With limited supplier capacity today, it's more important than ever to recognize that suppliers often treat preferred partners better. Therefore. it is necessary for managers to foster mutually respectful relationships with suppliers. By building trust and communication, firms cannot only save money but can also benefit from additional innovation and services. As one executive in the study suggests, treating suppliers like partners is a strategic method to build lasting value.
Supply chain management is a constantly evolving field, and it's important that professionals regularly reevaluate their processes in order to garner the most value. As is detailed in the report, traditional value structures that focus on cost-saving techniques have been redefined to include a more holistic understanding of value. Understanding how procurement and sourcing professionals can use these approaches to create value is imperative for the future success of their firms.