Procurement in 3-D

It's time to move beyond two-dimensional sourcing and supply management

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From the August/September 2009 issue of Supply & Demand Chain Executive.

October 20, 2009 — From the dawn of time, man has attempted to capture the world around him through drawing. As techniques grew more sophisticated, artists progressed from crude drawings on cave walls to elegant paintings with intricate detail and lifelike features. But even the greatest masters of yesteryear would be amazed if they could see today's 3-D computer animated graphics. There is an interesting parallel between this progression of art from 2-D to 3-D and innovation in procurement — what we might call "Sourcing and Procurement in Three Dimensions."

Figure 1: Traditional 2-D Sourcing and ProcurementTraditional 2-D Sourcing and Procurement

A time-honored formula for success in procurement is to combine efficient buying with effective strategic sourcing to realize maximum savings. The "first dimension" is the buying or procurement process. At a rudimentary level every organization begins its procurement journey by putting in place buyers and implementing policies and procedures to govern the procurement process. Later the quest for efficiency leads to the centralization and consolidation of buying activities, automation and offshoring to reduce costs. This one-dimensional approach to purchasing was the norm up until about 30 years ago, when the "second dimension," strategic sourcing, emerged as a best practice. Strategic sourcing, with its emphasis on category expertise instead of generalist buyers, added "color" to mundane purchasing and elevated the status of the procurement profession. Sourcing professionals led the charge to aggregate spend across their businesses, consolidate suppliers and then drive greater value through strategic supplier relationships. Maximum savings result when a company has gained complete control over its spending and can therefore realize the full benefits of sourcing and procurement.

This approach to 2-D sourcing and procurement has served companies well for many years, but the question remains: "Is this all there is?" I propose that a third dimension has emerged that will take sourcing and procurement to new levels of value. This third dimension is spend leverage.

Figure 2: The 3rd Dimension: Spend LeverageThe Third Dimension: Spend Leverage

Once a company has gained full advantage from the potential value offered by sourcing and procurement, the only remaining direction to look is outside of the company for additional leverage and value. At the simplest level, this begins with benchmarking and application of "best practices." However, benchmarking really only begins to point us in the right direction but cannot deliver the full value that a company seeks. True spend leverage occurs not just when a company uses the best ideas of another business but when it actually leverages the resources, infrastructure and spend of other businesses in concert with its own to derive more value than it can by itself.

Shared Resources and Infrastructure

The advent of procurement outsourcing over the past 10 years has created new opportunities to leverage the investment and scale of providers to further increase the efficiency of procurement processes. While simple "lift and shift" outsourcing (moving people and processes to a provider with minimal change to the underlying operations) provides minimal advantage, leading providers make use of shared resources, tools and infrastructure to realize added levels of efficiency. These types of benefits are increasingly available in outsourcing arrangements but only represent a portion of the potential value.

Optimized Sourcing and Supplier Management

An added value that most outsourcers have yet to fully realize is optimized sourcing and supplier management. It begins when a large provider is able to bring the accumulated expertise of its sourcing professionals and larger managed spend to bear to secure improved pricing and service from suppliers for the benefit of a single client. However, even greater value can be created by a provider managing spend and supplier relationships across its client base. For example, by synchronizing sourcing events at a category level, the provider can pool client requirements and increase the efficiency and savings generated by the sourcing process. Similarly, risky or problem supplier relationships can be more effectively detected and dealt with by a provider managing a broader, multi-client supplier base. Much like innovative casinos have implemented pattern recognition software to detect the betting patterns of cheaters, procurement outsourcing providers must continue to build deeper analytics capabilities to detect problems and opportunities across both their clients and suppliers.

Smart Spending for a Smarter Planet

At IBM we have led the call for innovation to realize the vision of a smarter planet. Much like the progression from crude drawings to 3-D computer animation, IBM has been on a many year journey toward smart spending by implementing these techniques of spend leverage. Companies that move beyond traditional sourcing and procurement and embrace this third dimension of spend leverage have an opportunity to increase the return that they are receiving from their procurement spend and improve their overall competitiveness. Companies considering procurement outsourcing should carefully evaluate a provider's implementation of practices that deliver the full value of spend leverage.

About the Author: Bill Schaefer is vice president of procurement services for IBM. He can be contacted at wss@us.ibm.com.

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