Whether struggling to keep your company above water, or
looking for ways to increase an already profitable operation, strategic
sourcing offers a reliable platform for companies to increase or attain
profitability. Commonly, strategic sourcing is mainly associated with cutting
supplier costs and re-negotiating contracts. This definition and common school
of thought ignores the other, oftentimes more critical, components of strategic
sourcing; that being process optimization. In order to execute an effective strategic
sourcing initiative, strategic sourcing itself must be thought of in a broader
sense in terms of evaluating alternative cost savings methodologies attained
through process improvements and corresponding soft cost savings. When
traditional cost reduction methodologies such as executing RFP’s, RFQ’s, or
conducting direct negotiations with suppliers are combined with a thorough evaluation
of process optimization opportunities, results oftentimes exceed expectations.
In current news, this comprehensive approach is being utilized
by a company who has been the subject of an unfortunate series of events and
ongoing financial woes-- that being Malaysian Airlines (MAR). MAR has had their
fair share of setbacks within the past fiscal year. First came the disappearance
of flight MH370 in March, and then the crash of flight MH370 over Ukraine in
July. Both of these tragedies compounded the financial troubles that MAS had
been experiencing over the past few years. In fact, the company posted losses
of £770 million in 2013 after three years of consecutive losses prior. With the
brand name as of late at an all-time low, and the company at risk of
bankruptcy, MAR has set their focus towards recouping losses by cutting costs
and improving current processes.
One of the first steps MAR has taken to cut costs has been to
eliminate 6,000 jobs across the company, which represents approximately 30% of
the total workforce. This immediate cost savings approach for struggling
companies is something that a thriving company would generally want to avoid,
but in this case, the move made sense for MAR. Leading up to the job cuts, MAR
had approximately 183 employees per aircraft (a common unit of measure in the
airline industry). Considering Singapore Airlines, who is one of MAR’s top
competitors, has a rate of 138 employees per aircraft; this metric reveals
that MAR is less efficient than their direct competitors to begin with.
In addition, historically MAR has been known to pay a higher
price than that of their competitors for equipment and services. This condition
represents the opportunity to cut costs by leveraging benchmark pricing and
volumes to attain more competitive prices via direct negotiations and
leveraging volumes in RFX events for both indirect and direct materials. For
example, Air Asia is a well-known player in the international airline market
and is notorious for their low air-fare prices. It is no secret that part of
the reason they are able to offer lower prices is because their operating costs
are lower, and supplier contracts more competitive. MAR is leveraging this
knowledge in one of their main cost cutting initiatives by re-negotiate
existing supplier contracts to bring them in line with industry utilizing
benchmark pricing.
The actions listed thus far are typical of a traditional
sourcing effort and focus on reducing supplier costs, re-organizing their
supplier base, and cutting operating expenses. However, as previously
mentioned, by taking an all-encompassing approach to true strategic sourcing, one must consider process improvements and alternative
areas of soft cost savings that oftentimes go overlooked by procurement
departments, sourcing professionals, and category buyers. As an example of this
practice, MAR has evaluated the opportunity to invest, despite the company’s
instinct in such times to do the opposite. MAR has begun to switch out Boeing
737-400 aircraft and is investing in 737-800 models that have higher fuel
efficiency and lower maintenance costs. In addition, the re-engineering of
existing and new aircraft has begun to include more business class seats in
order to increase utilization and general population capacity. This tactic is being complemented by route
rationalization and cutting infrequent travel lanes. MAR is instead turning focus
to flying within the regions with the highest current utilization, including routes
to Japan and Australia.
This recent example displays at a high level the type of
approach necessary to achieve greater cost savings through multiple different
channels. By not only focusing on cost cutting, and by improving their
processes and operational strategy, MAR has positioned themselves to possibly
avoid bankruptcy.
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