Marrying Sourcing and eProcurement - Being Strategic By Going Tactical

November 6th, 2007 at 06:21am Dave Stephens - Coupa

Most sourcing programs start off with a bang. Companies attack the biggest spend categories looking for savings. Usually, a flurry of online negotiation follows a lot of careful research and analysis on prior years’ spend data. And oh boy do the initial savings roll in.

Companies pursuing competitive sourcing for the 1st time can achieve fantastic outcomes. By negotiating more aggressively and using modern methods (i.e. a dedicated Sourcing tool) procurement leaders can achieve 10 to 20% cost savings (or more) on IT equipment, on travel, on communications, on facilities spend for new store construction, and other areas. In fact, the “low hanging fruit” is wherever spend is high enough to warrant a standalone program, wherever spend can be aggregated to a fewer number of suppliers, and wherever contracts are really being put in place for the 1st time. Companies should be careful not to solely base their decisions on lowest price, and modern negotiation tool help keep analyses quantitative yet focused on “best value” not just best price. Still, the savings from thorough investigation of opportunities and competent execution of sourcing events are truly impressive.

Regrettably yet inevitably, that initial rush of savings always comes to a close. Sure, it’s true that some procurement leaders game the system by pacing themselves and letting savings build over a few years. But at some point they have competitive contracts for the majority of their important commodity areas. And the question then is - what next? CFO’s and CEO’s have by now become accustomed to the savings and begin to expect it each and every year. And so a part of a procurement leader’s job is to anticipate the end of “low hanging fruit” and communicate it early and often. But despite great communication procurement leadership must continue pursuing additional savings goals.

In this pursuit, many procurement leaders begin to yearn for better data on what they are spending. Their yearning often turns their attention to the transactional systems underpinning the execution of their purchasing programs. These transactional systems are first and foremost tools to increase operational efficiency and corporate control. Using a good, modern system results in employees buying what they need quickly while following the rules the purchasing department has codified. When implementing transactional procurement systems there is no short-term expectation that prices paid will decline through system utilization. Instead, the expectation is that goods and services will be acquired more quickly with less operational expense and with a higher degree of (non-bureaucratic) oversight.

Justifying working on these tactical transactional systems can be tricky. Procurement leaders that aren’t careful risk their own budgets through promises of increased efficiency. More and more, reduction in clerical activity achieved through successfully implementing transactional systems is turned into increased bandwidth for strategic sourcing. But where should leaders look for ongoing cost savings opportunities? The answer, in my view, is embedded right in the procurement transactions themselves - and not after the fact but in real-time.

Most of the progressive procurement leaders I talk with agree these transactional systems are vital to building a healthy procurement practice. These leaders are past the euphoria of the easy initial strategic sourcing wins and have switched focus towards building sustainable programs for the long-term. They want to establish a framework to capture and process ongoing opportunities for cost savings.

The problem behind this vision is that most best-of-breed sourcing tools do not integrate with their corresponding best-of-breed transactional procurement systems. And further, many transactional procurement systems do not support the concept of pausing in an approval workflow to obtain competitive pricing or engage in a sourcing event.

Yet marrying these systems is not that complicated a proposition - and once completed can help transform procurement leadership from a “one hit wonder” to an ongoing cost savings juggernaut.

The idea behind sourcing on a one-off basis, and as a result on ongoing transactions, is nothing new. Tactical buying teams have often been required to collect competitive bids according to rules a tactical purchasing manager might specify. But using manual procedures these rules are often static, only receive perfunctory support, and aren’t auditable. With the myriad of automated systems out there today, and the decrease in effort required for negotiating contract pricing or a one-off quote, there’s a better way.

I strongly advocate procurement leadership put cost savings criteria in place - and then review and adjust them quarterly. Requests that meet these best-guess criteria for possible cost savings can be automatically directed for actioning. There are tricks of the trade on how to do this well - one key method is to involve the purchasing department early on in the request lifecycle as often time runs short as the approval and review process drags on. Another is to make sure to operate fast enough to not irk the business groups initiating the spending requests.

Measuring success once an organization is ready to tackle tactical sourcing is often straightforward and usually quite fun. Each triggered event will have a tactical outcome with an originating list price. Organizations may simple tally the list amount vs. negotiated amount, or go further and include other factors such as shipping and special charges (including internal processing costs). And what is great about this program is its longevity - year-in and year-out procurement leadership can stay abreast of a company’s overall goods and services buying needs and adapt as needs change.

So by all means I encourage you to invest in tactical sourcing once your organization has completed its initial wave of strategic sourcing savings. And consider investing in a modern transactional system to make sure savings “stick” and your new competitive contracts are utilized by your firm. Then tie your transactional system to your sourcing tool to pursue ongoing, incremental savings opportunities - and pursue continuous improvement.

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Entry Filed under: Functionality, General, Supply Management Best Practices, Technology, e-Sourcing Marketplace