Strategic Sourcing and Category Management: Lessons Learned at IKEA by Magnus Carlsson (KoganPage, August 2015) is not a case study, although I didn’t need the note from the author in the introduction to know that. The author may have spent 25 years at IKEA, working in strategic sourcing, but this is less a story of one company and more the learnings gained by one professional over 2.5 decades in a competitive environment.
Like any other book I review or event I attend, my focus in reading this book was to cull out the important ideas: what are the few take aways that really stand out as unique? There are quite a few in this book, any of which will improve the maturity and results of your procurement organization. I think this book is fantastic – full of great new ideas and ways to implement them.
The first question that might come to mind is ‘how does the author suggest we segment our spend or supply base to get the best results from category management?’ He advocates segmentation by manufacturing process – and yet he introduces the idea that the processes he is accustomed to are different than the ones most commonly seen. The steps in any process must be allowed to influence each other – not just downstream, but back and forth. This philosophy brings the entire process to life and pushes those managing it to emphasize agility and flexibility.
Several of the take-aways I detail below provide examples of where learning something or changing a requirement must be allowed to affect the trajectory of the project no matter how far through the process it is. That being said, Carlsson does not suggest that processes should be ‘loose’. In fact, he explains that the difference is in the details – the difference between mostly getting a process right and actually getting it right may be small in percentage of the total effort, but will be significant as a percentage of the results.
This is big – first of all, knowing the difference between the two and second of all being able to build and wield both.
Influence is like BATNA outside of a negotiation. You strengthen it by increasing your options. If a company (or individual) can create and define a reason for suppliers to give them something others can’t access, they have influence. Another way of looking at it is increasing control over one’s environment. It is important to note that volume of demand does not automatically create influence. This provides someone with the option to improve results without violating the popular collaboration paradigm.
While Influence incentivizes desired behavior by offering something of value in return, power makes it happen through leverage. There is more force to a power-based approach.
Another critical idea. As Carlsson says, “locate the money.” Market diagnosis should be conducted early enough in a project that the findings can be allowed to shape the resulting sourcing efforts. Always look at the difference between what high margin/cost suppliers provide and what lower cost suppliers provide. High price suppliers have found a way to deliver value added services, and low cost suppliers have found a way to be efficient. The right answer is likely somewhere between the two, and there is something important to be learned from both.
If there aren’t enough viable alternatives in your project, re-engineer the offering to make them viable. Maybe your requirements are more the issue than what is available in the market. Understand the role that different cost types (fixed/variable/unit-based/overhead) as well as material vs. process costs have on the value created for your consumers. Start with cost calculations and then move to a value analysis which combines costs and consumer benefits.