Tuesday, August 2, 2011

Mastered TCO? Now Learn TVO.

The total cost of ownership or TCO has long been the focus of sourcing and procurement  A new report from Accenture says the pioneers are now moving towards total value of ownership or TVO. Just semantics or real evolution: Decide for yourself though there are definite ideas that are worth emulating.

The paper brings out several key differentiators between the pioneers and followers (termed in the paper as masters and contenders), noteworthy among then being the following: the alignment with business strategy, visibility across the extended supply chain, and extended view of spend management.
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Understanding the business strategy and aligning your functional strategy with it definitely seems to be the biggest story of this evolution. Very few corporations have achieved the holy grail of such alignment and then again within a few key business functions. But the logic holds: Any functional strategy that does not support the goals of the business strategy is effectively wasting valuable resources and contributing nothing towards creating value or advantage for the corporation. This is the core principle that I have discussed at length in my book on supply chain strategy. In an example provided by Accenture, an automobile company achieves such alignment through first commissioning “a gap analysis to see where the company might need to improve. The exercise revealed the importance of tying procurement more closely to the overall business strategy.” This though is a foregone conclusion: You don’t need to commission a study to find that if your functional strategies are not aligned with the business strategy, you are wasting your resources. What you need to do is to establish the goals of the business strategy clearly enough that each function can quickly assess its contribution and identify capability gaps that must be addressed for effectively achieving those goals.     
The visibility across the extended supply chain and extended view of spend management are old stories: These are not so much the evolution in concept as they are the evolution in technology that is making these concepts more real and achievable. The web, cloud, virtualization, computing and connectivity performance is making real-time collaboration possible among business partners at costs that are affordable. These technologies are also driving the corporation’s ability to collect much more data across the spectrum of activities collectively under procurement to create a clear picture of costs involved": Whether these costs are direct procurement costs obtainable from the purchase orders or indirect costs obtained through an expensive activity analysis in the warehouse. Of course, that does not diminish the pioneering work being done by the procurement masters in establishing the processes to extend their view of procurement costs and use the data to effectively support their businesses.
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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

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