Defining Procurement Values to Build a Responsive Supply Chain
By: Business Standards November 15, 2013
Factoring uncertainties into supplier strategy decisions builds agile procurement into the whole supplier life cycle. Procurement leaders of the future will measure uncertainty through quantitative analyses, modeling scenarios to take key uncertainties, such as supplier bankruptcy or material scarcity, into account.
They will then define strategies and design a supplier portfolio based on expected values (prices and costs) rather than those defined in contracts. They will always have alternative solutions ready to be activated for critical suppliers and parts. They will consider the overall, global supplier footprint, and they will evaluate and compare all possible supply solutions: make versus buy, backward integration versus direct sourcing options, and single versus multiple sourcing.
Li & Fung is an example of a company that factors uncertainty into its supplier strategy. As the largest outsourcing agent in the apparel industry, having $10bn in revenues and 12,000 suppliers in more than 20 countries, it was particularly vulnerable to volatility. It now has the ability to instantly switch to alternative suppliers and countries to minimize exposure to currency risk, quota and tariff risks, raw-material price risks, and other, political risks.
As another example, a global tire manufacturer reduced costs by seven percent through global dynamic sourcing of polybutadine rubber. The company made arbitrage gains by switching sourcing regions when appropriate. This was enabled by building up suppliers in all regions and by contracting in a way that allows the manufacturer to switch between them.