Archive for December, 2013

The Future of Purchasing and Supply: Strategic Sourcing

December 31st, 2013

Strategic Sourcing is a supply management tool that delivers significant cost reductions and other benefits. More specifically, it’s a periodic event that includes the identification and selection of initial commercial arrangements with a selected supplier that either creates or resets a relationship. That sounds simple enough, but what makes strategic sourcing different from a traditional sourcing activity? After all, “identifying and selecting initial commercial arrangements” can just as easily be accomplished with the old “lowest of three bids” process, right? Not quite.

Strategic Sourcing requires that organizations divide their spend into categories and then classify the categories based on the importance of that product and service, and on the complexity of the supplier marketplace. From there, the purchasing organization – and the supplier organization – must recognize that various relationships are required. At one end, the least strategic relationships might be based on cost, but at the other end, the most strategic suppliers are chosen for their ability to create new business opportunities or technological advances. Specifically targeting or searching for suppliers in such a formalized manner, to fill this role is what strategic sourcing is all about.

Strategic sourcing is the first rung of the ladder. And once it’s combined with strategic supplier management and effective day to day purchasing activities, the outcome is true supply advantage.

Why focus on Strategic Sourcing

In the past, purchasing and supply functions have often had a sole mission: Drive cost to the lowest possible price points, then track and report them. Although they still value cost reduction initiatives, most CEOs believe that purchasing and supply management’s role should go beyond cost cutting. In the 1997 CEO Global Business Study by A. T. Kearney, the top priorities for supplier relationships were ;cost reduction, quality improvement, access to new resources and enhanced sales.

Furthermore, those leaders who value end product competitiveness as a primary objective, 86 percent, also valued establishing relationships with leading suppliers (79 percent). In the organizations, purchasing and supply management professionals provide strategic positioning advantage and revenue enhancements.
Go-getters in purchasing and supply management have heard their CEO’s message and recognize that strategic sourcing –and the subsequent strategic supplier management –will bring them to centre stage as a major part of organization-wide success. The alliances that they create with suppliers spur innovation, identify new product opportunities, bring access to new markets or technology, and provide new intelligence for strategic decision making.

At Cisco Systems, the San Jose, California – based provider of Internet networking materials, strategically selected supplier relationships are a key driver behind its recent remarkable growth. Cisco inaugurated a build to order program and rolled out extranets through which supplier can monitor and fulfill customer orders. This new cooperative relationship with suppliers, combined with a high percentage of production outsourcing, has done much more than help the company slim down costs. Cisco has quadrupled its output without investment in new plants, and its products now reach the market in one third the time. The close operative efforts yielded yet another reward: Cisco shareholder value has quadrupled in three years.
So there are bright spots in terms of strategic sourcing, but it’s hardly the norm. Few organizations have managed to become leaders in both sourcing and strategic supplier management. Proactive purchasing and supply management professional that capitalize on working with suppliers to foster innovation and develop markets are still a rarity. Some organizations are simply not focused on establishing purchasing processes to make the creation of genuine supply advantage the norm rather than the exception.
Failure to make procurement process oriented rather than transaction –oriented often stems internally from the purchasing organization, rather than from the supply base. Many suppliers stand ready to contribute to their customer success

Conclusion -Realize the benefits-

Executives are beginning to understand that procurement is a key part of the business or supply chain process. It is typical for businesses to spend more than 60 percent of revenue purchasing goods and services, and it is estimated that approximately 70 percent of all potential savings from purchasing can only be achieved through the Strategic Sourcing initiative can be impressive and the benefits can be extended well beyond cost reduction.