Chapter 8: Keeping the Sourcing Cycle in Motion
You’ve come to the point where the strategic sourcing process loop has closed, but that does not mean your work is finished. Strategic sourcing is a continuous process of improvement, and now you have to look for additional improvements in the second round and beyond.
So far, you’ve analyzed your spend and consumption patterns. You know your processes inside and out, and you understand the supplier market’s potential. Most likely you’ve interviewed internal stakeholders and suppliers. With their help, you probably come up with a dozen different ways you can increase savings.
The first round should have been dedicated to achieving some easy wins and picking the lowest hanging fruit. It helps to have a boost self-confidence to know you’re heading in the right direction. This gives your process improvements momentum and helps you prove to the rest of your organization the value of procurement. These are all good things, and you’ve gotten off to a strong start. However, your organization expects your contribution to the bottom line every year. How do you get the process started all over again?
To get started on round two of your strategic sourcing, you’ll need to go back to where you started the first round: with measurement and analysis. Before planning the next round of activities, you should first measure how well you succeeded in the first round. Did you regularly capture all your savings and connect them with your category spend? Were you and your manager happy with the results? Was it easy to achieve initial savings? If it was, don’t worry, subsequent rounds will gradually get harder and harder.
Again, you’ll have to analyze your spend. (Review this topic in Chapter 1.) Once you do so, you may want to make changes in categorizations. Be careful, though. If you do change your categorization structure, you will lose the ability to compare current category performance with previous years. Make changes in the categorization structure only if absolutely necessary and doing so would allow you to analyze your spend in greater detail.
Analyze the savings you achieved and compare them with the opportunities list. Did you carry out the savings actions from your list with each and every supplier within the category? Probably not all. But now you have new spend information, and you have new benchmark products and cost breakdowns that you should analyze and compare. Do all your category suppliers already use cost breakdown pricing and are those cost elements comparable? If you see that one supplier is not competitive but you want to keep him, do a supplier site visit, complete a full process audit, and identify points for improvement.
Suppliers are your external stakeholders and valuable resources. As we wrote in Chapter 6, just as strategic sourcing is a continuous process so, too, is supply base optimization. While you are onboarding new vendors, you will be offboarding others. Your supply base is a living list that should be actively renewed on a regular basis. Of course, keep in mind that you cannot offboard vendors before you have a replacement already in the onboarding phase. Ramping down one vendor and ramping up another should be done simultaneously.
Questions to help you reflect and identify gaps to address in round two and beyond:
- Have you captured all the projected savings from the last quarter?
- Did you collect all savings as planned?
- If you didn’t, why were you unable to carry out your plan?
- Did you spot any savings leakages (unrealized savings)?
- If yes, can you find out why they occurred and are you able to fix them?
If you had trouble achieving your desired outcome during the first round, try to figure out the reason why. Look at the chart below. Do any of these sourcing challenges look familiar? Ask yourself if there’s something you can do to overcome these challenges. You may need to become your function’s internal champion and ask for support from your manager.
On the purchased component side, the first quick win can be achieved by running an RFQ for the specified product. There can also be different benchmarked products for different criteria. For example, best price can be one product but best functionality another. As soon as you identify the benchmarked component, you can define a gap and start thinking about how to close it. (Review benchmarking in Chapter 3.) While it’s worth repeating as often as necessary for as many components as possible, you won’t be able to use it to achieve the same cost savings year after year. And although strategic sourcing is cyclical in nature, you will notice diminishing returns in the categories that you’ve optimized.
During the first couple rounds, you may be able to bring down purchase price by running RFQs or expanding your geographical scope from regional to global. You’ll even have to move beyond total cost of ownership (TCO) eventually. To truly move your sourcing processes into the strategic sphere, you’ll have to move on to total value of ownership (TVO) analysis.
Using TVO as a guide for your sourcing process will provide you with numerous benefits beyond cost savings. This way, you take into consideration additional criteria, such as ease of assembly and working efficiency. Examine the whole supply chain of this product and evaluate every operation. Ask yourself what value it provides to the customer. If you find operations that provide no value, then try to get rid of them. In addition to looking for ways to increase process efficiency, you can also find ways to reduce supply risks and reduce risks to brand reputation through suppliers.
If you haven’t optimized your supply chain in the first round, then now is a good time to consider it. Think about freight mode, batch size, packing requirements, inventory level, or other logistics issues. Have you considered import taxes? Import taxes differ depending on the country of origin. For example if this is the case, changing to a supplier from a different country might give you cost savings.
Use the new supplier information, stakeholder interviews, and new benchmarks to review your existing sourcing strategy, the one you developed in round one. The supplier-buyer dependency level gives you the basic framework for deciding if and how you can change the balance of bargaining power and buying strategy.
Remember the goal is to move step-by-step towards the bottom right quadrant of A.T. Kearney’s Purchasing Chessboard, and that involves either changing demand or changing specifications. (Take a look at Chapter 5 for more details.) Review your strategy, re-evaluate your dependency level and see whether your strategy is still valid or needs to be adjusted a bit. Maybe you will find that there is no point of contention with a supplier, and you’re better off entering into the strategic alliance.
Strategic sourcing is not a new buzzword; it’s already a concept that’s been around for decades. According to a report by the Aberdeen Group, about 30% of organizations don’t have a strategic sourcing program in place, which means there’s still room for improvement. Plus, they found the main driver for 78% of respondents for implementing strategic sourcing was the pressure to reduce costs. This means many are still focused on a purely tactical approach to procurement.
Furthermore, among those who do, actual performance levels vary. The figure below represents the findings of an IIAPS Services study using the PSCM Index to benchmark category management and strategic sourcing performance of over 400 organizations. Overall, the best mean performance levels occur for the tendering process (running RFx’s, contracting, and negotiating). Again, this area is where the comfort zone for tactical procurement lies. For strategic procurement to take place, performance levels for the work leading up to the tendering process and afterwards when developing new strategies must improve.
Strategic sourcing and strategic procurement have to include the groundwork of categorization, spend analysis, and supply market analysis. This lays the foundation for making strategic decisions and improving round after round. It’s a long road with many obstacles, but that is what makes it interesting.
Don’t forget to share this guide with your colleagues!
Written by Peep Tomingas