Value-Chain Report -- Leading Practices In Strategic Sourcing

In the quest to develop ever more efficient supply chains, many manufacturers, distributors, retailers, governmental agencies, and other entities are turning their attention to their supplier network. These firms recognize that, in many cases, a large percentage of their cost of sales resides in the cost of purchased materials and services. They also recognize that any savings that can be achieved through improved sourcing practices will likely result in almost a one-for-one improvement in profitability. Major improvements in sourcing effectiveness usually result from implementation of a robust strategic sourcing approach. Strategic sourcing is the systematic application of sourcing- and supplier-management techniques and methodologies that optimize the buyer-supplier relationship and minimize overall supply-chain-sourcing costs. Key Elements of Strategic Sourcing At a minimum, a robust strategic sourcing approach is likely to encompass at least five primary areas, including:

Sourcing and contract management

Supplier management

Specification management

Transaction management

Organization Increasing effectiveness in each of these areas tends to be evolutionary and unequal in the transition from traditional practices to world class. In most firms, it is not unusual for one or more areas to have some leading practices concurrent with some traditional practices. At Cap Gemini Ernst & Young, we help clients evaluate their strategic sourcing capabilities along a continuum having four overlapping categories:

Traditional

Emerging

Leading

World Class. Sourcing and Contract Management Sourcing and contract management typically includes processes such as supplier selection, commodity sourcing, and contract negotiation. In evaluating strategic sourcing capabilities, companies may consider these characteristics: Companies having traditional sourcing and contract management performance would typically have local suppliers with multiple sources and minimal buying leverage; adversarial relationships with suppliers; transaction specific, order related purchase orders, and limited use of blanket orders; focus on unit pricing with comparisons to, and savings measured against, market prices; and fragmented and/or limited spend data. Businesses having emerging sourcing and contract management performance would typically utilize domestic suppliers with multiple and dual sourcing; some cross-functional sourcing activity; focus on lowest delivered cost; annual contract negotiations; managed bidding with negotiated price improvements; and reliance on supplier for spend data and basic spend analysis. Firms having leading sourcing and contract management performance would typically forge supplier partnerships and have global evaluations or sourcing with structured negotiations; single sourcing for standard commodities determined by formal, cross functional commodity teams; leveraged sourcing for key commodities; focus on total value and total cost management; and utilize multi-year contracts with service level agreements. Companies having world class sourcing and contract management performance would typically exhibit strategic sourcing for most or all commodities, utilizing a multi-faceted sourcing approach; strategic alliances and colocated suppliers; collaboration and coordination of supply-chain activities; life cycle sourcing agreements; Web-based negotiations (e.g., continuous bid/ask, reverse auction); and self-managed spend, supplier and commodity data. Supplier Management Supplier management typically includes processes such as supplier relationship management, supplier development, and supplier performance management. In evaluating strategic sourcing capabilities, companies may consider these characteristics: Traditional supplier management performance would typically include large, fragmented supplier base with few specific relationships; suppliers viewed as interchangeable; no formal supplier performance evaluations with communication by exception; and incoming inspection is routine. Emerging supplier management performance would typically include preferred suppliers with limited relationship structures; supplier ratings system and bi-directional communication; key suppliers provide product certification; site visits, surveys, and supplier reviews; and limited supplier consolidation. Leading supplier management performance would typically include formal supplier certification; service-level agreements with performance metrics and formal evaluations; and an understanding of supplier cost drivers. World Class supplier management performance would typically include supplier self-certification; key supplier account management, strategic relationships, and inter-firm supply networks; systematic performance ratings/feedback; simultaneous two-way communication; and defined supplier rationalization processes. Specification Management Specification management typically includes processes such as design management, component/product standardization, cost management, and und use performance. In evaluating specification management capabilities, companies may consider these characteristics: Firms having traditional specification management practices would typically reflect no supplier involvement in design; make to specification; focus on product only; and proliferation of specifications. Companies having emerging specification management practices would typically exhibit joint buyer-supplier specification development; higher value-added content by supplier; and standardization and substitution processes in place. Businesses having leading specification management practices would typically have interactive (design/source/redesign) processes with forums for technology transfer; design for assembly/manufacturing with value engineering by suppliers; and bundling of value-added services with products. Firms having world class specification management practices would typically include simultaneous design by joint supplier/buyer design teams; full design responsibility shared with suppliers; Web-enabled design collaboration with suppliers; and shared content management and decision support tools. Transaction Management Transaction management typically includes processes such as requisitioning and creation of purchase orders, order tracking, and receiving. In evaluating transaction management capabilities, companies may consider these characteristics: Traditional transaction management performance would typically be paper-based and include requirements for multi-level approvals; requestor selects the supplier; purchase of a delivered product; three-way matching for payment; paper catalogs; and PO status via phone/fax. Emerging transaction management performance would typically utilize technology point solutions with purchases linked to planning; online purchase orders; procurement cards; and status via EDI. Leading transaction management performance would typically utilize internally integrated systems/technologies; online catalogs and requisitioning; two-way match for payment; pre-approved purchases; automated workflow tools; and status via supplier Web sites. World Class transaction management performance would typically include electronic links with suppliers; real time collaboration; eProcurement capabilities; participation in trade exchanges with dynamic commerce, Web-based transaction engines and catalogs; and collaborative order visibility. Organization Organization structure and capabilities supporting strategic sourcing processes would include organization design, performance planning, performance metrics, and cost measurement. In evaluating organization capabilities, companies may consider these characteristics: Companies having traditional organization structure and capabilities would typically focus on functional silos and narrow job descriptions; constituents working around the formal purchasing organization. They tend to be transaction focused and measure performance against internal benchmarks. Firms having emerging organization structure and capabilities would typically have business-level coordinated purchasing activities; a matrix organization; some commodity sourcing plans; formal performance management processes and metrics in place; succession and career planning; and stakeholder awareness. Businesses having leading organization structure and capabilities would typically have their sourcing strategy aligned with overall business strategy; strong executive level support; central coordination and local administration of sourcing processes; and cross-functional coordination. Companies having world class organization structure and capabilities would be expected to have a global supply-chain perspective; proactive change-management processes; functional and process orientation with optimized benefits across business lines; focus on perpetual innovation; and strong communication and change management capabilities. Winners in the global economy are those companies that continually evaluate their performance to ensure that they are leading, not falling behind. Strategic sourcing is a key element in today's competitive business environment. Using the evaluation criteria outlined above can help to identify those areas that require improvement. Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.