Procurement

Transforming Sourcing and Supplier Management to Support Profitable Revenue Growth

December 16, 2014

With manufacturing CEOs intensely focused on creating profitable revenue growth for their shareholders, it is time for sourcing and supplier management teams to assess the alignment of their traditional responsibilities and strategies with this critical objective. While these teams must continue to improve supplier costs, ensure quality, and minimize risk, it is essential that they go beyond these customary goals and demonstrate an equally strong focus on revenue generation.

A recent study by Directworks compared sourcing and supplier management professionals' top-priorities for 2015 to their assessment of the biggest challenges facing their company next year. The results show a clear disconnect. Cost management and quality are the top two priorities of the sourcing and supplier management teams. But these same respondents named revenue and cost management as the biggest challenges facing their company. And practically no one cited revenue growth as a sourcing and supplier management priority, presumably leaving this responsibility for other functional teams to support.

Successful sourcing and supplier management teams will close this perceived "priorities gap" and demonstrate their value through greater contributions to profitable revenue growth. They will build and maintain a reliable component supply chain that supports innovation, provides greater speed-to-market, and enhances cost competitiveness.

Here are two concepts to consider when developing strategies to support profitable revenue growth:

  1. Understand what is important to the customer and make smarter supply decisions

Sourcing and supplier management teams should begin by educating themselves about the customer's needs, as well as understanding what customers care about when making their buying decision. Then use this knowledge to determine the supplier selection criteria to gather during the sourcing process. These insights also enable more informed analyses, especially when comparing and contrasting supplier bids and making tradeoffs. Consider the following activities:

Seek input from Product Management and Marketing

Early in the sourcing project, meet with Product Management and Marketing to gather information about the customer and how they will make their buying decision. Make sure you understand the value the customer is expecting to experience when using your product. Keep in mind that customer preferences are not only about feature and functions, but rather the problem your product solves and/or the experience it creates. It is also important to understand the image your company is trying to create and maintain in the marketplace. You will want to ensure that supplier decisions support the desired brand experience.

Seek input from suppliers

When it comes to understanding those who buy and use your product, you should be sure to turn to your suppliers as a valued source of information. Many suppliers conduct their own market research to better understand the features, usability, and quality expectations that are desired among end users. Savvy suppliers will be able to communicate how their distinct offering generates incremental value and a better experience for the customer.

Build expertise around the "Internet of Things" (IoT)

Manufacturers realize that today's customers have less brand loyalty and are willing to switch products if they believe the alternative is better, faster, easier to use, etc. Sensor technology now exists to enable manufacturers to understand actual product usage better than ever before. Gartner defines the "Internet of Things" as the network of physical objects, accessed through the Internet, that contain embedded technology to sense or interact with their internal states or the external environment. Simply put, the IoT allows you to assess the performance of a product, how the user utilizes the product, and if the product delivers the intended results. Given the insights that this data can provide, sourcing teams should facilitate conversations to determine if there is value in incorporating such technology into new and existing products.

  1. Ensure the cost-competitiveness and reliability of the supply chain in new markets

Sourcing and supplier management teams must engage early in the evaluation of any potential new markets. Before your company commits to a new market, sourcing and supplier management teams should build an understanding of the regional supply market to understand supplier costs, quality, and risk. Some specific activities your team should consider include:

  • Collaborating with suppliers to leverage their regional knowledge of customer needs, market issues, and trends.
  • Assessing the capabilities and performance of suppliers in the region to ensure that a reliable, cost-competitive supply chain can be built and maintained.
  • Evaluating the availability and talent of local resources to support regional sourcing.
  • Understanding the logistics and transportation options and their impact on total cost.
  • Coordinating with demand planning, assessing the capacity of suppliers, and determining if the supply chain will be able to support expected growth.
  • Gaining the necessary visibility into the multi-tier supply chain to meet compliance requirements and manage risk.
  • Understanding all regulatory, compliance, and tax obligations related to a potential new market and the margin impact of enhanced regulatory oversight.

At the end of day, the sourcing team must understand the true total cost, supplier capabilities, and all risks associated with operating within a new market. Accurate, timely data will be critical to this decision.