For decades, the industrial equipment sector has been a hub for mergers and acquisitions:
- Danaher Corp. has acquired hundreds of businesses since 1984;
- Honeywell International Inc. this year snapped up Ballard Unmanned Systems and Rocky Research after closing the deal on Rebellion Photonics and a lengthy string of others; and
- Tyco International Plc has famously had “a complicated history full of acquisitions.”
M&A activity has left these and many of their peers with catalogs of products that sell at low volumes. This creates a lot of complexity internally and in how these companies manage supply-chain risk.
That’s in part because manufacturers have a giant set of global suppliers. Plus, each operating unit within these large manufacturers traditionally has managed its own supplier relationships.
The industrial equipment manufacturing arena has a bias toward the decentralized business unit model. Self-sufficiency related to profit and loss is often a source of pride for business units.
That may seem like a good thing, but it creates massive procurement and sourcing inefficiencies. You may have five different business units all buying the same thing — but at different price points. Suppliers know and will take advantage of this lack of alignment.
Realize that as a manufacturer you need to aggregate and manage the spending that is now fragmented among your business units. This will provide your company with greater leverage with your suppliers and more visibility and control of strategic spending — so it is truly strategic.
Centers of Excellence
The most progressive industrial equipment companies have built centralized procurement and supply-chain teams. Oftentimes these companies have also either tried or thought about building a center of excellence (COE) to make rapid progress in procurement and sourcing.
Spend Matters in 2017 defined a procurement COE as “an internal entity that performs internally facing knowledge-based services on a one-to-many basis to procurement (and to broader stakeholders) in order to drive scale, repeatability and best practice.” But while COEs are not a new idea, the reemergence of COEs makes perfect sense right now, at a time in which the world and supply chains are more unpredictable than ever. You need a convergence of specialization to monitor, analyze and address supply-chain risk — especially in electronics.
COEs facilitate cross-functional collaboration among product design engineers and finance, sourcing and procurement professionals — and can lead to new forms of decision-making. Here's how.
Set a clear vision with defined roles. Building a successful COE is not easy to do, and procurement leaders "often struggle to define the COE’s mandate, find and recruit the right talent, encourage engagement and change adoption, and measure and demonstrate the COE’s value,” according to research by Gartner Inc. To create a successful COE, be sure your leadership and stakeholders have a shared vision for how to measure COE success and add value. Define decision-making roles so everyone is clear on what plant manufacturing and supply-chain teams will own and what the COE will manage.
Ensure your COE has the power to drive decisions about sourcing events, allocating spend across suppliers and making appropriate trade-offs such as locking in key supplier capacity and making volume commitments to suppliers that are key to growth and new demand. When COEs can only make recommendations or report on potential trends, they usually don't last long.
Avoid relying on legacy systems. Making the right sourcing and procurement decisions also relies on having accurate and current data. Yet legacy systems at industrial manufacturers are fraught with data quality problems.
For example, it’s not unusual for legacy systems to list the same parts under different names. Outdated data is also a problem with legacy systems, which may not be ingesting and normalizing data on new parts as those details are entered into other ERP systems. COE leaders may find that they can’t even begin to add value until they solve these fundamental problems.
Your COE team may want to go from a single to multiple sourcing events per year so that your organization can benefit from emerging market trends. But it’s likely that your legacy systems will prevent that kind of agility and leave them totally flat-footed.
Leverage industry intelligence. To become agile, focus on data quality — and validate that information using external, real-time, sources of insights rather than limited spend history pulled from multiple ERP systems. Leverage a modern platform that employs outside-in intelligence. That will enable you to get in-the-moment visibility into what’s happening with individual suppliers and parts as well as what’s happening in the larger market.
For example, you can use modern data platforms to ask and answer questions such as:
- How are certain suppliers performing versus their competitors?
- What is the current and near-term view of global supply constraints and lead times?
- What are the best sources of external cost benchmarking?
- What are the potential supply-chain risks that I need to balance?
Keep in mind that while modern data platforms and COEs can certainly lead to significant cost savings, succeeding is not always just about negotiating the lowest cost. Understand that design-to-source intelligence is key to COE success; if you can leverage the latest market intelligence, you can build resilience into your products from the beginning, when they’re being designed. Use this intelligence to inform different disciplines to build a new kind of COE and a culture that is based on data-driven negotiations for better business outcomes.
Richard Barnett is chief marketing officer with Supplyframe.