August 2022 Volume 4

OPERATIONS & MANAGEMENT

The Importance of Supply Chain Management By Vic Venettozzi

Last time we discussed supply chain management in today's business environment. In this installment, we will discuss how companies large and small generate leverage. It is not a foregone conclusion that one side of the table has more power or influence due to its comparative size. Yes, the spending power of a company can make a significant difference, but on the side of the smaller or less powerful negotiator is the importance of the deal to their company and the need for careful and strategic thought into preparing for the negotiations. We will discuss the foundational analysis that will allow the buyer to master knowledge about the commodity and the company's spending, one of the two keys to winning a negotiation. The second key is making the best use of time because being 'good at the table' is not that big a factor and training abounds in learning how to master real-time negotiating. Indeed, those skillful in the business theatrics of face-to-face negotiation bring significant value. Still, it isn't the most crucial factor to winning what you need from the negotiation. And there is onemore precursor to this discussion. Larger companies with formal commodity management structures will subscribe to two general strategies. They will employ either long-term or short term commodity management assignments. In long-term roles, the commodity manager becomes thoroughly schooled in the technology's cost drivers, manufacturing methods, market players, future trends, etc. The alternative method will favor commercial goals but not necessarily generate a deep understanding of the commodity. To close the knowledge gap, shorter-term assignments mean the company's roadmap for the commodity must be well-established to transcend the manager's lack of deep knowledge of it. Both can work, but my professional preference is the longer-term assignment method. But suppose a company favors the shorter-term approach. In that case, they must rely on a rich process-driven organizational commitment to documenting and detailing the particulars of any actively managed commodity. The commodity roadmap is necessary regardless of the long-term or short-term assignment strategy, but it is a tool that becomes essential if the short-term assignment method is selected. This approach allows the cumulative knowledge to be passed from one commodity manager to the next. A future installment will delve deeper into this toolset. Now let's discuss a straightforward foundation for understanding your company's spending, briefly mentioned in the May article. Such a foundation begins with profiling your direct and indirect purchases. For clarity, direct spending is on materials, goods, and services consumed in the product's production and designated as a direct cost of manufacture. Indirect spending is, then, everything

else. It is helpful to complete the exercise I will describe for direct and indirect spending separately, but in the final view, they can be merged. Categorizing a company's spending uses four quadrants. The X-axis illustrates the size of the purchases for the commodity or category in dollars. The Y-axis is the increased risk of all aspects of supply, low to high. The lower left quadrant is entitled Administrative. In this quadrant, the cost of managing the purchase of the commodity challenges the actual dollars spent -- think office supplies. The upper left quadrant is labeled Critical. In this quadrant, the consistency and surety of supply transcend cost considerations. Think about an inexpensive defoaming agent added to a chemical recipe for safe and proper blending for a process business. You cannot process without it, and ruining a batch of expensive ingredients is prohibitive. These are the 'mark on the wall' commodities. If you ever find yourself below the mark on the wall, the next shipment should be right around the corner and about to be delivered! In the bottom right quadrant is Competitive supply. The commodities in this quadrant are mobile, and we will also discuss the concept of Supply Mobility further in a future installment. Mobile in this context means the switching costs are minimal, and specifications are industry norms. And the buying company does not or cannot necessarily influence the marketplace to any significant degree alone. The company purchases materials, goods, or services where competition is perfect or near-perfect. Whether the company buys the materials or not, the competitive nature of the category is demonstrably unchanged. In the Competitive Quadrant, contracts will be shorter and business awards based on frequent competition between qualified sources. And potential disrupters – suppliers new to the buyer but pre-qualified as potential business relationships – should be invited to events. Productivity is generated by competition and hard negotiation. It is not permanent productivity, unlike what we will discuss in the Strategic Quadrant. The productivity comes from the commodity marketplace – a heartbeat that a buyer cannot ignore. To pay more for a Competitive commodity places the buyer's company at a strategic disadvantage to competitors. What about permanent productivity? These are savings that volume or commodity trends over time cannot erode. If a buyer and supplier determine that a value engineering change lessens weight, as an example, the saving will evermore be enjoyed. And what of productivity generated through competition or following a commodity macro-trend? It may be appreciated for some time but could be erased due to marketplace trends.

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