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How “Strategic” is Your Sourcing?

Posted by ron sanderson on April 1, 2010

One of the enduring myths of the two decade long journey of Strategic Sourcing is that many companies have actually turned their procurement processes into “strategic” processes that perform Strategic Sourcing projects and achieve strategic results.  In reality, only a small percentage of what companies and consultants call “Strategic Sourcing projects” can be viewed as truly strategic.  Most of these attempts can at best be called good procurement practices.

Before you get irritated and protest that you in fact have done strategic sourcing projects or programs, stop and think about what you actually did.  Did you (or the consultant you hired) leverage and consolidate volumes?  That’s great!  But isn’t that what good purchasing professionals should be doing regularly in their jobs?  It doesn’t take a lot of strategic thinking to compile a database of your spend by supplier in a category and then offer a higher volume of business to a supplier that can come up with better prices for a higher volume.  That’s just good purchasing practice!!

You say you installed a new software package that allows you to analyze RFP responses better?  Wow, that was a nice technology improvement to support your RFP process!  But strategic?  Hardly.

Okay then, you may protest that your company did a great job of analyzing pricing in detail and renegotiating a best price with some of your suppliers.  Again, we’d say “great job” and give a hearty handshake for doing good purchasing work to lower your basic cost.  But what if you used a broader definition of cost and considered the impact of a decision on your TCO (Total Cost of Ownership)?  You may have considered other costs beyond price, such as the internal operations costs required to support inventory and tooling and other needs.  Now we’re getting closer!  But this still isn’t really “strategic,” but rather simply a more comprehensive way to look at cost impact.

Let’s talk about real strategy.  Have you ever considered alternative sourcing strategies, such as outsourcing, or deciding to build a new plant to become a self sufficient internal supplier to yourself?  How about redesigning your production process so that certain indirect items aren’t needed anymore?  Or redesigning your products to reduce demand for direct materials?  How about developing a strategic supplier relationship that leads to the supplier actually investing in your supply chain, such as building a dedicated warehouse or even a production facility?  Not so easy, is it?

The frustrating reality is that very little truly “Strategic” Sourcing is performed, given the constraints of time and budgets and resources available, to say nothing of managing the disruptions to the company or ensuring that the needed buy-in and support will be achieved across the organization.  Even when high priced consultants are brought in to manage or support a Strategic Sourcing program, too often the results are simply lower costs achieved through improved purchasing, not through strategic changes.

There is nothing wrong with reducing costs!  But the point is that we need to be careful to understand the difference between good purchasing practices and truly Strategic Sourcing.

The way most Strategic Sourcing project results are measured is by the impact on cost, with cost savings targets developed for each project or category of spend.  When the goal is cost reduction, the “strategies” will usually focus on ways to reduce spend, the easiest being lower prices or volume consolidation.  But the real goal of Strategic Sourcing should be to improve a company’s financial health, meaning the value of the company to shareholders.

True Strategic Sourcing is about making changes in the supply base, in the Supply Chain, and throughout the organization that lead to reduced spending on external goods and services while also leading to improved processes and the general business environment within the organization.  An effective Strategic Sourcing program or project should make the Supply Chain more effective, from the suppliers’ suppliers to the end customer.  There should be more words like “total value” or “more effective business alignment” or “environment that supports change” rather than simply “lower cost”.

And one other point – Strategic Sourcing programs should be looking for strategies to ensure effective implementation of new tools and processes, since new ways of doing business too often fail to be implemented properly.  There is often a gap between expected and realized results.  Of course, it’s more difficult to measure better alignment of a company’s Supply Chain than to measure cost reductions in purchased goods.  But companies need to challenge suppliers and internal business groups much more to seek solutions that will lead to strategic changes in processes or in the environment of the company.

Are there any stories out there about Strategic Sourcing efforts gone awry or not meeting expectations?  Or conversely, are there any examples of true strategic changes that came out of a successful Strategic Sourcing project or program?  What will it take for Strategic Sourcing to finally achieve its true potential?

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One Response to “How “Strategic” is Your Sourcing?”

  1. Jeri Sessler said

    Interesting blog on strategy in procurement by my friend Ron Sanderson for the MPower Group. He is spot on in that most of the “strategic” sourcing efforts I’ve been involved in for clients produce great savings but few real lasting strategic practices since the scope of what they really want is cost reduction and nothing more.

    Sometimes I think having consultants come in to your “house” is like having a visit from your mother in law – you clean up your act for a while, do things a little differently while she is there, and then slip back into old ways once she walks out the door. No wonder repeat work exists in my world.

    True transformation requires real change – uncomfortable, pushing the envelope, thoroughly annoying and work-world changing change. Change that challenges – no, affronts – your long held view of things you believe are true, just because you’ve done them a thousand times without thinking about them. Sourcing done without the strategic is incomplete.

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