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.