“As I hurtled through space, one thought kept crossing my mind - every part of this rocket was supplied by the lowest bidder.” John Glenn - the first American astronaut to orbit the Earth
Little did he know…
January 28, 1986 saw the Space Shuttle Challenger break apart 73 seconds into its flight, leading to the deaths of its seven crew. The spacecraft disintegrated over the Atlantic Ocean, after an O-ring seal in its right solid rocket booster (SRB) failed at liftoff.
The O-ring failure caused a breach in the SRB joint it sealed, allowing pressurised burning gas from within the solid rocket motor to escape causing a catastrophic explosion.
The subsequent inquiry revealed a catalogue of failures including the rejection of a proposal for a one-piece solid rocket booster that would have eliminated the need for O-rings. NASA instead accepted a less costly plan for an SRB built in segments.
It would be facile and offensive to lay all the blame at the feet of those who were charged with cutting costs but that does not allow us to escape the inevitable conclusion that injudicious cost cutting can have dire consequences.
Fortunately such consequences are not ones the legal profession has to contend with but the consequences of shortsighted, ill conceived and poorly executed cost savings can nonetheless be very serious.
There is no doubt that aggressive procurement practices are getting short term wins, but according to John W. Henke, Jr., Ph.D., Professor of Marketing in the School of Business Administration at Oakland University in Rochester, Michigan, "The real question is, what are the long term consequences?"
Professor Henke's pioneering research on Chrysler's procurement practices show a direct link in aggressive procurement practices and Chrysler's profitability. Henke calculates Chrysler lost up to $24 billion in profit in the past 12 years due to "lost supplier trust" associated with adversarial procurement practices.
University of California's (Berkeley) Professor Oliver Williamson has shown overall transaction costs increase when buyers do not act in a credible manner. Williamson says, "The muscular approach to outsourcing goods and services is myopic and inefficient."
Leading academics and practitioners such as Robert Handfield and Gerard Chick are challenging procurement professionals to change. Chick and Handfield's new book, The Procurement Value Proposition: The Rise of Supply Management, does exactly that.
Handfield and Chick call for procurement professionals to move away from being only about cost reduction to playing a role in value-adding activity and influencing business strategy. 'Value', they claim, will become the "Holy Grail for procurement" in the modern business era'.
The smarter move is to create highly collaborative relationships with key suppliers where buyers and suppliers work together to mitigate (or even eliminate) risks.
I am pleased to be presenting on this theme at the Buying Legal Conference in London on 28th September 2015.