Posted by: Christian Verstraete | March 30, 2010

Procurement versus Supply Chain, what a match

In my last post, I mentioned the reaction I got when talking about how the procurement team could make relationships with suppliers difficult. I’d like to take a minute to come back to that, as I believe an important change is required in the mindset of both teams to be successful in the future.

The traditional Supply Chain model is dead. Today, with the growing globalization and with the need for increased responsiveness, the nature of the Supply Chain itself has changed dramatically. Unfortunately, we are still measuring many procurement specialists  by how much they can reduce the cost of supply. And, as Dave Packard used to say “Tell me how you are measured and I will tell you how you behave”. Such professionals will reduce costs regardless of the implications.

Taking an end-to-end look at the supply chain and analysing the implications of such decisions, are typically not within their scope of responsibilities. And obviously, many of them are trying to do what makes sense, they are great professionals. However, there is no systematic way of looking at the supply chain. Beside the cost, quality, responsiveness, visibility, availability of supply, are all aspects that should be taken into account. Ultimately what is critical is the total cost of making the end product, not the cost of the components.

So, does it make sense to have a department that is focused on buying the components? Does it make sense to measure them on the cost (reduction) of those components? Well probably not. Wouldn’t it make at least as much sense to have people focused on the acquisition and use of components in the end-product. They would not only focus on the acquisition costs, but also on how the supplier works with the development engineers to get the best out of the component. They would ensure the engineering teams work with the supplier to review how best to manipulate the component during the manufacturing of the product. They would finally follow-up on the amount of spare parts needed, what the component quality issues are etc. In other words, they would be responsible for the total lifecycle of that component within the end-product.

How should they be measured? Two elements should be looked at in my mind, first the contribution of the component to the cost of the end product, and second, the percentage of warranty costs attributed to the product.

This may sound like a wild idea, but it is a different way to look at the procurement function all together. Let me know what you think. Does this makes sense in your mind?

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  1. Good post Christian. quality of the Measurement systems is key to drive appropriate behaviors. In these times corporations should rethink their olds models and includes “constituants” ‘ wishes and ambitions.

    PS: I used the Sun Tzu definition of contituants
    Thanks for making the point.

  2. Social comments and analytics for this post…

    This post was mentioned on Twitter by Fibol: RT @ christianve Procurement versus Supply Chain, what a match: – Good post…

  3. […] a recent blog Christian Verstraete, the Chief Technology Officer, Manufacturing & Distribution Industries at […]

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