That sort of balancing act can be achieved more systematically with the Continuous Sourcing Cycle, which draws on the foundational capabilities required by Balanced Sourcing. A close look at Exhibit 1 shows two types of critical insight throughout the cycle. “Cost insight” resides at the center of the circle. Such insight derives from modeling total cost — the foundational organizational capability highlighted in Balanced Sourcing. Similarly, the “competitive insight” in the outer circle derives from the organizational capability for creating sourcing strategies, the second of the model’s six core capabilities. A little reflection will prove that each of the other six capabilities naturally supports the four methods within the Continuous Sourcing Cycle.
The Four Phases
Capture margin, the first phase of the cycle, addresses the effective use of competitive threat in negotiations to reduce supplier prices. It is the bread-and-butter way for most purchasing functions to meet short-term targets. Negotiation to reduce margins ranks as the oldest and most fundamental purchasing tactic. But, despite its longevity, new wrinkles such as online auctions continue to appear on the old cloth. Regardless of the current technology applied, pressure imposed from competitive tension among a broad, potentially global supply base undoubtedly delivers money to the bottom line.
Better still, cost understanding provides the insight to uncover excessive margins where suppliers have the most room to give. For example, a manufacturer sourcing metal bakeware from Asia analyzed the price trends for Asian flat-rolled steel and discovered a 30 percent drop over the prior year. With this information in hand, the company then negotiated a near-term price reduction to decrease the excessive margins the suppliers had enjoyed from the deflation in their primary raw material.
A merger of two companies with common spend categories offers an opportune time to capture supplier margin by comparing prices between the prior entities. Once again, cost modeling provides a better insight than simple price comparison. Understanding the scale impact of the combined volumes of the merged companies often supports a negotiation to achieve prices lower than those achieved by either company previously.
Reduce cost, the second phase of the Continuous Sourcing Cycle, impacts supplier cost, not just margins. For example, a company can reduce cost by switching supply to countries with low labor costs. Alternatively, it can change the role of a supplier to simplify the value chain, or it can move products to a manufacturing technology better suited to the company’s specifications. An automotive manufacturer in the U.K. transitioning to strategic sourcing uncovered a pattern quite common among companies employing a transactional approach to sourcing decisions. The company found that many of the rubber seals purchased from outside suppliers were running on compression molding machines designed for low-volume production, although annual volumes had grown to a level that would make high-volume injection molding more economical.
Honda of America provides a classic example of reducing cost by working with existing suppliers through its “BP” program. BP — which stands for “best practice,” “best process,” and “best price,” among other things — employs a team trained in the Japanese method for continuous improvement, or kaizen. These manufacturing process specialists help suppliers uncover and eliminate waste. Again, the combination of competitive insight and cost understanding drives efforts to reduce costs.
Both of the first two phases — capture margins and reduce cost — fall cleanly within the domain of purchasing and require limited support and involvement from other business functions.
Manage demand, however, requires compliance from the rest of the organization, as purchasing executives challenge the quantity, quality, or service levels required by their internal customers. In the mid-1990s, for example, Ford created a dedicated facility for conducting hundreds of Value Analysis Workshops with engineers, buyers, program managers, and suppliers to identify different ways to reduce cost in a vehicle. The teams focused on eliminating features customers did not desire — or were not willing to pay for — such as a black paint coating for a part not normally visible to the consumer.