eSourcing To the Rescue

Last year Ford Motor Co. took two big hits. These were its Firestone tire fiasco and a billion dollars of unwanted palladium. Combined, they accounted for most of Ford's whopping $5.5 billion loss last year. Why did these two events occur and what did they have in common?

Last year Ford Motor Co. took two big hits. These were its Firestone tire fiasco and a billion dollars of unwanted palladium. Combined, they accounted for most of Ford's whopping $5.5 billion loss last year. Why did these two events occur and what did they have in common? Both could be attributed to bad sourcing and supplier management. Great sourcing is the bedrock of a great manufacturer. Recognizing this fact are legions of consultants and information-technology (IT) vendors. They're attracted to the area because, as the famous bank-robber Willie Sutton said, "that's where the money is."

The majority of most manufacturers' budgets go to their suppliers. Sourcing is the heart of this activity. It is the collection of functions that shape, develop and improve a company's supply chain. Ideally, a company has a set of well-articulated strategies for handling each of its supplier categories and relationships. In addition, it has formal processes that "error proof" its sourcing procedures. These insure that the resulting supply chain consistently delivers the expected results. In all of the company's sourcing activities information flows quickly. Decisions are made speedily. The whole process and underlying information are highly visible. All departments—including purchasing, engineering, finance, and manufacturing—collaborate and conform to established sourcing processes.

That is the ideal world. Reality is far different. Instead, a thicket of bureaucratic hoops face every sourcing activity. Consistency isn't achieved. A single department or individual often unwittingly undermines what the company overall really needs. Ford's palladium snafu is an example. Its commodity manager was stockpiling the metal just as its engineers were minimizing the amount needed in its catalytic converters. Meanwhile, Ford's purchases were so large they drove up the market price of palladium from $500/ounce to $1,125/ounce. Hence, Ford was paying top dollar for a commodity it didn't need in those volumes.

As another example a new-vehicle-development team that may quickly pick a supplier but look only at that single platform's requirements. Meanwhile, a corporate purchasing manager may be trying to have multiple vehicle lines share the same part.

Inaccurate and old information similarly sabotage good sourcing. For example, say a purchasing group at a supplier company wants to select suppliers for a new program. It looks at the costed bill of materials (BOM) for a similar assembly already in production. However, purchasing looks at its own historical data, namely the costed BOM at the time the contract was awarded. Unfortunately, those numbers do not at all reflect what the customer is now paying its suppliers for parts actively in production. Obviously, the latter set of numbers is a fair better basis to forecast actual prices. Good sourcing is a requirement for good cost modeling. An example when this didn't occur was when Ford introduced its new Thunderbird a few years ago. The automaker didn't know what that vehicle's true costs were, on a per unit basis, until it was six months into production!

(Comprehensive insight into the ‘nightmare' of vehicle manufacturer purchasing can be gleaned by looking at it through a supplier's eyes. To do so, see the book-length report, "The Automotive How To" study available from Motorcity Consulting, Inc.)

Sourcing snafus aren't caused by one errant individual or single department. Rather the task is simply too big for any individual to know all the relevant information and variables. Coming to the rescue are eSourcing services and tools. Some of these eSourcing tools seek to uncover opportunities company wide. For instance, Dun & Bradstreet recommends doing a "spend analysis" across the corporation. This can help suggest where to aggregate purchases now spread across too many vendors and contracts. CEO Orville Bailey of B2eMarkets cautions, however, against seeking only one-time savings. His firm advocates a more systemic approach. That is, it helps firms formulate sourcing strategies. Where a firm already possesses such a strategy, B2eMarkets helps them institutionalize the strategies into business processes. Also required is putting into place monitoring procedures that insure conformance to the sourcing procedures. The results are sustainable cost savings.

Most manufacturers aren't pursuing such holistic, longer-term approaches as advocated by B2eMarkets. Instead, they start by implementing one of several eSourcing point solutions. These include:

  • "RFx," that is, bid/quote tools for managing RFIs, FRPs, RFQs, etc.(e.g., from Covisint),
  • Auctions (e.g., from FreeMarkets),
  • Procurement transaction systems (e.g., from SAP, Oracle, Baan, J. D. Edwards).

eSourcing as a whole, fortunately, has much to offer the auto industry. With every manufacturer in the midst of a purchased-parts cost-cutting program, expect to hear much more about this hot, emerging area. 

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