The More Things Seem to Change . . . .

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. . . . the more they remain the same. It was many years ago when I had just moved to the USA. My first job as a Controller also included the responsibility for Purchasing. A few months into it, it was obvious that we were losing money because of the downturn in the industry and had to get our costs under control (corrugated manufacturer). Not knowing any better (this was way before the days of Strategic Sourcing), I sent out a general letter to all our suppliers asking them for a 5% price reduction and lo and behold, a large number of them responded positively. Little did I know how much I had to learn?

Fast forward to today and I just concluded four reviews with clients who are all in the midst of severe cost pressures because of the industries they are in (Oil and Coal) and were in the process of launching cost reduction programs. The decks all looked very impressive and they all had one thing in common: they were all a variation of the email that I had sent out decades ago. The entire programs were based on reviewing all current contracts and seeing which ones could be rebid and going after all the suppliers to see what could be squeezed out.

When we operate in the context of a Zero Sum Game, our approach is designed to shift cost but not eliminate it. Our goal becomes optimizing a component (us) of the overall system so we end up pushing cost around the system – not reducing the overall cost in the system. Our current adversarial processes will never get us to “systems thinking” and it’s only through collaborative processes that we will get to eliminating system cost and not pushing it around. Let me illustrate with a couple of real and not hypothetical examples.

We had a situation where a supplier could reduce their overall cost by 15%, if their production runs were at least 100 units. They had two customers who were ordering 60 units and 40 units respectively at one time. It wasn’t until we approached the customers separately on behalf of the supplier when we found out that they could easily place their orders in the same week allowing the supplier to get to the optimal EOQ and reduce the overall system cost by 15%. Imagine trying to get to that same result using our current adversarial commercial processes.

In another situation, our client had a need for some critical engineering resources that were in short supply and will continue to be for the foreseeable future. Incidentally, a number of their competitors were also faced with the same dilemma. Unfortunately, none of them individually have a big enough need for any supplier to invest in standing up a specific delivery unit for that particular skillset . If a couple of them were to combine their needs, then a supplier would have sufficient volume to invest in satisfying that need.  However, the current context and processes would never allow such a solution to emerge? We helped our customer identify the appropriate supplier, had them contact a couple of the competitors to explain the challenge and  issue and got enough committed volume for 2-3 years for the supplier to stand up that delivery unit. 

It is pretty clear that the days of squeezing your trading partners using adversarial processes and merely shifting cost, risk etc. around the system are over. Systems thinking means identifying all the players in the system and then using collaborative processes to maximize value for the entire system, not just for your piece of it. Zero sum thinking may lead to zero sum value because when we shift costs, risk etc., at best we shift it only for a certain time because it remains in the system and always finds a way to make it back to us.

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Dalip Raheja is President and CEO of The Mpower Group (TMG). Dalip has over 30 years of experience managing large organizations and change initiatives. He has worked across the spectrums of supply chain management, strategic sourcing, and management consulting.

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