SOURCING SOLUTIONS

Today, significant business pressures are forcing the procurement department to shift its focus from reducing costs to driving value throughout the organization. Globalization, cost pressures, innovation, and regulatory compliance are four of the key pressures driving changes in procurement processes. Companies must respond to these pressures by striving to create value through high-performance sourcing.

No matter what stage your procurement is in – whether you’re just beginning to run e-sourcing events or integrating sophisticated supplier relationship management (SRM) tools with other enterprise systems like enterprise resource planning (ERP) – you have an opportunity to add tremendous value to your enterprise by achieving sourcing excellence.

The road map shown in Figure 1 can be used to asses procurement processes and capabilities (the sum of people, processes, and technology). Simply stated, the road map indicates that the value delivered to your organization (by any measure you choose) increases proportionally with your organization’s capabilities, and the procurement group will pass through several phases as it develops sourcing excellence.

The benefits to the organization grow as it approaches sourcingexcellence, and these are incremental. For example, in thefirst phase when you launch initiale-sourcing events, the primarybenefit is negotiated savings basedon effective e-sourcing events. Thiscompetency never goes away andcontinues to produce value in allsubsequent stages.

PHASE ONE (FIRST YEAR): LAUNCH INITIAL E-SOURCING
You may already know the categories that will comprise your first wave of sourcing events. If not, a quick spend analysis can help you pinpoint the opportunities for the first wave. Choose your first wave of events wisely; you want to be certain of success. Success is the capital that you will spend later to invest in developing your organization’s capabilities.

In choosing categories for the first wave, consider such factors as: total spend in the category; relative fragmentation of the category; supply market and probability of savings through; volume concentration; stakeholder or budget holder cooperation and support; and your team’s understanding of the category.

You may be wondering why you should use e-sourcing tools now instead of later. E-sourcing tools help in two key ways: they enable you to provide stakeholders with visibility into the process and decision criteria, which can be critical to obtaining their buy-in; and they enhance the competition in the supply base because suppliers can observe first hand your coordinated approach to selecting and negotiating future contracts.

For example, a telecommunications organization in phase one began by running auctions on categories in which it was likely to see a price reduction, for example, security systems, and the generated savings created confidence and momentum in its e-sourcing program.

PHASE TWO (SECOND YEAR): BUILD ON YOUR SUCCESS
In this phase, you’re building on your initial success by completing additional waves of category sourcing events. For example, you might now have the expertise to tackle new categories. Or your initial success might have provided an opportunity to source categories that previously were met with stakeholder resistance.

The first order of business is to understand your supply base in its current form. This is most often done with a “spend analysis”, which can take many forms and varies widely based on the level of investment. At a minimum, your analysis should be detailed enough to clearly identify the first 10 to 20 categories that would generate a high return of investment if strategically sourced.

This is also the phase in which you should begin to institutionalize e-sourcing for two key reasons. First, you now have best practices that can be defined and repeated in the system as templates. This has the effect of up-skilling your team by putting the best persons’ skills in the hands of many. Second, using process templates, you can shorten cycle times by not reinventing the wheel each time you define a sourcing project.

Tracking sourcing project cycle time was a big initiative for a manufacturing company in phase two. Using an SRM project management tool integrated with request for quotation and proposals, auction, and contract management tools, the company was able to gain valuable insights and reduce sourcing project cycle time by67 percent.

PHASE THREE (THIRD YEAR): INTEGRATE PROCESSES
In this phase, your organization plays a lead role in facilitating a more integrated process, such as project inception, followed by sourcing, contracting, and supplier implementation. And the integrated process includes an extended teamof stakeholders along the way.

To coordinate a cross-functional team, collaboration tools become essential. Team members should always have access to a single version of the truth to ensure effective communication and coordination. Approaches like emailing document versions around prove inferior to using shared project workspaces in a common sourcing system.

In addition to shared project planning, the need for knowledge management emerges. Most cross-functional projects produce numerous documents and versions. It’s important to address such issues as document repositories, document versioning, user access rights, and security. After all, each team member plays a different role and should therefore access the subset of project documents and data that pertain to them.

Another telecommunications company somewhat further along toward excellence (phase three) used templates and process workflow to create a repeatable approach to sourcing and contracting complex categories. Reporting on progress and savings was done manually on weekends by the staff , but with the e-sourcing tools, reporting was completed in minutes – and during the work week.

PHASE FOUR (FOURTH YEAR AND BEYOND): SEGMENT SUPPLIERS
In this phase, procurement organizations play a role in managing the entire supply base. Supplier segmentation is critical to defining the nature of the role based on the type of supplier. There are various methodologies for determining which segment your suppliers belong to.

In the three-tier segmentation model depicted in Figure 2, the value derived from suppliers increases as you move up the stack. Not only does the absolute value increase, but you derive additional benefits as well. Perhaps it’s important with your tactical suppliers to simply reduce the prices paid for these goods and services. In the realm of strategic suppliers, it’s about tight interrelationships that fundamentally affect your organization’s revenue, profits, and end-customer product experience.

At this stage, your organization has company-wide strategies that apply to all supplier segments, commodity types, contracts, and types of relationships. Your processes and systems should reflect the role your organization plays in that context.

A large insurance company in phase four became deeply involved in certain spend categories, such as IT labor. The procurement group was able to integrate its processes with its IT customers’ processes to help manage selection of vendors and staff using a preferred vendor list. This ensured compliance with existing agreements and resulted incosts below rate card.

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