Purchasing Parts Vs. Buying Into A Strategy

The old days of “write a specification, collect bids, and pick the low one” are long gone. Your suppliers are now an extension of your company. This is especially true in manufacturing.

Ten years ago or so, few cared where Apple computers were built, who made them, or where the raw materials came from. But that has changed.

A series of home-run products from iPods to iPads put a blazing hot spotlight on Apple, and its entire supply chain. Labor practices at its Chinese assembly plants, environmental practices, and sources of its conflict minerals came under close scrutiny. A business strategy had to change to incorporate corporate social responsibility, and that change required new policies and practices throughout the supply chain.

Not every manufacturing company is as adept at realigning its supply chain to meet changing business conditions and corporate strategies. Think of how long it is taking U.S. automotive companies to move from hammering suppliers for year-on-year price reductions to creating strategic partnerships to encourage innovation and other long-term benefits, as an example.

Now with capacity reductions forced by the recession and the automotive down turn, there is a question if the supply chain can manage the resurgence in manufacturing.

CEOs of world-class companies now see their procurement and supply management as strategically important to their overall business success. If the corporate goal is low cost producer, that demands one set of procurement strategies. Innovation goals require another, as do positioning goals as a premium brand or a socially conscious company.

New Approaches

The old days of “write a specification, collect bids, and pick the low one” are long gone. Your suppliers are now an extension of your company. This is especially true in manufacturing. For instance, there are companies that will manage all your maintenance and repair parts within your own facility. These companies essentially fund and staff an MRO “parts cage” on the factory floor. They carry all the costs of the inventory on their books, use sophisticated tools to anticipate demand and reduce downtime, and on top of that can often deliver costs savings on the parts themselves.

In this new era of leveraging supplier relationships for successful business outcomes the question every CEO has to ask is, “does my procurement division deliver a function, or is it generating value as a strategic part of the business?” The answer to that question probably lies in how procurement fits into these four strategic tasks.

In days past vertical integration was one way of managing to assure even production flow and control of components.  The hard lesson to learn is that we can’t make the large investment in technology for every component we make.  Furthermore, we can’t have latest R&D experts on hand to advance our manufacturing technologies in all areas. 

The realization is that we need a lean flexible supply chain capable of delivering components. Low cost and innovation.  If our competitors have a faster more innovative supply chain, we will be at competitive disadvantage.

  • Generating cost-savings

Your procurement team should know how to analyze your spend by assessing how difficult it is to source each category. Team members should be using procurement tactics appropriate to each category while building long-term relationships with strategic suppliers so you can work together to find ways to cut costs.

  • Bringing innovation to your company

You wouldn’t sell your best new idea to your worst customer, and neither would your suppliers. Your procurement team ought to be cultivating trust with open communications and good practices that encourage your suppliers to bring you their innovations first, or exclusively. Those might generate new business, or simply save you money. Either way is a route to new profits.

  • Managing risk

Supply chains in many industries are circling the globe. A volcano eruption in Iceland disrupts the flower trade from Africa. A tsunami in Japan blocks the delivery of black cars to customers in the U.S. Disasters may be random, but mitigating their risks is not. Smart supply managers are analyzing risks deep into the supply chain and developing mitigation strategies that deliver solid ROI.

  • Integrating operations across geography or operating divisions

In an older model, companies planning new product initiatives would consider the purchasing department as an obstacle that would have to be overcome. World-class companies now call on procurement professionals as leaders or facilitators of cross-functional teams of product and manufacturing engineers, marketing and financial managers.

The key to success is not necessarily creating a supply management organization that does all these things well, but concentrating its skills in the areas that are most important to the company as a whole. Think about how often you hear vendors describe their offering not as a product or service, but “a solution.”

In the same way, supply managers should be doing more than getting a part with a number in the right place at the right cost. They should be literally buying into your company’s patch to success. Indeed in today’s “smaller” world, procurement and supply chain strategies will have a greater impact on your bottom-line financial and operational successes, so you should be prepared to utilize partners in these areas to be that solution providers.

Bill Michels is president of ADR North America, a consulting firm specializing in global supply chain management.

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