Today, I’d like to welcome a guest blogger to Supply Excellence. Doug Smock is the co-author of the top-selling supply management book, Straight to the Bottom Line, and heads up his own online community for sharing supply strategy, GlobalCPO.com. I encourage you to sign up for Doug’s free newsletter, How Smart People Buy.

A lot of supply managers talk the talk on supplier relationships, but I find that very few walk the walk. Evidence of this was the mad rush to electronic reverse auctions. One member of the Purchasing magazine Editorial Advisory Board even told me he used auctions as a tool to gauge weekly changes in electronics prices. The real problem of course, is lack of top-level metrics as I mentioned in an earlier discussion on Supply Excellence.

We need to get the focus off of short-term, short-sighted cost savings and on to longer-lasting, more meaningful metrics, such as the role of suppliers in generating innovation, improving new product development, reducing supply chain costs, and helping cope with huge shifts in market demand—up or down. Premier suppliers don’t want to deal with customers who put the business out for electronic auction after they just made a huge investment in reducing your costs.

As I pointed out in the “Tale of Two Spenders” chapter in Straight to the Bottom Line, this was a classic strategy in Detroit. A DuPont or GE Plastics would invest in development of a whole new injection molded instrument panel and then one of the old Big Three would put the resin order out for bid, and then demand a 10% price rollback off the invoice. Detroit is now paying the price today for that strategy.

One of the key issues in these new “premier-level partnerships” (a term coined by John Paterson, CPO at IBM, whose strategy will be profiled in my next book on the role of technology in supply management transformation) is how to make sure the buying company is paying appropriate costs for the products and services it receives from the supplier partner. Enter one of the processes which I think will be one of the fastest growing in the supply space in the next five years: should- and could- costing. When I first started at Purchasing magazine in 1977, costing was pretty much limited to value engineering, although some whiz kids in the John Deere purchasing department were starting to explore activity-based costing. Well, we’re in a whole new era today. In my next post, I will describe what’s happening today in cost management — both within supply management organizations and with the supply base, which is the next frontier.

Please feel free to e-mail me at dsmock@globalcpo.com if there is a particular aspect of product and supply costing you would like me to cover.

Thanks, Doug. Costing is top of mind with most Supply Excellence readers, particularly in today’s tightening supply markets where price inflation and supply scarcity are increasingly common. We anxiously await your next installment to learn how to predict future costs and develop sourcing and supply strategies to hold down costs and assure supply.

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