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Archive for November, 2010

Testing the Theory that “Sourcing is Dead”

Posted by lowellyarusso on November 30, 2010

Today’s post is from Dr. Lowell Yarusso, Senior Vice-President, Talent Management, of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.

My, how time flies when you’re having fun!  It’s been a while since I posted my thoughts on how Kuhn’s The Structure of Scientific Revolutions could inform the discussion about the “Death of Sourcing”.  In today’s blog, I want to take a look at what how, over the past twenty-five years, we may have been our own worst enemies.  As I do so, the focus of my comments will be on how the way we have chosen to think about Strategic Sourcing has influenced what we have done to demonstrate its value.

Let’s start with a sports analogy.  Growing up, I was a football fan.  One of the things I noticed along the way, and it still seems to be true, was the tendency for new approaches, whether to offensive or defensive play, are always touted as the death knell for the other side of the ball.  For example, when the Shotgun formation was first introduced (By the San Francisco Forty-niner, if memory serves me right), there were stories all over the place, i.e., In the two newspapers I read (Hey, the internet wasn’t even a brainchild yet!) about how “No one” could stop that new offensive formation.  Then, someone looked, not at the results the new formation achieved, but at the underlying structure of the offense.  Viola!  It’s now just a standard option that no defense particularly fears.  The same has happened to the 3-4 defense, the wishbone offense, the Cover 2 defense, and so on.  Whether you’re coaching football or coaching a sourcing team, stagnation is just another word for losing. 

So, what does that tell us about Strategic Sourcing?  By and large, we have been focused on evaluating results, i.e., the effectiveness of efforts to apply the Strategic Sourcing process, and have pretty much ignored the question of the underlying structure, i.e., the effectiveness of the Strategic Sourcing theory.  I believe that has led us to a false sense of comfort that we had developed an approach and process that were so powerful there was nothing left to do but execute.  (The ongoing efforts to evolve the Strategic Sourcing Maturity Model are, in large measure, a good indication that we did not have it right at the outset.)

What we failed to consider was the possibility that the underlying structure has flaws that, while we focused on results, were largely hidden.  That led us to avoid the messy business of thinking through our assumptions and their implications, i.e., of evaluating the theory upon which the process was built.  To Kuhn’s point, our apparent success in solving problems of the type, “How do I reduce the price for goods/services?” and, later, “How do I reduce the total cost of goods/services?”, led us to accept the theory without question.  Recently, there has been a subtle shift in emphasis to problems that are more of the type, “How do I create value across the enterprise?”  And, with this continuing evolution of the nature of the questions we face a realization that we may be operating under a set of assumptions and a theory about sourcing that do not allow us to resolve the real issues Supply Chains face.  Again, like the football team, continually rethinking what we are doing is forced on us by the realities we face.

This is neither the time nor the place to undertake a detailed analysis of the assumptions that have informed Strategic Sourcing Theory.  However, it may be useful to undertake a short thought experiment to see what such an analysis may reveal.  One assumption we may want to test is that Strategic Sourcing must be driven by quantifiable data, i.e., that, if it can’t be measured, it can’t be managed.  The experiment is this:

Consider a sourcing event that focused on the category, “Motor Oil”.   I have a friend who sources that category on an ongoing basis.  His decision criteria focus on traditional “total cost of ownership” variables, i.e., price per quart, Mean Time to Failure, recycling costs, etc.  So far, so good.  But, what are the less obvious value drivers related to Motor Oil.  One is ease of handling.  Purchasing in gallon containers yields a lower total cost of ownership per unit (quarts) of oil used.  But, a gallon container is more difficult to handle, has a greater propensity for spillage, and, because few vehicles have a crank case that holds an even number of gallons, gallon containers lead to overfilling or underfilling as his maintenance staff try to gauge when “enough is enough”.  (The alternative is to add significant time to the oil change process to allow for careful measurement of the exact amount above an even gallon that is needed.)  And, all those partially used gallons further complicate his life.  The issue is, how does he quantify the value of buying in quarts rather than bulk containers?  The answer is, he doesn’t.  He just “knows” quarts are better than gallons and only buys in quarts.  Note, too, that this discussion assumes that the highest value approach to lubrication is motor oil, a conclusion that, as technology evolves, may not continue to be the case.  A focus on “quantifiable variables” may be totally inadequate to deal with that kind of change in the environment.

What does our “quantifiable variables” assumption say about my friend’s approach to sourcing Motor Oil?  Could he come up with a dollar value to add to the decision model?  More importantly, should he?  Or would the effort to do so be patently wasteful and unnecessary?  Of course, some would say, “so, make it a go-no-go decision criteria and be done with it.  That, however, is tantamount to saying, quantifiable variables do not capture everything we need to incorporate in our sourcing decisions.  In other words, the assumption is inadequate to the task and, therefore, the theory and the process need to be revised to accommodate the additional assumption(s) needed to cover this situation.  Or, the assumption itself is flawed and should be discarded. 

Now, I admit that this is an overly simplified example.  On the other hand, if the theory can’t handle the simple cases, how can it be considered adequate for the more complex realities of most of the categories that get run through our existing Strategic Sourcing process?  The point is a simple one.  We need to do some meta-thinking around Strategic Sourcing and not simply accept the current practice because it is current.  Kuhn, I am sure, would agree.

And, as an aside, I hope that you agree as well.  On the other hand,  I would like to do a future blog that addresses the rebuttals to my thinking.  I am sure there must be some but I’m running out of steam so I’ll ask that you help me out by sharing your reactions, whether positive or negative.

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