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We Need More Value Based Sourcing Performance Measures

Posted by ron sanderson on May 20, 2010

In an earlier post, I questioned the belief that Strategic Sourcing as currently practiced is truly “strategic” (How Strategic is Your Sourcing?)  It seems that the vast majority of Sourcing efforts are at best no more than high quality procurement practices, such as volume and supplier consolidation.  What’s missing is the more complex value oriented piece that makes a process truly strategic in its focus.

That word “value” has proven to be a difficult concept to pin down.  In retail environments, “value” is most often associated with consumers paying the lowest prices for good products and services.  And although value can be thought of as a sort of ratio of the total package of quality, service, and other factors received from a purchase divided by price paid, the value that should be a driving force behind every Sourcing project is a little different.

I would propose that the starting point to all Strategic Sourcing programs, strategies, and projects is an assessment of the value that is desired by the organization, and how a Sourcing initiative can add to that value.  How does an organization define value?  How is it measured?  What is the impact of increasing the total value?

It continues to amaze Supply Chain consultants how often a client will speak glowingly of the Strategic Sourcing process and how focused it is on real results, and yet there are no real performance measures.  Even when there are formal metrics in place, they are most often the kind that measure operating statistics, such as errors per purchase order, or number of invoices paid against a purchase order.  It’s good to measure purchasing efficiencies, but Strategic Sourcing should be all about contributing value to the organization, not about day-to-day operating efficiencies!

What do we mean by “value,” an often misunderstood word?  To begin, value is not about TCO, or Total Cost of Ownership.  TCO is a useful concept that looks at a broader definition of cost than just price and is a useful way to evaluate the true cost of selecting a new supplier, for example.  Value is also not about basic service, quality and other inherent elements of a supplier’s product or service offering.  When you measure on-time delivery performance, for example, you’re not measuring “value,” but rather a basic level of expected service from a supplier.  Customer satisfaction deals with providing great service, including dealing with errors or problems.

But real value to a customer comes from the way a product or service is able to make the customer more successful! Find a way to make a customer feel that he/she has become more profitable from the relationship with your company, and that customer will say that truly high “value” has been received!  Or use your Supply Chain to help a customer gain more of a competitive advantage, such as when your seamless Supply Chain assures customers of higher than normal assured availability of required goods, so that those customers can offer much faster make-to-order products that require less internal inventory, and you’ll have customers who perceive that they are receiving high value from you!

Another example is to lower risk for a customer.  When a customer in the financial services industry, for example, attempts to provide the greatest possible assurance that consumer data will be securely maintained, risk management is critical.  The OCC (Office of The Comptroller of the Currency) regulates banks in part to protect sensitive consumer data.  An external supplier such as a software vendor may have access to such sensitive data, and if the company has created state-of-the art technology and processes to ensure that such risk is minimized, the customer will see those services as providing high value.

Higher revenue, higher profitability, lower risk, competitive advantage – these are all some of the more strategic ways to provide real value to customers, and the Supply Chain can play a key role in providing this value.  When you perform Strategic Sourcing, have you attempted to evaluate suppliers based on how they can make your company more successful?  Which supplier relationship will lead to the greatest risk mitigation in some critical area of concern?  Can a supplier be a true partner in your major product development programs in order to provide you with an even greater competitive advantage during the critical introduction and sales growth phase?  Is there a supplier that can help you achieve greater revenue growth simply because of a superior Supply Chain capability?  And have you incorporated any real value oriented performance measures into your RFPs or into your supplier measurement process?

If so, drop me a line.  I would be interested to hear about it.

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