Information Management and Data Management

The most essential aspect about purchasing is having all the data and information about the product. Many companies have gone ahead with extensive data mining activities and had some amazing results. There is lots of examples with organizations adopting spend analysis projects at regional as well as global level to reduce spend and enhance savings.

However most of the spend analysis project simply put the readily available data like spend involving a particular category of product through a period of time and then analyze it to create value in terms of consolidation and savings. This method is very effectively used till now but organizations have to move ahead from here to tap in large about of information that is available in the system apart from simple numbers and data sheets.

To understand this concept it is very important to understand the difference between data and information. Data is essentially any kind of number i.e. part price, part number, supplier name, share of business, yearly spend, raw material / foreign exchange prices and trends etc. Information is knowledge about supplier base and part. Generally there are key suppliers in every organization and there is a continuous negotiation and interactions which takes place with them. These negotiations don’t happen only with one dep’t or person but with different persons and departments.

The reason why I defined data and information is that data analysis is becoming increasingly common but at information level even the first step of compilation has not begun yet in most organizations. Data analysis was the first step of Consolidation which has been on since a decade now. Now organizations should move ahead with information management and analysis.

The essential aspect of data and information management is that buyer should have each and every bit of information with him during its sourcing process. This will take science of purchasing to next level. I would talk about details about this thought in my next blogs and will try to explore the topic in full detail. Also I would like to involve my reader’s participation to refine my thoughts on this topic.

Buyer Role in Managing Strikes

There have been lots of new aspects about purchasing that I am learning lately. The latest is understanding of handling of strike at supplier end. This is a nightmare situation for a buyer when his supplier, who is single source for many critical components, is hit by strike. To start with once the strike has started the buyer has very little time to react but there are lots of steps which can prevent the strike or give advance warning signals of the same and also prevent the line stoppage at his end.

Buyers are the eyes and ears of an organizations supply chain. They are the one who are at constant touch with the outer world and they have to keep looking for clues of any impending catastrophe. Understanding the enivornment at supplier end is possible on frequent supplier visits. There is a popular saying that “Prevention is better then cure”. Not only looking minutely at the process and raw material of the supplier it is important to keep on communicating with workers at supplier end. Machine operators, dispatch workers and other shop floor workers provide many clues of distress related to salary or working culture. Immediately this should be discussed with the supplier management at the highest order and necessary corrective actions should be placed.

Although despite of best efforts strikes do happen like the current strike in labor sensitive North Indian Auto Hub around Delhi / NCR. It is also important to deal with the crisis by moving to alternate source and planning your inventory accordingly. However it is very difficult to completely negate the effects of these strikes and almost impossible to prevent such occurrences but detail and thorough planning can reduce the downtime at the manufacturing organization to certain degrees.

Indian Automobile Industry: A story of success

The emergence of India and China has been synomanus with two different terms manufacturing and service. If you compare manufacturing infrastructure in China and India then China dwarfs India . But now, India has proven that its manufacturing Industry, specifically auto-manufacturing can surpass China with its quality and low cost. While China 's auto exports plunged 60% between January and July to 1.65 lakh units, India exported a total of 2.30 lakh cars, vans, SUVs and trucks in the period, representing a growth of 18%.

China has become a great auto exporter because of huge subsidies, an undervalued exchange rate and dirt-cheap credit. The amazing success of Indian story could be attributed to two big factors one is very competitive and open Indian auto industry and innovation success of Indian auto industry.

Indian auto industry has expanded heavily from mid 1990s when only cars available were of Maruti Suzuki (a Suzuki group company). Now with heavy duties on importing cars and exploding domestic car market saw world leaders like GM, Toyota , Honda, Hyundai entering Indian auto space. Also local players like TATA and Mahindra benefited from increased spending power from Indians working in successful IT industry. The Auto companies competed by constantly producing new models with improved features like fuel efficiency and increasing their capacity in India for domestic market. The cheap and highly skilled Indian manpower helped these companies t o not only increased their footprints in India but the low cost of production with high quality is making India a favorable destination for all major auto OEMs to make India their export hub.

India is also increasingly becoming synonymous with innovation. It is already becoming hub for small car and is home of world cheapest car i.e. $2500 Nano from TATA Motors. Also big R&D centre is being planned by Suzuki to enhance development of new generation models of his existing portfolio of Swift and Alto which is buoyed by latest Suzuki success of indigenously developed A star which is a big hit in export market for Maruti Suzuki. Others players like GM and Ford are also ramping up there R&D centers in India to develop small car concepts faster and effectively.

With all this development India has shown the world of its success in competitive market and answered China’s manufacturing might with new innovative concepts and designs.

Some Update

I have been missing on the blogsphere for quiet a while due to some changes in my current job and location. Though changes are part of life and most of the times changes open you towards new experiences and horizon. Due to this specific reason I have decided to shift. But still I will be back on my blog to share new and exciting things about Purchasing soon.

Contract Renegotiation Tips

Every Contract which is finalized comes for renegotiation whenever there are changes in business environment. Jamie Liddell recently wrote a very good article at SSON on contract renegotiation titled as “Top Ten Tips for a Smooth Contract Renegotiation”. The article contains ten tips to smoothly renegotiate the contract. Excellent article and must read for buyers. Here is the summary of these ten steps:

1. Know what’s right for your business.
Have complete data about your Contract. Discuss internally with your stakeholders and leadership and clearly define goals and objectives you hope to achieve in the renegotiation.
2. Have clear rules of engagement.
Set out and agree fair rules with your supplier. Define time lines and people involved in the negotiation. Make your discussion fair and just in order to maintain a long lasting relationship with your supplier.
3. Make sure it’s worth everyone’s while.
It takes two to tango. There needs to be an incentive for the supplier to renegotiate specially in case it’s a midterm negotiation, you must offer him some reward to conduct a smooth renegotiation.
4. Bring the right people to the table
Assemble the right team. The team should have people who can make long term decisions. These teams also need to preserve an effective relationship so that they can work well together after the revised deal has been struck.
5. Aim for success, plan for failure
Every negotiator should be prepared for the BATNA (Best Alternative To Negotiated Agreement). Should the parties not be able to come to agreement, what happens? Both parties should understand the floor and the ceiling boundaries.
6. Understand the status quo
Understand the details of contract. What is going right and what is going wrong in the contract and importantly what could be the ramifications of changes proposed in the negotiation.
7. Learn from your mistakes.
Every contract is negotiated with some assumptions of quality of service and productivity of the service. However things normally don’t go as per planned. So understand why things didn’t work out the way it was negotiated. You should think about long and hard, and work towards overcoming in this next iteration of the deal.
8. Your tone matters - a lot.
Don’t be too aggressive or weak & defensive in your tone. Present a solid, factual, respectful case to the supplier in the best professional manner.
9. Know your other options.
Always understand your options. Whether you have a source ready or a competitive source could be easily found out or you have to ensure that current service provider provide the service. It’s imperative to understand where indeed you can go in the event of things getting bogged down
10. Don’t dawdle.
Instill a sense of urgency. Clearly communicate your objectives and attempting to find ‘the middle way’ to achieve those objectives.

Single Source Supplier: A Buyer Nightmare

Negotiating with Single Source Supplier is always a difficult situation for any Buyer. Often these cases are common when you are buying spare parts and specialized tooling or services. Also when you are managing legacy plants there are often cases where your choice of buying from different supplier is limited. How to negotiate in these cases is difficult and finding a win-win solution are limited.

Recently there was an article at Supply Excellence by Justin Fogarty titled “Negotiating with a Sole Source Vendor”. The article refers a similar debate happen on LinkedIn where there was many solution offered and Justin summarize these solutions into 6 point summary.

1. Play to Each Other’s Goals: Find the balance of power. Establish clarity about your and suppliers goals. That is what would make you more attractive to them and can be used in exchange for cost reductions.
2. Analyze the Cost-Drivers: Best negotiation strategy in any scenario. Understand each cost drivers and suppliers logic of pricing and negotiate based on that.
3. Squeeze out More Value: In specific cases where it is forced by law to deal with service provider. Offer them more freebies.
4. Maintain Competitive Spirit: Always check the competitive level of pricing. Supplier must get the feeling they may not be the single source on the next project if they are cheating you.
5. Stay Alert: Keep on checking the pricing of whole Commodity. There might be instances where initial purchase price is high because of new technology ( Ex : Servers) and in few months down the line as newer technology comes the actual price of the same server has gone down. Suppliers generally don’t forward the price reduction. Other point is if you are buying the same item again and again from single source you can leverage and ask for discount.
6. Bring in the Heavies: Involve Higher ups in negotiation which generally helps during negotiations.

You can read more about these points in detail from Justin’s Article. Also post any new points you think could help in negotiation better while dealing with single source supplier.

Global Supply Chain vs Regional Supply Chain

Globalizatation has almost reached its peak in last decade and since the start of recession there has been a lot of talk on whether globalization will survive the new wave of protectionism specially which is done by western governments to stabilize their economy and improve their job market.

Another interesting aspect coming out from study of Globalised supply chain is that it is becoming very complex. It is becoming increasingly difficult to identify the true cost of the product (in cases Tier 1 and Tier 2 suppliers are placed across the globe), the benefits of having a globalised supply chain and overall risks associated with a global supply chain.

Due to these factors companies are now pushing for much simpler and near shore supply chain so that risks associated (in terms of cost, delivery and quality) with the supply chain can be managed easily. Procurement Leaders recently ran an article “Regional procurement the new globalisation”. The article quoted , Dan O'Regan , head supply chain of Ernst &Young as saying that "I think you will find smaller, more regional supply chains”. The same view was supported by CEO of Philips Gerard Kleisterlee.

But the fundamental question is that whether environmental issues or economic issues can force companies to abandon their Global Sourcing objective. Especially when companies across the globe have invested so much in building infrastructure for it and moving away from Globalised setup to regional setup will diminish the benefits of economies of scale achieved (by the companies) by integrating their supply chain.

The answer to the question remains a tough one to decide. There are lots of benefits of smaller supply chain as it gives increased visibility to spend, less cost to manage and more control while global supply chain provides better leverage in term of volume, access to wider supplier base and best cost across the globe. In my view the idea of globally connected supply chain is still economically superior to abandon in a hurry.

Overview of Spend Analysis Market

Spend Analysis is one of the most important part of ePurchasing Market. Analyzing Spend data and then consolidating spend between key supplier has now become key to purchasing policies. Though every company wants to analyze and consolidate it’s spend but only few has the requisite capabilities to do so. To bridge this gap there are lots of players who has now come up. The spend analysis market is increasingly becoming more competitive and crowded. It is growing fast and provides a range of offerings based on complexity and price. However it’s a healthy sign for this new market as newer innovation and better products are coming into the market. Also emergence of Saas has given a great amount of boost to ePurchasing Market and Spend Analysis suppliers have used the opportunity to maximum extent.

Spend Analysis though has a very old beginning but with the boom of ePurchasing Market in early 2000 it has started to develop and prosper in great deal. Andrew Bartels at Forrester Research published a very detailed white paper on ePurchasing Market Aptly titled Predictions 2009: ePurchasingMarket. He covered in great deal about the whole market and also given some overview about Spend Analysis Market. As per the report by Andrew Spend analysis market has achieved a double digit growth since 2004. Growing by phenomenal 27% in 2008 and to put matter into prospective it CAGR from 2004 to 2009 is 20%. Also it is expected to increase (despite of tough economic conditions) to about 13% in 2009. The data as a whole confirms a very healthy picture of Spend Analysis market.

Along with growth in the sector there is also a growth in the number of suppliers offering highly efficient and unique products. Susan Avery recently published her article titled Purchasing's guide to spend analysis at Purchasing.com. The article covers very comprehensively almost all the major players in Spend Anysis Market and gives an exciting insight into major features of the product offered, Suppliers Claim about their product and their pricing model. The report is very useful to all those who wants to know in detail about this market.

Some of the Major Supplier Highlighted in the article are:

1. Ariba.
2. Zycus Inc.
3. Emptoris.
4. Basware, Inc.
5. BravoSolution.
6. CVM Solutions.
7. Enporion, Inc.
8. Fieldglass, Inc.
9. Global eProcure.
10. Iasta.
11. IQNavigator.
12. Insight Sourcing Group.
13. Ketera.
14. Oracle.
15. PurchasingNet, Inc.
16. U.S. Bank.

SaaS An Overview

Saas is Software as a service. Wikipedia define Saas as “Software as a Service is a model of software deployment whereby a provider licenses an application to customers for use as a service on demand. SaaS software vendors may host the application on their own web servers or download the application to the consumer device, disabling it after use or after the on-demand contract expires. The on-demand function may be handled internally to share licenses within a firm or by a third-party application service provider (ASP) sharing licenses between firms.”

To understand the concept just imagines using licensed software through internet without paying any license fee. It is a low cost way for doing business and obtains the same benefits of commercially licensed, internally operated software without the complexity and high initial cost (license Cost).
Saas applications are developed specifically to leverage web. The application are priced on a per-user basis, and often charged with additional fees for extra bandwidth, storage or other options. They give users an opportunity to upgrade their account in accordance with specific needs they might have in future.
The Speed of Deployment is also very fast. The application is already up and running on the vendor’s servers so you just have to get your data into the system. The control over the data is however the main reason of concern. Data is stored on the vendor’s servers. Reputable vendors back up their data and store backups in a secure location. Most vendors also provide you with ways to export your own data.

Benefits of SAAS

Cost Savings: Buying the Patented product from a firm is generally associated with huge license fees. A normal software installation is a very big and cumbersome process which involves experienced IT people and also engage various employees at different levels. The real cost of implementation normally exceeds cost of software itself.

Save Time: Because you eliminate many of the typical implementation tasks associated with licensed software and because the software is already up and running on the SaaS vendor’s data center, deployment time tends to be much shorter with a SaaS application than a traditional one.

Immediate Access to Innovation: Every new version of licensed software is costly and complex to update. With a SaaS subscription, on the other hand, you benefit from innovations on an on-going basis. As soon as a new or improved feature appears in the application, you can begin using it.

The main Reason Saas applications are catching up with the industry is because SaaS is an excellent operational model. It frees up resources and allows organizations to concentrate on their core competencies.

History of Purchasing

History of Corporate Purchasing started in late 1890s purchasing was rarely used as different department except some railroad organizations. Even during early 1900s purchasing was considered to be a clerical work. During World War I and World War II purchasing function increased due to the importance of obtaining raw materials, supplies, and services needed to keep the factories and mines operating.

During 1950s and 1960s purchasing continued to gain stature as the techniques for performing the function became more refined and as the number of trained professionals increased but still purchasing agents were basically order-placing clerical personnel serving in a staff-support position.

In the late 1960s and early 1970s, purchasing personnel became more integrated with a materials system. As materials became a part of strategic planning, the importance of the purchasing department increased.

In the 1970s the oil embargo and the shortage of almost all basic raw materials brought much of business world's focus to the purchasing arena. The advent of just-in-time purchasing techniques in the 1980s, with its emphasis on inventory control and supplier quality, quantity, timing, and dependability, made purchasing a cornerstone of competitive strategy. Various different questions became the order of the day for a buyer like
Are we buying at right cost?
Supplier is producing it at right quantity or not?
Whether supplier Is producing the right product or not?
Whether material will come at right time or not?
Whether buyer is buying for the company or for personnel gain?

During Early 1990s, Value Proposition in purchasing increased. People realized that by letting purchaser negotiate and ask for discount bring lots of cost reduction. COST SAVINGS become a buzz word and ofcourse control over the buying process remains one important function of purchasing.

During Late 1990s the purchasing evolved into strategic sourcing. Enterprise wide process that continuously improves and re-evaluates the purchasing activities of a company. More emphasis on supplier data base begun. Contracts were sourced for long term basis to have better cost. Supplier relationship building and supplier management started.

In the past decade of 2000s Purchasing evolved from a myopic view on cost to much broader terms. Some of the new developments which are widely used now are:
Assessment of a company's current spend (what is bought where?) – SPEND ANALYSIS
Assessment of the supply market (who offers what?) –LOW COST COUNTRY SOURCING
Procurement Technology Evolved - (SAP, ERP)
Procurement Outsourcing Evolved - (P2P Model)
Total cost analyses (how much does it cost to provide those goods or services?) – TCO
Identification of suitable suppliers. – SUPPLIER MANAGEMENT
Development of a sourcing strategy (where to buy what considering demand and supply situation, while minimizing risk and costs) – ADVANCE STRATEGIC SOURCING
Negotiation with suppliers (products, service levels, prices, geographical coverage, etc.) – Data Mining and Benchmarking
Implementation of new supply structure – Lean Purchasing

In future Purchasing will continue to evolve with more focus on complete supply chain. Even purchasing at Tier I and Tier II will be looked in much more minutely. Suppliers will be key business partners driving new technological breakthroughs to drive cost down. Also Technology in Purchasing is evolving very fast and will redefine the way we procure and source currently. Purchasing is now recognized as a major function whose importance is immense and amount of value it brings to an organization is huge.

Outsourcing Industry: Factors of Growth

Following up on my earlier blog highlighting challenges for outsourcing industry however the industry is showing lots of resilience and as a whole it will bounce back from the lows to period of double digit growth again.

There are few factors which make the industry growth in future very much possible:

Business Expertise: Organizations has gained lot of expertise in handling outsourced work since it started in last decade. Now organizations have matured in handling the business process of identifying opportunities to reduce waste and streamlining the process in an efficient way. In short they have moved from being the fresher in the business and doing the work assigned to them to subject matter expert and now doing not only the work assigned to them but also with their past experience telling clients how to do business more efficiently. Now they have set examples of managing outsourced work. It’s a remarkable achievements and this opens the door of bigger and better future for the industry.

Globalization is still on: The Recession has been very severe but still globalization is the buzz world and if I say it is the key to make your company stronger in recession. Organizations with excellent global delivery model in outsourcing are still the easiest way for organizations to outsource. Outsourcing though doesn’t cover the complete globalization but still provide an excellent start for the companies willing to go global and is also cheaper and now more reliable way for companies to achieve their global expansion plans.

Technology and Skills: It is ironical that outsourcing companies like Wipro and Infosys are now developing technologies that can challenge the best in the business to collaborate or compete directly. Recent example is Wipro tie up with Oracle with which Wipro will deliver PeopleSoft HR to various client bases using Wipro BPO model.

Pressure from Competition to reduce operating costs: Outsourcing saves money is still true and if your competition is saving money more then you then you have to find ways to reduce yours. Finding the right outsourcing partner, finding the right outsourcing process and doing it at the right time are the three keys. Outsourcing decisions can still provide lots of cost down and bring in better process control if done correctly.

In all Outsourcing is still a concept very much viable and Outsourcing organizations are becoming smarter and efficient and are now offering better quality, process, technology and cost optimization. So future of the industry looks secure and growing.

OutSourcing Industry: The Challenges

Outsourcing industry has been steadily growing since past decade. After becoming the toast of the discussion in every big and small company during last decade the things are coming to somewhat slower growth in these recessionary periods. There are many experts who are now looking at the whole outsourcing model with skepticism and predicting a slower growth with more focus on near shore sourcing.

Outsourcing mainly started with the concept of lower labor cost in countries with abundance and untapped human resource. The benefits outsourcing brought for organizations were huge in terms of cost. Same work can be done far more cheaply at remote location the world. This changed the way businesses were done globally. Each
Organization moved from an in-house model to a hybrid model of strategic in house work and non strategic work outsourced. The hybrid model was huge success and outsourcing industry registered huge growth in last decade due to it. The world has become a global place where everyone is connected and companies are present around the globe.

The hybrid model received the most severe test now in this recession. There were few reasons
1. The cost benefit of moving non critical business outside has been long utilized and the cost advantage of the organization has been largely negated with the fact that every competitor is following the same model.
2. There were some inherent inefficiency in the system due to the fact work was done outside the organizations and there were always stuff lost in translation. However these inefficiencies were either too meager (in terms of cost advantage) or were handled well that nobody counted it in the issue list.
3. The cost of doing the work near shore has dramatically increased with high unemployment rate resulting in cheap labor and more near shore facilities available now.
4. Huge Fluctuations in Dollar and other currency in past few years have affected the bottom line of most of the Organizations. The outsourcing model is well built to manage some small fluctuations but kind of fluctuations seen in last few years are hurting the model a lot now.
5. There is huge internal social pressure also for organizations cutting cost and jobs and moving them to different country.

These issues had lead to considerable slow in outsourcing industry. But with these negatives there are a lot of strong points also which will ultimately decide the future of this industry going forward. I hope to highlight those points in my future blogs.

Supplier Network Integration

The major function of the buyer is to know its supplier base and keep on looking for new suppliers that can bring better cost and technology to the organization. With the large information available nowadays there are lots of suppliers that are being managed by a buyer and the organization. It is very important to manage these suppliers well. With e-procurement it is worthwhile to add suppliers to the overall supply chain in order to enhance the performance of the whole program.

This result in ensuring long lasting bond that can generate lower costs and quicker turnaround on sourcing and payment activities. The major benefits of Supplier Network Integration are:

1. Today Organizations are increasingly moving towards the process wherein suppliers can see the current and future programs of the Manufacturer thus building their own production and sales plans. This helps in clear and efficient communication between the supplier and manufacturer. Also suppliers can update and react immediately to any changes quickly.
2. Suppliers are being sent both RFQ (Request for Quote) and PO (Purchase Order) electronically through EDI or XML thus saving lots of money for the organization. This not only reduce the paper work done by the organization (good environmentally also) but also results in quick turnaround by the suppliers. This also reduces chances of having any manual error thus making the system more efficient and reliable.
3. Suppliers also can see their payment amount due and payment due date. Also if there are any issues with the invoice submitted or any reason in delay in payment. The quick sharing of information through the system helps in quick resolution of the issue.
4. The best benefit of all is for organizations as they can quickly see the spend under each supplier and can make their future strategies based on the data available.

Spend Analysis

Spend analysis is the process of aggregating, classifying, and leveraging spend data for the purpose of gaining visibility into cost reduction, performance improvement, and contract compliance opportunities. It is part of an overall spend management and visibility process that includes the analysis, award, and monitoring of corporate spend. Additionally, it is the first and last step of the strategic sourcing process that drives total value.

Spend Analysis gives out the data regarding who is Buying, What is being bought, from whom, from where, and at what price.

Spend analysis can be an important competitive advantage for companies that use it, especially in highly competitive industries. It enables companies to out-think and out-execute their competitors by helping them lower costs and leverage supplier relationships. Spend analysis consists of six phases, which are repeated cyclically on a quarterly, monthly, or even weekly basis. The level of effort is highest during initial dataset construction; subsequent refreshes require significantly less work. The fifth step, Spend Decision, ties spend analysis directly to the overall sourcing process.

1. Collection, Consolidation and Translation
2. Cleansing and Categorization
3. Data Enrichment
• Commodity Mapping
• Data Extension
4. Analysis, Assessment and Reporting
5. Spend Decision
6. Refresh and Maintenance

Implementing a successful spend analysis project is not necessarily easy. It takes a lot of work and a lot of challenges will need to be overcome, especially the first time the organization undertakes a considerable spend analysis project.

In getting a spend analysis project up and running, the challenges are the following:

• Lack of Spend Understanding:
Chances are that organizational spend data currently exists scattered throughout disparate
Systems, each of which uses different classification schemes; consequently, no one knows for sure how much is spent on the same supplier, or the same commodity, across the organization.

• Lack of Resources:
A sourcing team might have difficulty obtaining the C-level executive buy-in they need to help them secure the budget and support that is required to ensure a successful
spend analysis project.

• Required Analytics Capabilities:
Significant analytics capabilities are needed both for the extraction and cleansing of the data and in the execution of the spend analytics process. This is true from both a technological perspective and a human resource perspective.

Once a spend analysis system is in place, there are a number of studies that can be performed that improve visibility with regard to appropriate sourcing strategies. These data studies include building commodity-specific datasets, identifying areas for demand reduction, monitoring contract status, detecting fraud, and running an opportunity assessment.

While challenges exist, there is great reward for those companies committed to a spend analysis project. Companies that leverage best practices will contribute to the overall success of a spend analysis project in more ways than might initially be visualized.

A list of best practices includes:
• Identify Business Needs and Organizational Goals
• Define Corresponding Spend Visibility Requirements
• Understand and Baseline Organizational Spend
• Identify and Segment Key Commodities
• Leverage Category Expertise
• Have a Holistic Approach
• Analyze Continuously
• Utilize Decision Support Tools.
• Ask the Right Questions.
• Cover the Majority of Global Spend.
• Institutionalize Knowledge.
• Invite Everyone to the Party.
• Build More Than One Dataset.

Note: The Article is essentially taken from eSourcing Handbook. The article is only meant for reference for people interested in topic. Additional details about the topic/ Book are available on http://www.esourcingforum.com/archives/category/blog-aggregator/

Bangalore to Buffalo: Procurement BPO industry needs to innovate to sustain and survive

“Bangalore to Buffalo”, is the new message from President Barak Obama to US Industries. This message was discussed in great deal during his presidential campaign and now he is living up to his promise. Many critics says its more of a political move then economical and if you see some of the facts around it looks more the same.

India has been the forefront of BPO revolution since 1990s. US Companies have opened there offices in Bangalore to cash in on the phenomenon and they invariably achieved the cost saving objectives by doing so. Is it possible for Barak Obama or US administration to reverse this tide and especially if you look into the supply chain and procurement prospective.

Procurement BPO industry has been growing a lot since 2000s and India has cashed in from the opportunity. India controls almost 69% of the business sphere as highlighted by a study conducted by AMR Research in 2009. This has been highlighted in his article India's back-office dominates procurement outsourcing by Phil Fersht of AMR Research.
Another study published by AMR Research (i.e. Supplier Management BPO breaks a billion) in terms of value of business handled by Supplier Management BPO sector has crossed $1 Billion mark.
Phil highlighted the key factors for this phenomenonal shift as:
· Service providers have successfully shifted their delivery resources to India.
· The onshore vs offshore mix for procurement is successfully materializing.
· Procurement BPO is being taken on by new industry sectors.

The study highlights the fact that business model of outsourcing is still strong and the overall business is growing in this field.

Can the current scenario of protectionism change the tide of Procurement and Supply Chain outsourcing? Many experts say the overall impact will be minimal. However the industry as a whole need to continuously innovate with new business model and take newer avenues of growth to survive the wave of recession and protectionism. The outsourcing has started from simple transactional works of issuance of contracts and managing data. It progressed towards handling low value spend buy and now with new procurement techniques like spend management, e sourcing the offshore concept has now become a strong part of procurement function of all major organizations.

Organizations needs to add more and more value to their products and try to innovate in order to manage not only low value spend but strategic spend also independently. This will be the next phase of evolution of Procurement and Supply Chain Outsourcing industry that will not only enable them to tide over the current scenario but will help them retain their global leadership in the field.

Paradigm Shift towards Supplier Management in Global Purchasing

The current scenario of recession has renewed the focus on supplier risk management. Organizations are focusing great deal to understand different parameters which are helpful in determining the health of the supplier base. The best strategy to ensure smooth functioning of supply chain is to have an eye on the current supplier base while be proactive to have an additional supplier ready in case of any disruption due to failure of any key supplier base.

However increasing your supplier base and distributing the share of business between them does effect the spend management of the organization. Instead of focusing on few supplier and consolidating your spend between them is suppose to be the best way forward until few months back.

So many supply chain professionals are facing this dilemma of having to choose from two different scenarios:

1 Consolidating your spend between key supplier base and work with these key suppliers to achieve better productivity, more knowledge as well as expertise inputs and achieving cost savings targets.
2 Make a broad supplier network and distribute the spend between the supplier such that in case of failure of any supplier the impact on supply chain is minimal.

The answer to the problem is not simple. There are numerous factors involved in the decision making like amount of total spend, economic health of supplier base, the supplier base location, the technological resources available at supplier, suppliers willingness to be the major supplier, suppliers spare capacity.

The final solution could be much closer to Point 1 i.e consolidating spend but the current economic scenario has introduced a very dynamic picture into the idea of supplier and spend consolidation. The drive in the first decade of 21st century is for a push towards best cost from any location possible. The idea was great till everybody was making money and there were no disruptions but now the idea of best cost from any location has changed to best cost from best location.

Consolidation will remain the key focus for everybody but supplier selection and its continuous monitoring and its continuous management will be the focus now. The mad rush for lowest cost will abate and more factors like supplier capabilities and suppliers economic health will add a new dimension to Global Purchasing and Supply Chain.

Low Cost Country Sourcing: IPO vs BOEG

Low Cost Country Sourcing has evolved from an option to an imperative. LCCS can be done in two ways, First company manufacturing complete product and shipping globally from low cost countries(like apparel, toys etc) or Second organizations sourcing only parts and subassemblies from low cost countries and produce the finished goods at different locations (like automobiles, heavy machinery etc). Although LCCS started with low value goods being manufactured in LCCS but the trend of finding the best cost supplier of parts and subassemblies have now become an integral part of every organizations supply chain.

Organizations have adopted two ways to achieve part / subassemblies sourcing from low cost countries.
1. Setting up their International Purchasing Offices (IPO) at different low cost countries to develop parts and supplier base.
In the last few years, it also has become clear that international procurement offices (IPOs) are an exceptional way to manage and optimize a company's global sourcing effort. The purpose of establishing an IPO for most companies is to maintain a staff of local buyers and quality engineers near the sources of supply. Obvious advantages include local language capability, knowledge of local markets, reduced travel costs, and potential for greater leverage of the corporate purchases for a given commodity. Additional benefits can include local supplier development programs, enhanced quality oversight and frequency of audits, identification of potential suppliers for other commodities, and support for expansion of internal manufacturing capability in the region.

The major roles of an IPO are:

ü Performing supplier selection and maintaining a data base of top suppliers.
ü Doing detail capability study of supplier (quality, capacity and export capability).
ü Doing supplier quality improvement work.
ü Be a part of sourcing cycle and help suppliers win global business.
ü Manage contract compliance and quality issues.
ü Helping with local customs and norms of doing business.

2. Take the help of Business Outsourcing Expert Groups (BOEG). These are third party expert groups which help the organizations identify the kind of suppliers’ organizations can approach and help them achieve their cost savings targets. Prime examples of BOEG are IBM, Accenture, and Ariba.

Both approach’s have their Advantages and Disadvantages:

IPO approach help organizations to understand the country supplier base and to make long term and effective business relations while BOEG approach is used by organizations who wants to quickly achieve their LCCS goals.
Second critical point in deciding whether to have an IPO or BOEG is companies overall spend. If spend is low(less than $10 Million) it is better to approach BOEG while IPO are better for big corporations looking for long term presence and higher savings target.

LG saves money through Centralized Purchasing

I recently read a case study on LG Electronics strategy on centralize its purchasing function. The case study LG Electronics centralizes purchasing to save was published by Purchasing.com and talks about LG’s Transformation from de-centralized purchasing to a centralized structure.

LG has 120 operations Globally Comprising of four business units-Mobile Communications, Digital Appliance, Digital Display, and Digital Media. With such a wide operations in such different fields and regions, it was very important for LG to have visibility into it’s spend. Once the visibility is achieved, LG has started to effectively use its leverage among the suppliers. The result are there to see, since January 2008 about 50% of purchasing is now centralized in LG and has led to a reduction in 16% of material cost.

LG Procurement transformations results show the positive effect of spend consolidation and leverage buying in large OEM.

The case study re-emphasis on following three points:

1. For a large OEM with multiple divisions, centralizing purchasing is needed if a company is going to leverage its buys and reduce materials costs.
2. Procurement engineers can help reduce costs by suggesting changes in materials, suppliers or processes.
3. Suppliers will devote resources to OEM companies that are growing.

Risks involved in Low Cost Country Sourcing

Low Cost Country Sourcing (LCCS) is a procurement strategy for organizations looking to reduce cost while benefiting from Low Labor Cost and Low Production Cost at various countries around the globe. With highly advanced communication and transportation system now organizations can manufacture any part or subassembly at multiple locations and assemble them at the best possible alternative thus manufacturing the product. LCCS concept followed this simple theory. Organizations look out for location which gave them best total cost (broadly include manufacturing cost and shipping cost).

Common LCCS countries are China, India, Thailand, Malaysia, Ukraine, Romania, Mexico, and Brazil. These are typical developing countries benefiting from huge human resource or geographic location.

Why Organizations follow LCCS strategy:

· Low Labor Cost
· Low Production Cost
· Low Material Cost
· Pressure from customers to reduce price
· To be competitive in market
· To enter emerging markets


Risks involved in LCCS:

There are many papers published on how much cost savings organizations are doing by adopting LCCS approach. But LCCS strategy has many risks involved also:

1. Planning and Start up: Before an organization decide to pursue LCCS strategy a lot of due diligence is required in terms of identifying sourcing strategies and tactics, demand and spend analysis, market due diligence and financial business case.

2. Managing long distance and complex supply chain: Sourcing one part from China and one from India and assembling them in US is not easy task. Managing such a supply chain is challenging task not only logistically but on quality and cost front. It looks very good on paper but very difficult to implement and manage.

3. Supplier Knowledge: There is a significant variation in supplier capability and sophistication in developing markets, in specific verticals in a specific developing market, and even within individual operations and factories. Before selecting a supplier, it's important to meet with the supplier and conduct on-site visits and assessments. But it's even more important to do good research on the supplier in a pre-qualification process to make sure the supplier has a decent chance of living up to the requirements, or the organization might end up wasting a lot of time and money.

4. Quality: Most people say quality is directly proportional to cost and when you source from low cost country this is your prime problem. Organizations while doing LCCS have to make sure required infrastructure and processes are in place to counter this problem.

5. Infrastructure: The basic requirement to meet deadline is infrastructure and to be always competitive you need latest technology. Most low cost countries lack it. You could have cheapest cost to manufacture but if material cannot be delivered on port for shipment on time it is useless. China has understood this point and has worked in great deal at it but still most countries need to work on it.

6. Human Resource: Poor quality staff, lack of experience and high attrition is the most common issues faced by organizations while doing LCCS. People are backbone of any organizations and if they are inexperienced and unskilled it directly affect the quality of product and efficiency of the organization.

7. Government Policies: Each emerging market has its expertise and government policies regarding special waiver in taxes are very important factors. Although such policies are good in short term but are seen to be unsustainable in future. Even Chinese suppliers are feeling the competition now as special packages like waiver of VAT has been taken back by government.

8. Communications: Whole world doesn’t speak English. Go to China you will find people barely speak in English but better when you communicate through email. In India excellent in communication but speak with different accent. In Mexico they are more comfortable in Spanish then English. These are typical example of problem faced while communicating in some low cost countries.

9. Culture: Culture defines how aggressive people are towards task completion and conflict resolution.

Building Negotiation

The main objective for every buyer is have lowest cost for the project and supplier always try to maximize their profit while maintaining a healthy business relationship. The way to obtain this win win situation is achieved by both parties through Negotiation. Although there are various ESourcing Tools available for buyers nowadays but still One on One negotiation is best way to negotiate for any complex project.

There are no strict formulae for success in negotiation. You might get success using one methodology in one project and might have to change it again for the same supplier in different project. Still there are certain points which are used by buyers globally to build the negotiation and reach a position of strength in it.

1. Prepare, Prepare and Prepare Hard: This is the unwritten “Golden Rule” of Negotiation. More than half of the battle is won if you study each and every aspect of the project.
a) Understand the project and associated cost drivers: Before you can start negotiating buyer should know the project completely and should assess the associated cost drivers.
b) Understand your negotiation weakness and strengths. Buyers’ strength could be the business volume he will be awarding to the supplier while weakness could be very strict timeline or highly critical design which is specialty of certain suppliers only.
c) Alternate plan. You need to have different plans of negotiation ready with you before you begin. If you have one plan only and supplier came up with brilliant defense you will lose the negotiation. Always have Plan B, Plan C ready before you begin negotiation.
d) Know your supplier. Find all the information about the supplier. Visit its website, Look at its financial details, Look at his technological expertise, its Capacity, its client list, the process and procedure in place. Try to find anything and everything you know about it. This all will help in great deal during negotiation.

2. Get data internally from the organization: Data is always key for every negotiation. Most buyers look outward to find data about the suppliers and about various cost drivers but fails to gather huge amount of data available to them internally through various departments.
a) Engineering and Stake Holder: Talking to the people who are the brain of the project is best way to prepare for a negotiation. It gives a great insight about the design, cost drivers and scope of the project. It is being said that maximum savings can be negotiated if sourcing is involved right from the design stage with engineering. You can choose your bid list based on the expertise required to build the design. The latter purchasing enters the project greater is the probability that it will do only a paper job. Having a collaborative relationship with the supplier during design stage and finalization the detail scope of project gives a company greater chance to achieve success in negotiation.
b) Production: Engineering design the product, Purchasing buy it but manufacturing uses it. Ask any regular supplier the importance of a manufacturing person at the client. This data is very helpful when you have two long term competitive suppliers fighting for the business.
c) Quality: This department is always pain for any purchasing group but if you are negotiating with your existing supplier they can provide you excellent data like ppm, reloading and stoppages.
d) Logistics: A supplier is as good as his last shipment. In the world of just in time and lean manufacturing timing is the key which each supplier understands. The crucial data of timely arrival that a buyer can get from here can be used at any point during negotiation.

3. Understand the bigger picture – Total Value Approach: Negotiation is not purely data but is also based on how well you have understood the total value of the project. To understand the concept take an example of buying a machine. You source the project based on lowest quote of the machine from different supplier. However you didn’t make any agreement for the servicing of the machine or the spare parts cost. In scheduled 5 years work life of the machine the supplier will laugh all the way to the bank. Identify these hidden costs or indirect costs in the project. Suppliers usually play during negotiation to get best overall cost while buyers keep their focus on short term goal of immediate price savings. The idea is understand the total value in the project and set your goals accordingly in the negotiation table.

4. Make your learning process Incremental: Most of the time buyers are dealing with same suppliers. Talking to them on daily, weekly or monthly basis and negotiating with them on small and big projects. Understand suppliers way of working. If a buyer always negotiate hard suppliers tend to come with their first quote on higher side and gradually decrease their bid to the price they want while giving the impression that they have moved a lot. Learn from past negotiations. Learn from the rules of engagement followed by the supplier during previous negotiations. Try to be creative in your negotiation tactics. Try to build your negotiation based on your past experience with the supplier.

5. Make a relationship and harness from it: Dealing with same set of supplier’s day in day out helps in making a relationship with the supplier, harness this relationship during negotiation. Leverage using additional products and service offered by the supplier. Offer them long term contracts. Make them part of the product development cycle. Make them equal business partner. A supplier always wants more business and when he smells the coffee he brings the cookies himself.

Procurement Outsourcing

Organizations have been searching hard to find ways to reduce cost in every sphere of business including procurement. In recent past it has been identified as a major service that can be outsourced. Though companies are not outsourcing all the functions of procurement but non strategic, low volume, low spend and non value added activities are being outsourced quiet aggressively now.

The most common example of Procurement Outsourcing are issuing of PO or sending RFQs and receiving and compiling quotes from the suppliers. There are numerous companies providing strategic procurement systems wherein even the strategic procurement is also being outsourced using radical new technologies. The prime example is the whole procurement processes being driven by third party using e auction process.

Benefits of Procurement Outsourcing

The benefits of doing outsourcing of procurement are many like:
1. Manpower Reduction.
2. Better spend visibility
3. More savings using better negotiation tools and global supplier base( finding supplier base in Low cost countries)
4. Lower Procurement costs.
5. Low Investment and Better Flexibility in Procurement process.

Increased global competition is forcing various organizations to move towards new and better technologies in procurement. During recent times companies are cutting manpower and focusing their resources on key value added strategic work. Wherein the key decisions are taken by the company employees and data compilation and data mining activities are outsourced. Another point in this regard is the transaction cost. Through outsourcing of non core activities this cost can be reduced in great deal.

Steps to follow to achieve Procurement Outsourcing

The benefits are huge but taking a decision to outsource has to be taken after due deliberation.

1. The whole process starts with gathering of data regarding current procurement practice. A detail spend analysis report is to be formed to determine low volume and non strategic commodities. The next step is to analyze the data to determine savings opportunities which can be direct or indirect savings. A clear and visible long term saving targets should be formed.
2. Organizations need to be clear about the scope of the contract agreement. Contract should define how the responsibilities will be divided between the client and the service provider.
3. The most important aspect is the relationship as procurement function is very important, it is very important to have a strong healthy relationship between client and service provider.
4. Finally to oversee that required goals are met a key person from parent company should be with the service provider to oversee implementation and smooth achievement of companies goals.

Two aspects should be kept in mind before embarking on Procurement Outsourcing. First the data used to identify the function to be outsourced has to be very discrete and detail i.e. The right commodities should be outsourced and the other aspect is the fact that procurement is very process orientated operation. Slight deviation could make a very serious problem for the organization hence sufficient safeguards should be placed in the Outsourcing process to achieve the desired results.

Summary

Procurement Outsourcing is basically about generating value in the procurement function. It is not only about headcount reduction or passing your non strategical operations to third party but is about bringing expertise, newer technology and highly efficient processes into your business model thus making your company fit to take challenges of future (and current recession).

Currency fluctuations and Sourcing Decisions

How much do currency fluctuations matter in sourcing decisions? The answer is simple: they matter a lot.

If you are in India and buying from America and your contract is in dollars then you are bleeding money like hell. Rupee was at Rs39.36 in Jan 08 and in Dec 08 it had moved to Rs 49.66, 26% decrease in value of Rupee. Now take an example of a contract of a part worth $100 dollar made in Jan 08, it would have cost the company Rs3, 936. But if you had re-bought the same part at same price of $100 in Dec 08, it would have cost at Rs4, 966. Oops!!! You lost 1000 bucks if you don’t understand the currency fluctuations.

Similarly the weaker Indian Rupee has helped the Indian Outsourcing and IT industry in great deal. Now with Dollar hovering at around Rs 52 in March 09 things have become slightly easy for Indian ITES Industry and exporter.

Dollar being primary currency of trade globally so it is very important to understand what its fluctuation means to the world. Currently dollar is very strong despite of economic uncertainties in the US economy. The main reason for that is flight to safety into U.S. Dollars and U.S. Treasuries by different governments who still perceive the US economy to be the safest.

But Strong dollar is hurting the US industry most right now because it is making American goods much more expensive abroad thus making American industry uncompetitive abroad. Similarly Toyota posted loss for the first time in its history thanks mainly due to huge drop in sales but also due to the fact that Yen has become very strong vis a vis the dollar.

Due to these factors Sourcing decisions are becoming increasingly complex. Anticipated savings can disappear due to currency fluctuations alone. Two equally capable suppliers from different companies who had quoted at same US dollar price equivalent can end up generating significantly different costs for the buyer over along contract period.

But forecasting currency changes is extremely risky and tricky. Companies can go for “Hedging” of currency to offset any high risk associated with fluctuation but this policy can boomerang if the dollar becomes weaker thus leaving you with higher import bill.
It’s important that companies model the possibility of changing currency values when making global sourcing. Too often, those analyses are made using current exchange rate levels, and don’t well vet the impact if those ratios change significantly. Doing different analysis to understand the change in costs under different currency scenarios can lead to more informed and balanced decisions.

On the other hand, fear of exchange rate changes shouldn’t cause companies to abandon outsourcing strategies that have the opportunity to lower costs. This argues for maintaining a maximum level of operational flexibility in terms of sourcing. While this may result in somewhat higher costs versus the optimum strategy at the present moment, the huge swings in currency values seen across the globe in recent years place a premium on flexibility, which should result in overall lower costs over time.

Buyers can also try to secure contracts that lock in a price regardless of currency changes for a given period. This, in a sense, can be a form of hedging, as the overseas supplier may command a higher unit price for this guarantee. They may also negotiate large shipments as the “price” of this guarantee, in which case buyers must weigh the potential increase in inventory holding costs against currency swing protection.

Companies can also sometimes negotiate a risk-sharing clause in offshore contracts. For example, the buyer and seller might agree to split any changes in currency swings, regardless of direction. The downside to this strategy – currency swings that increase the value of the U.S. dollar would result in higher unit costs, not further reductions, as would be the case without such a risk sharing clause.

Total Value Management

Purchasing has evolved from simpler buy and sell to find absolute value of every dollar amount you spent.
There have been many concepts to ascertain value of spent.

PPU: Price per Unit, it is the cost paid for each bought unit. Although it never gives the true cost of owning the unit

TCA: Total Cost of Acquisition, It takes into account multiple variables – PPU, transportation costs, duties, tariffs, temporary storage costs, and any other external cost that is incurred from the time an order is placed to the time the product is received.

TCO: Total Cost of Ownership, The most talked about concept. It takes into account all direct costs (such as PPU, transportation, tariffs, etc), indirect costs (product utilization costs, switching costs, transaction costs, etc), and quantifiable market costs (quality, brand, etc.). It captures every cost associated with the product and gives a total usage cost and it is often considered the best comparative cost metric.

However All concepts were cost based concepts and were focused on short term goals of cost optimization. Now the latest concept to measure sourcing value is TVM (Total Value Management).

TVM: Total Value Management, It is a comparative cost metric that quantifies the overall cost of each acquired unit relative to the overall value of the spend category as it relates to the organization’s sourcing strategy and supply chain goals.

To understand this concept take an example of a sourcing done considering Total Cost of Ownership and Multi Year Contract is awarded with considerable cost savings based on the current cost model. But no overview is done on the actual implementation of the contract. If due to certain issues you were forced to give extra money like due to urgent shipment, late order, sudden breakdown of the current tool etc the actual savings after the contract period becomes negative due to extraordinary “leakages” in the system.

TVM concept not only takes into account the overall total cost of each acquired unit from a direct, indirect, and quantifiable market cost viewpoint, but the impact costs of deviating from the overall sourcing and supply chain strategies.

Strategic sourcing is sourcing for value, not lowest cost. Sometimes value is gained by selecting a lower cost provider, and sometimes value is gained by selecting a higher cost provider with greater quality and reliability. Producing poor quality products or failing to meet demand hurts both current and future sales. TVM insists all value-based measures and costs are included in the model, thus minimizing potential risks.

Supplier Risk Mangement

The major role of the buyer is to manage his business with all his suppliers. One bad supplier can ruin the complete supply chain thus managing supplier proactively is critical. Also if you add the current situation of global uncertainty managing supplier is very high on priority list.

In a more general term if you ask any buyer whether he will be able to manage his business if one of his top three suppliers fails. The answer comes out as NO. Also companies go to great lengths to assess the quality of the suppliers output or there delivery model but do very less on assessing how much strong supplier financial and production aspects are.

So it is very important for companies to implement a supplier focused risk identification and management model. The basic framework of supplier risk management should include:

1. Communication is key: To manage supplier the communication is the key. The best a buyer can do is having an information strategy that calls for more emphasis on risk management. If you talk to suppliers on daily or weekly basis regarding what’s happening in their organization, it would provide an input to vast information as to what might go wrong and you can sense whether an issue with supplier is coming or not. This acts as a predictive model for supplier risk management.

2. Making an Effective Process: Make a strong process to monitor and mitigate risk. The process should measure, monitor and mitigate risk using a repeatable and scale able process. The process should be rating supplier in green yellow and red zones. The green one the best and red being worst. Whenever a supplier enters red zone, there should be a defined process to analyze whether it is worth to continue business with him and if yes then how and when supplier will come out from the red zone.
The common criteria for supplier ratings include:
a) Quality- ppm
b) Delivery – Schedule Adherence.
c) Cost / Price - Savings targets
d) Capability
e) Service.
Suppliers and Buyers should also utilize supplier ratings system to drive performance and improve the business relationship.

3. Incorporate it in sourcing Decision: Now most companies think risk management comes from continuous evaluation of their supplier base. There is a critical error in that Risk management of supplier should start at the sourcing cycle itself. Incorporate risk mitigation evaluation in your sourcing decision making and supplier evaluation cycle itself. Once Suppliers are identified due diligence should be done on their economic and functional risks. Only then a supplier can be selected.

4. Develop Exit Strategies: Buyers should always augument their knowledge and resources relating to potential exit strategies. The main goal should always be no supply chain disruptions.

Supplier Risk management should not be a single activity done once or twice in an year but should be a continuous process. The goal should be to find the best tactic to deal with any general issue or a specific one. A good business sense is to look every movement and every factor more closely as you can so as to predict a failure before it effects your supply chain.

The Strategy of Supply Chain Cost Reduction

In the era of recession every industry wants to rationalize their spend by initializing various strategies to cut costs. But do cutting costs across the board is the right way of achieving success is recession?

There are various views on this while most companies are doing aggressive cuts in all sphere of business like payroll, advertising, consulting, strategic initiatives etc. But again is it the right approach? Jim Tompkins (of Tompkins Associates) recently published a very detailed article on this where he emphasized on the fact that cut, cut, cut across the board is not a right strategy.

The cost in an organization can be broken into three categorize i.e Capitol and operating costs, Talent and Resource cost and strategic costs.

While Capitol and Operating costs are traditional ongoing expenses and full emphasis should be given on reducing this cost. Talent and Resource Cost should be carefully analyzed and any decision to cut here should be taken after due prudence. The talent pool is essential for the running of the organization and will be an important asset to turnaround the company towards success and profitability. Strategic Cost must be protected at all costs. Taking any decision to cut this will be suicidal for the organization as it will have nothing left to innovate and succeed if they do not make any strategic initiatives.

So how do you achieve true cost reduction?
The answer to the question is doing it in a very aggressive and intelligent way. As Jim points out Today's marketplace is full of folks who want to help reduce capital and operating costs in a piecemeal fashion. Transportation costs, purchase costs, customs and duty costs, inventory carrying costs and distribution center costs are all very, very important expenses that in these difficult times need to be reduced, and you should do so aggressively and intelligently.
The answer to the riddle is an integrated, holistic approach that increases profitability and puts your company in a stronger competitive position.

Buyers Strategy in Recession : Business Consolidation

The times are tough for most companies globally including both OEM and suppliers. The buzz word during any recession is cost cutting. With declining revenues, companies are looking to reduce costs to preserve profit margins. Now how can a buyer manage sourcing decisions during recession while achieving both business continuity and cost savings targets.

There are lots of factors in favor of buyers:

· Opportunity to have a discussion with your supplier to have cost savings. In times when you are under extreme pressure of savings target you can ask the same to your key suppliers for cost savings and make them recognize the need. It’s perfect opportunity to start a discussion.
· Business consolidation is key. You may have five suppliers for a particular product and you have given all equal share of business. Now is the time to consolidate. Suppliers will be more than willing to have additional business as overall volume has reduced while providing you the most competitive pricing. It’s a win win situation for both parties as more business with key suppliers will bring cost down.
· Lower Commodity pricing are there lowest since 2005, this helps in making a strong business case with your existing supplier base to pass on the cost savings.

There are few factors unfavorable also:

· Suppliers unwilling to hold prices due to extremely low volume. You might be producing 1000 parts in good times but with reduced volume of 500 parts the complete costing of the part goes for a toss.
· Supplier must be fighting to save his operations and would have no opportunity to have any new initiative for you.

Overall it’s a tightrope for a buyer. The mantra for success is consolidation of supplier base by identifying key long term players and focusing your purchasing strategy around them. Offer them more business by cutting the smaller player and push them to work harder.

Lean Purchasing

In the past decade the concept of Lean Manufacturing has picked up in a great deal. Companies are looking forward for reducing wastage in the system and improving performance and efficiency. This resulted in reduced inventory, increased throughput and improved customer service levels. Using the similar dynamic concept of lean companies are now moving fast ahead in Lean Purchasing. This concept helps companies to broaden their framework of Lean concept deeper into their supply chain.

Lean Purchasing is a long term commitment to combine elements of strategic sourcing and Lean principles. It provides visibility to suppliers about customers current and future business and stressed at lasting, collaborative relationships with suppliers and business partners.

The key to lean purchasing is visibility. Suppliers must be able to "see" into their customers' operations and customers must be able to "see" into their suppliers' operations. Organizations should map the current value stream, and together create a future value stream in the procurement process. They should create a flow of information while establishing a pull of information and products. Lean purchasing calls for partnering with supplier and understand the total cost of doing business with a particular supplier.

The first step in conducting any type of Lean Sourcing initiative involves understanding where dollars are spent. Companies often track expenditures by supplier, but this approach is limiting, particularly if there are a large number of parts (e.g., over several thousand). Companies that manage their expenditures by part groupings or categories typically have a better handle on where their dollars go and can analyze pricing trends over time.

The Benefits:
Lean Purchasing provides four key benefits to organizations. These are:
· Greater buy-in from key functional areas—operations and purchasing which care about both price and performance
· Greater likelihood of implementing identified sourcing savings
· Improved quality and reduced waste
· On-going additional cost reduction opportunities via collaboration with supply partners
More advanced organizations that begin to experiment with lean purchasing quickly realize that strategic sourcing does not have to be in conflict with lean. Rather, they observe that strategic sourcing is really a precursor step to identifying long-term supply partners and more tightly coordinating purchasing efforts with operations and manufacturing. They also realize that in an increasingly global supply market, conditions change and leading companies need to regularly go to the market to identify, qualify, benchmark, ensure best global supplier capability and competitiveness.
Today, Lean Purchasing is making its way into the middle market, where smaller organizations are beginning to realize that strategic sourcing provides a means for substantial cost savings and at the same time addresses the concerns of operations personnel. Many are beginning to bridge the gap between procurement and operations by getting started with Lean Purchasing. At its core, Lean Purchasing is really about reducing Total Enterprise Cost.