The why and how of strategic sourcing
If proof were needed that procurement is the epicentre of modern business, then one need only look at the demands placed upon it. Its evolution has seen it transform from a price-driven, cost centre, to a strategic powerhouse that delivers on everything from corporate and social responsibility to environmental outcomes.
Increasingly, there’s the question of value too, which itself has undergone an evolution. Traditional models saw value as an open and shut case, where value was extracted at the point of negotiation and sealed when the contract was signed. In effect this gave rise to the notion that good procurement was simply extracting the lowest price from your supplier possible – a practise that was essentially a race to the bottom for suppliers.
Modern models aren’t so short sighted, thankfully. Leading companies are now looking beyond contract-award to gain value from suppliers in the shape of better performance, collaboration and innovation. It means, essentially, that they’re tapping into hidden and previously unknown revenue streams and generating efficiencies – which make for smoother operations and happier end users.
But how does this relate to strategic sourcing? Surely it’s common sense? Well, for procurement to deliver real value to the organisation, its objectives have to be very tightly aligned with that of the business – and specifically the business’s supply chain strategy.
Quite often these are misaligned or developed in isolation. And where that’s the case the two can be opposing. Procurement traditionally looks at price and volume of goods – so from a financial perspective, as a gross margin. On the flipside, the supply chain takes into account the, logistics, inventory and includes working capital costs associated with the delivery of goods and services. In financial terms, that’s more of a net margin approach.
The result of this misalignment? Quite often sub-optimal outcomes for things such as cost, quality and service – all of which indicate the need for a joined up approach and to get more from the contracts you sign. Value is at times a vague term. But if we think of contracts as assets, then value takes on a tangible meaning. For example, it’s the speed at which your supplier delivers your goods or the flexibility they show in helping to meet your high demand – qualities that directly affect your performance and your ability to do your job.
So in practice you need to manage the contract more effectively and managing the supply performance to ensure your suppliers are delivering on their obligations. We see too often that once the contract is done, it’s put in the drawer and not looked at again – and businesses don’t realise the value potential of the contracts that they have.
Strategic sourcing: The how
Extracting value from your supply chain needn’t be difficult and nor should making sure every aspect is aligned with the overall business goals. In fact, it’s a relatively straightforward five-step process that sets your thinking and action straight. And more importantly it gets you heading in the right direction and gives you scope to review and refine as you go.
Set the strategic direction, the mission and vision and goals for the procurement function
The first stage is setting the strategic direction. It involves setting the current mission for the organisation, the future vision for procurement and the supply chain, and the specific goals it wants to deliver. The idea is that it will give a long-term direction to the procurement function, and it will make sure that it’s aligned with the company strategy.
Analyse the situation, understand the key levers of performance.
The second stage is analysing the situation and it essentially involves looking at internal and external trends and the key levers of performance. Here, you can use tools like SWOT analysis or PESTLE analysis in order to understand the situation. And the key outcome is that the strategy that you develop is going to be aligned with the context in which it’s going to operate.
Develop detailed strategy
The third stage is developing the procurement strategy. So here, what we’re trying to do is determine the specific initiatives that you’re going to deliver as well as your mission and your future vision. What you want from this step is a strategy map with all of the different initiatives connected, making sure that you have key performance measures and that you’re delivering the strategy you intended to deliver.
Deliver, implement and manage the strategy
Stage number four is implementing the procurement strategy, so once we have a plan, we need to roll it out. And this is very much about project management and stakeholder management. Meet with stakeholders in the organisation and meet with suppliers to make sure they’re doing what they need to do to deliver that strategy.
Review and refine
The final stage in the strategic procurement cycle is learning and improvement. And in here, what we’re doing is reviewing what we’ve done and making sure that we’ve delivered what we wanted to deliver and also learning from it. Not everything will happen as we expect it to happen, but we need to understand what went wrong, why it went wrong and what we can do better next time so that we connect the cycle – because as soon as you finish delivering one strategy, you start crafting the next one.