Supply Excellence — Sometimes Cost Can Go to (nearly) Zero

Sometimes Cost Can Go to (nearly) Zero

April 7th, 2008 · by Justin Sullivan · No Comments · costing, events, sourcing, supply management

If Spend Management has a limiting axiom, it might be the idea that there is a limit to how much cost you can take out of an item, service or process. After all, cost can not go to zero…can it?

With a slightly different perspective on things, it turns out that cost can nearly go to zero. A couple of months ago in the New York Times, I picked up a couple of interesting sourcing related facts: In 1984, it would have taken an American working at the average salary 435 hours to earn enough to buy a PC and 456 hours to earn a cellular phone. These two staples of modern life that many of us lug nearly everywhere we go would have taken you more than 1/3 of a 2,000 work year to earn.

Today, the PC will take the average American 25 hours to earn - a reduction of 94.1%. Pretty good, I’d say. But, the cellular phone is even better since the average American can earn the cost of one in just 4 hours of work - a reduction of 99.1%. So while the cost of a cell phone has not gone to zero, it can be had for less than 1% of what it would have cost you 24 years ago if the “currency” you’re spending is work.

Last month, I had the opportunity to speak at the Sourcing Interest Group’s Regional Meeting (free registration required) in Atlanta about some of the changes and challenges that Spend Management organizations are facing now that the cost of cell phones are down to (nearly) zero. Seldom in recent history has the pressure within companies to reduce cost been in such stark contrast with economic trends that are driving prices upward.

This pressure revealed an ugly, unfortunate truth. At many companies, the sourcing process has simply not become an operating platform to facilitate making the best business decisions. Companies that executed category-based sourcing programs as part of a race to capture value at the turn of the century are now being forced to revisit poor decisions. Some sourcing organizations that had preached at the pulpit of cost reduction without a sustainable strategy and process behind them are finding doors closing when their companies should need them most. Even the best sourcing organizations, many of whom are frustrated by their ability to use their enabling technology beyond executing a few RFx and reverse auctions, are having to revisit mediocre processes to ensure that they produce the best return on their organization’s “investment” in expense.

Now is the time we will see how permanent a part of the operating DNA the sourcing process has become. The winning organizations will take a structured approach to Capability Deployment to make the Spend Management process THE default process for making purchasing decisions…and keep cost heading towards zero.

Justin Sullivan is a Senior Manager in Ariba’s Spend Management Services Group. In addition to his strategic sourcing and technology expertise, Justin worked for a number of years in the White House Office of Management and Budget (OMB) where he analyzed the fiscal implications of Federal policy.

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