This article is older, but it is the most reprinted article in the history of the Harvard Business Review (HBR). It keeps getting reprinted because it is a classic and its premise is still very relevant. HBR is a journal with articles written for higher level managers. I would highly recommend becoming regular readers of 3 journals that your boss’ boss will read. One, HBR – general strategic management topics based on academic research written in an easy to read way. Two, the Journal of Supply Chain Management – strategic SCM topics based on academic research written in an easy to read way. You will get a free copy of this every three months by joining the Institute of Supply Management. Three, the Wall Street Journal – the front page alone will tell you everything you need to know on a daily basis in terms of global events that impact business.
The attached core competency article is basically research making the claim that every organization needs to focus all of its scarce, limited, and valuable resources (manpower, machines, money, management, and material – the 5Ms) on being the best at one specific thing (your core competency). The idea is that if you try to be a huge diversified conglomerate that tries to be the best at everything, then you will eventually suck at everything because you will have to spread your resources out too thinly across too many areas. General Motors used to be a diversified industrial conglomerate that made train engines, airplane engine, cars, trucks, ovens, refrigerators, generators, etc. How about just focus on cars and trucks?
If you do something better, faster, and cheaper than anyone else in the world (your core competency), then wouldn’t everyone come to you for it? Why wouldn’t you outsource to someone that can do it better, faster, and cheaper than you? But, isn’t developing a core competency putting all of your eggs in one basket? Answer – no. Look at 3M. What is 3M’s core competency? Answer – Adhesives/glues/sticky stuff. They make the best sticky stuff in the world. What customers, products, and/or industries use sticky stuff? All of them do. 3M has a core competency and is actually diversified and recessionary proof because of it. Every company in every industry for every product needs glue.
How about another example like Honda. What is Honda’s core competency? Answer – Powertrain (engines and transmissions that last forever). So what products use Honda powertrain? Answer – anything and everything that needs a powertrain – leaf blowers, snowmobiles, jet skies, 3 and four wheeler, cars, trucks, generators, motorcycles, chainsaws, etc. That is diversified and recessionary proof by definition.
Companies right now are outsourcing entire functional areas to other companies that have core competencies in these functional areas. For example, companies are outsourcing logistics/transportation/distribution management to 3PLs and 4PLS because these 3PLs and 4PLS can do it better, faster, and cheaper (it is their core competency). Are companies outsourcing purchasing/procurement/sourcing? Yes – to BPOs (Business Process Outsourcing firms), especially for indirect (e.g., MRO, printers, toilet paper, travel, advertising, etc.) and perhaps even direct one day. Are companies outsourcing manufacturing/product/operations? Yes – to manufacturing subcontractors like Jabil Circuit. Jabil can build circuit boards for several different industries such as aerospace, automotive, computer hardware, etc. These companies that outsource to Jabil do not have the economies of scale that Jabil gets by doing it for everyone. Futhermore, in some industries like high tech (Texas Instruments, Hewlitt Packard, Honeywell, Intel, Apple, etc.), their product life cycles are so short that they cannot afford to make the capital investment that Jabil can and does for circuit boards. Companies like Nike, Mattell Toys, Dell, etc., do not actually even build anything themselves and they outsource everything to manufacturing subcontractors (some of which might be sweatshops in South East Asia – but hopefully these shops are SA 8000, ISO 9000, and ISO 14000 certified which proves they take labor laws, quality, and the environment somewhat seriously).
The cool thing about your majors is that lots of companies are outsourcing purchasing, operations, and logistics management. That means there are companies out there with core competencies in a component of your major. So, who are they going to give preferential treatment towards for hiring? Probably students like you that are majoring in their core competency. Think about it, wouldn’t there be fewer jobs for you if companies did everything themselves and they did not outsource SCM functional areas like purchasing, operations, and logistics. You could make the argument that if they did this stuff themselves, they could still hire you, but they were not doing that in the 1970s and 1980s. They hired general business majors or just put people without college degrees into SCM jobs. That might explain why they started to kind of underperform in these areas. Couldn’t we say the same about healthcare today or in the very recent past? There were a lot of people in healthcare making supply chain and spend decisions that had no formal education or training in SCM. There are college students now majoring in the other specialized majors such as Sales, Food Marketing, HRM, etc. That is a great thing because that is a core competency for several companies in several industries and they hire those students.
Final thought before you actually read the HBR core competency article –
But what about these manufacturing companies that are outsourcing everything, who will they hire? Probably you. I think SCM is a core competency for manufacturing firms that outsource everything. Think about it. They all outsource everything to the same suppliers. Who wins in that situation? The company that manages their suppliers the best – SCM. An aggressive outsourcing strategy that not only includes outsourcing your direct material needs, but also entire functional areas (like purchasing, operations, and logistics management) is very risky territory. It is territory that requires strong skills sets and a core competency in your major – supply chain management. Please describe some of what have been the core competencies of some of the companies you have worked for (or companies that you are fond of).
I hope this video lecture brings it all together for you:
Here is the Core Competency paper with my notes (from decades ago!)…
Pasted below are the sample stories I read in class about the previous internship experiences of former WMU ISM students. Pasted below each one is the moral of the story (i.e., the sourcing strategy). Thank you. Sime
Last summer, I was a sourcing “analytics” intern at FirmA and the main part of my job was sending and receiving RFQs for the FirmA Parts and Service Department. We tell suppliers that we will only participate in “one round” of RFQs and we expect their best price the first time.
I had a small tube manufacturer in Iowa contact me one day stating that they were having issues lowering their prices and wondering if they could get assistance so they could be a better supplier. I discussed this with my boss and he sent a quality engineer and a Senior Buyer to the supplier to assist them (I asked to go but unfortunately HR would not approve Intern travel to a facility that wasn’t owned by our company). My internship ended before I could see the results of the visit implemented, but the pair that went estimated that they reduced the cost of some products by up to 10%! I very much enjoyed my internship at FirmA and helping suppliers was a thrill.
“From Sime”: Sourcing = procurement = purchasing (companies use different terms).
Rather than mess with a supplier’s profit margins via competitive bidding to get a lower price, why not just help your suppliers reduce their Direct Costs? That way you do not mess with their margins and chances are you get a much lower price. However, it takes a strategic effort (time).
The single chance to bid is a great option even though it seems counter intuitive. The “single bid only” is the same model that FirmB uses for its commodity bidding. I have used this very technique successfully when purchasing Oil for FirmB (lubricant, not the combustible kind). FirmB had an oil supplier who we felt was too expensive, so I send out a series of RFQ’s to other competing firms (Shell, Exxon, etc.). Through this process I found FirmB was paying significantly more than we should be paying. I then went back to our original supplier and said “We have found significant cost savings with alternative suppliers. You need to come back to us with the most competitive price you can offer, or we will place our last purchase order on [date roughly two weeks away]”. After this they were able to miraculously lower their price by 46% for all oil. This goes to show you that even a novice negotiator can find significant cost savings when using this technique.
“From Sime”: Notice the one shot deal to bid on the business. By giving suppliers only one chance to bid on the business, you tend to get their best price. However, that was not the case with this lubricant supplier. By the way, this sounds like an MRO purchase to support its factories. Remember, your P.O. with your suppliers will likely have terms and conditions that say you can reopen bidding on the business for any competitive reason (i.e., you think you are overpaying!).
The two companies that I’ve worked for choose to have “vendors” bid “once”. At FirmC, our vendors have learned that we expect the best up front and quotes are to be turned around within 3 days. Our quoting process moves insanely fast and we definitely pay for it. At FirmC, I was able to host over 10 Ariba events and we also taught our “vendors” that we expect “one and done”. I did see the problem that you point out there. The vendors at SupplierA for the super specialized, engineered items are not local or utilized as much so their quotes are most definitely padded. I had a few vendors call me to say that if they’re close to the lowest bidder, they would drop their pricing to match. Or they would say that they would have given us better pricing if they were guaranteed the business. I thought this was interesting.
“From Sime”: Notice how this student worked for a company that called their suppliers “vendors”. I think that is fine if you are buying “indirect” material. Otherwise, call them “suppliers”, especially if they design and build stuff that goes directly into your product. It sounds like this supplier did low volume customized engineered work and this supplier did not need their business. It sounds like this supplier had some leverage to talk to a potential customer like this.
I would like to defend myself on my previous emails referring to suppliers as “vendors”. The last 4 months at FirmD introduced me to using the term “vendors”. The definition you gave refers to vendors as suppliers of “indirect” materials. Everything bought at FirmD is an “indirect” cost and their acronyms used frequently are as followed: VIMS (Vendor Invoice Management System) and CVM (Central Vendor Maintenance). Now that I know other companies will cringe at that word, I will stop using “vendors” and refer to all suppliers as “suppliers”. I’m very grateful that you pointed this out.
“From Sime”: She made a good point. She worked for a company that did not design and build anything. All of their spend was therefore INDIRECT spend. So, I guess it is OK to call suppliers “Vendors” if they only provide stuff that does not go into anything that you build. In this case again, they do not build anything so all their spend is INDIRECT. Note, 90% of Americans work in the service sector for companies that do not build anything. All of their spend is INDIRECT.
This summer at FirmE, I did some work preparing for engine negotiations with SupplierA (they design and build engines). SupplierA does not provide ANY cost transparency with their engines, because they know they produce the best engines in the world and have the leverage to say NO to providing transparency. As a result, we had to do a lot of “should costing” with SupplierA’s engine components, and even tear down an engine of theirs, to prepare our “cost breakdown” for their engines. That way we could do our homework, and show what price SupplierA should be making their engines for.
If you are working with a commodity like fasteners (a true commodity, tons of suppliers), you can get away with sourcing from multiple suppliers. Fasteners do not vary too much from one another, so it sometimes may be necessary to have a larger supplier base, as a method to assure there will always be a supply of parts.
I was able to learn this first hand, by working in procurement on FirmE’s Powertrain Category Management Team. I was able to work with the Supply Chain Manager for engines, and learned that we (FirmE) used to make their engines! However, FirmE began to outsource their engines to SupplierA nearly a decade ago because they could make better engine’s than we (FirmE) could, and at a better price, therefore, we (FirmE) outsourced their engines and became much less reliant on vertical integration (making our own engines).
Based on my personal experience, it makes a lot of sense why companies would outsource “strategic” parts. This can help companies rely on assembly and their final product, rather than wasting a lot of resources on strategic parts, that another company can make better, faster and cheaper.
“From Sime”: There is so much in this one. FirmE started to outsource a core part (engines). Over time, they lost design and manufacturing capabilities on engines. Once SupplierA of engines realized this, they started jacking up their prices and telling FirmE that the cost breakdown was none of their business. I have no issues with FirmE outsourcing engines for over 10 years, but you better make sure you that you never forget how to design and build them if you sell buses. FirmE should have told SupplierA ten years ago that they can have the business if they have joint ownership of all design and mfg capabilities associated with their business and that a cost breakdown will always be required. Had they done this Day One, they likely would have not lost leverage in this buyer supplier relationship. FirmE got greedy and sloppy. Note, the person that made that decision ten years ago might have gotten a huge bonus ten years ago and retired, and now someone else has to fix this sourcing decision. A sourcing decision today can impact your company 10, 20, 30 years down the road. 10, 20, 30 years ago, a bunch of managers decided to source stuff from China because it was soooo much cheaper (or so they thought on the surface). As it turns out 10, 20, 30 years later, it actually ended up costing them more (i.e., quality, lead times, control, insurance, inventory, etc.).
I can support the statement of companies mostly outsourcing their “manufacturing” capabilities. Johnson & Johnson just recently sold their entire Medical Device manufacturing plants to a third party manufacturer called Jabil.
“From Sime”: So, if J & J outsources mfg for medical devices, what the heck is their Core competency? Answer: Scaling and ramping up small companies that they buy. J & J has tons of cash and credit and can buy small businesses with great ideas. J & J has a super sophisticated supply chain and J & J manages their supply chain very well. So they can take a medical device that someone is building in their garage and take it global super fast. That start up company in the garage has no idea what supply chain management even means. That start up needs J & J (or Stryker in Kzoo) to help them scale up. Otherwise, the product never leaves their garage.
Back to Jabil. Jabil is a manufacturing subcontractor. Jabil’s core competency is building stuff for entire industries like medical device. Jabil does it for the entire industry (not just for J & J) and gets the economies of scale, so that it does it better, faster and cheaper than companies like J & J could if they built it themselves. Products and technology change so fast for medical devices that the product might be outdated in 6 months, so J & J does not want to build factories to support such short product life cycles. Jabil can make money doing it for them (and everyone else in the industry) and that is Jabil’s thing (core competency).
Student # 7 (this was a bad day for the WMU ISM program):
I wanted to let you know we had at least three WMU students attend the early session of MSU’s career fair. I was thrilled they made the drive and spent time with our team. Unfortunately, we had a bit of a situation. We selected John Smith as one of our top picks for first round interviews based on multiple members of our team talking to him. He had completed the intake form indicating he had a 3.0 GPA which is our minimum requirement. During the interview we realized his GPA was actually 2.64. This is unacceptable that he lied to us and completely goes against our core values of Integrity, Commitment, Quality and Innovation. I won’t be able to invite WMU students to MSU if we have a situation like this again.
“From Sime”: Do not lie. Be honest on job applications. Sometimes they do not even care about the details. They just want to check and see if you are lying. Lying is a “falsification of records” (kind of a big deal in SCM). Also, do not renege. Be a leader.
|Sime Curkovic on LinkedIn: Reneging: Once you commit, quit! | 13 commentsStudents are getting lots of job offers… Reneging: Once you commit, quit! https://lnkd.in/e85beQ2 In U.S., 28% accepted a job offer & reneged! 70% of… 13 comments on LinkedInwww.linkedin.com|
In the above link, people came after me a little in the “comments” section.
As I work for a smaller company I have been on the receiving end of the negative impacts of this idea that you strategically source core parts of our valves. A specific example is one of our molded xxxxx, sure we save a lot of money and no longer have to mold a rubber to a metal xxxxxxx but recently the supplier went through a management change, and switched from an outdated ERP system to SAP. This created huge problems for them, and ended up shutting down our lines for almost a week. As a smaller company we do not have a lot of leverage with this supplier. We ended up coming to an understanding and moving molds to another location but shutting down for that long is less than ideal for any manufacturer. Just an example of where it can come back to bite you if you do not upkeep a safety stock or have good relationships with a supplier for a core part.
From Sime: Yes, most of you will work for companies that will be bigger than your suppliers and you will be a hugely important customer to your suppliers. Enjoy that leverage! However, some of you might work for a smaller company and your suppliers might be much larger than you. Further, you might not be an important customer to your suppliers. Finally, you might ask these suppliers to do low volume customized highly engineered stuff for you. In other words, it is NOT a commodity. If you are ever in this situation, good luck with that. Hopefully, your company is very good at something and your customers are OK with paying a premium.
Lastly, when outsourcing strategically, you always want to look at if the supplier makes parts “in-house” or “outsources” themselves because that plays a key role when choosing a supplier. Yes, during covid, some supply chains broke down because companies were outsourcing stuff to suppliers who then flipped it to other suppliers and the companies did not even know about it (until that supplier in China shut down for 8 weeks because of covid).
Please contact me for more material. Thank you. Sime
Dr. Sime (Sheema) Curkovic, Ph.D., Professor, Operations/Supply Chain
Western Michigan University, Haworth College of Business