Discuss the major difference between cost-reduction and cost-avoidance measures. Why have some described the reported savings in cost-avoidance measures as soft, funny money, and easy to manipulate? When can purchasing take credit for a legitimate cost reduction or cost avoidance? Give some examples from your organization.
Part 2:
Given the trends described in this chapter, what do you think the future purchasing organization will look like? What are some of the primary skills that purchasing and supply chain managers will need to be successful in the future?
The classmate’s answer was:
Part 1:
Cost-effectiveness measures can be described into two categories: cost changes and cost avoidance. A cost-change measure compares the actual cost of an item or family of items over a period of time. A cost change is the increase or decrease in cost resulting from a change in purchasing strategy or practice brought about by an individual or group. This can be calculated by taking (new price prior price) multiplied by estimated volume (Monczka, 2016). Cost-reduction measures are reflected in financial statements and the annual budget (Dawson, 2018). Cost avoidance represents the difference between a price paid and a potentially higher price (which might have occurred if purchasing had not obtained the lower price through a specific effort or action). Cost avoidance refers to the amount that would have been paid minus the amount actually paid. Cost avoidance figures almost always require manual calculation and are sometimes subject to exaggeration. As a result, some observers have described cost-avoidance measures and figures as soft, funny money, and easy to manipulate (Monczka, 2016). The term soft savings can also be used to describe cost avoidance which means any action that avoids incurring of costs in the future. These measures are normally never reflected in financial statements or the annual budget, but they are reflected in instances where a proposed action is not implemented, thus resulting in a cost increase (Dawson, 2018). Purchasing can take credit for a legitimate cost reduction or cost avoidance when they are actively involved with the measures that were used in buying goods at reduced prices. When this happens, overall cost is reduced, which in turn then improves overall profitability. These revenue measures demonstrate the impact of purchasing and supply strategies and actions on revenues of the firm. For example, purchasing and supply may uncover new supplier technologies before others in the industry do and gain exclusive access, resulting in new-product applications with favorable pricing and volume growth (Monczka, 2016). This favorable pricing is used to fuel overall cost reduction. As of recently with the COVID-19 pandemic, organizations are scrambling to find measures to reduce cost due to plant-shutdowns and decreases in production. Some organizations are eliminating jobs completely, while others are taking a different approach by evaluating current work processes and supplies to confirm what can be reduced in order to keep the morale up for the workforce. Within my organization, a cost-reduction strategy that is being used is the elimination of temporary employees and reduced overtime hours. My organization has a ton of contract and temporary employees, and as production increases they will be brought back. Initially, others were laid off or terminated due to the reduction in production during the COVID-19 pandemic.
Part 2:
The trends described in this chapter outlines the real and projected changes and how they will continue to affect purchasing and supply chain management. The supply chain is a fluid entity within an organization and management must continue to develop new strategies in order to keep up with technological advances and customer/supplier relations. Some of the trends described are:
Expansion of goals, missions and performance expectations
Strategy formulation and selection
Creating and managing merchants
Designing and operating multiple supply networks
Collaboration of external and internal activities
Attracting and maintaining highly qualified professionals
Some companies welcome change and a dynamic workplace, while others struggle to embrace the same practices. In order to assist with the changing supply chain, one of the first things companies need to do is collaborate and integrate with suppliers. All too often, there are miscommunications with suppliers and buyers because the two are not integrated. It is difficult when a company has numerous suppliers, however building a long-lasting relationship with a supplier should start with integration. The future purchasing department would have an integrated system in which suppliers and buyers share IT professionals and procurement professionals to establish a collaborative relationship. In order to get here, the evaluation and assessments of these suppliers needs to be precise and detailed. Within my department, we are responsible for auditing suppliers to ensure their processes and products meet our expectations. This can be done by making sure these suppliers have the right processes in place to do so. The suppliers performance is measured by a scorecard, which we measure wrong delivers and any type of incidents from these suppliers. When there are several incidents within a 12 week period, we then put these suppliers in what we call escalation, meaning we charge them fees and reduce their productivity within our company. Some of the primary skills that management will need to be prepared for these changes are:
Cross-functional and Cross-Cultural Teaming Skills
Soft-side skills
Acquisition, Development, and Retention
The cross-functional and cross-culture teaming skills are the most essential here in my opinion. With an evolving workforce, there are people working together from all walks of life. Different races, genders, and age groups are present within the supply chain department. Also, these people have different ways of thinking as they also come from different educational backgrounds. Some come from an engineering background, while others come from more of a business background. Cross-functional teams will continue to be important to supply management strategy because they provide a broader base of knowledge for decision-making, recognize the needs of major stakeholders in the organization, and provide for implementation support (Monczka, 2016). The more dynamic a person is, the better their chances in this changing workforce. As a personal development strategy, I plan to take advantage of a program my company has that allows an employee to work in three different departments, each for 8 months, to gain knowledge and experience of the supply chain in order to see where their skill set is best put to use.