Effective procurement strategies generate revenue and enhance profitability, no doubt about it. Two executives from Cisco Systems, the giant manufacturer of electronic equipment and software, detailed the payback a company can get when it aligns its supply chain operations internally and works with suppliers to reduce costs.
In a presentation at Aberdeen Group’s Chief Procurement Officer Summit in Boston last week, Norm DePeau, Cisco’s senior director of cost operations and supplier management, and Rajesh Kalidindi, director of supply chain operations, said that the Silicon Valley mainstay developed an “end-to-end cost mindset” that covers supply chain management (SCM) from the initial stages of innovation, planning, and sourcing to production, quality assurance, and delivery.
Crucial to this mindset was creation of a “culture of true cost ownership” within the company, which eventually became “a brand” called Cost Excellence. In devising strategies for savings, “we all came together,” DePeau said. “We didn’t call anyone in [to assist us]. We got people to think outside their own areas.”
DePeau encouraged his team and related departments to develop a “burning platform” mindset, to convey the urgency needed to devise better and more cost-effective ways of SCM.
Cisco’s procurement operation is enormous. The company has more than 2,000 SCM employees worldwide and over 70 manufacturing and logistics sites. Procurement oversees the purchase of $10 billion of components every year involving 750,000 part numbers. Cisco uses 33.6 billion components in products annually. Freight costs alone are $600-700 million per year.
At the same time, Cisco faces stiff competition in many markets and, consequently, downward pressure on its own selling prices.
Of the initiatives adopted, one of the most successful was collaborative, data-driven negotiation with suppliers over component and system costs.
“Data is an immense help in negotiations,” said Kalidindi. “It can be used in scalable fashion for internal and external leverage,” he noted, allowing Cisco to present extremely detailed arguments for the prices it wants to pay.
The company performed tear-down analyses of components and systems to justify the cost reductions. “Suppliers were very surprised that we were so prepared in our price negotiations,” he noted.
To sweeten the pot, Cisco offered considerable new work to key suppliers — but on a time-limited basis; they needed to quickly make a decision to accept the work at Cisco’s price for it or risk losing the business.
Cisco’s procurement also offered product design options to suppliers and compared the costs they developed with Cisco’s benchmarks. “We gave them more control [in development], but in exchange we expected more flexibility” in price and other considerations, Kalidindi remarked. Overall, the company achieved a 14 percent cost reduction and two years of guaranteed productivity from the suppliers.
Procurement also took a close look at tail-spend management. Cost performance in this sector, the bottom 10-20 percent of the supply chain, was significantly lower than in the top 80 percent, DePeau noted. Cisco launched a pilot program using internal resources and a third party to monitor and improve tail-spend performance. The result was “double-digit savings” that came to four times those of the previous year. More savings are expected in fiscal 2014 as the tail-spend program expands.
There are many other aspects of Cisco’s Cost Excellence program. The message, though, is that organizations, large or small, can revamp operations by being aligned in their thinking about SCM, being creative in developing strategies, looking closely at all supply-related costs, applying metrics, and collaborating with key suppliers as valued partners.
Cisco’s efforts produced “outstanding results” in fiscal 2013: The company posted 6 percent top-line growth to $48.6 billion; 8 percent bottom-line growth, which yielded $10.9 billion of net income; and a 12 percent increase in operating cash flow amounting to $12.9 billion.