From SCDigest's On-Target e-Magazine

- Jan. 27, 2015

Supply Chain News: Time for CPOs to Focus More on Organizational Costs and Efficiencies Rather than Just Contracted Costs

Almost All the Focus is on Supplier Spend, Some Say, as Tom Linton of Flextronics Calls for End of the PO in Some Cases

SDigest Editorial Staff 

Everyone in procurement understands the pressure to reduce the cost of purchased goods, materials and services, with demonstrating year over year savings in such supplier costs (usually against some external cost index) usually a key metric for the Chief Procurement Officer overall and individual procurement managers in their areas of procurement management.

SCDigest Says: Linton said this kind of thinking has led him to come up with the following approach for his procurement team: eliminate work before you automate, automate work before you move it, and always make sure outcomes are improved in any given scenario. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

A focus on achieving those cost savings will of course always be central to what procurement does and the goals and metrics that guide the organization and its individual practitioners, but does that focus on outside spend sometimes blind CPOs to the need and opportunity to reduce the costs of the procurement organization itself? Can some real out-of-the-box thinking identify areas where procurement organization costs can be reduced, or low value processes eliminated?

A couple of 2014 studies found there were real differences between leaders and the average company in the leverage they were achieving with their investment in procurement staff and tools, for example.

One such study was from the Hackett Group, which found that procurement leaders achieve costs savings nine times their investment in procurement, more than twice the 4.06 ratio seen by average firms, as shown in the graphic below.

A similar study from the Institute for Supply Management and AT Kearney delivered similar insights. The point is that there is a return on procurement investment, and that that equation involves both the savings in the cost of procured goods and services but also the level of investment in the procurement organization itself, including people, technology and other tools.

End of the Purchase Order?

Tom Linton, chief procurement and supply chain officer for Flextronics, has emerged as one of the supply chain's most prominent thought leaders over the past few years.

Hackett Group Research Finds Differences in Procurement Spend Leverage

He also been among those asking whether procurement leaders should move some of their attention back to organizational efficiency - with some rather provocative ideas on how that might be accomplished.

"Do we ever seriously try, voluntarily try, to cut the cost of our own organizations?" Linton wrote in a column in 2013. "The first point of call for many procurement organizations has been suppliers. The thinking often goes: "our hard time is your hard time," and the upshot is not only several rounds of negotiations, but also a reversion to a familiar stereotype for the [procurement] function."

He continued: "The question we need to ask ourselves as procurement professionals is: Who are the members in our chain of costs? Leaders need to complete a strategic assessment of every activity in a sequence of work - you might go so far as to say that this needs to underpin not just how we deal with suppliers, but how we plan our own teams' development. This "DNA Mapping" is essential to locating the weak spots and opportunities in a process."

Linton said this kind of thinking has led him to come up with the following approach for his procurement team: eliminate work before you automate, automate work before you move it, and always make sure outcomes are improved in any given scenario.


(Sourcing and Procurement Article Continues Below)