Project 10X | Article

cuting an outsourcing dealHow can companies get a 10 percent improvement in purchasing supply costs in the next 10 years?

Phillip Carter, director of the Center for Advanced Purchasing Studies (CAPS) at Arizona State University in Tempe, will spend the next two years answering that question. Outsourcing, he predicts, will be a significant strategy for businesses to achieve cost savings of that magnitude.

The 10X Project, as the study is known, focuses on three different 10’s. The academics will try to project a blueprint for success 10 years out. Gazing so far into the future is a stretch, he admits. The second “10” is predicting what business will be like in the year 2010. The third “10” is the aim to cut all purchasing metrics by a factor of 10 through the next decade.

The idea for the study came from David Nelson, chief purchasing officer of John Deere & Company and the current president of the National Association of Purchasing Management. He pointed out to Carter that his supplier base represents the standard bell curve: some are the best at what they do, most are average and some are poor performers. Nelson, who is also a CAPS board member, asked the Center to study ways to improve the effectiveness of the bottom group.

Carter says he realized then that even the suppliers at the top may lose their hold on excellence unless they change the ways they perform. That’s because the business models of the future are shifting significantly from contemporary practice. “Today, the changes are not just linear. There are fundamental shifts in the way business does business,” explains the professor, who holds the Harold E. Feron Chair of Purchasing Management.

So, a major query of the study became: “How can we help the world class suppliers stay world class and help the average company become world class in the future?”

Carter says cost reduction pressures are so strong throughout the world that they have become a major driver in business. He predicts these pressures will lead companies to turn to outsourcing and e-commerce to preserve cash, making them key strategies in purchasing supply, according to Carter.

He predicts companies won’t outsource all purchasing decisions. Strategic items like technology and parts production probably will remain in-house because companies absolutely have to stay on top of them. But non-strategic purchasing categories like maintenance, repair and operating (MR0) or office supplies are perfect areas to outsource.

New Skill Sets for Purchasing Managers

The shift to outsourcing can cause a tectonic plate shift in purchasing management. The traditional role of being a good buyer and negotiator vanishes. Instead, the key responsibility on the customer side becomes managing the outsourcing relationship. This new position requires a different skill set to perform the new role.

Carter believes many chief purchasing officers by 2010 will have no experience in actual purchasing. Instead, they will have a history of being skilled relationship managers. “The new purchasing officer will have to be able to effect change in an organization. S/he will help implement the transition to the new way of doing business” with outsourcing suppliers, explains the professor.

Companies today will have to retrain their current managers. Replacing executives who can’t learn the new management behaviors may be another solution to the problem. Companies may prefer to hire a new MBA who doesn’t have the burden of 20 years of experience.

E-commerce will have a major impact in achieving the goal of 10X cost reduction over the next 10 years. “It’s just mind-boggling. E-commerce is fundamentally changing purchasing,” says Carter.

E-commerce systems now in place make it feasible for companies of almost any size to outsource their MRO and office supplies. Carter cites the example of a commercial bank that has a lot of medium size companies as customers. Everyone needs office supplies. The bank could offer to buy office supplies for its customers as one of its services. The bank can get better price and service by aggregating this demand, Carter points out.

The bank, as the buying organization, installs an electronic ordering system. Whenever a customer needs copier toner, for example, he logs onto the system and orders a case. The office supplier then delivers the toner to the bank’s customer. The bank, meanwhile, handles the financial transaction. This kind of system fundamentally changes the way purchasing is done up and down the supply chain, Carter says.

The Arrival of Buying Organizations

Carter says these intermediate buying organizations are already growing up. Ford Motor Company and General Motors Corporation just announced this kind of buying group for their suppliers. Their leverage to take out costs is tremendous, the professor notes. And, when this happens, everybody wins.

The only losers in this scenario are small suppliers who can’t compete on a national or regional basis. He guesses the number of suppliers will decrease since organizations will have to be big to survive.

Supply chain management will become more common in the next few years. Carter believes dominant companies will have a large say over the supply chain. They will accomplish this by helping determine what suppliers do based on their levels of competence. “Dominant players will force companies to give up production to someone else if that’s the most efficient way,” he adds.

An example would be Lear, a company that makes seats for car manufacturers. Carter says Ford could look at everyone Lear does business with, going as far back as five suppliers. Ford would then facilitate a discussion, which would determine what Lear would produce itself and what it would outsource. “This is happening already, but we’ll see more and more,” predicts the professor.

Carter says the most controversial trend he sees on the horizon is the fact that everything can be outsourced. He laughs and calls this “extreme outsourcing.” Companies with good relationship managers and up-to-date information systems can become virtual organizations. “That may be a good way to maximize profit and shareholder value,” he says.

Lessons from the Outsourcing Primer:

  • Cost pressures worldwide will require more and more companies to outsource to maximize profit and shareholder value.
  • Purchasing managers will have to become relationship oriented, since their major responsibility will be to oversee the outsourcing relationship.
  • Companies will form buyer organizations to obtain better prices and services for outsourced activities like office supplies.
  • There may be a time when everything a company does is outsourced.

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