May 2014 |

Supplier Management

We were chatting to a management thinker the other day – a former CFO, as it happens – and he said something so compelling, yet so simple, that we were stunned. “The problem with the runaway success of MBA schools is that we’re developing a global corporate monoculture,” he said. “We’re concentrating risk in similar places around the world.”

Reading the latest research into corporate spending patterns, it seems he’s right. The same big trends of global markets, networking technology, hyper-efficient logistics and specialization – collectively creating increasingly virtual corporations – are visible in organizations right around the world.

Our research includes countries on every continent – 1,954 in total – from Japan to Sweden, Israel to South Africa. It shows that it’s non-labor costs that define company efficiency, much more so than staff costs. And that truth is more consistent between countries than it is, say, between sectors.

(To give you an idea, financial services is still very much a people business – with a near 1:1 ratio between non-labor and labor costs. But technology has a 5:1 ratio, retail is 7:1 and oil and gas a massive 10:1 ratio. That doesn’t mean there aren’t significant cost savings to be made from smarter procurement in financial services – just that the Profit Enhancement Potential is significantly higher, proportionately, in those other sectors.)

The global balances have been changing for a while – and for all sorts of reasons. For example, general outsourcing and the shift of manufacturing jobs to China in the 1990s massively increased the share of non-labor costs in mature economies (as corporations made more money with fewer direct employees). But soaring labor costs have meant that Chinese companies, in turn, are outsourcing and automating labor costs.

But there’s something much deeper here than the simple economics of (labor) supply and demand around the world or automation. This is about global visibility.

The reason? Good procurement and a value-enhancing supply chain really aren’t about driving the lowest unit cost for everything your organization buys. Now that so much of the value a business creates is derived from third parties – be they outsourcers, marketers, manufacturers, even raw material suppliers – getting it right has a significant impact on areas like innovation and reputation. Those are the source of competitive advantage and license to trade. And they’re global.

It’s not just BP (with its Gulf of Mexico oil spill) or Tesco (taking the PR hit for horsemeat in pies) in the media-obsessed West that have to consider these kinds of risk in their supply chain. If Bangladeshi factory owners are exposed for bad practice there’s a knock-on effect for companies in the West that stock their products – but also for the local middlemen and the regional economy.

So we think that the former CFO nailed it. Global practices and economics that work on a worldwide scale are creating global risks. But they’re also creating similar opportunities around the world. Best of all, putting procurement and the supply chain onto a strategic footing not only helps manage those rapidly emerging risks – it also turns out to save a lot more money than worrying about which labor to lay off.