Strategic Sourcing Success Factors

4 comments March 21st, 2007 David Bush - Iasta

Today, I would like to welcome my friend, Mark Usher from Treya Partners. Mark recently started his own consultancy after long stints at The Genesis Group, ePlus and Accenture. One of the fundamental concepts he consults on, is what he believes are critical factors to strategic sourcing success, which have been learned through his experiences. Hopefully, Mark will be able to post more in the future and possibly get into some of these categories with more detail and examples.

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KEY SUCCESS FACTORS FOR STRATEGIC SOURCING

A successful strategic sourcing program generates measurable and sustainable cost savings that drop directly to the bottom line of the enterprise. Such a program must address six key success factors:

1. Spend visibility to capture all addressable spend and identify all potential sources of cost savings (supplier reduction, internal consolidation, standardization, maverick spend reduction, incumbent renegotiation, etc.). Achieving this success factor requires a combination of (i) best-in-breed spend analytics software to cleanse, classify and enable analysis of the spend data (at the item level where possible) and (ii) sourcing analytics skills to interpret the spend analysis output, identify savings opportunities and plan the programs needed to realize them. It is also important that sourcing professionals achieve “forward-looking” visibility of spend by working with users to understand future demand, in particular any data that points to deviations from historical patterns.
2. Deep category expertise to identify and exploit the most powerful points of leverage in the supply market including the industry’s total cost model, industry structure & competitive forces, specialties and core competencies of individual vendors, profitability of the industry and its major players, emerging industry practices, predicted pricing and supply trends, capacity issues, use of technologies, alternative logistics & supply chain strategies, and availability of value added services to name just a few. Access to this depth of expertise is best obtained through seasoned procurement professionals with several years of strategic sourcing experience in the relevant category. Lesser experienced individuals can be somewhat effective with the support of category “templates” although this can lead to credibility issues when dealing with more experienced internal customers and suppliers.
3. Best practice methodology to ensure that optimum sourcing strategies and tactics for all spend categories are employed consistently and uniformly across the enterprise. This is accomplished by utilizing structured, repeatable and easily accessible methodologies for category profiling & segmentation, category strategy development, choice of supplier relationship type, selection of sourcing event method and tool, negotiation strategy, contracting approach, and other key procurement decisions. An example of where this is important is the area of supplier relationships. It is critical that all sourcing professionals, regardless of level of expertise or personal style, recognize when close, non-adversarial relationships with suppliers are appropriate. One “maverick” category manager could ruin an important relationship with a major supplier by adopting the wrong approach. Best-in-class organizations are making their best practice sourcing methodologies available to category managers through company intranets or some other form of web based, on-demand method.
4. Best-of-breed e-sourcing technology to maximize effectiveness and efficiency of sourcing events. With the developments in the e-sourcing technology space over the last 5-7 years the tools are now finally available to fully realize the benefits of strategies such as early involvement of procurement & suppliers in product design (product cost management software), complex multi-attribute sourcing (optimization software), and supply assurance (supply risk management software). Companies should look to embrace those enabling technologies that correspond to each of their most critical sourcing strategies if they are to stay ahead of the cost leadership curve in their industry. The combination of deep category & supply market expertise, best practice sourcing methodology, and best-of-breed e-sourcing technology represents the most formidable set of weapons an enterprise can deploy to create value in the spend management arena.
5. Contract implementation to ensure high levels of compliance. This includes communication of new contracts and related policies and buying processes to the stakeholder community, linking of the new contracts to the procure-to-pay system, enablement of contract suppliers, and loading of contract content and pricing into electronic catalogs. Each of these activities is necessary to effectively communicate the existence of the new contracts to users and to provide them with a single, efficient, user-friendly experience for finding and ordering all of the items they need. Best-in-class procurement organizations recognize that contract implementation is where the rubber hits the road in strategic sourcing. The best expertise, strategies and technologies will amount to nothing if the final contracts are not found and used.
6. Stakeholder management to secure support and active participation from the stakeholder community. It is critical that all influential stakeholders be identified, assessed and proactively managed throughout the complete strategic sourcing process. In a general sense stakeholder management will, like contract implementation, help drive high compliance by reducing organizational resistance to the new sourcing strategies, supplier relationship and contracts (”getting everyone on board”). More specifically, stakeholder management will also result in a more efficient and ultimately higher quality strategic sourcing program. Senior executive sponsorship will drive enterprise-wide cooperation, business unit involvement will guarantee all organizational requirements are incorporated into sourcing strategies, finance participation will validate and lend credibility to cost savings calculations, and user involvement will support internal marketing efforts.

The above success factors are applicable whether an organization is performing all procurement activities in-house, engaging consultants, or outsourcing. If an enterprise is considering the use of external providers it should ensure that the provider is addressing each of the success factors either itself or through the use of alliance partners. Care should be taken that the provider is given the incentive to do so. For example if a strategic sourcing consultant is being paid a fixed fee regardless of whether measurable benefits are achieved (i.e. they have no “skin in the game”) then there is no incentive for them to address success factors #5 or #6 above since these success factors are focused on actually achieving measurable savings. The net result is that if you don’t address #5 and #6 yourself you will realize no measurable savings. Far better is an arrangement where a consultant’s compensation is based 100% upon hard, budget impacting savings. In these cases you will find that the consultant addresses each of the success factors - and well - since their revenue depends upon it.

Entry Filed under: General, Supply Management Best Practices, Technology