A new supply base or a merger may provide new energy. For example, companies can introduce a business discontinuity by oscillating between reducing the supplier base to gain leverage and expanding the supply base to introduce new blood. Online auctions — currently in vogue in fragmented supply industries like packaging, transportation, and metal fabrication — try to push both simultaneously. The most effective online auctions invite a large number of new participants beyond the incumbents — and promise to award business to a small number of winners to gain the maximum leverage.
Horizontal mergers — in which companies acquire competitors — create another discontinuity, forcing a renewed look at the supply base of each company. The merger of the Chrysler Corporation and Daimler-Benz AG forced the combined entity to rethink each supply base. Arguably, Chrysler suffered from some “blind trust” partnerships that needed a renewed focus on competitive pricing. The more aggressive negotiation tactics of Daimler-Benz — mandating a 5 percent price reduction across the board — may have been a somewhat crude process for altering the balance, but it did get the attention of the suppliers. DaimlerChrysler AG is now seeking a more collaborative approach to capture an additional 10 percent reduction over the next few years.
Changing scope boundaries — for example, combining services and product — introduces a dynamic likely to reduce cost, manage demand, and create value. For instance, Dow Chemical Company and Nibco Inc., a $400 million maker of valves and pipe fittings, collaborated by expanding the supplier’s role beyond the traditional scope of mere physical product. (See “From Solutions to Symbiosis: Blending with Your Customers,” by Deven Sharma, Chuck Lucier, and Richard Molloy, s+b, Second Quarter 2002.) The tighter operational integration between the two companies allowed Nibco to incorporate a wider variety of resins and thereby expand its product line, ultimately increasing its overall market share by attracting customers seeking greater product breadth.
Like the operators of a hydroelectric dam, a top-notch purchasing function adjusts the water flow of discontinuities and maintains the equipment by applying new tools as they become available. For example, Deere & Company, following the direction of R. David Nelson, developed new cost-modeling tools. Adding to a strong tool kit for bottoms-up cost modeling, Deere now applies parametric modeling to address parts like fasteners that might not warrant the investment of a detailed cost model.
On March 1, Mr. Nelson took the top purchasing job at Delphi Automotive Systems, the GM spin-off and now the world’s largest automotive supplier. His charter? Shift the company beyond the margin-focused tactics of the Lopez era to focus on supplier development and “should cost” modeling. Or in other words, pursue the next set of phases in the Continuous Sourcing Cycle.
The Whirlpool Corporation has prospered under the leadership of Roy Armes, corporate vice president of global procurement operations. The company builds long-term forecasts of supply and demand in spend areas exhibiting commodity pricing dynamics like flat-rolled steel and integrated circuits. After all, having a bottoms-up cost model for Intel’s Pentium processor likely will not provide significant negotiating leverage, but knowing supply-and-demand curves for Intel and its competitors could.
In the end, CEOs and their chief procurement officers might dream of a perpetual purchasing machine — despite the constraints of business “physics.” The Continuous Sourcing Cycle, coupled with business discontinuities and good old hard work, can deliver ongoing improvements to the bottom line of any company.
Reprint No. 02204
Hugh Baker, [email protected]
Hugh Baker is a principal in Booz Allen Hamilton’s London office. His expertise is in supply chain management and sourcing across industries, with a primary focus in the retail and consumer products value chains.
Tim Laseter, [email protected], serves on the operations faculty at the Darden Graduate School of Business at the University of Virginia. Previously he was a a vice president with Booz Allen Hamilton in McLean, Va. Mr/ Laseter has 15 years of experience in building organizational capabilities in sourcing, supply chain management, and operations strategy in a variety of industries.