One of the ideas at the heart of the discipline of supply chain management is the importance of collaboration. The discipline has done a good job of driving collaboration between sales and marketing and manufacturing, procurement, and logistics. The profession has not yet managed to integrate product development into core decisions in a meaningful way.
I attended the SAP Spend Connect Live conference in Vienna, Austria a couple weeks ago. This user conference focused on SAP’s spend management and business network solutions. Because procurement is a major theme of the conference, I could not help but talk to the top executives of this business unit about the new Elon Musk biography.
Musk Insists on Collaboration
In the biography, the author makes it clear – and this is a vast understatement – that Elon Musk is not like most other CEOs. Elon Musk is not just the CEO of Tesla, the market leader in electric cars and trucks, he is also the CEO of SpaceX. SpaceX designs, manufactures, and launches advanced rockets including Starship, the tallest and most powerful rocket in existence.
One thing that makes Musk distinctive is his hands-on approach to product design. Where other CEOs spend a large portion of their time on finance, marketing, and sales, Musk spends a much higher percentage of his time on product design and manufacturing.
Here is one excerpt from the book that highlights this theme. “Musk turned his attention to Raptor, the engine that would power Starship.” But Raptor would “have to be manufactured by the hundreds at reasonable cost… Raptor was too complex to be mass-manufactured… So in August 2021, Musk fired the person in charge of its design and personally took on the title of vice president for propulsion.” His goal was to get the cost of each engine to a tenth of what it then cost.
To lower costs Musk employs what he calls an “idiot index.” This is the ratio of the total cost of a component to its raw materials. “Something with a high idiot index – say a component that cost $1,000 when the aluminum that composed it cost only $100 – was likely to have a design that was too complex or a manufacturing process that was too inefficient.” Musk threatened to fire a financial analyst that did not know the idiot index numbers like the back of his hand.
The next day when that analyst met with Musk, he had the 20 parts with the highest idiot index scores listed on a slide. “It’s mainly the parts,” the analyst explained, “that require a lot of high-precision machining. We need to cut out as much of the machining as possible.” Musk smiled.
At both Tesla and SpaceX, Musk put the design engineers in charge of production. He said to the head of production design at SpaceX, for example, “you are responsible for the production process. You can’t hand it off to someone else. If the design is expensive to produce, you change the design.” The 75 design engineers then moved their desks next to the assembly lines to reinforce the idea that product design and manufacturing must work hand-in-hand.
Link Design and Procurement to ESG Goal Attainment
One of the themes that emerged from Spend Connect Live was the growing importance of the procurement function. One of the drivers of this is sustainability. As corporations announce plans to be Net Zero across their end-to-end supply chain at some point in the future – often 2050 – they then need their suppliers to participate in helping them meet their goals. And because procurement has a major role in selecting which suppliers a company will work with, companies that are serious about environmental, social, and governance (ESG) issues will make sure ESG concerns are reflected in the supplier selection criteria.
This journey to integrate procurement more tightly into the ESG process is still early. Cost is still the most important driver of supplier selection. With high inflation rates around the world, cost is more important than ever in procurement decisions. But increasingly corporations are working with companies like EcoVadis to help accelerate their journeys to collect ESG data from suppliers and prospective suppliers.
According to EcoVadis, only 20% of suppliers in the EcoVadis network annually report on their emissions. Currently, a supplier looking to satisfy a customer usually goes through a labor-intensive project to collect and analyze their data. Many companies don’t even know how to start these projects. The work EcoVadis is doing is focused on not just getting data, but helping companies be able to get emissions data on an ongoing basis in a much less labor-intensive manner. EcoVadis is a solution partner to SAP, and the EcoVadis ESG data will be able to be pulled into SAP’s new Spend Control Tower if suppliers have calculated their emissions data. If the supplier does not know what their emissions are, artificial intelligence can be employed by the SAP Spend Control Tower solution to estimate the emissions. EcoVadis is also integrated with SAP Business Network, which enables suppliers to showcase their sustainability rating in their network profiles. Buyers can then search for suppliers based on these ratings.
Etosha Thurman, the chief marketing & solutions officer for SAP’s Intelligent Spend and Business Network business unit, made the point that for procurement to play a significant role in helping a company meet its ESG goals, procurement needs to be more tightly integrated with the product design function. “Once the specs are set, the ability for procurement to select lower emission suppliers is very limited. By contrast, when procurement teams are involved during the design phase, they can bring to light important sustainable sourcing information before it’s too late to make a difference.”
In short, where Elon Musk has focused on integrating product design with manufacturing and procurement, Ms. Thurman is pointing out the necessity of linking procurement more tightly with the product design and sustainability functions.