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Effective Knowledge-Based Sourcing Fosters Collaborative Savings

Knowledge-based sourcing by manufacturers and suppliers shares commitment to improving each other’s capabilities

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California solar energy conservation Do you need a more cost-effective, smarter way to produce a supply contract? Taking a sustainable approach could be more profitable, provide better costing and even corporate survival...if the following article is any indication of how companies are proving that collaboration outshines competitive bidding approaches.

At Honda Motor Company, during meetings with suppliers, the executives write their proposed actions and agreements on a whiteboard. When all the items have been discussed, the meeting is over. The contents of the whiteboard are then typed up and two copies are printed, the supplier and the automaker sign them, and the contract is complete. Thereafter, both sides focus on executing the plan.

Honda and its suppliers thus avoid the drawn-out, querulous negotiation process that is common at other automakers, a process that can last months and even then sometimes blow up without reaching a resolution.

These methods add up to a form of procurement based on shared information and insight: One could call it knowledge-based sourcing. With this approach, manufacturers and suppliers share a long-term commitment to improving each other’s capabilities, starting by working together to eliminate wasted effort and inefficiencies.

They use sophisticated costing tools and industry data, as well as discussions with other suppliers, equipment manufacturers, and competitors to produce realistic cost targets that change over time.

They set prices that reflect the supplier’s true economics for each process, part, component, or system.

These prices include a reasonable profit margin for the supplier as well as incentives for lowering costs, improving quality, expanding innovation, and making design changes in subsequent years.

Contrast this with the alternative ingrained in many companies’ purchasing departments: price-based sourcing. Essentially, this approach pits the interests of the supplier against those of the manufacturer. Each side reveals as little information as possible, for fear of giving the opposing side an edge. Components, parts, raw materials, and finished goods are purchased through competitive bidding, with specific volumes and deadlines spelled out in advance (hence those agonizing negotiations).

With raw material prices rising, margins cut to the bone, and purchasing departments struggling to meet corporate expectations for cost reductions, suppliers feel pressure from all directions. In the motor vehicle industry, Delphi, Dana, Dura, Tower Automotive, and Collins & Aikman have all filed for bankruptcy.

Even suppliers with a long record of success have been squeezed, with profit margins often falling below the cost of capital. These financial crises are causing, in turn, a huge cost to buyers. Expenses associated with bankruptcy can swamp any perceived savings.

Strategy Business magazine reports that in everyday practice, knowledge-based sourcing consistently outperforms the traditional bid-based model. This is true for companies in a variety of industries, and particularly for repeat purchases of anything that is not a true commodity. In most cases, even taking into account annual price cuts of approximately 5 percent, the quoted price under competitive bidding doesn’t approach the agreed-to cost under knowledge-based sourcing for the life of the contract.

More importantly, this form of win-win sourcing ensures that the improvements learned on one program or product will be transferred to the next. Meanwhile, the improvement plan continues to achieve new levels of success each year, until productivity gains draw the supplier ever nearer to ideal cost expectations, which reflect more closely the supply and demand realities.

SOURCE: This excellent, lengthy article by Bill Jackson and Michael Pfitzmann can be read at Strategy-Business.com



Edited by Carolyn Allen, owner/editor of California Green Solutions
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