Optimizing Sourcing Strategies with a Robust Procurement Function

Posted: 07/09/2012

Strategic sourcing and sourcing strategies are primary ways for a company to add value to the enterprise.However, strategies such as make or buy decisions, off or near-shoring, outsourcing, low cost country sourcing, etc. are only part of the equation. A robust procurement process is a key element to any successful sourcing strategy. It underpins and compliments these strategies for optimal business outcomes and financial results. Procurement processes allow sourcing strategies to stretch for greater achievement and success.

Regardless of the industry or market segment, there are a number of common characteristics of a robust procurement function.Three characteristics stand out, and best in class procurement operations will almost always be successful at all three of these:

  • a high percentage of spend under management
  • strong alignment between procurement and the business stakeholders
  • a rigorous discipline around lifecycle vendor management

Spend under management is one of the cornerstones of a robust procurement function.This means that an expenditure has come through a defined procurement and sourcing process, has been competitively sourced, and is recorded in a repository of analytical data for use in future expenditures.As a company’s spend "under management" increases, so does the ability to reduce costs, forecast expenses, and manage vendors.

Purchasing data is not only the measure of spend under management, it is the foundation for spend analytics.If you don’t know the details of what you are spending, with which vendor, and for what goods and services, you can’t manage either the spend or negotiate effectively with suppliers.The ability to access this data quickly is critical, both in terms of supplier negotiations and internal business discussions.

For example, a senior finance leader looks at a monthly GL report, calls the purchasing manager and says, "I can’t believe we are spend this much on computer disk storage!Our business isn’t growing this much; how can we need so much storage?Get a plan together to reduce this spend by 20%!"

Without readily available spend data, the purchasing manager has a huge task to drill into the details that make up that one line on the GL report.But, with access to good spend analytics, the task is much simpler.The purchasing manager quickly can see the storage expenses broken down into various categories such as maintenance costs (including those which were pre-paid and are now showing in the expense stream), new purchases, and upgrades to existing systems.Procurement can then share this data with IT leadership, and together they can build a strategy to present to Finance on what reductions can (or can’t) be achieved, with any associated trade-offs such as reduced maintenance service levels.The spend data provides the facts so that decisions are rational and sound, not reactive and emotional.

Speed is king in today’s business environment, and access to spend data demands speed and ease.A robust procurement function will have spend data in a readily available tool so that analysis can easily be done by category, commodity, vendor, etc.If it takes too long to get and analyze the spend data, the opportunity will have passed, and decisions will have been made without it.

Specific category management strategies are another key to maximizing spend under management.A mature procurement team will use spend data to define the major spend categories.Working with the business stakeholders, they will develop detailed strategies for each category.Depending on how critical a category is to the business, this may result in unique vendor-specific strategies.Category strategies are not static; they should be updated on a monthly basis, and reviewed with the business stakeholders quarterly, if not more frequently.

For many companies, spend under management is how maverick spend is monitored.The higher the percent of spend under management, the lower the maverick spend.A well-defined purchasing policy provides the framework for spend to be managed, not maverick.Each company must decide how rigid they want their purchasing policy to be, and how strongly they want to enforce it.As a general rule, a policy should include only those things that the company believes in strongly enough to enforce.And enforcement is directly tied to the degree which a company’s executives support the policy. If the senior management "walk the talk" and support the policy, a culture exists which promotes the right spending behaviors -- and this will naturally drive spend through the defined procurement process.

Spend under management then increases and maverick spend is limited.

A strong alignment between procurement and the business stakeholders is the second major characteristic of a strong procurement function.In fact, without this partnership, the category strategies mentioned above cannot successfully be developed nor executed.Procurement and the business must be unified and must present "one face" to suppliers throughout the procurement cycle -- from the request for quote all the way through to the final negotiations.Particularly in tense and tightly competitive situations, vendors often look for signs that purchasing and the business owners are not in sync, and then quickly use this to "divide and conquer."Too often, procurement learns that a business owner has told a vendor what the available budget is, and that they’ve "got the order" (or worse, that "we have to have your product").At that point, the negotiation leverage is essentially gone.It is critical to have a negotiation strategy decided internally before any meeting with a vendor.And if you plan to play "good cop, bad cop" in the meeting, make sure to agree who is taking each role.If the vendor senses any discord between purchasing and the business owner, they will seize the opportunity to let you negotiate amongst yourselves!

Procurement’s alignment with the business must start at the early stage of any project, when business requirements are defined.This is the start point to create the strategies that become intertwined and co-requisite with category strategies and supplier negotiations.This "from the start" team also fosters the right level of partnership in which both procurement and the business recognize that "their whole is greater than the sum of its parts."

The third major characteristic of a robust procurement function is a disciplined approach to lifecycle vendor management.Even with a strong partnership between procurement and the business, and a successful purchasing strategy to drive spend-under-management, a clearly defined lifecycle approach to vendor management is required to maximize the value of sourcing strategies.The degree to which a vendor is managed depends on the individual scenario, the amount of spend, and the level of criticality assigned to the goods or services the vendor provides.

At the very least, a simple scorecard approach should be used to monitor a vendor’s performance against contractual and regulatory requirements, benchmarks for pricing, and quality. For the most critical suppliers, typically deemed strategic partners to the business, a focused and often full-time resource should be dedicated to managing the vendor relationship.This encompasses the scorecard criteria, and also includes a proactive understanding of product roadmaps, supply chain issues, real time quality metrics, etc.

In any case, regardless of the degree to which a vendor is managed, the performance monitoring data is a key input to procurement and the business.It provides leverage points for negotiations, highlights changes needed in service level agreements or for remedy provisions of contracts, and enables the business to have a more complete picture for future product development requirements.

Another benefit of having a strong vendor management discipline is risk mitigation.Quality issues, weaknesses in a vendor’s supply chain or logistics, concerns about a supplier’s financial stability or creditworthiness, are all highlighted by the process.These become key inputs for both business and sourcing strategies, and allow the procurement/business stakeholder partnership to more effectively leverage vendors for better price, quality and product innovation.

Summary

A robust procurement function provides the structure and framework to enable successful sourcing strategies.Companies that compliment their sourcing strategies with a strong procurement department can maximize their value to the enterprise.The results are real and measurable, both from a financial and the broader business perspective.

Benefits include:

  • Increased cost savings and better contractual terms and conditions based on informed spend analytics and negotiation strategies that are in sync with the business goals
  • Improved quality of procured goods and services through diligent supplier performance-monitoring and feedback
  • Enhanced supplier relationships as a by-product of lifecycle vendor management fostered by continuous communication with the supplier
  • Risk mitigation based on the ongoing analysis of vendor scorecards and financial health checks

The structure and processes of an effective procurement function ultimately provide a company with lifecycle control of the sourcing process, allowing sourcing strategies to be optimized and business goals to be more easily achieved.

Posted: 07/09/2012

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