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Signs of Mismanagement in Supply Chain Spend

Are 21st-century supply chains worth as much to manufacturers as the capital they invest in them?

Here are a few indicators of supply chain spending may require significant retooling very soon:

1. Optimization efforts that show no skepticism over current operations
Real improvement starts by identifying a problem and working from there. Yet more often than not, manufacturers scrutinize partners, employees, and contracted help while turning a blind eye to their internal processes.

Results from a recent supply chain survey conducted by Grant Thorton LLC on behalf of the National Association of Manufacturers proved this. Nearly 80 percent of manufacturers reported primarily targeting direct spend to improve their supply chain operations as opposed to indirect spend. Wasteful operations and rework are undoubtedly worth addressing, as these indirect expenses correlate with direct ones. How can a business expect to reduce, say, materials costs without first understanding exactly the base amount of materials it needs?

But there’s something far more disconcerting about the stark difference between attention paid to direct versus indirect spend lurking here. Are these manufacturers essentially ignoring faults in their internal processes because they lack the resources to properly vet them and fix them intelligently? Why assume such unpreparedness? Because the same Grant Thorton/NAM survey revealed only 10% of manufacturers even have a definitive strategy for optimizing supply chain performance.

Lean operations require investment in continuous improvement strategies. Companies must examine whether their direct-spend improvement mindset reflects a true dedication to excellence or an avoidance of a larger issue of documentation and analysis.

2. No goals (or negotiating) at the negotiation table
Manufacturers walk a narrow line when meeting with supply vendors over contract renewals or modifications, or when they enter new supplier partnerships entirely. Strategies around procurement pricing must be tight and calculated. One PricewaterhouseCoopers study estimated sourcing costs for manufacturers at between 50 to 80 percent of total cost.

Yet this hard-line approach obscures the benefits of a goal-oriented negotiation, one that recognizes the importance of whatever it is the vendor hopes to achieve through the partnership. This builds a solid foundation for rewarding a supplier relationship that can return far more than pricing discounts ever could.

Before hashing out procurement with a new or legacy supplier, manufacturers should take a second look at the goals they hope to achieve through this partnership and prioritize them so they know which goals they can and cannot budge on. To be valuable, however, these objectives must not be general. Leaders would be wise to speak with materials handlers and operators to learn exactly what their operations require from the supplier. Extra materials processing before delivery, for example, could save workers on the shop floor who would otherwise do it a lot of time in production.

3. Zero investment into eco-centric transparency
Customers of manufactured goods are hungry to know more about where supplies came from, whether they comply with health and safety standards, and what their residual effect on the environment is and will be. Manufacturers that do not implement new supply chain strategies around this new consumer demand will wish they had in the years to come.

Consider the recent alliance between Google and the Healthy Buildings Network, as well as the Portico platform these two businesses created together. Portico is a nascent repository of disclosure information people can access to learn about building materials manufacturers, their products and, among other things, the green certifications those products do or don’t hold. Should this database catch fire as architects and contractors demand more environmentally sustainable goods for their clients, this change could have a disruptive, revolutionary effect on producers of cement, glass, insulation, etc.

Whether or not a business operates in the building material industry is beside the point. By investing in supply chain visibility with an eye toward environmental friendliness, manufacturers in any sector can create a value proposition for customers that far too many competitors have yet to act upon.

For more information on how to curb exorbitant indirect spend management costs throughout your entire business, check out this blog post on the subject. You can also speak with a USC Consulting Group representative today to learn about how to achieve operational excellence anywhere in your company.