© Spend Matters. All rights reserved.

P E R S P E C T I V E S

When Sourcing Becomes Supply Chain

By: Jason Busch, Group Managing Editor, Spend Matters

In many companies, even manufacturers, the view of supply chain is quite different from that of
procurement. Even though supply chain involves both inbound (supplier) and outbound (fulfillment/
sales) processes to move goods and/or services, unlike procurement it is largely a demand-driven
function based on forecasts, orders, etc. At its core, supply chain is fundamentally data-driven and
quantitative.

The goal for many supply chain practitioners is simple indeed – have enough inventory on-hand
but don’t get stuck with too much of it, regardless of what part of the supply chain (shop floor,
warehouse, tier one suppliers, etc.) you are looking at. Of course this is easier said than done, but
the rise of supply chain efforts and intensified supplier/customer collaboration in areas such as just-
in-time, lean, available-to-promise, capable-to-promise, and sales and operations planning (S&OP),
just to name a few, have put analytics and insight at the heart of the function.

In contrast, procurement as a general function is still becoming data-driven. There are certain
exceptions to this; for example, sourcing efforts are increasingly relying on spend analysis initiatives
to pinpoint the biggest opportunities for cost reduction (spend aggregation, supplier rationalization,
buying off common price/terms, using escalation/de-escalation clauses to track underlying
commodity price swings, etc.). Although overall we would be hard pressed to describe the typical
procurement organization today as data-driven at the core. Purchasing – yes, it is still too often
just “purchasing” – is ruled by instinct, habit, and negotiation of all sorts. It is about as scientific as
astrology in most companies!

Yet the migration to data-driven analysis as a constant must take place in procurement – and it will.
It’s happening right now in the increased analytical skills we see coming into many procurement
groups, including more data-driven specialists from other parts of the business (e.g., finance) as well
as new recruits from business schools and consultancies. There is a subtler driver of this transition
as well – the introduction of new techniques into the sourcing process itself that allows procurement
to take greater responsibility for a range of design, specification, buying, inventory, fulfillment, and
related decisions as part of a single buying process.

In essence, what we are describing is a world in which sourcing – sourcing specifically, mind you,
not all of procurement – is becoming supply chain. We can now make integrated decisions that used
to occur within business silos or perhaps partially stitched together as part of a sourcing process
that determines what a supply chain will look like – not just how it will operate once it’s defined.
© Spend Matters. All rights reserved. 2

This is truly an awesome shift and it’s one that can reshape what strategic procurement can do for
organizations of all types, industries, and sizes. By taking into account a wide range of criteria and
data as part of a sourcing process that encourages options and supplier creativity (even multi-
tier supplier creativity), we can at the same time explore a universe of potential supply chain and
procurement outcomes and quantify the cost of any particular given “constraint” or request that
gets factored into an ultimate decision.

And we can do this for just about any category or, more broadly, an entire line of business— even
taking into account customer, demand, and sales-side considerations.

In the rest of this Spend Matters Perspective, we aim to introduce our readers to supply chain
possibilities, based on actual case examples, when sourcing becomes supply chain.

Marketing in the Extreme: 1 Billion Catalogs Distributed Globally

Imagine if the public face of your business were highly dependent upon a printed catalog that
over 1 billion (!) people would flip through over the course of a year. Then consider how versions
of this catalog would have to be sent to individuals in nearly 40 countries around the world – with
regional languages, variations, and tastes accounted for – and showcased in over 300 stores.

If one begins to deconstruct the supply chain, it becomes even clearer how many moving parts
there are. Mills produce paper. Then the component parts are delivered to printers and binders
(who in turn need to acquire ink, MRO parts, and other items to fulfill requirements as well).
Then the finished product is sent to the distribution facilities. Finally, repeat the cycle for the next
catalog.

Further, consider all the various constraints and requirements throughout the extended supply
chain, including the following:

• Production scheduling for mills, printers, binders, and distribution facilities

• Distances and logistical decisions between raw material, production, and distribution centers
– and inventory requirements based on those decisions
© Spend Matters. All rights reserved. 3

• Quality – including paper, ink, and related elements

• Localization and frequency – and its effect on sales

Talk about complexity! There are literally trillions of potential permutations of optimal supply chain
designs to ensure the highest possible fill rates (without excess inventory), how to manage unit and
total costs, improve sustainability metrics (e.g., carbon footprints), and so on. But there is only one
optimal outcome based on all the possible inputs and all the business constraints that the retailer
could opt to put into the sourcing and supply chain design equation.

Any solution needs to be accurate as well as manageable (e.g., smaller orders might be ideal on
an inbound and outbound unit cost basis, but not when factoring in labor and other soft costs).
Furthermore, all the participants and stakeholders on the buy side would need to see the cost of
their requested demands quantified (so they can make the best decision for their own cost center
and for the business overall).

Previously, this organization answered all of the questions in silos with 80 full-time employees
dedicated to this task – albeit individually and not collectively. They even used their own
procurement team, who sourced inputs on an individual basis – pulp, logistics, origination,
photography, print, graphic designers, etc. Essentially, the catalog was not one category in terms of
how it was managed: it was over a dozen!

By compressing all of these individual silo decisions (previously made at different points in time,
independently) into a single sourcing and supply chain event, the organization was able to radically
shift the cost economics of how it went to market for this tender— creating tens of millions of dollars
in annual savings and far greater alignment among stakeholders, as well as improving various “soft”
outcomes including CSR metrics in the process.

The fundamental element of this “sourcing meets supply chain” project involved data collection
based on the following types of elements from internal stakeholders and various suppliers at
different tiers of the supply chain:

• Where is a given required item (e.g., paper) in the supply chain, and what are associated
variables (e.g., specification) and materials/service level requirements?
• When is it available? In what quantities?
• What volume discounts or pricing apply and under what scenarios (order size, shipment type –
container load, etc.)?
• What is the quality?
• What is the environmental impact of a decision?

Being able to gather millions of data points during a sourcing process and then interpreting ideal
outcomes by applying internal constraints and requirements can often lead to surprising outcomes
that were not envisioned in the first place. For example, it might make sense that a catalog for
a specific Asian market is actually produced within the Eurozone and then shipped, but that
production in North America is highly regionalized (down to local pulp suppliers, printers, and freight
carriers).

This use case example – which runs as a continuous process for the retailer in question to this day
– is proof that it’s possible to compress supply chain network design, demand management, raw
materials procurement, corporate social responsibility (CSR) programs, and strategic sourcing into a
© Spend Matters. All rights reserved. 4

single, integrated effort that yields better outcomes for all, while also saving significant costs.

Optimizing a Global Production Network and Asset Allocation

Imagine a typical production environment in either a discrete or process manufacturing context. It’s
likely that for any given organization outside of the SMB market there are multiple production lines.
Moreover, each plant is capable of producing different SKUs and likely has assets (e.g., equipment)
that are both similar and dissimilar to those of other facilities.

In addition, each asset or set of assets that the company has in its facilities must be qualified (e.g.,
tested) to produce a given SKU. There’s also typically an optimal (and also many sub-optimal)
process flow based on equipment availability, inventory availability, manufacturing process flow, and
other elements. Also consider how there are also opportunity costs to qualifying assets (e.g., first
article testing), which can take weeks, months, or even quarters – and the availability of engineering
resources that can qualify new asset utilization scenarios is also constrained.

And these are just the “internal” elements of examining different production and facility scenarios
driving a set of fixed and variable costs. Consider external volume and cost components/drivers as
well:

• Demand variability and forecasting (customers)

• Profit/margin requirements (based on discounts and pricing offered on the sell side)
• Logistics/freight (inbound and outbound)
• Inventory carrying costs/warehousing
• Tax/tariff/duty
• Raw material cost (including different materials for different sites and the ability to share / mix
material between sites – or not)
• Part component (supplier) cost
• Insurance and re-insurance
© Spend Matters. All rights reserved. 5

The potential outcomes from such exercises are almost endless starting with the basics: figuring out
the current “as is” total cost structure and picture. After this, companies might consider in such an
activity:

• How best to leverage their own and their suppliers’ existing assets and optimize potential
solutions based on contracted commitments
• Adding new assets to facilities
• “Buying” rather than “making” elements within the production supply chain
• The potential for broad-based cost reduction opportunities based on changes in procurement or
supply chain strategies (e.g., supplier consolidation/rationalization, order size, etc.)
• Evaluating and reducing supply risk across multiple tiers of the supply chain (e.g., tier three
bottlenecks)
• Launching new products or new initiatives (cost of entering new markets/geographies,
launching new SKUs or improving product quality/fill-rates to a certain level)

For a manufacturing, supply chain, and procurement expert, being able to accomplish all of the
above in a single exercise might seem like attaining a level of nirvana that does not exist in the
physical realm. But it does. And it’s possible today by bringing sourcing together with supply chain
in a specific project- or event-centric manner to determine optimal asset allocation (physical and
virtual assets, including suppliers) and the ideal design of a global production network.

One organization, a fast moving consumer goods company, set up just such an exercise to optimize
for current assets examining both demand and production across 5 countries, 40 plants, 200
production lines, 450 assets, and 500 SKUs representing some $500 million in annual (external)
spend per year. This company, which possessed a highly mature procurement and supply chain
function already, was able to identify $25 million in short-term cost reduction opportunities and $35
million in long-term opportunities from the exercise.

But as important, it was also able to identify supply chain bottlenecks and reduce supply risk. In
addition, the exercise enabled it to figure out a better framework for engagement with suppliers in
negotiations through information asymmetry (i.e., the procurement organization was armed with far
more information on total cost for all supply chain participants, including itself, than the suppliers it
was in discussion with). Lastly, it also provided an optimal means for managing total cost and margin
when introducing new products.

By bringing together sourcing and supply chain into a single procurement supply chain and
production project, all stakeholders in various production silos are able to have their voices heard –
creating a total cost and margin management chorus that is rare for the industry.

Where Margin, Brand, and Category Management Meet

Category management is often buried within a procurement organization. But what if all of the non-
marketing aspects of brand management (e.g., pricing, design, quality) and category management
could come together within a CPG organization? They can, and they have. The following is an
example from a single brand/P&L large enough to form a separate company for one of the leaders in
the sector.
© Spend Matters. All rights reserved. 6

The organization in question sought to use a single, integrated information gathering and decision
optimization process to take into account an incredibly wide range of cost, quality, design, margin,
risk, and related variables in a specific project bridging procurement, supply chain, manufacturing,
sales, and marketing. The variables that were counted included:

• Machining
• Printing
• Packaging
• Assembly
• Logistics
• Currency fluctuations
• Tax/tariffs/customs/VAT
• Sourcing (multi-tier) for semi-finished and finished components/ingredients
• Sourcing (multi-tier) for raw materials

But the effort was not just limited to cost elements. It also included developing an incredibly deep
understanding of the cost structure, capacities, and future plans of all of its potential suppliers. With
this information in hand, the organization was able to design an optimal production and supply
network both for current and future scenarios, so the supply chain could flex based on potential
demand and market scenarios over the course of three to five years, modeling out demand, cost, and
margin on a weekly production basis.

The ultimate decision path led the organization toward award scenarios that include “take or pay”
agreements with suppliers based a variety of criteria (e.g., capacity, commitment, and holding
pricing), as well as optimized internal production scheduling. Just as important is the fact that it
provided a chessboard framework and roadmap that could adjust as the market unfolded, in a
manner such that the organization was not bound to manufacturing and procurement decisions by
the expectations of current demand.

Sourcing and Supply Chain – Becoming One

Leading edge organizations across retail and manufacturing are proving today that sourcing and
supply chain can become one for the most strategic production and procurement decisions. But it’s
no easy feat to arrive at shared and collective decisions based on a combination of product design,
demand forecasting, market variability (commodity, currency, etc.), supply chain allocation, and
sourcing decisions.

It requires stakeholder involvement (and of course ceaseless change management). It requires the
ability to gather vast amounts of supply chain and production information (which implicitly requires
knowing what questions to ask). It requires a set process, very much like S&OP, but with even more
information sets coming together. And it also requires the right set of technologies that can both
gather large information sets from diverse sets of internal stakeholders and suppliers and apply
specific constraints against this information to run different design and award scenarios – as well as
model potential changes and contingencies as market conditions relentlessly change.

None of this is easy. But it is possible. And it’s happening today. If you’re interested in further
exploring the “art of the sourcing and supply chain possible,” we would urge you to get in touch
with us. We’re happy to point you toward some of the most interesting use cases (companies) and
technologies that can truly bring supply chain and sourcing together as one.
© Spend Matters. All rights reserved. 7

http://www.tradeextensions.com/
Trade Extensions has the technology and expertise to enable businesses and sourcing professionals
to make better sourcing decisions – decisions that are strategically-aligned and optimised against
operational constraints. Our online platform, TESS™, is uniquely flexible and can run projects ranging
from simple reverse auctions to complex sourcing events involving goods and services worth billions
of dollars, millions of data items and multiple rounds of negotiation.

Further information on this topic and others can be found at the website: www.spendmatters.com.
Reproduction of this publication in any form without prior written approval is forbidden. The information
in this report has been obtained from sources believed to be reliable. Spend Matters disclaims all
warranties as to the accuracy, completeness, or adequacy of such information and shall have no liability
for errors, omissions, or inadequacies in the information contained herein or for interpretations thereof.
The reader assumes sole responsibility for the selection of these materials to achieve its intended
result. The opinions express herein are subject to change without notice. To purchase reprints of this
document, please email info@spendmatters.com.