Tag Archives: strategic sourcing

Why It’s Time To Grow Beyond Strategic Sourcing

If the CPO wants to have a seat at the table, they must move beyond delivering cost reductions to deliver solid and sustainable business value where it really counts: top line growth and business
innovation.

I recently worked on a large-scale program of strategic sourcing transactions across multiple business and technology functions. The strategic sourcing team produced a considerable volume of contracts and notably delivered significant cost reductions along with contractual obligations for supplier-led innovation.

While the strategic sourcing effort followed a mature process and produced great results there was a gap in the process for ‘hand-over’ from the externally sourced strategic sourcing teams to transition the contract relationship

to the category management function. The hard-earned gains and concessions of the negotiations phases needed to be understood by the category manager and then further nurtured and managed through ongoing supplier relationships.

The gap in the process was understandable as the business was in a state of disruption after their acquisition and the brand-new procurement function was immature

and still finding its feet. Notably they
were starting to implement a strategy for category management, so no doubt the situation will quickly improve for them.

However, this first-hand experience of this gap did highlight for me the impact on the procurement organisation if they are unable to transition from strategic sourcing view to category management.

Category Management is a way of driving and delivering value, growth and innovation and yet most companies struggle with the transition from Strategic Sourcing to effective Category Management.

Category Management includes strategic sourcing but it is much broader than that. The Faculty defines Category management as: a rigorous, fact-based, end-to-end process for proactively collaborating with stakeholders to develop and implement strategies that generate significant value that stakeholders recognise, from an organisation’s external spend

It sits above and guides both the content and the sequencing of the lower level methodologies such as (not limited to): spend analysis, demand management, strategic sourcing, supplier relationship management and benchmarking

What is a category?

A category is a grouping of materials or services that have similar supply and usage characteristics to meet business objectives. Managing by categories is a strategic approach which organises procurement resources to focus on specific areas of spend categories.

This enables category managers to focus their time on the business requirements, conduct in- depth market analysis, supplier capability and performance analysis to fully leverage their procurement decisions on behalf of the whole organisation.

Many CPOs understand that implementing and sustaining an effective category management process can deliver great benefits, it usually leads to:

• Raising the profile and competency of the procurement function within the organisation

  • Significant savings typically 10-30 per cent
  • Reduced risk in the supply chain
  • Improved stakeholder relations
  • Improvements in service levels, quality, availability and value for money
  • The revelation of other sources of value and innovation from the supply base
  • Re-usable processes to leverage across other categoriesCategory management allows you to source more effectively and then to get even more value from constantly optimising the resulting contracts.

How to get started and maintain an effective Category Management function:

• Ensure that you have an effective and seamless transition process from strategic sourcing outcomes to the business-as- usual category management function

• Develop the logical categories for your business by bringing together products or services that have the same features and are bought from similar supply markets.

• Build an in-depth understanding of the organisation’s plans and business strategies and ensure that the categories are aligned to business goals

• Develop category benchmarks so that you can more easily identify additional improvement opportunities

• Use big data and business analytics to undertake continuous analysis of spend, (direct and indirect), market data and performance against benchmarks

• Undertake a program of constant price analysis on local and international markets and the monitoring of trends in the category

• Invest in a process of gathering supplier performance data for more quality and service improvements

• Monitor and track all the savings that have been achieved through substitutions, better compliance or contract negotiations

• Engage with your stakeholders! and have continuous discussions and reviews to ensure that all stakeholders are involved in decisions on the category

The bottom line for the CPO

Category management will be a continuous improvement process that should form the basis for all future successful strategic sourcing initiatives. It requires the right level of attention and a good training program Category management will deliver a range of benefits such as being able to work with suppliers to speed up the time between initial adoption and full implementation. At the same time, also providing a layer of continual strategy adjustment once a new supplier or contract has been initiated

Your category managers will be the ones responsible for all things related to a given project or managed service (gather requirements, collect bids and negotiate contracts) and their time will be freed up for engagement with the business to focus on their jobs and deliver better value.
Establishing the single points of contact means better co-ordination and this will streamline communication in a way that will vastly improve stakeholder and supplier relationships.

Sourcing, But Not As We Know It!

How many procurement pros do you need to manage $1 billion of spend? We examine the stats revealing the state of today’s sourcing landscape…

How many staff does it take to make a success of strategic sourcing?

We might not have a definitive answer to that question, but we do have access to some figures that tell us a lot about the state of the sourcing landscape today.

For instance, we know that companies dedicate 16 full-time employees (FTEs) to the sourcing process for every $1 billion in spend. It’s one of those stats that makes you think. At first glance this might sound ok, right? 16 full-time staff can achieve a lot. But $1 billion represents an incredible amount of procurement.

The fact is, most organisations aren’t maximising the value of their purchasing. Efficiency is being compromised, and in this there are a number of factors at play.

Periodic category reviews, while being the best way to ensure effective sourcing, are just not possible for most organisations with the resources available to them. This means companies aren’t adjusting their sourcing to account for changing market conditions.

Compounding the problem, the bulk of sourcing teams’ time – 50 per cent – is swallowed up by the supplier evaluation and negotiation stages, which in some cases can involve highly complex financial and regulatory work. With so much time spent on this phase, more strategic and potentially value-adding phases such as planning – which are still mostly conducted by category managers – don’t get the attention they deserve.

Looking at the landscape as a whole it’s no surprise that most sourcing projects are long and costly, and ultimately don’t deliver the results that stakeholders expect.

Strategic sourcing, it’s a-changing

And automation is the key…

More and more firms are convinced that digital transformation is the answer to increased efficiency in strategic sourcing, and they’re not afraid to invest in software that gives them a procurement advantage. In fact, they spend more than a quarter of a million dollars a year on these solutions. What’s more, they’ve found that this investment is paying off. According to these companies, supplier discovery, e-sourcing and contract lifecycle management software is helping them streamline the entire sourcing process – from discovery to contract signing. As a result, their total sourcing times are being reduced by 30 per cent as are their costs.

This is just the beginning of a trend that holds significant opportunities for organisations. But firms need to be bold in their thinking to achieve these results. Increasing FTEs isn’t the route to increased efficiency. Companies need to look to technology to help them transform their procurement processes and deliver faster, more cost-effective sourcing than ever before.

To discover how your organisation can embrace digital transformation and reduce costs and cycle times by 30 per cent, read The Hackett Group report now.

This Little Procurement Pro Went To Market…

How do you know when you should  go to market? ThomasNet discuss strategies for three common sourcing scenarios.

Haso/Shutterstock.com 

Strategic sourcing is all about generating a return on investment for every sourcing initiative. However, different sourcing scenarios require different levels of investment – in terms of time, effort and resources. Therefore, it’s important to approach each situation differently as well in order to produce the best results.

Here are three common sourcing scenarios, along with proven advice you can use to ensure an optimal return.

Scenario 1: Reducing Costs With A Strategic Partner

Your current supplier is deeply involved in the design, engineering, and process improvement of your product. You rely on them for the success of your day-to-day operations, and they have invested heavily in technology to ensure the success of your product. However, you are exploring ways to reduce costs.

When your incumbent supplier already acts as a strategic partner, the potential return on investment from pursuing alternate suppliers is significantly reduced. In fact, pursuing alternative suppliers can actually yield greater risk than reward. That’s because the supplier has provided you with capital investments that they have engineered and maintained, and the transition costs are likely to exceed the cost savings opportunities available with an alternate vendor. In addition, your current supplier has a comprehensive understanding of your product design, so they are less threatened by outside competitors who are likely working with imperfect information, and therefore less likely to reduce their pricing.

The Strategy

Rather than pursue alternative suppliers, you should engage the incumbent supplier in direct negotiations. Leverage the value your business brings to their operations; be upfront with your desire improve pricing; and be transparent about your procurement goals. Should negotiations prove unsuccessful, that may be a flag that your supplier is too complacent in the relationship, and alternate options can be explored at that time.

Scenario 2: The Unsolicited Proposal

Before reviewing a purchasing category, you reach out to suppliers within that category to notify them about your initiative. One supplier responds with an unsolicited proposal that reduces costs or otherwise increases value.

As a Supply Chain Project Analyst at Source One, this is a situation I encounter often. After a supplier realizes that their spend is being reviewed or a sourcing initiative is being considered, they attempt to get ahead of the process by offering up a proposal. The proposal typically includes a cost reduction in exchange for a longer contract or additional business.

The Strategy

The supplier is aware that their costs are not market competitive and are adjusting accordingly. However, while it may be tempting to award your existing supplier and reap the savings, it’s better to conduct a full sourcing initiative through an RFP, eAuction, or even an RFQ. At worst, you will have alternative bids to use as leverage with your incumbent supplier. At best, you can save a substantial amount of money. In fact, in my experience, the savings you can realize from alternate suppliers is often greater than the cost reduction proposed by the incumbent.

Scenario 3: Tactical Versus Centralised

Your business has been purchasing tactically in a particular category. The overall market basket is high mix, low volume, with very few recurring purchases to leverage for specialized pricing.

This is a common occurrence in indirect categories such as industrial supplies, industrial hardware, safety supplies, and office supplies. Employee preferences and unique company needs can influence purchasing, and standardization of products is nearly nonexistent.

The Strategy

 In this scenario, the continuation of tactical purchasing may seem like the most appealing option, as prompting a centralized supplier to bid on such an immense market basket would likely result in poor pricing and participation. However, it’s almost always prudent to conduct an RFP. Invite suppliers that can cover all required geographies and product categories. Focus on leveraging the overall value of the market basket to establish discount structures, rather than having suppliers exhaust resources pricing out an extensive product list.

To gauge the potential savings available, examine a random sampling of products and ask suppliers to apply the proposed discounts to those items to compare to your baseline price. If you do eventually move to a centralized account, lean on the supplier to drive product standardization and compliance. This will give you the opportunity to further refine pricing and terms down the line.

Other Strategies


Granted, not all sourcing events will fall into one of these three scenarios. However, there are some principles that can be applied universally:

  • Closely monitor the relationships with current suppliers
  • Don’t be afraid to shake up the status quo if a competitive event can yield cost savings or product improvements
  • Maintain clear and consistent communication between procurement and other departments
  • Above all, remember that the strategic sourcing process does not begin with the identification of an initiative, it thrives on the constant analysis of the current state of purchasing

Jennifer Engel is a Supply Chain Project Analyst at Source One Management Services, responsible for executing strategic sourcing and process improvement initiatives for Fortune 1000 clients.

This article was orginally published on the ThomasNet blog.