Four enablers that must be addressed to ensure a successful roll-out and savings over the lifetime of your company's strategic sourcing project
In today's competitive marketplace, most mid-sized and large corporations across all industries are executing strategic sourcing initiatives to lower operational costs and improve profit margins. In addition to improving cost efficiencies, strategic sourcing provides an opportunity to foster stronger relationships with vendors throughout the supply chain. Many have used sophisticated e-sourcing tools to conduct strategic sourcing activities such as online reverse auctions. Some have adopted tools permanently by subscribing to an e-sourcing application service provider (ASP) or even creating their own homegrown systems.
But making strategic sourcing work in the long-run is still a challenge for many organizations. To sustain hard-dollar savings and continue to deliver results, companies must treat strategic sourcing as more than a one-time effort. Whether you are already managing a strategic sourcing initiative or just starting out, the following four enablers must be properly addressed to ensure a successful roll-out and prevent savings from being short-lived.
1) Organization — Center-Led Versus Centralized?
Strategic sourcing inevitably brings change, and change is often resisted by users of any newly acquired process. Cross-functional sourcing teams, when used, are often short-lived. When the sourcing project is "over" and the team is dissolved, processes often go back to the "old ways" of conducting business.
What is needed — beyond the cross-functional team — is a sustainable, long-term procurement organization sponsored at the executive level, where authority, roles, responsibilities and individual performance metrics are clearly defined. Stakeholders must buy into the organization and be aligned along common objectives. Ideally, this organization is in place at the beginning of the strategic sourcing initiative and its structure supports continuous improvement.
Should a procurement organization be centralized? Not necessarily. Some spend categories are quite specific and category owners should reside within their areas or business units. A "Center-Led" — as opposed to "Centralized" — procurement model is what many companies have put in place as a successful model. If the current procurement organization (if there is one to start with) does not or cannot support the sustainability of results, it probably makes more sense to delay strategic sourcing and address the organizational deficiencies first.
2) Skills — Continuous Improvement
Many companies seek help from external resources when launching strategic sourcing initiatives; it becomes crucial that knowledge is transferred to the organization's procurement staff. But that is not always the case. Procurement individuals' skill sets should be sufficient so that they themselves can lead and manage future sourcing initiatives — from analyzing spend to developing request for proposals to negotiating contracts or managing a spend category. Contracts will expire; products, services and the supply base will certainly change over time.
Strategic sourcing is a continuous process not a one-time event. Sourcing professionals must develop and maintain proficiency in all aspects of the sourcing cycle. Organizations need to identify the knowledge and the skill sets of their procurement staff and develop the specific training plans to close any knowledge gaps.
3) Processes & Technology
If long-term savings from strategic sourcing are to be sustained, it is critical that the appropriate procurement processes and tools be in place. The "if you build it, they will come" model only works if and when what is "built" is communicated, accessible, easy to use and does not disrupt existing operations. If a new supplier's products and services are not easy to procure and/or use, there will be limited compliance, regardless of the potential cost savings associated with better pricing.
Procurement organizations and suppliers must invest the necessary time and effort in planning a smooth transition and putting in place the appropriate tools and technology that will automate or facilitate viewing online catalogs, issuing purchase orders via auto-fax or electronic data interchange (EDI), monitoring purchase orders (PO) status with online collaboration solutions, etc. End users are becoming more and more sophisticated, understanding the concept of total cost of ownership (TCO), and they will have no problem justifying going back to an "old" supplier if they can prove their case that, even at better unit pricing, the new supplier's products and services just aren't worth the trouble.
4) Performance Measures — Be Specific
Procurement professionals should measure the results and savings achieved from all strategic sourcing initiatives. This important aspect is often overlooked when savings are merely projected by multiplying price differentials with estimated annual usage. But theoretical savings have no impact on the bottom line; only realized savings do.
A formal set of measurement processes should be put in place to track usage, pricing, user compliance to established contracts and supplier performance, especially if financial incentives and penalties are contingent upon a supplier's compliance to service-level agreements (SLAs). New suppliers may indeed deliver at greatly reduced purchase prices; but if deliveries are late or incomplete, the cost savings associated with purchase price may very well be offset by increases in multiple expediting activities. Savings should be measured taking into account the TCO. This requires a comprehensive supplier performance measurement system.
Finally, savings achieved should be reported and communicated to end users, emphasizing the financial impact to business units and to the organization as a whole. Success stories will reinforce the effectiveness and help build momentum for other sourcing initiatives.
Strategic sourcing alone can deliver substantial cost savings, often resulting in significant improvements to financial performance. It has been used as, and continues to be, a popular cost reduction tool. But without the supporting organization, processes and technology, skills, and performance measures in place, those benefits will never reach their full potential, impeding companies over the long-run from optimizing their cost efficiencies and profitability.
About The Author: With over 14 years of industry and consulting experience, Eric Issa, Director, Kanbay, has developed deep expertise in supply chain strategy, operations management, strategic sourcing and procurement. He specializes in helping clients in various industries reduce costs of procurement, inventory and operations. Issa has an MBA from McGill University and a Bachelor of Science in Industrial Engineering from École Polytechnique de Montréal. "www.kanbay.com.
