In an earlier article (Procurement As A Change Program, 17th November 2016), we highlighted that Sourcing is a pertinent function of Procurement. We will now provide our point of view on the Sourcing function.
Mention “sourcing” and the majority of us will pride ourselves as the ‘experts’ in finding the good deal during our weekly grocery shopping or the occasional splurge on tech gadgets from online sites. Likewise, many management teams may consider their insistence on securing three (or five) supplier quotes prior to purchasing as a good practice in sourcing. On the contrary, the art and science of Strategic Sourcing is more than just the examples stated here. The efforts required from Strategic Sourcing is far more intense than just comparing the battery life of a smartphone, or the receiving of three quotes from the open market.
In the latest publication of the eminent research on procurement practices (CPO Rising 2016- The Art and Science of Procurement, Ardent Partners, June 2016), Best-in-Class procurement and sourcing organisations deliver results which are 12% higher in returned value (Actual savings), and lower their contractual risks by almost 30% (Spend that is contract compliant) when compared to all other organisations. So what are the traits and mechanisms of Strategic Sourcing that these Best-in-Class procurement organisations seem to have mastered?
Strategic Sourcing is NOT…
As stated earlier, it is common for organisations and management teams to regard their dogmatic practice of insisting on three (up to five) quotations to support purchasing decisions as a form of sourcing. This practice of requesting for price quotations from suppliers is aimed to establish a ‘fair market value’ or ‘benchmark price’ for the required purchases. And with limited rounds of negotiations ensuing before a buying decision is made, this practice gives one an impression that there are cost savings and value to be derived from it. As the process can be executed with minimum effort and manpower, it further supports the impression that “sourcing” is carried out efficiently and all is well with the practice.
It does not take a stretch of imagination to anticipate that this process is easily manipulated to favour an incumbent or preferred supplier. And there are numerous incidents and court cases to support this conclusion. Regardless of the criminal cases associated with this practice, the process of establishing the fair market value for purchases has its merits and is best left for the ad-hoc purchases of supplies and services. To limit the potential risks of buyer-supplier collusion, the process could be restricted to low-value purchases or commodities as defined by the organisation. For now, we shall call this practice Tactical sourcing or Spot-buying.
Strategic Sourcing IS…
Having defined tactical sourcing, we now look at strategic sourcing. A number of organisations, individuals and academics have provided definitions of strategic sourcing. A simple search for “strategic sourcing” on the Internet will yield many results. We look at a handful of definitions here:
“A method of managing procurement processes for an organization in which procedures, methods and sources are constantly re-evaluated to optimize value to the organization. Strategic sourcing, which is considered a key aspect of supply chain management, involves elements such as examination of purchasing budgets, the landscape of the supply market, negotiation with suppliers, and periodic assessments of supply transactions.” – Business Dictionary
“Strategic Sourcing is an organised and collaborative approach to leveraging targeted spend across locations with selected suppliers that are best suited to create knowledge and value in the customer-supplier interface.” – Robert J. Engel, The Procurement Centre (2004)
“Strategic Sourcing is an approach to procurement whereby the business needs of the organisation are matched with the supplier market. It is much more than simply centralizing procurement. The approach is founded on a detailed understanding of both the spend profile of the organisation as well as the supplier market. This understanding is continually updated in order to deliver ongoing improvements to the organisation’s sourcing and procurement performance.” – Purchasing Insight
Whichever way we look at it, it is clear that Strategic Sourcing encompasses the following:
- An organised and disciplined approach to manage bought-in supplies for an organisation.
- Leverages the aggregated and combined spend across an organisation.
- Involves analysis and understanding of an organisation’s spend pattern and demands (from purchasing budgets).
- Analyses the suppliers landscape and supply patterns.
- Selection and negotiation with the right suppliers with ongoing assessments to ensure continuing relevance.
- Focus on creating knowledge and value from the business relationship for continuous improvements.
In other mentions and definitions of strategic sourcing, the following aspects are included:
- Adopt the right technology for enhanced results.
- Teams of experts and specialists in commodities and supply markets.
- Right skillsets and motivation of sourcing personnel.
- Sourcing strategies and remedial actions to counter changes and shifts in global economics.
- Trusted advisers and partners of business executives.
We shall examine some of these aspects of strategic sourcing in our next articles. But for now, it is useful to reiterate the stark difference of Strategic Sourcing from a common practice often regarded as Sourcing.