The popular press is loaded with stories about supply problems affecting many industries. Extensive outsourcing of major portions of a firm's value chain, relentless pressure from customers to improve product and service functionality and to reduce costs across almost every industry, and steep global competition have combined to create a search for new sources of competitive advantage. This search has led to supply management, the management of suppliers, and improved supply base relationships to become hot topics in the boardrooms of many organizations.This book presents a roadmap and understanding of what it really means to practice strategic supply management. No longer a transactional activity, supply management is about creating and sustaining new sources of competitive advantage. Dr. Trent articulates how to create a supply management organization that you can count on to deliver reliable sources of supply and, eventually, competitive advantage. He purposely presents a holistic approach that focuses on breadth rather than depth so that readers can see how the different elements that comprise strategic supply management come together to create a hard-to-duplicate source of competitive advantage. Strategic Supply Management presents, in a concise manner, the need for supply leadership, the organizational enablers that must be in place, and the strategies and approaches that leading organizations pursue to achieve advantages in price and cost, quality, cycle time, technology, flexibility, and end customer responsiveness.This is a must read for any procurement or supply management professional; finance, operations, and engineering functional managers; executives who interact on a regular basis with supply management professionals; and academics and students.
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Imagine being called a hogâand liking it! Thatâs exactly how the owners of Harley-Davidson motorcycles feel about the company and its bikes. But this feeling was severely tested during the 1980s and 90s. As with many once-proud brands, Harley-Davidson sold products that no longer met the standards of demanding customers. Global competitors entered Harleyâs markets with high-quality and innovative products, and like too many other U.S. manufacturers, the brand lost its luster.1
Today, Harley-Davidson again stands tall. In its analysis of the worldâs best brands, BusinessWeek said the company is âstill the king of the hogs. Growing sales to women augment the loyal customer base of baby boomers and hard-core bikers.â2 Harleyâs successful turnaround is as much a triumph of strategic supply management as it is engineering and marketing. For years the company kept suppliers at a distance, viewed purchasing as a lower-level activity, and relied on overworked engineers to make selection decisions based primarily on a supplierâs technical ability. These decisions, which often proved not to be the best as the company moved toward full-scale production, had severe consequences on product reliability and costs.
How did the company achieve its turnaround? Harley-Davidson elevated the reporting level of its chief purchasing officer, pursued longer-term relationships with carefully selected suppliers, adopted just-in-time supplier deliveries, created the position of procurement engineer, and brought together the talents of procurement, engineering, and suppliers in a state-of-the-art design center. Supplier on-site residency programs, extensive communication through the Internet, regular assessments of supplier performance, and active supplier involvement on an executive buyer-supplier council also promoted better working relationships.
While these activities are well and good, can Harley-Davidson show us the money? Without question strategic supply management has delivered the results envisioned by the companyâs leaders. Material costs are lower, over half of Harleyâs suppliers perform at a defect level of less than 50 parts per million, early supplier involvement has helped reduce by about half the time and cost it takes to design and build a new motorcycle, and, thanks to cooperative efforts with suppliers, the company now operates with drastically reduced inventory levels. Perhaps most importantly, Harley-Davidson is again one of the worldâs most admired brands. So, the next time you are riding your Harley and someone calls you a hog, accept the compliment graciously. Thanks in large part to strategic supply management, the hog is back!
Todayâs competitive environment requires new ways of doing business. This environment is one where capabilities that win business today only qualify for business tomorrow. It is an environment where global pressures to improve are relentless and severe. And it is an environment where speed, flexibility, and innovation now count for more than sheer muscle.
Market success will increasingly require firms to bring a âtotal packageâ to the table, a package that must include a set of progressive supply management activities and practices. The supply package can be broad, involving activities such as integrated global sourcing, early supplier involvement, commodity management teams, supplier alliances, and supplier development. A common feature of these activities is they each have the ability to make contributions well beyond the functional level. Supply management can affect corporate performance.
This chapter begins our journey through the world of strategic supply management. We thoroughly explore the concept, including a set of principles that underlie strategic supply management and the framework around which this book is structured.
EXPLORING THE CONCEPT
Most firms have worked diligently to improve those parts of the supply chain that are under their direct control. Many managers, in fact, will say they have reached a point of diminishing return as it relates to internal performance. In other words, much of the âlow-hanging fruitâ has been thoroughly harvested. If this is the case, what will be the next major source of improvements? When 60 percent of total revenue, and sometimes more, passes directly to suppliers as payment for inputs, the source for future cost, quality, delivery, and cycle time improvements becomes obvious. Simply stated, most firms would benefit from a more enlightened approach to managing expenditures and suppliers. And most firms have a long way to go before fully tapping into the competitive advantages that strategic supply management offers.
Not too long ago, placing the terms strategic and supply management in the same phrase would quickly be dismissed as contradictory by most executive leaders. Consider a comment by Bruce Henderson, a respected purchasing professional. He once observed that most executive managers regard purchasing as a negative functionâit can handicap a company if not done well but can make little positive contribution. John Hill, another procurement leader, noted that many executive managers view purchases as simply an inescapable cost of doing business that no one can do much about.
How the times have changed. Extensive outsourcing of major portions of the value chain, constant pressure to improve, and ever-increasing global pressures have combined to create a search for new sources of competitive advantage. For most firms an untapped opportunity surrounds the extensive supply networks they rely on but often take for granted. At progressive firms purchasing is being replaced by strategic supply management, and transactional and armâs-length relationships are being replaced by value-added relationships.
Table 1.1 presents a set of factors that affect how rigorously a company should pursue strategic supply management. Competitive and customer pressure to improve, the rate of change within an industry, the ability of suppliers to impact our competitiveness, and the location of suppliers all affect how seriously a company should endorse strategic supply management. Some companies, such as those in banking or other services, will rightfully not see the potential from strategic supply management the same way as companies in the computer, aerospace, or automotive industries. Todayâs global model features supply chain against supply chain, and for most firms external suppliers are an increasingly important part of their chain. Strategic supply management is a competitive necessity.
A major item that affects a firmâs likelihood of endorsing strategic supply management is the percent of revenue that passes through directly to suppliers. Take a moment and look at Table 1.2. On the income statement of publicly traded companies is a seemingly innocent line item called by various namesâcost of goods sold, cost of revenue, or cost of sales. Whatever its title, this account includes all the costs a company incurs directly to produce its products or services, including material costs to suppliers.
It is not unusual in some industries for suppliers to receive 80 percent or more of the amount that appears in the cost of goods sold account. It does not take a rocket scientist to see how large this amount can be relative to other financial line items. We must also consider how suppliers affect a firmâs capital asset and inventory accounts. Supplier fingerprints are all over their customerâs balance sheet and income statement. The importance of making supply management a corporate mandate becomes evident when looking at the numbers.
Table 1.1 Assessing the Need for Strategic Supply Management
Defining Strategic Supply Management
Up to this point, the concept of strategic supply management has been mentioned but not defined. First, and perhaps foremost, fundamental differences exist between purchasing and supply management. Purchasing is a functional group (a formal entity on the organizational chart) as well as a functional activity (buying goods and services). The purchasing group traditionally performs many of the activities required to support an organizationâs operations, including negotiating, buying, contracting, and research.
Table 1.2 Cost of Revenue as a Percentage of Total Sales
A problem at many organizations is that purchasing is a legacy termâitâs been around for a long time and the legacy is not all that great. Many still view purchasing as a reactive, lower-level activity focused solely on managing prices and transactions. Consider the comment of an engineer at a high-tech company when asked recently to explain the role of purchasing at his company. With a completely straight face he replied, âSomeone has to do the paperwork.â For many years when someone was transferred to purchasing, the person wondered what he or she did wrong.
Supply management, on the other hand, is a cross-functional, proactive process for obtaining goods and services that features the active management and involvement of suppliers. The supply management process involves identifying a companyâs total requirements, developing supply strategies, evaluating and selecting suppliers, and then managing and developing those suppliers to realize performance advantages at a level higher than what competitors are realizing. Figure 1.1 presents a broad view of the strategic supply management process.
Keki Bhote, one of the architects of Motorolaâs Six Sigma quality process, argues that a key part of supply management is its cross-functional nature, meaning it involves purchasing, engineering, supplier quality assurance, the supplier, and other related functions working together as one team, early on, to further mutual goals. It is a progressive way of operating, involving internal groups and external suppliers to achieve advantages in cost, product development, technology, cycle time, and quality.
Figure 1.1 The strategic supply management process.
Instead of adversarial relationships, which characterize traditional purchasing, supply management features longer-term win-win relationships between a buying company and specially selected suppliers (a later chapter explains the concepts of win-win, win-lose, and lose-lose). Supply management also involves helping to develop supplier performance capabilities in exchange for continuous improvements. Except for ownership, select suppliers become almost an extension of the buying company.
Our discussion so far has only casually mentioned the word strategic, a word that is tossed around way too freely. In fact, itâs somewhat surprising how often this term is used without ever being clarified or defined. If you had a dollar every time something was called âstrategic,â you would be independently wealthy.
What, then, makes something strategic? What gives us the right to combine strategic and supply management in the same sentence? One perspective argues that something is strategic if it has great importance within an integrated whole. This means that strategic activities, plans, or decisions have the ability to affect the integrated whole, which for our purposes means they have the ability to affect a firmâs overall competitive or market success. Strategic initiatives can affect market or corporate success. This perspective excludes day-to-day decisions or routine activities that are part of traditional purchasing and materials management responsibilities.
Several examples will further clarify this concept. Developing a procurement card program to simplify the ordering of lower-value items, while ideal for driving out transactions costs, will not have strategic ramifications. Entering into a supply alliance that provides access to leading-edge technology before competitors even hear about the technology is a different story. Most of the topics presented throughout this book have strategic implications. They can make a difference at the corporate level.
Strategic supply management processes and approaches are remarkably robust as we move across industries. Itâs surprising how well the language of supply management translates across industry sectors. Every industry evaluates, selects, and measures suppliers; they enter into contracts, many pursue supplier development activities, and most of them source globally. The good new is that laggard industries can learn from those industries that have been at the forefront of supply management. We should not discount the value of someone elseâs lessons learned, particularly when those lessons are learned the hard way.
No longer a transactional activity, supply management is about creating and sustaining new sources of competitive advantage. These sources could involve better quality, lower costs, faster responsiveness to end customer needs, or incorporating before competitors do the technologies and features that differentiate end products or services. Supply managers should envision the domain of advantages they can bring to the table as being broad.
Contrasting Purchasing and Strategic Supply Management
Table 1.3 provides a more detailed contrast between traditional purchasing and strategic supply management. As this table reveals, major differences exi...
