5 Critical Mistakes When Restructuring the Supply Base
Tariffs, covid, shortages, war, and inflation. We have experienced over 5 years of chaos that have had purchasing professionals restructuring their supply chains. However, due to the unprecedented issues requiring immediate firefighting, sometimes shortcuts are taken and the restructuring results are not favorable.
What mistakes are being made, and what are the lessons learned? We asked our team and came up with this Top 5 list:
Lesson 1: Develop a Commodity Specific Team Charter
- Failing to establish a cross-functional process. Purchasing provides value when the supply base for a commodity is aligned to support the needs of engineering, sales, operations, and other activities affected by the commodities. Determining who needs to be part of the process and how they will be involved is critical.
Lesson 2: Ensure Executive Sponsorship and Participation
- Lack of executive sponsorship & participation – According to the Harvard Business Review175% of cross functional teams are dysfunctional failing to deliver on 3 or more of the following:
- Meeting a Planned Budget
- Staying on Schedule
- Adhering to Specifications
- Meeting Customer Expectations
- Aligning with the Company’s Corporate Goals
However, cross functional teams can be successful. Those with strong governance support including higher level cross-functional reviews and a single executive champions had a 76% success rate.
Lesson 3: Develop an Ideal Supplier Profile
- Lack of consensus on the right supplier – Supply base transformation includes changing the sourcing patterns for new business and oftentimes moving existing. Most last-minute cross-functional fighting can be avoided if the selection criteria for new suppliers is established prior to the start of potential supplier identification. How will each supplier be evaluated for their ability to support the functions impacted? We develop this by asking the question “what are the necessary capabilities and profile an ‘Ideal Supplier’ would have to flawlessly meet to match our shared expectations?”. This almost unachievable measuring stick becomes the selection criteria.
Lesson 4: Build Cost Knowledge
- Not building cost knowledge in the process – Potential new entrants to the supply base are most often likely to share cost information to gain admission. Ask them for the information your current suppliers are not providing and then use that as leverage to get the information from the current suppliers.
Lesson 5: Evaluate Not on Piece Price, but on Total Acquisition Costs
- Making decisions without factoring in total acquisition costs – Much of the restructuring we are seeing is being done to reduce risk and costs of long supply chains. Many companies established the long chains without factoring in the Total Acquisition Costs including the “risk” costs for obsolete materials, expedited freight and stock outs. Make sure these costs are included in sourcing evaluations.
