While 2009 was a turbulent year across the board, in 2010, purchasing departments are beginning to see the early signs of the promised economic turnaround; orders are up, and therefore buying is beginning to rebound. What's in store for the strategic sourcing word in 2010? If the economy is returning to a stable position, does this mean a return to business as usual for the procurement group?
The lessons learned from the recession would say no. Last year was a watershed year for a lot of procurement organizations -- a time when the entire business turned to them for help at a difficult time. The discipline and best practices that were forged under fire last year will form a solid foundation for the kind of strategic, meaningful role that procurement should play on an ongoing basis.
In 2010, three specific trends are developing: The first is increasing stakeholder alignment. As sourcing and procurement teams continue to take on increasingly strategic categories, the importance of ensuring that they are working effectively with all of their stakeholders throughout the business has never been more important, and technology is helping sourcing teams to be increasingly effective at driving stakeholder alignment.
Next, procurement is beginning to recognize that purchasing is about more than contracting a price; sourcing teams need to evaluate a number of price and non-price factors to effectively evaluate myriad trade-off decisions, and procurement needs to be continually evaluating the effectiveness of their contracts to ensure that they are getting the most value for every single purchase they make.
And finally, a trend that acts as a sort of umbrella to these first two: increasing spends under management. Quite simply, an increasing amount of sourcing and procurement teams are being tasked with taking on a growing number of categories previously thought to be un-sourceable, and dramatically widening its sphere of influence throughout the organization.
When dealing with a low strategic value indirect category, stakeholder alignment is not a terribly critical component of the sourcing process. Sadly, these categories also tend to produce the lowest yields in terms of savings potential, particularly for the mature sourcing organization, which has likely addressed all of its low hanging fruit more than once already. When looking into more complex, strategic categories, the savings potential goes up, as does the risk. Take, for example, a large consumer goods company who sourced several packaging categories. In the consumer goods world, packaging is the most visible sign of a company's brand, and the sourcing team in this case faced no shortage of interest on the part of nearly a dozen different stakeholder groups including marketing, legal, logistics, quality control, manufacturing and purchasing to name a few.
The sourcing team went out to its key suppliers in the spirit of collaboration to more effectively understand both price and non-price factors, and to identify win-win cost reduction opportunities. They invited their suppliers to provide detailed bids that incorporated raw materials costs, cost of various order sizes, discounts associated with longer lead times, and hundreds of other data points that helped the sourcing team evaluate the cost of product, and also to identify new areas of potential cost savings, such as creating packaging on different equipment, providing longer lead times, and reorganizing their ordering procedures to take better advantage of idle machine time or reduce setup/switchover times.
The team used optimization-supported scenario analysis to evaluate the costs and benefits of various combinations of these alternatives. Armed with this information, the sourcing team was able to have a fact-based conversation with each stakeholder to demonstrate the costs and benefits associated with each of their demands, and to engage in a conversation about the appropriate balance of cost over other business requirements. By placing all of the facts on the table, the team was able to accommodate the needs of the entire organization while identifying double-digit savings in a high spend category.
Better Decision Making
In all but the most basic sourcing categories, it helps to evaluate various non-price factors at some point in the decision making process. Understanding quality, service levels, and other, more qualitative information about a vendor can help to paint a total cost picture that is invaluable in minimizing costly suprises down the road. Even in auctions, it's useful to conduct a qualification round to ensure that all of the bidding vendors are of equivalent quality. Having a template that is tailored to your category and the right tools to evaluate this information quickly and objectively is crucial.
In more complex categories, the more information you can collect, the better.
But it's not just about quantity. It's important to seek the advice of peers and advisors who have experience in a given category to better understand what sort of information is useful -- and what is not. When sourcing transportation, the plethora of information -- about equipment types, carrier demographics, and capacity constraints, to name a few -- can be truly mind boggling. But, we've seen clients achieve upwards of 40% savings in their transportation categories -- without alienating their carriers -- by being smart about how they collect and interpret that information.
Using a flexible model to collect and analyze detailed bids lets transportation managers conduct detailed trade-off analysis that helps identify and compare the costs of each of their business requirements to determine the appropriate blend of cost and quality. This recognition that total cost analysis is instrumental in driving meaningful, long-term savings and strong vendor relationships in mission-critical categories will prove long lasting in good economic times and bad.
But the decision making process doesn't end once a contract is in place. AMR Research recently featured a $3 billion discrete manufacturer who used spend analysis to identify dramatic working capital improvements by re-negotiating payment terms with all of its vendors. The team compared payment terms with like vendors across over 20 sites to identify opportunities to move to more favorable terms. Using spend analytics, this company was able to make better decisions about the way it managed its existing contracts to drive continuous improvement in a previously un-addressed area.
Increasing Spend Under Management
By demonstrating success in these key areas, procurement teams can drive additional spend under management, as more and more stakeholders become comfortable with the value strategic sourcing can deliver to their business area. No longer a bureaucratic hassle to be endured or avoided, sourcing is now seen as a strategic advantage for most large businesses. For example, a large manufacturer needed to transform its sourcing department into a more strategic function in the business and set a goal to source every single category of spending within the year. Using targeted support to supplement the team where necessary, the team conducted over 100 sourcing events each month and drove tens of millions of dollars in in-year savings.
This aggressive approach served to establish the sourcing organization as a powerful force within the business that was not only capable of pulling its weight, but of delivering meaningful results that helped to dramatically improve the company's profit margins. Procurement teams who have successfully taken these bold steps are well positioned to play a key role in their companies' ongoing strategic direction.
While 2009 saw procurement groups taking on an increasingly important role for those companies who saw the potential to drive significant cost reductions in a year of lean sales, the smartest of those procurement teams will build upon that foundation to continue to expand their influence in the business.
Liz Flynn is the Director of Solutions Strategy for BravoSolution. BravoSolution (www.bravosolution.com) supports procurement professionals with tools and services to identify sourcing opportunities, prioritize initiatives and execute projects with tailored solutions.
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